Croda International Plc

As Steve highlighted, the group delivered an excellent financial performance in the first half of the year, building on the record performance seen in 2021. Sales increased to over £1.1 billion and were up by 21% against the prior year, 18% in constant currency terms. Adjusted operating profit increased by 24% to £300 million and EBIT return on sales improved by 70 basis points and is now approaching 27%. Adjusted profit before tax rose by 26% to £289 million, and with the tax rate broadly flat against the prior year of 24%, adjusted earnings per share increased by 25% to £155. We've declared an interim dividend of £47, an increase of 8%, continuing a 30-year track record of unbroken dividend growth. Free cash flow reduced to £21 million in the period, with significant investment in working capital reflecting the strong sales growth. Turning now to the IFRS reconciliation, exceptional items and intangible amortisation totaled £13 million. We delivered a profit on divestment of the PTIC business of £361 million, and as a result, on an IFRS basis, profit before tax more than tripled to £637 million. The P-TIC divestment concluded on 30 June, so the first half year includes a full period of P-TIC, reported in the usual way as continuing operations. Turning now to the sales bridge for the first half. The chemical sector has seen significant inflation for some 18 months, which continued through the first half of 2022. We have continued to fully recover cost increases, demonstrating the strength of Kroda's business Price Mix added 22% year-on-year, of which the successful recovery of cost inflation through higher selling prices is estimated to have contributed 20% of the points. This was supported by a 2% improvement in Mix. Volume declined by 5% year-on-year. The first half of last year had been characterised by strong consumer demand, coupled with significant customer restocking. not wanting to be short of product as the post-COVID recovery took off, combined with the uncertainties around global supply chains and rising supply prices. As a result, we were serving the high demand last year from both production and existing stocks. The first half of 2022 has seen supply chains and service levels improve, with the result that customer ordering patterns have been normalised. Nevertheless, consumer demand has remained strong and our capacity does remain tight in some chemistries. As a result, we have demarketed some lower margin product. This has been reflected in the slightly lower volume, but the higher margin you see. In addition, overall acquisitions added 1% and currency translation of further 3%, giving reported sales growth in the first half of 21%. I've also shown what the impact of the PTIC divestment would have been had it occurred on the 1st of January. Taking account of sales retained by CRODA and the impact of a new supply agreement to Cargill Post Divestment, revenue would have been £191 million lower. This next slide unwraps the cost inflation further. The left-hand side shows the breakdown of sales. Raw materials make up 35% of our sales value, labour 19% and energy and freight 3% each. 9% is in other costs and 31% is our EBITDA margin. Raw materials saw a 25% increase on average over the first half year compared with the final quarter of 2021. With a broad basket of raw materials, mostly grown commodities, it was unprecedented to see so many different materials increasing together. The conflict in Ukraine added further to the existing inflation. Now, we don't hedge raw material prices, but we buy on a quarterly basis, and our operating model ensures that we get successful recovery of this cost inflation as it occurs. Freight costs continue to inflate after a challenging 2021 for global distribution systems, and we're up 14% in the first half. Energy costs were up by 47%, though this benefited from a degree of forward cover, which we take on a rolling basis. Energy costs constitute a relatively small proportion of our cost base, but have been recovered through selling prices. Given our manufacturing footprint, we don't anticipate any material exposure to potential gas shortages in Europe from the current forward uncertainty, although some of our petrochemical or material suppliers may see some impact. As we look forward, we see signs of smaller price increases to many materials, but we will continue to recover inflation as and when it occurs, protecting profit in line with our operating model. Growth was strong across all regions, with double-digit percentage growth on both the reported and underlying basis, that is, excluding the impact of currency translation and M&A. Reported sales growth was particularly strong in Asia at 31%, including in China, where sales grew even in April, the worst of the COVID lockdown months. Sales in North America continued to grow strongly, and in Latin America reported sales growth of 35% was driven by excellent demand in crop care. In Europe, reported sales grew by 13%, despite a small adverse impact from the conflict in Ukraine. Sales impacted by the conflict are just 1% of the group's total revenue. Turning now to look at how the sectors performed. Consumer care grew sales by 24%, while adjusted operating profit was 34% higher. And as a result, return on sales increased 200 basis points to 26.6%. Life sciences continues to grow. Sales were up 14%, with adjusted operating profit 4% higher, against a record prior year performance that included peak COVID-19 demand. Life Sciences delivered a best-in-class return on sales of 36%. The combined performance of performance technologies and industrial chemicals saw sales grow by 24% and profit by 61%. Industrial markets reached top of the cycle during the period, with prices for commodity by-products particularly strong, delivering an overall return on sales of over 17%. Sales began to slow somewhat in the second quarter. and there was broadly similar performance between the business we divested and the partner we've retained. As already noted, at the group sales level, sales were up 21% and adjusted operating profit 24%, with return on sales at 26.6%. As in previous years, return on sales is impacted by the level of our variable remuneration charge. This particularly reflects the impact of the share price and the market-to-market value of our global employee share plans. The lower share price due across the first half year saw a benefit of 1.5 percentage points to both sector and group return on sales. So now let's look at each of the sectors in turn. Consumer care was the standout performer in the first half year. Underlying sales increased by 18%. Price mix was up 22% driven by successful cost inflation recovery. and volume was marginally lower, reflecting the strong prior-year comparator which benefited from the post-COVID resurgence in demand and the associated customer restocking that I mentioned. This combined with some selective demarketing of low-margin business to manage capacity limitations, with underlying consumer demand volume remaining robust. The prior year acquisitions of Album Muller in beauty actives and Parfix in F&F added 3% to sales growth. Currency translation also added 3%, resulting in overall reported growth for consumer care of 24%. We saw sales growth across all four business units. Beauty care was the strongest and noteworthy performance given this was the business where growth had been inconsistent back in 2018 and 2019. Consumer demand for sustainable ingredients, such as eco-suffactants, and our enhanced formulation capability for customers are driving growth and creating greater resilience. Alongside beauty care, the beauty actives business continues to strengthen with the integration of Albon Muller and complementary natural actives. Home care continues to accelerate its customer rollouts in high-value proteins for fabric care. And the F&F business saw some improved growth in emerging markets alongside good progress in synergy capture. Consumer care return on sales increased by 200 basis points to 26.6%. Following an outstanding year for life sciences in 2021, with a rapid expansion of healthcare following the Avanti acquisition and COVID vaccine sales, the first half of 2022 saw further progress, consolidating on this exceptional performance. Underlying sales growth was 12%, with price mix up 1% and volume growth of 11%. Currency translation added 2%, resulting in reported sales growth of 14%. Volume growth was driven by a standout performance in favourable market conditions for crop protection. But the lower average pricing in crop also reflects in the lower price mix for life sciences and in its slightly lower return on sales of 36%. This crop growth built on a strong second half of 2021, so the headline growth will slow in the second half this year, but the outlook remains strongly positive with high commodity prices driving great demand. Healthcare consolidated on a stellar 2021, with growth across all of its platforms other than lipid systems. Recent investment in capacity expansion in patient health drove continued growth in specialty excipients and in vaccine adjuvants. We're starting to see lower demand for lipid systems, as COVID vaccine use declines from its peak. 2021 saw total lipid system sales of about $230 million, of which 190 was for COVID-related vaccines and the balance, the Avanti R&D lipids business. The first half of 2022 saw $90 million of total lipid system sales. Looking forward, we expect a further second half decline to give full-year sales this year around $150 million, within $120 million in each of 23 and 24, as COVID demand stabilises at this lower level. After this, total lipid sales should return to growth from 2025, as clinical opportunities in mRNA and nucleic acids develop and convert into commercial-scale projects, leveraging Croda's wider scale-up capability and Avanti's great pharma R&D access. It's important to remember that this was our rationale for acquiring Avanti, to develop this new patient healthcare delivery platform in exciting new technologies. But it's also good to be approaching the bottom of the curve from the initial COVID sales, and important, I think, to see the profit growth we'll still be delivering in 2022, despite an $80 million decline in total of its sales. We're building a strong foundation for in drug delivery, which will deliver exciting growth in the future. And Steve will share some of the exciting pipeline programs later. In PTIC, first half performance was strong, with underlying sales growth of 22%. Price mix increased by 32%, reflecting the most significant cost inflation seen across the group, but volume declined by 10% against a strong comparator, and as industrial markets peaked in the second quarter. On the 30th of June, we completed the principal PTIC divestment with gross proceeds of €775 million, with a potential subsequent sale of CIPO in China subject to reaching an agreement with our local partner. The retained business will now form the new industrial specialty sector and play a critical role supporting the efficiency of the consumer care and the life science sectors on common manufacturing sites. In the first half, the combined PTIC business delivered 343 million of sales and 61 million of operating profit. Had we made the divestment on the 1st of January, the impact on the group overall would have been to reduce sales by 191 million and adjusted operating profit by 39 million pounds, as shown in the table. This includes sales from a new supply agreement with Cargill and the impact of stranded costs across all three sectors, which we expect to mitigate over time through future growth. Going forward, we expect the industrial specialties business to operate with a return on sales at or just above 10%. Now turning to cash flow, EBITDA grew strongly. Working capital increased by £184 million, primarily reflecting the impact of inflation on inventory value and receivables. The bar chart shows that about two-thirds of the working capital increase reflects the simple pro-rata impact of inflation, a constant day's cover. One third reflected investment for growth, primarily into higher receivables. We expect working capital to reduce in the second half of the year, particularly if raw material inflation starts to recede as expected. Net proceeds from the divestment were £613 million, reducing half year net debt to £331 million, a leverage ratio of 0.69 EBITDA. This next slide shows how we intend to use those proceeds. Capital allocation policy remains unchanged and the divestment will allow us to deploy more capital in line with this policy to support expansion in higher growth, higher return in consumer care and life science markets. We have a rich seam of growth opportunities and will prioritise organic capital expenditure to drive value creation through new capacity, product innovation and expansion in attractive geographic markets. This will be complemented with targeted acquisitions in technology adjacencies, in line with our preferred approach to buy and build. This is demonstrated by our recent investments in patient health, where we have secured new technology platforms, like vaccine adjuvants in Denmark and lipid systems in the US, through modest acquisition spends, and then built for a global scale through organic investment. Our typical capital investment spend is going to be around 6% of annual sales, or just over £100 million currently. We believe this is sufficient to maintain our asset base and deliver target organic growth rates. In addition, we're investing £160 million over four years to access fast growth and farm-out opportunities, which Steve will cover shortly. We're also committed to pay a regular dividend to shareholders with the 8% increase that I mentioned earlier. And in addition, we monitor leverage against our target policy of one to two times EBITDA, returning surplus capital to shareholders when identified.

I'll now hand you back to Steve to look at our strategic opportunities.

Many thanks, Jez. And for the first time in our history, Kroda is now solely comprised of eight growth businesses supported by industrial specialties. We expect each of them to deliver sales growth of at least one and a half times GDP, with return on sales above 20% and ROIC over two times the cost of capital. Ten years ago, you would be investing in our business, one business, and it was called Actives. Now you can take your pick. You might choose to invest in us because of our personal care, our F&F business, or even our crop franchise. Or maybe you invest in Crota because of the emerging healthcare platforms that we've got. There is a much broader breadth and depth to our growth than in the past. We also no longer have exposure to industrial markets to worry about, and the portfolio has rich innovation in each area. So this increased focus makes our future growth much more resilient, even in a more uncertain environment. So in consumer care, Beauty Access is still the leading innovator in the skincare market, with a strong position with Prestige and Mastige brands. Beauty Care is a stronger, broader business with multiple revenue streams, and growth is being driven by a structural shift in behaviour by customers and consumers towards sustainable ingredients. F&F has significant exposure to fast growth markets, underpinned by a highly flexible and responsive business model. And whilst home care is concentrated on fast growing niches, that should be broadly unaffected by the macro. So consumer care has a much broader portfolio today than we had two years ago. Turning to life sciences, we expect all the businesses to be pretty immune to any deterioration in the macro environment. People don't compromise on health and farmers continue to look for ways to protect their crops and get more output from their land. As consumers think more and more about their impact on the wider environment, our customers want us to deliver novel, sustainable ingredients, and this has become a real differentiator for us. We're leading in four areas. Firstly, our target is for the raw materials that we use to be 75% bio-based by 2030, and by continuing to move away from petrochemicals, we're helping our customers to meet their own commitments to fossil-free formulations. Secondly, by ensuring that our raw material sourcing has a positive impact on communities in our supply chain, giving our customers an even stronger platform from which to market purpose-driven brands. And thirdly, by decarbonizing our operations and supply chain to meet our 1.5 degrees science-based target. We expect to reduce our product carbon footprint by 35% and we're developing a scope three index so our customers can see how our actions are benefiting them. And fourthly, with R&D projects that help to transition our portfolio and enable our customers to meet their own sustainability goals. We're combining leadership on sustainability with market-leading innovation to deliver sustainable growth. Our focus is on niche areas developing next-generation products. R&D is driving growth in our beauty actives business. Recent launches have included an innovative retinol and anti-aging active. By encapsulating the active, We've improved skin penetration by more than nine times, creating the most sustainable retinol-containing complex on the market. Beauty care is delivering more consistent top-line growth, particularly in the higher-value sun and hair care markets. Sales of eco-biobase surfactants continue to accelerate, and both in beauty care and home care, where they have doubled in the past first half year. And in F&F, we have launched encapsulated fragrances, one of the first on the market, and expanded our presence in Indonesia and South Africa, as well as launching in Brazil. Innovation, as you all know, is crud as light blood and the bedrock of our future growth. We continue to make significant investments in R&D and are taking bigger bets with more ambitious projects. Our pipeline is being strengthened by our biotech investments, such as Nautilus expertise in blue or marine biotech, and we're using microorganisms found on the ocean floor to find new ways of treating dandruff, skin ageing and inflammation. Our new biotech-derived surfactants have expanded the options available to customers. They're helping to increase our bio-based portfolio and meet our ambition to eliminate petrochemical-derived surfactants globally by 2030. And biotechnology is opening up new approaches to making fragrance ingredients one of the ways in which we're making our F&F portfolio more sustainable. Investments in organic expansion. form part of the redeployment of capital from the P-TIC divestment into innovative, fast growth markets. We're growing our IP with more specialist scientists coming into the business. And we're expanding sustainable technologies, building on growth in areas like sulfate-free surfactants and ingredients that double the life of fabrics. And we're also increasing geographic coverage, particularly in China. So these investments are delivering results and strengthening our platform for growth for the future. The vast breadth of the consumer care portfolio is at an all-time high. Tens of thousands of products focused on fast growth, high value markets. And our pipeline is getting stronger, responding to both current and future trends, creating next generation technology replacing petrochemical formulations along the way. We're winning by focusing on premium, share, agility and fast growing and sustainability driven niches. So consumer care has developed very significantly to become an even more resilient growth platform, underpinned by a strong pipeline and focused investment. Turning to life sciences then. Growth is being driven by demand for high-value delivery systems to enable the latest biological drugs. Biologics is a huge market, accounting for 70% of the top 20 selling drugs, enabling doctors to treat diseases when they could previously only treat the symptoms. So going across the three areas that you will be familiar with, growth in excipients is being driven by expansion in injectable drugs using biological APIs, such as monoclonal antibodies with 5,000 clinical trials currently underway. Adjuvant demand is being driven by new vaccines, greater adjuvants used to enhance the body's reaction to vaccine protection and WHO programmes to expand vaccine take-up in developing countries. So vaccines are also increasingly being used to trigger an immune response to an already contracted disease, to treat HIV for example. There are 1,500 clinical trials for these therapeutic vaccines underway globally. And whilst lipid systems have played a critical role in COVID vaccines, they offer significant potential beyond COVID-19 as the preferred delivery system for nucleic acid therapeutics. The mRNA market is expected to reach $35 billion over the next 15 years, and 180 clinical trials are already underway for applications across preventative and therapeutic vaccines and therapeutic drugs. So biologics also has the potential to revolutionise crop science with our innovative delivery systems. Crota is well positioned to benefit from the move into biopesticides, which are growing at twice the rate of traditional crop care. Our biopharma pipeline is very exciting indeed. We're partnering with major pharma brands to provide specialty excipients for monoclonal antibodies. Applications range from oncology to combating macular degeneration, a condition that affects people's vision. And with the only aseptic manufacturing site for vaccine adjuvants globally, we are the gold standard for aluminium adjuvants used in a third of preventative vaccines. So we have a strong sales pipeline across a variety of vaccines, including flu, pneumonia, shingles and HIV. And therapeutic vaccines promise even faster growth rates, enabling the treatment of diseases such as HIV with a new vaccine that is in Phase 3 trials in Africa. And our lipid systems are being used in preventative vaccines for flu and RSV, a common virus seen in schools during the winter, and in therapeutic vaccines for cancer. All of this highlights how we're involved in helping to treat some of the biggest diseases in the world, creating more and more opportunities for Crodo. And similar to consumer care, our innovation pipeline in life sciences is extremely strong. Here are some examples of applications that use our current generation delivery systems, but illustrate, more importantly, the focus of our future innovation. The first one uses one of our specialist high purity excipients, which has been developed for APIs that require superior solubility performance. They will help enable diabetics, for example, to take insulin orally rather than by injection. And this project is currently in phase three clinical trials in the US. Our vaccine adjuvants are being used in a novel personalised immunotherapy for the treatment of patients with melanoma, lung cancer and bladder cancer as well. So phase two clinical trials are underway in Denmark at the moment. And most exciting of all, our lipid systems are being used by customers which recently completed the world's first dosing of a patient with a gene editing therapy and as part of a clinical trial for the treatment of heart disease. We are truly applying our purpose of smart science to improve lives in all of these opportunities. And again, we're driving growth through focused investment. And as Jez said earlier, Our preferred approach here is to adopt a buy and build model, securing new technology platforms and know-how through modest acquisition spends, then building site expansion from within. We have already double capacity at our specialty excipients plant in Pennsylvania and are rapidly expanding our adjuvant systems factory in Denmark. Our priority here is continuing to build our knowledge base in lipid systems too, so we are investing in our R&D and preclinical capabilities at Avanti, and in a second scale-up site in Pennsylvania to augment current commercial scale-up capacity at Leek in the UK. Between 2021 and 2024, we will invest up to £160 million in new capacity to deliver on the exciting pharmaceutical platform we're building. Complementing our own investment, the US and UK governments are co-investing up to £75 million too, recognising the importance of new generation delivery systems to discovery. These are already some of the highest returning investments in our portfolio, and the expansion will drive accelerated growth. We're going to go into a lot more detail at our investor day in October, but our pipeline in biopharma will be a significant growth engine for CRODA, and it's getting bigger. In the first half, we secured 30 new customers and 18 new clinical and preclinical programs, bringing the total to 330. More than three quarters of these programs are for non-COVID-19 applications, up from two thirds just six months ago. And the pie chart in the middle shows the proportion by each product class. So monoclonal antibody and oncology programs make up the majority of our specialty excipient pipeline, as well as immunosuppressants. In vaccine adjuvants, in addition to our continued focus on fighting against WHO-listed diseases, immunotherapy applications, such as the personalised cancer treatment I mentioned earlier, are becoming increasingly important. And in lipid systems, all of the new programmes in the first half were for non-COVID applications. In this business, we're now involved in more oncology and gene editing trials than we are for COVID. And new mRNA vaccines beyond COVID are a particular area of focus. So finally, coming to outlook then, with stronger profits than anticipated in the first half, full-year profit before tax will be modestly ahead of our previous expectations. And that is despite growth moderating in consumer markets in the second half and full-year lipid sales reducing to $150 million versus $230 million last year. Our improved overall outlook reflects the things I've talked about today, a more resilient growth platform in consumer care ongoing demand in CROP and continued overall growth in healthcare. So in summary, CROP's powerful operating model, its increased focus, the greater innovation and exciting pipeline underpin our resilience, ensuring we're even better equipped for future growth. Now, Jez and I are very happy to take your questions.