Croda International Plc

Good morning everyone and a warm welcome to our full year results presentation. Great to see lots of you in the room and many on as well too. As usual I'm here with Jez, our final appearance on the public stage together after an eight year partnership. So it's official now, Hugh Grant is retiring. His successor, a lot of people think he looks like you. His successor, Louisa Burdett, here. Could have called you something else there, Jed. But his successor, Louisa Burdett, is here today. And I hope you get a chance to say hello and see her afterwards as well. She's looking forward to introducing herself over the coming months and formally taking over in three weeks as well. And I'm very much looking forward to working with Louisa. She'll be great for Claudia. Okay then, usual agenda then this morning with some overview comments from me before Jez on the numbers and then back to me to get you excited about direction of travel for Croda in terms of our strategy. We'll then of course be very happy to take any of your questions. Okay then. So on to the results then. It's been another milestone year for the group with a huge amount of progress across all areas of the business. Strong growth in core sectors and most geographies. And after adding £150 million of profit in 2021, we've delivered results, record set results again in 2022. We've added a further £50 million of profit. And that's despite divesting our industrial business halfway through the year. and much lower sales of lipid systems during the pandemic. So quite a remarkable achievement. And it demonstrates the strength of the organic growth in the business. And it also shows our ability to navigate a challenging macro environment too, while successfully managing significant input cost inflation and supply chain disruption. A major highlight this year has been the further portfolio evolution in the group. We've exited cyclical industrial markets, to increase our focus on faster growth niches in both consumer care and life sciences, bringing our business closer than ever with the exciting emerging megatrends that we see around the business. And we've continued, as you'd expect us to, to invest in innovation, bringing new products to market, whilst building our pipeline for continued growth in the years to come. The progress is driven by our operating model, the bedrock of our business. And it's reinforced by a relentless focus on commercialising people's knowledge. That's what we do. Alongside disciplined investment and strong execution. And for the first time in Crudas history, sales increased above £2 billion sterling and profits exceeded £500 million. Quite an achievement that too. And I've been really pleased with our ability to manage significant raw material cost inflation. We haven't seen that for about 15 years in the group. Sign of a strong business when you can move profits forward. Price mix was a massive 24%, reflecting the need to recover these costs. And we've announced an 8% increase in the full-year dividend, continuing our unbroken track record of dividend growth of more than 30 years. So turning to the sectors then, I'm very pleased with the strong progress that we've made in our core businesses. Consumer care is becoming ever more resilient, achieving record sales and profits last year. The renaissance in beauty care continues thanks to the strong demand for sustainable ingredients. Solar care was especially strong, reflecting high demand for minimal sunscreens. And while sales of eco, bio-based surfactants are a three-fold increase as well. F&F is bringing great balance to the portfolio. Whilst our industry had to manage significant destocking in the second half, they posted their best half for two years, growing more than 10% in constant currency. So very strong growth there in emerging markets, supported by sales synergies building too. We continue to see a structural shift in consumer demand towards sustainable ingredients, and we're responding to this with a shift to buyer-based and buyer technology across our portfolio. You'll hear a lot more of that over the next year or two. And as expected in consumer care, the second half was impacted by customer destocking following strong demand in 2021, particularly in North America. It also reflects selective demarketing that we've chosen to do on low-margin products due to some capacity constraints. This is a classic destocking cycle playing out in the industry, so important to look at consumer care's performance through the lens of the year as a whole. Life Sciences had another great year, building on exceptional 2021, where we benefited from the strong demand for COVID-19 vaccines. And whilst lipid system sales reduced for COVID vaccines, all other areas grew double-digit growth. Crop protection was a standout performer, as we continue to benefit from from a growing demand for sustainable solutions. We made excellent progress in pharma, not least in growing our pipeline of non-COVID delivery systems. And we've also repositioned the business to increase its focus on fast growth areas and empower further biologics delivery. As you know, we've got six strategic priorities and we've made excellent progress delivering against each one of them this year. We've continued to focus on strengthening consumer care and expanding life sciences, focus on fast-growing niche markets. We're continuing to see fast growth in Asia, where we now have over 1,500 employees, more than in North America. Our recent agreement to acquire Solus Biotech is going to further accelerate our progress, which I'll come on to later. We're scaling biotechnology with more than 100 biotech-derived products now in our portfolio. And our scouting network is building our pipeline of potentially technology acquisitions. So lots of momentum and excellent strategic progress this year. And we've been just as focused on delivering our non-financial targets too. As you can see from the slide, with progress against all of our KPIs, we've delivered a 20% reduction in scope one and two against our baseline year. and with 81% of suppliers now engaged to improve the sustainability of our products. And crucially, we're taking the organisation with us, with three quarters of our employees recommending Crota as a place to work. We're also giving back to the communities that we work in. It's about impact, positive impact. The Crota Foundation has committed £3 million to 21 grants across 19 countries, and it's impacting nearly 15 million lives, and we've just started. So many of these projects utilise the skills and expertise of our people. So, for example, we're helping to enhance the yield of seeds native to the Amazon so that indigenous people can use their land more effectively. So all in all, a great year, and we're all set for the year ahead, which I'll come back to. And we continue to do the right things in Crota, and we do them very well. Now, let me hand over to Hugh for a more detailed run-through of our financial performance. I mean, Jez.

Okay, thanks, Steve, and good morning, everybody. As Steve has highlighted, through consistent execution, the group has another record financial performance in 2022. Reported sales and adjusted profit before tax both increased by 11%, with sales exceeding £2 billion and adjusted profit exceeding £500 million for the first time ever. EBIT return on sales was broadly flat at 24.7%. Adjusted profit before tax increased by £50 million to £496 million. The effective tax rate on adjusted profit rose slightly over 2021 to 22.8%. That's still a bit below our medium-term guidance of 24%. Adjusted EPS was up 9% at £272. And we've proposed an 8% increase in the full-year dividend to £108. Free cash flow has started to improve, with some softening in input cost inflation, with a 9% increase in 2022 to £167 million. Turning to the IFRS reconciliation, exceptional items worth £38 million, primarily an impairment of the goodwill acquired with the standalone Ibekem Flavors business in 2020, which is behind its acquisition plan. Intangible amortisation was unchanged at £34 million, and we delivered a profit on divestment of the P2TIC business of £356 million. So as a result, on an IFRS basis, profit before tax nearly doubled to £780 million. Turning now to the sales bridge, the chemicals sector has seen significant inflation since the start of 2021. with our raw material basket increasing by 23% in 2022, on top of 17% in 2021. Encouragingly, this basket peaked in Q3 and has seen modest declines in Q4 and into the current quarter, although we do continue to see inflation in the other operating expense areas, particularly labour and energy. In response, our powerful operating model has allowed us to successfully recover these inflationary increases. including the benefit of new innovative products, price mix added 24% year-on-year. Organic volume in the retained business declined by 6% year-on-year. The impact of divesting the majority of the PTIC business in June 2022 resulted in a 13% decline in sales. That's the impact on total sales of not owning the divested business in the second half year. Acquisitions added 1%. We also benefited from sterling's weakness, particularly against the US dollar, which increased reported currency sales by 5%. You can also see on the right-hand side what the impact would have been had we not owned the PITIC divested business at all during 2022. Sales would have been £191 million lower than we're reporting today, so that's the sales you need to deduct in order to arrive at the baseline number for 2023. So this slide looks at the same bridge, but for adjusted operating profit. Organic growth in 2022 added 53 million pounds to adjusted profit with growth across all three sectors. This was an excellent performance, particularly as Steve said, given that lipid sales reduced by 60 million US dollars from the peak of 2021's COVID driven demand. The PTIC divestment reduced operating profit by 27 million pounds, being the benefit we had in the second half of 2021 compared with not owning the business in the second half of 2022. There was again a small acquisition profit benefit and currency translation added £19 million. Again, on the right-hand side, you can see what the benefit was in the first half from owning the PTIC business pre-divestment. Operating profit would have been £39 million lower than actually reported. So again, that's the profit that you need to adjust for in baseline in the 2023 performance. So looking now from a geographic destination perspective, all regions saw good growth in sales and profit other than North America. Asia achieved a record year with strong demand, particularly in life sciences, and also delivered modest growth in China despite the pandemic lockdowns. Demand in Western Europe remained robust despite higher prices and energy costs, with strong growth particularly in crop protection and in beauty care. Latin America enjoyed good growth led by demand in the regional crop protection market and supported by consumer care demand, including the new F&F operation there. Eastern Europe saw a negative financial impact from the closure of our Russian business, which overall represented 1% of group sales in 2021. In North America, sales were very strong in 2021 and peaked in the first quarter of 2022. Since then, demand has softened in consumer care and pharma, the latter partly reflecting lower COVID-19 demand post-pandemic. Now we'll look at the global sector performance. Consumer care delivered a solid performance, with sales up 18% and adjusted operating profit 9% higher. Margin was, however, diluted by lower volume and an adverse business mix. 2021 had been an exceptional year in life sciences, so it was very pleasing to see continued sales and profit growth in 2022. Sales reduced to 33.6% due to crop protection being a larger proportion of the sales at a slightly lower margin, together with a normalising lipid systems margin. The new industrial specialties sector holds the remaining industrial businesses and the supply agreement with the new PTIC owner. Sales declined year on year due to the divestment, but were strong in underlying terms thanks to robust commodity prices globally. Despite the divestment, operating profits still increased year on year. Return on sales was in line with our expectations, close to 16%. Looking at that 18% sales growth for consumer care, the sector saw the largest impact from inflation recovery, with price mix 22% higher. By contrast, volume was 12% lower, which was driven by two primary components – Firstly, we had seen very strong demand from customers back in 2021 to meet post-pandemic consumer recovery, with customers also buying ahead to mitigate surging inflation and secure supplies in problematic global supply chains. In the second half of 2021 alone, personal care sales were 20% up year on year. Then during the first half of 2022, supply chain issues eased somewhat, and it became clear that there were significant excess stocks across both our customers and the retail supply chain. This led to destocking by customers in the second half of 2022, particularly in North America, which also has significant onward customer export to China, where retail sales were impacted by COVID lockdowns. Overall, destocking is estimated to have accounted for 5 percentage points of the 2022 volume drop. The second factor is that we suffered some capacity constraints. Earlier in the year, this was due to high demand in areas such as solar and hair care, but later in the year we suffered some plant downtime, constraining supply from some of our sites. Both these factors caused us to demarket, which we hope to recover as 2023 progresses. And this impacted sales by another 5 percentage points. In addition, we exited our Russia operation, reducing sales by 1 percentage point. Previous acquisitions added 2% to overall sales growth and currency added 6%. Across the four businesses in consumer care, beauty care and fragrances saw the strongest growth with increasing demand for sustainable ingredients and a recovery in emerging markets benefiting Iberchem after the weakness it saw in 2021. Asia continues to be a strong growth market in consumer care. We're investing more resource there as well as agreeing the Solus Biotech acquisition in South Korea. That will cement our presence in three key skincare technologies, peptides, retinol and ceramides. Profit in consumer care grew overall through a combination of underlying sales growth and currency benefit. However, return on sales declined to 22.8%. This was impacted by operating gearing on lower volume, particularly in the fourth quarter, together with a weaker business mix as beauty care and F&F were the stronger performers compared with the higher margin beauty actives business. Just under one percentage point of the decline also represents the reallocation of dissynergy costs following the divestment of the PSEC business, which will be recovered as proceeds are reinvested into more growth through acquisition. Now, following an outstanding year in for life sciences in 2021, with rapid expansion of the fire business following the Avanti acquisition, an exceptional COVID demand-driven vaccine, it was great to see further progress in 2022. Sales grew by 19%, with performance strengthening in the second half of the year. Price mix grew by 6%, and volume was 8% high, giving total underlying growth of 14%. There were no acquisitions during the period, but currency at 5%. 2022's strong performance was achieved despite the anticipated 40% decline in sales of lipid systems due to lower demand from our principal COVID-19 vaccine customers. But the balance of the farmer business, together with crop protection and seed enhancement, all grew sales double-digit percentage terms. Crop protection was the standout business, benefiting from strong agricultural commodity prices and a good demand environment. Within FHIR, the nucleic acid delivery systems business is developing its portfolio from the blockbuster COVID-19 vaccines, which drove demand in 2021, to the new mRNA and gene therapy vaccines and therapeutic drugs for the future. 2022 sales in the business were approximately $170 million, a little ahead of our expectations at the half year. mainly due to higher COVID-19 vaccine demand in Q4, although sales are still well down on their peak of $230 million in 2021. More excitingly, sales outside the principal COVID-19 vaccine customers represented almost 40% of the 2022 lipid business and are expected to overtake COVID vaccine demand in 2023. when we still expect to deliver £120 million of total lipid sales. Overall, 2024 lipid sales should be stable with 23, and then we will see growth from applications in mRNA and gene therapy from the growing innovation pipeline thereafter. Turning to cash flow, EBITDA grew strongly. Working capital increased by £134 million, reflecting the impact of inflation on inventory and receivables values, which added £82 million to working capital. with an underlying increase of £50 million in holding higher stocks and having higher receivables. With raw material prices peaking in Q3, working capital has started to reduce, a trend which we expect to continue in 2023. CapEx was a little below our guidance of £150 to £160 million. This is due to a delayed phasing. With the proceeds from the PTIC divestment, net debt reduced to £295 million, which is a leverage ratio of half a turn of EBITDA. On that theme, this is a reminder of our capital allocation policy, particularly relevant given our low gearing level post the PTIC divestment. The policy remains unchanged from what I've shown previously. The divestment is allowing us to deploy more capital to support expansion in higher growth, higher return in consumer care and life science markets. Firstly, we're investing organic capital spend with a rich seam of growth opportunities in new capacity, product innovation and geographic expansion. Our typical capex remains around 6% of sales or £120 million per year. And in addition, we're partway through our pharma investment programme to meet the growth in proteins, vaccine adjuvants and particularly nucleic acid delivery. Crota is investing £175 million in this programme, with an additional £75 million being provided by US and UK governments. Secondly, we're committed to pay a regular and increasing dividend to shareholders, with 22's 8% increase continuing an over 30-year unbroken record of dividend growth. Thirdly, we're complementing our organic investment with targeted acquisitions and technology adjacencies in line with our preferred approach to buy and build. Recently, we announced the acquisition of Solus Biotech and continue to look at target technology platforms in both consumer care and life sciences. And finally, we monitor leverage against our target policy of one to two times EBITDA, returning surplus capital to shareholders where that's identified. So I'll now hand you back to Steve to talk about those strategic opportunities. Thank you.

Thanks, Jez. Okay, then.