Croda International Plc

Good morning, welcome everyone and many thanks for joining our half-year results presentation. I'm here with Louisa as well as David and we'll run through our respective sections of the pack and as usual there will then be plenty of time for your questions at the end. So a straightforward agenda this morning, a quick overview from me before I hand over to Louisa for a detailed run-through of our financials and outlook. I'll then provide an update on some key aspects of our strategy before the Q&A. Okay then, starting with performance. The results for the first half are very much in line with the changes that we announced to our full year guidance on the 9th of June. The significant volume decline that we've seen because of customer destocking inevitably impacted our profits and margins. And despite the challenging conditions, it is testament to the strength of our business that we continue to make good progress. Consumer Care delivered a sequential improvement in volumes, with sales flat for the half. Sales increased 8% in Life Sciences when stripping out the exceptional impact of COVID-19 lipid sales in the first half of last year. We saw improved free cash flow with lower working capital outflow, more than offsetting lower profit and higher capex. And the interim dividend has been maintained at 47p per share. As you've seen from us before in tough conditions, we've taken some immediate actions to address costs and protect profitability. Should current market conditions persist for longer, we'll look to do more in this area. We've also continued to increase investment to strengthen our platform for future growth. We're growing our R&D capability in Asia especially, expanding our manufacturing footprint to increase capacity, and whilst continuing to execute on technology acquisitions too, the most recent of which was Solus Biotech, a very exciting opportunity for Kroda. Turning to the sectors then, as we indicated in June, the speed and scale of customer destocking that we've seen impact consumer crop industrial markets is quite unlike anything that I've experienced before during my time in the industry. The brutal volume declines are indiscriminate to the segments we serve and are widespread across all parts of our industry. The IS decline is more significant in volume reduction than crop. But it's in challenging conditions such as these that the depth of and diversity of Crota's businesses really comes to the fore. In consumer care, whilst volumes were down 14% year on year, they were up 8% on the second half of last year. And we have continued to see good demand for innovation, with sector NPP remaining strong at 40% of total sales. Price mix was up 10%, reflecting price increases implemented towards the end of last year. Encouragingly, sales were up slightly in actives with positive mix whilst volume recovery was strongest in beauty care, driven by customer demand for sustainability. And our F&F business is doing exactly what we thought it would when we acquired Iberchem, growing sales by 20%, reflecting its high exposure to emerging markets and the progress we're seeing with Crudder-enabled growth. In life sciences, pharma sales were up 8%, excluding the impact of $60 million of lipid sales to our principal vaccine customers last year. We also saw growth in seed and crop protection, although crop was hit by earlier-than-expected destocking in the second quarter. Our nucleic acid delivery pipeline continues to develop well, with Crota supporting now more than half of the nucleic acid drugs in clinical trials that specify a lipid delivery system. This points to a strong medium-term growth trajectory for the business. And finally, as you'd expect, our industrial specialties business saw a significant deterioration in sales, highlighting the cyclical nature of this business and our rationale to exit this space last year. So just to unpick the destocking point in a little more detail, it's interesting to see from the publicly available data that inventory levels are significantly higher right across our consumer care customer base. The chart on the left shows the discrepancy between inventory levels pre-COVID, the dark green line and where they were at the end of 22. This correlates with the deterioration that we've seen in volumes in consumer care from quarter two last year. As you can see from this chart on the right, the evidence suggests that this is beginning to work its way through, with volumes steadily improving month on month from earlier this year. It is also encouraging to see NPP holding up well at 40%, reflecting the destocking cycle impacting both our NPP and non-NPP at the same rate. And as I've said before, our visibility is still restricted to two weeks, so we don't know when conditions are going to return to normal. But they absolutely will at some point, of that we are certain. And then in terms of our priorities, the current environment hasn't changed our strategy. There is no knee-jerk reactions at Coroda. And continuing to invest in the business remains a fundamental priority to support our growth trajectory in both the short and medium term. So top left, we've continued to do bolt-on M&A. Our acquisition of Solus is immediately transformational because it brings both ceramides to our consumer care business and phospholipids to our pharma portfolio. It will help to significantly strengthen our capability at the premium end of the market and also in Asia. And moving down the slide, Asia is a big opportunity for Kroda, probably the biggest, which is why we're continuing to invest in the region to drive fast growth. During the half, we have opened new R&D facilities in Shanghai, China, and Hyderabad in India. We've also continued to scale biotechnology. The fastest growth will come from sustainable ingredients, such as biotech-derived actives, so we're increasing our capacity accordingly. And finally, top right, we're also investing in our customer proposition. Our Doing the Basics Brilliantly program is introducing new ways of interacting with customers, leveraging digital to make engagement faster and easier. We're also finding ways to enhance productivity across our business. These initiatives will make us more efficient. Now let me stop there and hand over to Louisa to run you through the financial performance in more detail.

Thank you Steve and good morning everyone. I'd like to start with two orientation points. Firstly, it's only been six weeks since we updated the market and trading in June and therefore for the first half has been as expected. Secondly, the numbers need slightly more unpicking than usual due to the inclusion of PTIC in the prior period before its divestment on the 30th of June last year. The first three numerical columns on this page show our reported numbers and which include PTIC in the 2022 comparator. To estimate our like-for-like performance excluding PTIC, we've provided pro forma numbers in the two columns on the right hand side. As disclosed at the full year results, the divested business contributed sales and operating profit of £191 million and £39 million respectively in the first half of 2022, which we have adjusted for. On a reported basis, group sales of £881 million were down 22% on the prior period. but after adjusting for PTIC, pro forma sales were down 6%, largely due to destocking. Adjusted operating profit of £176 million is down 42% on a reported basis, but down 33% pro forma. Operating margin was negatively impacted by both lower volumes and the timing of COVID-19 lipid sales, which I will discuss in more detail later. The effective tax rate on adjusted profit rose slightly versus 2022 to 25.4%, driven by the geographic mix of profit and the increase in the UK tax rate. Adjusted EPS was 92.9 pence and we've proposed a flat interim dividend of 47 pence per share, reflecting our confidence in the longer-term outlook and the strength of our balance sheet. Pleasingly, free cash flow has improved to £76 million versus £21 million in the same period last year. And finally, turning to the IFRS reconciliation, in the bottom chart, intangible amortisation was unchanged at £17 million and exceptional items were £29 million, primarily an impairment of the goodwill in our Chinese joint venture, Sipo. The joint venture is trading below budget as a result of the same destocking trends that we're seeing in the broader industrial market, as well as increased local competition. Therefore, on an IFRS basis, profit before tax was £129 million, down from £637 million last year. with the 2022 profit on divestment of the PTIC business accounting for the majority of the difference alongside weaker trading. turning to the group sales bridge on the next page and moving from left to right on the chart. As covered, the estimate of not owning the PTIC business in the first half of last year results in a 17% adjustment to sales. And against this pro forma baseline, price mix added 9% in the period after a very strong increase for the full year 2022. The price of our raw material basket peaked in Q3 last year and has since seen modest declines. However, the annualisation of price increases in 2022 continues to support price mix. Proforma volume declined by 18%, largely as a result of extended customer destocking. And the weakness of sterling in the first half, particularly against the US dollar, helped to offset some of this impact, increasing sales by 3%. The next slide looks at the same bridge for adjusted operating profit. The estimate of not owning the PTIC business in the first half of 2022 results in a 13% adjustment, and against this pro forma baseline, the impact of lower volumes with reduced overhead coverage and the absence of COVID-19 lipid sales were the main contributors to the profit fall of 33%. Turning now to sector performance, this slide shows the percentage change in sales and operating profit, with industrial specialties and group shown on a pro forma basis. Sales in consumer care were flat, operating profit was 21% lower, with an operating profit margin of 20.9%, diluted by lower volumes, although the performance was an improvement over the second half of last year. In life sciences, there were no sales of COVID-19 lipids in the first half of 2023, with shipments due in the fourth quarter. This timing difference was the main contributor to the reported decline in sales of 8%. Excluding the impact of $62 million of COVID-19 lipid sales in the prior period, we were pleased that the rest of the life science business grew 8%. Operating profit in life sciences declined 39%, reflecting both the weak crop volume in quarter two and the phasing of COVID lipid sales, or it declined by 23%, excluding COVID lipids. Sales in industrial specialties declined 20% on a pro forma basis, with the sector experiencing more significant destocking than in consumer care and crop protection, as well as increased competition in China. IS margin was just under 7%, with volume declines affecting performance. Turning to the next slide, consumer care sales were flat in the period, a resilient performance in light of market conditions. The sector saw a price mix 10% higher, of which price accounted for approximately 6%, with positive mix, particularly in beauty actives, accounting for around 4%. Volumes were down 14% versus the first half of 2022, reflecting continued destocking, and currency translation added 4%. Although volumes remain down double-digit year-on-year, we remain encouraged that volumes were sequentially up by 8% versus half to 2022. We estimate that approximately 10 percentage points of the 14% volume decline is market-driven, mainly de-stocking, but the remainder is driven by Crota-specific supply issues and de-marketing that we discussed at February's results. At the bottom right of this page, we've provided detail on the price mix and volume dynamics of the four business units within consumer care. With the exception of fragrances and flavours, the consistent theme across each of these business units is positive price mix and positive currency, offset by lower volumes. These similar volume declines in beauty actives, beauty care and home care underpin our view that we are seeing a broad market adjustment. Beauty Actives has continued to counter volume declines with the highest positive price mix, driven by strong sales of Soderma Actives, particularly to China. And as mentioned, F&F is the exception to these volume declines, with sales growing 20% in the period, driven by its agile, cost-competitive model. Turning to life sciences, we've already covered the drop in reported sales of 8% driven by the timing of COVID-19 lipid sales, with underlying growth of 8% when lipids are taken out. The pharma business itself also grew by 8% on that basis. Crop protection had an exceptional 2022 and entered the year with good momentum, growing volumes with flat prices in the first quarter. But as we've said previously, the business began to see rapid destocking in the second quarter, something we'd actually expected to materialise more slowly in the year, with volumes down more than 30% in the second quarter compared with quarter one. Overall, crop protection grew sales 5%, with positive price mix and FX more than offsetting 12% lower volumes. Seed enhancement only has a limited exposure to stocking cycles, as a significant proportion of its sales are derived from services. It grew sales 18% driven by strong structural growth trends. The next slide shows the drivers behind the operating margin improvement in consumer care and life sciences. The consumer care margin declined from 26.6% to 20.9%. with weaker volumes accounting for approximately nine percentage points of the decline with reduced coverage of overheads. While volumes in consumer care have improved sequentially from the second half of 2022, they remain lower than historical averages and a step up in volume is required to deliver an improved margin. But encouragingly, price mix benefited margin by around 3 percentage points, with beauty actives particularly strong and partially offsetting the impact from lower volume. Life sciences margin declined from 36% to 23.8%. Volume accounted for approximately four percentage points, principally driven by the destocking in crop protection in the second quarter. And price mix was a significant driver, accounting for eight percentage points of the decline, with no COVID lipid sales in the first half year. The penultimate slide in my section focuses on cash flow. Halfway down the table, you can see free cash flow generation of 76 million pounds, was higher than £21 million last year. There are two significant contributors to this improvement. Firstly, a reduced working capital outflow of £10 million versus £184 million in the first half of 2022.

During 2022 we experienced a significant