Croda International Plc

Morning everyone and many thanks for joining us this morning for another virtual presentation. Given how long it's been since we saw you last, we've decided to do this by video just to reassure you that we're still very much alive. So OK then, let's get on with it. As ever, I'm here with Jez and he will come on to talk about the numbers following a brief introduction from me. I'll finish off by updating you with some more detail on various aspects of our strategy and he will then be very happy to answer your questions. So turning to the next slide then. Overall, Crota has delivered a record first half performance, driven by the strategic moves that we've made over the last 12 months. Underlying sales increased 27% on H1 2020, which of course was impacted by COVID. So important to point out that this is also 10% ahead of half one 2019. Including acquisitions, reported profits are up 50% versus 2020, or 35% versus 2019. The group margin is also ahead of the prior year, and despite the acquisition of Ibican, where margins are lower, that progress has led to a further 10% increase to the interim dividend, continuing our 29-year track record of dividend growth. There are three key areas that have driven this performance. Firstly, our existing business. We've seen strong underlying growth in our existing business, benefiting from significant investment together with increased innovation. End consumer demand has also continued to recover with the additional benefit of customer restocking in line with strengthening economic conditions. Secondly, acquisitions. 2020 was a year of significant investment, with nearly £1 billion invested in both inorganic and organic growth. Well, we've really seen the benefit of that, notably the acquisitions of Iberchem and Avanti, which are opening up some very exciting and significant opportunities for Croda. Thirdly, Life Sciences, which has delivered an excellent performance, and with our healthcare business performing exceptionally well. So very encouraging progress and testament to the strategy that we've been focused on accelerating over the last 12 months. So turning the page just over to the headlines then. Sales were up 38% due to higher volumes and price increases. This is reflecting our ability to successfully pass along raw material costs as well as the benefits of recent acquisitions. Good growth in high-value niches helped push the margin higher, and the combination of increased sales and an improved mix delivered a near 50% improvement in operating profit. Cash flow fell as a consequence of growing demand and increased capex to support our exciting opportunities for growth. Because the second quarter of last year was weak due to COVID, we've been monitoring business performance against the same period in 2019. So stripping out acquisitions and lipid system sales, all sectors are ahead double digit on an underlying basis, with volumes much better than 2019 and price mix ahead in consumer care and life sciences. Sales of new and protected products as a percentage of total sales are also ahead of 2019 levels, with acquisitions and lipid system sales benefiting reported NPP. As we continue our journey to become a more knowledge intensive company, we continue to build our brain incredibly. Overall, 85% of our profits are now generated in life science and consumer markets. And all sectors are delivering great growth. Turning briefly to each of the sectors then in turn, personal care continued the progress that we saw through the second half of 2020, but at a faster pace driven by beauty actives and stronger demand in the Americas. Better product mix and increased innovation focused on natural ingredients and biotechnology is enabling us to capture growing consumer demand. We're also very pleased with Iverchem's progress and the new opportunities that is opening up in the fast-growing fragrance market for us. Life Sciences has been simply outstanding and continues to exceed our expectations. We've seen strong momentum across all areas, with underlying sales in crop protection and seed enhancement both increasing by a double-digit percentage. The highlight was healthcare, where adjuvants and specialty excipients both grew by more than two-thirds. Our investment in developing our lipid systems, by which we mean both lipid excipients and other Avanti lipid products, has been a major benefit. We now expect to generate at least $200 million of sales from lipid systems this year, principally due to Pfizer and BioNTech, an increase on the $125 million that we communicated back in March. We've also seen a very strong recovery in performance technologies driven by the broader industrial end market recovery and our exposure to next generation sustainability driven applications. We also saw margins returning to 2019 levels, increasing to 15.6% versus 10.9% for the second half last year. So overall, in the round, an outstanding half with momentum in the business as strong as I've seen it over the last decade. More on that when I come back. Let me stop there and hand over to Jez to go over the half one performance in more detail. Jez.

Thank you, Steve, and good morning, everybody. As Steve has said, the first half of 2021 has seen a record financial performance for the group. Sales were up 39% in reported currency at 934 million sterling and increased by 47% in constant currency. The recent strength of sterling means that reported currency numbers are generally about eight or nine percentage points below the constant currency numbers across our financial metrics. Adjusted operating profit increased by 50% to £242 million. This reflected a better overall product mix and volume, resulting in return on sales increasing by 190 basis points to 25.9%. Adjusted profit before tax came in just shy of £230 million, up 50% on prior year. With the effective tax rate broadly unchanged at 24.4%, the increase in the number of shares in issue following the Iberchem equity placing at the end of last year saw adjusted earnings per share up 40% to 124 pence. The interim dividend has increased to 43.5 pence, up 10% per share and 19% in cash cost. Perhaps the only disappointing number on this slide is the free cash flow, which dropped by 47% on prior year to 43 million sterling. due to higher capital investment and working capital build, which I'll explain later. Adjusting profit items charged in the period totaled £25 million, including an increased charge for intangible amortisation following recent acquisition activity, and exceptional items just under £9 million, covering Avanti deferred consideration and M&A costs. For Avanti, we have increased the expected earn-out to 100%, or $75 million, to reflect the growth of the Lipid Systems platform. This is a win-win for both Kroda and Avanti shareholders. The M&A costs relate to our first-half acquisitions and preparing parts of the PTIC business for sale. Profit for tax on an IFRS basis was £204 million. The left hand chart shows the sales bridge for first half 21 versus the same period of 2020, recalling that Q2 20 was the worst quarter for us during the COVID outbreak. Underlying sales are up 27% in the first half of this year, equally split between price mix and volume. Price mix includes an estimated increase in average selling prices of 5 percentage points to recover higher raw material prices since year end. Mix improved in personal care and in life sciences. Acquisitions added 20% year-on-year to group sales, giving 47% constant currency sales growth. Currency translation, due to the strength of sterling, particularly against the US dollar, had an adverse 8% impact, giving a 39% rise in reported currency sales. Now, I'm conscious that the impact of lipid systems growth, particularly for COVID vaccines, has had a significant impact on the first half. And it would be easy, but incorrect, to conclude that the strong performance has been driven predominantly by this. So in the right hand chart, I've looked at the first half growth rate through a different lens. Of the underlying 27% sales growth, 8 percentage points have come from Lipid Systems and 19 percentage points from Crota's existing business, reflecting strong growth in consumer care, the rest of life sciences and performance technologies. Of the acquisition growth of 20 percentage points, 14 points has come from Ivochem and 6 from Avanti, and roughly half of Avanti's sales are in Lipid Systems. Turning now to look at the sector overview. Consumer care sales grew by 46% in reported currency. Adjusted operating profit growth was half this level, reflecting that Ibikem operates at a lower margin than the personal care business. As a result of this dilution effect, return on sales was just under 25%. The standout performer was again Life Sciences. Having seen no discernible negative impact from COVID-19 last year, sales grew in the first half of 2021 by 61%. With a stronger product mix, adjusted operating profit almost doubled and return on sales reached 39%. Performance technologies saw a strong sales recovery from the impact of COVID last year, with first-half sales 15% up on prior year, all organically driven. The benefits of greater volume on operating leverage saw adjusted operating profit 18% higher and return on sales moving above 15%. Worth noting across all the sectors is the impact of a higher remuneration incentive charge on first-half profitability. This comprises the bonus cost, having seen no group-wide bonuses accrue in 2019 or 2020, together with a higher share-based payment charge reflecting the strong share price performance and the fact that the vast majority of our employees have share ownership in CRODA. The impact of this was to reduce return on sales year-on-year by a little over 2 percentage points. Now let's look at each of the three principal sectors in some more detail. 2021 saw the creation of the consumer care sector, comprising CRODA's leading global position in personal care, a growing home care business, and Ibogaine fragrances acquired last November. After a steady recovery in the second half of 2020 after COVID-19 hit going out sales of actives and cosmetics, personal care improved rapidly in the first half of 21. It delivered underlying sales growth of 19%, and sales are now 8% ahead of pre-pandemic levels from 2019. Growth was strongest in the high-end, IP-rich products, with beauty-active sales up 26%. Beauty effects saw a progressive improvement in demand for sun care, cosmetics and hair care markets, growing sales by 11%, but remained constrained by some continuing lockdowns. Beauty formulation enjoyed resilient sales through pandemic lockdown, with its focus on at-home use products, but still delivered 8% growth this year. After strong demand for hygiene products during 2020, home care sales slowed to 5% this year. Customer relaunches using Kroda's Fabric Care technology, together with a progressive replacement of petrochemical products with bio-based surfactants from a US eco-plant, should drive further growth. Reported IBKM sales grew by 13%, continuing the double-digit percentage sales CAGR enjoyed pre-acquisition. IBKM's profit was in line with our acquisition plan. With active sales strong, this drove better product mix and margin improvement in the underlying business. Price mix improved by 7% and volume was 11% higher. Ibogaine, together with the smaller 2021 acquisitions, added 38 percentage points, and currency translation was an adverse 10%, to give the reported sales increase of 46%. Life Sciences continues to develop into a business to rival Crota's long-held leadership in consumer care markets. With its focus on drug, vaccine and crop science delivery systems, the sector is growing sales through organic expansion and by leveraging acquired technologies. The first half year saw sales up 61% and adjusted operating profit almost double. Within underlying sales, 47% higher, the existing business added 17 percentage points to sector growth. We saw an outstanding healthcare performance with rapid expansion in all three patient healthcare platforms. with sales of vaccine adjuvants and specialty excipients each up by over two thirds and new manufacturing capacity on stream to support both platforms. Crop protection and seed enhancement each delivered double digit percentage growth year on year. This demonstrated the breadth of the growth across the life sciences portfolio. The scale up of lipid systems at Crota sites added 30 percentage points of growth and the successful integration of the Avanti acquisition added 23 percentage points. Currency translation was 9% adverse. The sector is moving into higher value, lower volume niches. This is reflected in an increase in return on sales, which has risen 11 percentage points over the last five years. Growth in both sales and margin in the first half of 2021 have been exceptionally strong. As we bring capacity on stream and deploy more people to support this growth, we expect both margin and growth to moderate somewhat. However, the overall momentum is expected to remain positive. The first half year for performance technologies saw a continued improvement in sales driven by a recovery in industrial markets and sustainability driven demand. Margins also improved due to a better business mix and operating leverage. Sales increased by 15%. Smart Materials has led the recovery with sales up 18%. We've seen strong demand for food packaging and protective equipment, recovery and broader polymer demand, and growing customer requirements for sustainable solutions such as biodegradable and recyclable materials. This growth has been supported by a progressive improvement in energy technologies with a 10% increase in sales, Industrial markets have recovered and our demand has outpaced this broader recovery thanks to our exposure to higher growth markets, including next generation applications such as electric vehicles. Underlying sales for the sector are now 11% ahead of 2019, so well ahead of pre-pandemic levels. Free cash flow fell to £43 million as a result of working capital build associated with the growth in demand and the increase in capital expenditure. Of the £98 million investment in working capital, £72 million was the prior larger impact of higher raw material prices and increased demand. £20 million was an increase in contingency stock to manage raw material availability and forward price rises, which leaves £6 million as the net increase in working capital. So I'm not uncomfortable with the overall position here. We continued to deploy capital to deliver sustainable growth in life science and consumer care markets, and the first half capital expenditure was £80 million. We invested £40 million of this in healthcare capacity in vaccine adjuvants and lipid systems, and we commissioned a £30 million investment, which is doubled capacity of specialty excipients in the US. In consumer care, we invested €70 million in the acquisition of Arban Muller in beauty actives and Parflex in fragrances. Total investment in capital spend and acquisition totaled £140 million in the first half year, and this reflects elements one and three of the group's capital allocation policy, which is shown here. We expect to continue with the current accelerated capital investment programme for the remainder of 2021, given the strong demand, environment and range of opportunities, particularly in consumer and life sciences. In addition, in Element 2, we continued to provide regular returns to shareholders, increasing the interim dividend by 10%. And in Element 4, we continued to maintain an effective balance sheet. At 30 June 2021, leverage ratio had reduced to 1.7 times. I'll now hand you back to Steve to update you on our strategic priorities.

Thanks, Jez. Back again. Let me take you through the back of the pack then, and thanks to Jez. The framework for our strategy will be familiar to most of you, but at its core, we believe that sustainability together with innovation will drive our future growth. Sustainability trends are increasing rapidly, driven by consumer demand and regulatory change. We are responding through relentless innovation to help customers achieve their own sustainability objectives, and that's enabling us to win market share. We've made strong progress implementing our sector strategies over the last 12 months, expanding life sciences, strengthening consumer care and refining performance technologies. We've done our best work coming out of the COVID-19 crisis, which I'll come on to now, and the company is in a very strong position to capitalise on this going forward. Turning to the next slide then, the two strategic acquisitions we made last year have delivered significant benefits for CRODA. In particular, our acquisition of Avanti has enabled us to play an important role in the manufacture and rollout of COVID-19 drugs and vaccines, supporting 25 COVID-related products, something that we're very proud of, each and every one of us in Croda. Lipid system sales are now expected to reach at least $200 million in 2021, principally for our major COVID-19 vaccine contract, compared with guidance of $125 million previously. Demand for COVID-19 solution ingredients remains uncertain beyond the short term and the current level of sales could moderate, but we expect to see an ongoing expansion in the range of applications for lipid systems in vaccines and therapeutic drugs of the medium term. In future, we expect lipid systems to be used for mRNA drugs and vaccines to combat other infectious diseases such as flu and non-mRNA applications, including lipid systems for vaccine adjuvants. So as a result, we expect this to become a more meaningful part of our business. Iberchem's sales grew by 13% and the integration process has moved along at pace and we're firmly on track to deliver targeted annual synergies for 48 million euros by 2025. Iberchem's focus on higher growth emerging markets will drive significant value for the business in the coming years. You've heard me talk repeatedly now about focusing Crota on the faster growth markets of the future, and that's exactly what we're doing. It's all about making bigger, bolder bets on niche markets to either expand or build our leadership positions and drive significant value. So across both life sciences and consumer care, these are the areas that we are focused on and where we are delivering on our purpose and using smart science to improve lives. All eight of our core businesses shown here are performing strongly and are well positioned for future growth in markets that are already growing impressively. Turning to drug delivery then, drug delivery systems has been an area that we've been investing in for nearly two decades. We're focused on three platforms, all of which are niche, highly specialised areas where we see compelling opportunities for future growth. Given the size of each market and the leadership position that we've established, The market for specialty excipients continues to grow, driven by the expansion in injectable drugs using biological actives which continue to dominate new drug launches. Crota provides the broadest range of high purity excipients and purity is what our customers want. Lipid systems offer significant potential beyond COVID-19 for a wide variety of future mRNA and gene therapy applications, reflected in the market value which is currently doubling each year. We have a first mover advantage established through the Avanti acquisition and augmented by continued innovation and over £40 million of capital investment deployed in the last year. Vaccine adjuvants are another fast growing area. The vaccine market has more than doubled since 2019 and much of this is driven by demand for COVID-19 vaccines. And we're in a leading position founded on the technology that we acquired with Biosector in 2018. So we see significant opportunities in the future, combating both infectious and non-infectious diseases. So taken in the round together, we're working on more than 100 COVID-19 projects in over 20 countries across these three drug delivery platforms. the majority of which utilise our vaccine adjuvant technologies in addition to our expertise in specialty excipients and lipid systems. In R&D, our progress is being fuelled by innovation, innovation that is being driven by significant levels of investment and by working closely with our customers Biological drugs, normally administered by injection in liquid form, dominate the hospital prescription market. And we have the broadest range of high-purity excipients for biological formulation, and have launched a further eight excipients in the last year alone, taking the total to more than 50 that we have in the market. So we're scaling up in all areas, with lipid systems being no exception. And with over 200 lipid-based vaccines and drugs in Phase 1, 2 and 3 clinical trials, and a similar number in research, there is a huge opportunity for us. And we're reinforcing our market leading position through R&D investment and innovation. And finally, competition in the vaccine adjuvant market is mainly limited to a small number of traditional adjuvant manufacturers. And we're investing in the next generation adjuvant technologies and increasing the collaboration with Avanti to become more and more involved with the fight against other World Health Organization listed diseases. So to ensure that we continue to grow in this area, we're rapidly scaling up our operations with 100 million of capital expenditure, over 40 million of which we've invested this half. We've doubled our capacity for specialty excipients in the US with additional capability in Japan. And at Avanti, we've doubled the number of employees and double capacity, which we'll start to benefit from this quarter. So as Jez has said, we've also been scaling up Avanti's technologies at existing quota sites in the UK, and we've also doubled our vaccine adjuvant capacity, which is coming on stream now. These are already some of the highest returning investments in our portfolio, and we're confident that this trend will continue. Moving to consumer markets then, this slide gives you a picture of what we're doing in the consumer care sector. On the chart top left, you will see that the markets for our technologies are growing more quickly than personal care as a whole. Our peptides, botanicals and biotechnology ingredients are all fundamental to both the current and future generations of personal care products. And with biotechnology the fastest growing technology, whilst the number of new product launches has been up and down through the pandemic, There's been a steady upward trend in new products with sustainability claims, more than doubling since 2019. That trend will accelerate driven by today's younger consumer demand for green, clean and conscious beauty. And finally, China will continue to be the fastest growing personal care market globally, which is why we've more than doubled our presence there over the last year. And as I've said many times now, the sustainability trends are enabling us to win lots of new business. In future, we expect to grow consumer care both through novel product offerings and by unseating incumbent suppliers because two-thirds of our raw materials are bio-based and our ingredients deliver sustainability benefits to customers. So a good example of this is our Eco range of sustainable surfactants that use corn-based bioethanol as a raw material. Our eco plant is now fully up and running after some well-documented operational issues and we're rapidly seeing the benefits of this investment. We've seen a tenfold increase in the number of personal care customers with an equivalent increase in sales and have more than doubled the number of home care customers in the period from a higher base. So moving clockwise around the slide, we're also seeing a renaissance in very mild surfactants that have been in our product range for a number of years. Unlike similar ingredients from competitors, they are sulfate-free, and this is one of the things consumers are increasingly looking for with the clean beauty trend. Through our Soderma business in France and IRB in Italy, we're the market leaders in biotechnology and personal care, the fastest-growing beauty technology. And as an example, this has enabled us to develop Majestum, a market-leading product used to treat sagging skin on the face and neck, one for the senior members of the cell side dialing into the call. This product has been created from an Edelweiss stem cell culture and is just one of 50 products that Suderma has brought to market using biotechnology and one of over 100 crudder ingredients that are biotech based. We're also creating new market niches within home care and have recently helped Unilever to relaunch its comfort brand in Europe and Asia using our protein technologies that protect clothes from damage in the washing cycle. And it's all about finding more and more innovation. We're also the market leaders in botanicals, where we source ingredients from plants, a market that is growing significantly faster than the average for personal care. And to enhance our position, we acquired Alban Muller in March, who have a portfolio of 100% natural actives, many sourced from local farmers too. We're increasing our sustainable actives innovation to cater for that surge in consumer demand that we're seeing. Our beauty actives team recently launched Amazing, a biodegradable product with its origins in wild ginger that improves the appearance of dark-eyed circles. Overall, in the last 12 months, we've more than doubled the number of people we've focused on consumer care innovation, putting more R&D capacity close to customers and rapidly increasing biotechnology investment. So just building on the earlier comments about Iberchem, we're very pleased with its progress, delivering double-digit sales growth with profit on plan and good progress realising revenue synergies. Earlier in the year, we acquired Parfex, a small bolt-on that increases Iberchem's fine fragrance and sustainable offerings. We've established our creation centre for fine fragrances at Parfex in Grasse in southern France, where we will advance our R&D and manufacture of natural fragrances, where we see significant opportunities going forward. And as you know, a core part of the rationale for acquiring Iberchem was to extend our presence in emerging markets. And we've been increasing the collaboration between Iberchem and Crota China, supported by further investment and capacity expansions in the region. We're already seeing signs of early growth as a result, which is encouraging. And we've established a new Iberchem team on our main Crota site in Brazil, and are seeing exciting opportunities to grow Iberchem in mature markets, for example, leveraging Crota's sales network and logistic teams in North America. As I mentioned earlier, performance technologies have seen very strong recovery. Our smart materials technology is responding to the increased demand for sustainable solutions, such as biodegradable and recyclable polymers. In energy technologies too, we're seeing lots of exciting innovation that is helping us grow ahead of the market. As we said at the time we announced the strategic review of our performance technologies and industrial chemicals businesses, collectively known as PTIC, these are good businesses with a strong and exciting future. But like consumer care and life sciences, they need ongoing investment. So we are reviewing what the best ownership structure is going forward and the work that we've undertaken in the last few months now tells us that up to 75% of PTIC could be carved out to operate as a standalone entity or as part of another business. The critical objective is to ensure that PTIC can realise its full potential and thrive and we will provide a further update when the strategic review concludes at the end of the year. And finally, we're committed to being the most sustainable supplier of innovative ingredients, which is the right thing to do and also opens up lots of exciting commercial opportunities for Crota going forward. Consumers want more information about the products that they buy, and we've made strong progress with our ingredient transparency project. We're also making good progress with our decarbonisation agenda, important as much as anything when it comes to helping our customers reduce their Scope 3 emissions. Our focus has been on implementing decarbonisation roadmaps that cover over 90% of our emissions and using an internal carbon price to support our decision making. We've recently become only the third major chemical company in the world to have a 1.5 degree science-based target verified, something we're very proud of. And Kroda has been ranked as the number one most sustainable international company, putting us ahead of customers we admire so much in the form of L'Oreal and Unilever. So in summary then, we've had a record first half that reflects three key things. Strong underlying growth in our existing business. Secondly, significant benefits from the acquisitions of Avante and Iberchem. And thirdly, life sciences, with our healthcare business performing exceptionally well. In terms of the outlook, whilst customer restocking is expected to moderate, we expect continued underlying growth across all sectors in the second half of the year. Together with the benefits of recent acquisitions and at least $200 million of lipid system sales, we now expect full-year adjusted profit before tax to be significantly ahead of current expectations. So let me stop there. Jez and I are very happy now to take your questions.