Croda International Plc

Good morning, everyone, and a warm welcome to the London Stock Exchange for our full year results presentation. It's great to see so many of you in the room with lots of others online. And Louisa and I look forward to taking your questions at the end. So on to the agenda this morning, then I'm going to start with an overview of our performance, followed by a more detailed analysis of the numbers from Louisa. And then I'll come back and delve into some of the key drivers and future performance for the near and the long term. So, OK, then starting with the performance, then. 2023 has been a challenging 12 months for Clodagh and the wider industry, to say the least. Having delivered two years of record results due to a surge in demand after the pandemic, we've experienced a prolonged period of destocking compounded by a weak macro environment. Demand was therefore much weaker across most of our markets. The consequence has been a significant fall in volumes, principally in beauty care, crop protection and industrial specialties. The 19% decline in sales also reflects our divestment of PTIC, our industrial business last year, and a 50% reduction in lipid sales as the world has normalised post-COVID. Unusually for Croda, volume declines have caused low levels of capacity utilisation, with negative operating leverage impacting profit margins. And margins were also affected by low sales of high-margin lipids for mRNA COVID vaccines too. So whilst these headwinds impacted our financial performance, there were bright spots across the portfolio too. Within consumer care, F&F had another outstanding year. And whilst beauty active and home care were broadly flat. And in life sciences, stripping out lipid sales, both our farmer and seed enhancement businesses grew. So a large portion of our sub-businesses are growing. Furthermore, the technology trends driving our future growth are unchanged. and we're continuing to see the transition to sustainable ingredients and, of course, biologics. Demand for innovation also remains strong, with NPP sales broadly flat versus last year and up in consumer care. Cash generation has also been excellent, supporting ongoing investment. We've invested through the downturn to drive our future growth, like we always do. And finally, we've implemented a simpler operating model to enhance our efficiency and customer service, something that I'll come back to later. So a challenging year, but plenty of progress. And our confidence in the future is demonstrated by the board's decision to increase the dividend for the 32nd year in a row. So it's important to look at the year in the context of what we've done over the last five years and also take on board this point that 2021 and 2022 were breakout years. So 2023 has been the reset period. And as you can see, we've seen steady progress in each of the businesses within consumer care. Beauty care has been the exception and where the post-pandemic surge was most pronounced. So with customer inventory levels now below 22, we expect to see a return to a more normalized conditions going forward. The five-year data shows a similar story in life sciences, excluding the significant impact that lipid sales has had over the last four years. Pharma CAGAS has been an impressive 16% since 2018. And whilst growth has moderated in 2023, the pipeline is growing, and we are very well positioned to see the benefits of that in the coming years. In crop, you can clearly see the surge in demand in 2022, where Russia's invasion of Ukraine compounded the restocking trends seen in other markets. And that will take its time still to work through this year. And finally, turning to industrial specialties, whilst it's a much smaller business now, It's important not to overlook the role it plays, contributing to the efficiency of our production sites. So 2023 was clearly a reset year, but reported sales were also impacted by the inclusion of the divested business for part of that prior year. So turning to unpack our 2023 performance in a little more detail and starting with consumer care. As you can see from the top left box, the performance has been mixed. F&F was excellent. and we saw growth in actives, including the first sales of ceramides from the Solus acquisition. But the table highlights the material fall in volumes that we saw in beauty care due to customer inventory corrections and weaker consumer spending. Rebuilding volumes here is a key priority for us in 24. In terms of the margin decline, as you can see on the bottom left, four and a half percentage points of this is due to the operating gearing effect of weak volumes. Two percentage points of the margin decline was due to the weaker mix, primarily reflecting strong growth of lower margin F&F sales in the portfolio. So encouragingly, NPP sales were up slightly, reflecting continued innovation in the business and the migration to more sustainable ingredients too. A great example of that is the 20% plus sales increase that we've seen in our eco range. And we've continued to deliver double digit percentage sales growth in China and India. High growth markets where we're seeing the benefits of sustained investment from Krona. Finally, bottom right, F&F has been the standout performer due to its distinctive positioning in fast growth markets and its cost competitive model. F&F sales were up across all regions and especially strong in the Middle East. Excellent sales growth that aligns with our acquisition plan. And there is plenty more to come there. So turning to look at life sciences in a similar way, you can see from the top left chart that the drop in crop protection sales was volume driven. with the other businesses growing excluding covered lipids. So overall sector sales were down by 5% on that basis. The margin declined primarily due to price mix, with much lower sales of high-margin lipids. And four percentage points can be attributed to operating leverage, driven by the volume decline in crop. So again, in terms of highlights, the underlying picture is more encouraging in life sciences than the report numbers suggest. Farmers growing... And seed enhancement has continued to win market share as a result of our leading position in microplastic-free seed coatings. We are seeing high demand following the EU's decision to ban the use of microplastics in the next five years, and that demand is global. It's across the world. And finally, in pharma, whilst we were not immune from the impact of customers reducing inventory levels, COVID normalisation and the funding constraints for early-stage biotech companies, the breadth and diversity of our portfolio underpinned a resilient performance. So destocking primarily affected the heritage consumer health business, with lower COVID-19 demand adversely impacting adjuvant system sales, as well as lipids for COVID-19 mRNA vaccines. So by contrast, drug delivery technologies for small molecules, protein and nucleic acid applications continued to grow. And as you know, as a purpose-driven business, we place a lot of importance on our non-financial metrics as well. We've seen a strong improvement in our net promoter scores, with 92% of our customers rating our products very highly. We've invested in training to ensure that safety is a value that is embedded throughout the organisation and through the senior leadership team. We've continued to promote more and more women into leadership roles, establishing a leading position in our industry. And we're making great strides in becoming a more sustainable business. That can be seen both in the impact we're having on people's lives, with nearly 23 million people benefiting from the work that we're doing through the Crota Foundation, and also in the impact that we're having on the planet, with the CDP recently awarding us a minus across all three climate, forest and water metrics, complementing our longstanding AAA rating from MSCI. So despite the headline numbers this year, there is lots to get really excited about. The structural growth drivers are unchanged. And those trends are taking us in the right direction. Croda is well positioned for the macro recovery when it comes. There's no knee-jerk reactions in Croda. We're focused on executing our strategy, innovating and investing for the future growth. In addition to that, our near-term priorities are to capitalise on the steadily improving demand environment in beauty care, drive further innovation in crop and expand our pharma pipeline. And we will do that whilst continuing to enhance and improve the way we operate. making us even more efficient. I'll go into more detail on each of these areas shortly, but first over to Louisa to run through the numbers. Thank you.

Hi, good morning, everyone, and thank you, Steve. So firstly, as Steve has said, this has been a difficult year with destocking materially affecting the results that we expected to deliver when we stood on this platform last year. But we are pleased to deliver full year profit before tax of £309 million within our final guidance range of £300 to £320 million. So as usual, I'm going to talk to the adjusted pro forma numbers, which strip out the effect of the PTIC divestment in the prior period. We divested that on the 30th of June 2022, as you know. And this will be the last time that we have to make this adjustment. So on this pro forma basis, the group sales of £1.7 billion were down 11% against the prior year, obviously due to destocking in consumer care and crop protection, as well as lower COVID-19 lipids. And these items were partially offset by a strong performance in fragrances and flavours, which continues to grow really strongly. So adjusted operating profit of £320 million and adjusted profit before tax of £309 million were both down 33% pro forma, and that reflects the impact of negative volume leverage and the business unit mix, as well as lower COVID-19 lipids in 2023. Our effective tax rate on adjusted profit rose slightly in the year to 24%, and that was driven mainly by the geographic mix of profit. Our adjusted EPS was 167.6 pence, and we have proposed a full-year dividend of £109 pence per share. Pleasingly, free cash flow improved year on year to £165 million versus £157 million in the same period last year. And finally on this slide, if we look at the bridge from the adjusted to IFRS profit before tax at the bottom left of the page, intangible amortisation was broadly flat at £37 million and exceptional items worth £36 million. These exceptional items consist of the impairment of goodwill in our Chinese joint venture SIPO, which we took in the first half, acquisition costs for Solus Biotech, plus some costs that are associated with our internal reorganisation, which Steve has already mentioned. Therefore, on an IFRS basis, our profit before tax was £236 million, down from £780 million last year, and the 2020-22 profit on divestment of PTIC accounted for the majority of that difference between those two numbers alongside weaker trading. So turning to the group sales bridge and moving from left to right on this chart, the estimate of not owning PTIC in the first half of the year drives a £191 million adjustment to the sales for 2022. And against this pro forma baseline, price mix added 5% in the period, after a very strong increase in the prior year. Proforma volumes declined by 16%, largely due to extended customer destocking. And the combined effect of acquisitions and FX on sales was neutral, with total sales down 11% proforma and down 19% on a reported basis. So moving on to the next slide. which shows the operating profit walk on the left-hand side and the operating margin walk on the right-hand side. I'm only going to talk to the right-hand chart, which shows the group operating margin declining from 24.7% to 18.9%, a decline of around six percentage points. Weaker volumes accounted for approximately five percentage points of that decline, with reduced coverage of fixed overheads due to lower capacity utilisation. Business price mix drove a further three percentage points of decline, where fragrances and flavors had a very strong year relative to beauty actives and beauty care, and the profit from COVID-19 lipids was lower than in 2022. Cost savings did help to offset these headwinds by about two percentage points, and I'll talk to those cost savings on the next slide. So in previous presentations, we've highlighted that on the assumption that demand for our products recovers after destocking, a large restructuring programme to remove material fixed costs out of our footprint is not the right choice for our business. Our preferred approach is to drive continuous improvement across the business, including under the banner of our Doing the Basics Brilliantly programme. But as Steve will explain later, we did change our operating model from the beginning of 2024 which will deliver some modest annualised cost savings of around £8 million from 2025. But this change would have been done anyway and was designed to address accountability and simplification. However, given how progressively difficult 2023 was, our focus was to control variable costs and to maximise cash from the second quarter onwards, whilst continuing with appropriate investment for the future And this chart is summarizing the story of that cost base during the year. So the two bookends are the structural adjustments for the cost of running PTIC, that's on the left-hand side, and the cost of adding SOLUS Biotech on the right-hand side in July. And between these two bookends, the most significant items of the cost tailwinds were, firstly, variable remuneration, which was negligible in 2023, compared to the charge in 2022. The second item is lower factory and freight costs because we manufactured and shipped less. The third item is other discretionary items like lower travel. Under the fourth item, we offset the normal inflationary pay rises that we granted in quarter one with headcount curtailment throughout the rest of the year once we understood the magnitude and duration of the de-stocking and that had all become clearer. And finally, under item five, we had some late breaking events in Argentina, which added FX and valuation headwinds at the end of the year. So we're showing you this partly to confirm where our actions were taken to mitigate trading last year, but also to help guide the building blocks, apologies, of our 2024 performance. And given that, as you can see on the previous slide, that the majority of our savings were largely variable in nature, elements of that lower 2023 cost base will need to bounce back in 2024 to appropriately service the increased volumes as our markets start to recover. So on this slide, I will address the building blocks of our 2024 performance. The grey blocks on this slide are directional. They are not an attempt to provide a spot forecast for each item. So firstly, as we've talked about, we're not expecting any sales of high margin COVID-19 lipids in 2024, and that will be a headwind to profit of about £30 million. As the business recovers in the second grey block, we expect some of those variable costs to bounce back, including production and freight, as well as that remuneration charge which will return, that's about 25 million following a negligible amount in 2023. And thirdly, we continue to invest in people and assets to support our long-term strategy. So for example, we'll see some incremental depreciation in 2024, as well as normal salary rises without that offsetting benefit of the headcount curtailment that we saw in 2023. So as shown on the final right hand bar on this slide, sales growth will offset these profit headwinds to a degree. And Steve will discuss the sales guidance range and bring all of the elements of this together in the 2024 outlook at the end of the presentation. So moving on to cash flow, EBITDA at the top of the table fell significantly in the year by 192 million from 602 last year to 410 this year. But despite this, our free cash flow increased to 165 million versus 157 million in 2022. And this was primarily the result of two items. Firstly, a working capital inflow of 29 million pounds in 2023 versus an outflow of 134 million pounds in 2022. As expected, in an uncertain and declining sales environment, the team acted swiftly to preserve cash, and managed an unwind of inventory down to a year-end stock value of £341 million, significantly below the highs at the end of 2022. I just remind you that the working capital inflow of £29 million includes an adverse $60 million debtor driven by the December shipments of COVID-19 lipids. And then the second item is a combined £60 million impact from lower interest and tax charges. The impact of higher interest rates through the year was softened by our focus on cash generation from working capital and obviously from holding the PTIC investment cash during the first half. Our capital investment was £170 million up from £139 million and within our guidance range of £170 to £180 million. On the next slide, on the left-hand side, our underlying capex remains in a range of 6% to 8% of sales, with incremental capex being invested between 21 and 24, as we've guided, and that's to boost pharma lipid production capacity in the USA and the UK, alongside government investment. We expect total capex, including the remaining piece of that pharma investment investment, to reduce to about £150 million per annum as some of our larger projects near completion. And looking at net debt on the right-hand side of the chart, leverage at the end of the year after the completion of the SOLUS acquisition was 1.3 times EBITDA towards the bottom end of our target range of one to two times. And as I said at the start of my presentation, we're declaring an increase in the full-year dividend to 109 pence per share, continuing an unbroken track record of 32 years of dividend progression. The Board periodically assesses other forms of capital return, particularly when leverage is towards the lower end of our target range, but we're mindful of continued market uncertainties, so this will be kept under review. Our immediate capital allocation priority is to reinvest for organic growth. And finally, to finish up for me in my section, there are some technical factors on this slide, which I'm happy to take questions on later. But for now, we'll just highlight a modest increase in the depreciation charge following investment in recent years, as well as the increase in the finance charge with a higher net debt position entering 2023. These are perhaps some things you can consider when you're updating your models. Steve, back to you.

Thanks, Louisa. As I said earlier, the technology trends that will drive our future growth haven't changed, and we're seeing an ongoing transition to sustainable ingredients and biologics. That's playing out in the way we expect. Crota has well placed the benefit from these trends, having repositioned our portfolio to be closely aligned with them. We've also continued to invest in the business through the weaker demand environment, something we always do. We're doing this by adding more depth to our portfolio and by enhancing our proximity to customers. to support fast growth, particularly in Asia, where we see lots of opportunities. And in pharma, new laboratories in India and Singapore are opening up fresh opportunities for us. And whilst new capacity for nucleic acid delivery in the US and the UK will be transformational in the years to come for us. So it's not just about making progress in the core businesses, it's also ensuring that Crota is match fit through operational excellence as well, and by investing in fast-evolving areas such as AI and data analytics. As I mentioned earlier, our immediate priorities are highlighted here on the right, which I'll go through now. So when we talked to you in July, we illustrated how inflated customer inventory levels were versus pre-COVID levels in consumer care. We've seen these continue to normalize through the second half of the year, leading to a steady improvement in volumes. The year has started well and we're cautiously optimistic that this trend will continue through 2024 right across consumer care. Our priority is to capitalise on the continuing recovery in demand, particularly in beauty care, our largest and most volume-sensitive consumer care business. And because beauty care is so key to our recovery, I wanted to lift the lid a bit more to explain what underpins our confidence in this sub-business. We've broad-based exposure to the beauty markets, predominantly weighted to skin, and we're well-positioned in high-growth niches. We've also got balanced geographical reach, and we've been growing ahead of the market in four out of the five biggest beauty care markets globally. In France, Brazil, China, and India, we're ahead of the market, and the USA being the exception. So that's evidence of our strategy delivering. It's all about increasing R&D intensity in these countries, getting close to customers. And most regions have held up pretty well, actually, this year, and the step change in the U.S. will undoubtedly help drive the recovery. So two other important points. Sixty-two percent of this business in ingredients are bio-based, significantly ahead of our peers, with their biodegradability and, more importantly these days, lower carbon footprint, additional adding to these sustainability claims. So with demand from our customers strongest for sustainable ingredients, we are very well positioned in this market. And 80 percent of the portfolio is differentiated. And that means superior prices and profit margins and fall or churn. We've done a lot of analytics around that. 20% is undifferentiated in our book. So a large portion of potential good growth there. And our strategy is to strengthen our position in each of these four areas, accelerating our differentiation through innovation. You'd expect us to say that. And our strategy will support growth in all regions, but especially... in those parts of the world where the opportunity is the greatest. That includes Asia, where we've continued to invest in our portfolio with the acquisition of Solus Biotech, and in innovation with the new R&D facility in Shanghai, and in manufacturing with a new surfactants plant in Dahej, India, due to open in 2025, all supporting future growth. And with the USA key to our recovery, our refreshed leadership team is working hard to win back business That we lost with an increased focus on innovation, local innovation. And we will extend our sustainability leadership by transitioning our manufacturing processes to biotech and other low carbon technologies. And by providing customers with product carbon footprint data so they can see the emission savings that they're making by using our ingredients. And if you can see on here, three quarters of the beauty care portfolio has got product carbon footprint data. We've embedded R&D resource in consumer care to drive innovation faster and expand the differentiated part of the portfolio too. And at the less differentiated end, we've applied a volume KPI metric to ensure that we manage volumes in a more focused way going forward. So coming on to crop then, on the left, you can see how inventory levels at all of our major customers are still well above pre-COVID levels in yellow. 2022 in red. or pink, depends how you look at that, was an especially strong year for crop as inventory levels grew. And as you can see from the green line, they remain high. So we expect destocking to continue for a while yet. This is something that we'll just have to be patient about, and it has no bearing on the huge opportunities that we continue to see in this area. Our technology is helping customers to make their existing formulations more sustainable, to transition to biopesticides, and to improve yields through crop nutrition, and to adopt innovative approaches such as precision agriculture as well. Again, CRODA is leading the way here. We recently launched our first delivery system, especially designed for biopesticides, which has secured sales in all regions, and a new product that meets the growing demand for drone delivery, particularly in Asia. Pharma continues to be the most exciting aspect of our future growth story. The rapid growth that we're seeing in biopharma and bioprocessing supports that. Protein and small molecule delivery provides delivery systems for both the more mature small molecule drugs and the higher growth protein and monoclonal antibody applications. We're also moving into bioprocessing, which is integral to production of therapeutic proteins and vaccines. So the number of qualified commercial opportunities grew by more than 60% in 2023. We originally presented the graphic at the bottom left at our Capital Markets Day in October 2022. A lot of you will remember that. We're making great progress bringing our new pharma innovation to market. Lots of technologies that will make an important contribution to our sales and profit performance from this year. So top right, our pipeline includes a best-in-class solution for cell health, manufactured using a new process based on Crota's unique refining technology. we're bringing on stream in 2024 the disruptive solution will be launched in the coming months and will contribute incremental sales from 25. we've also expanded into bioprocessing aids a target adjacency launching viradex as an aid for biopharma manufacturing the first sales were secured within three months of launch and we expect them to ramp up considerably turning to adjuvant systems then the development of novel therapeutic vaccines that cure diseases previously only treatable for their symptoms, is creating a huge need for new adjuvant systems. And as a result, the number of projects in our commercial pipeline has grown by 24% in 23. And Crota's innovation is helping to unlock therapeutic vaccines as well, examples of which are here on the right. FAD, really important product for Crota, a novel lipid-based adjuvant, was pre-launched in 23. It's been really well received with samples into more than 20 candidate vaccines and about 10 million of sales revenue anticipated this year, growing to well over 20 million thereafter. Turning to the bottom right, many current generation vaccines use squalene adjuvants. These are adjuvants derived from shark's liver. Our squalene adjuvant is a sustainable technology that's currently being tested by three of the major vaccine companies with initial sales coming through this year too. And finally, Nucleic acid, our growth here will be driven by the commercialization of new nucleic acid drugs. With the number in development continuing to grow, we've seen an increase of 28% in the number of projects in the last year. This strong medium-term growth trajectory for our nucleic acid delivery platforms is likely to be realized in three phases. Firstly, mRNA vaccines for infectious diseases, which are expected to come to market from 2025. Secondly, oncology, which requires more targeted delivery systems. And thirdly, gene editing therapies such as CRISPR treatment for sickle cell anemia, which we're supporting. The first gene editing therapy to be approved by the US FDA. So alongside all of this great innovation, we're making significant improvements to the way that we work. There are many examples across CRODA of how we're using data analytics and AI to drive operational improvements. One of these is a refreshed operational dashboard illustrated on the bottom left, providing all the key metrics to leaders in one app, you know, real-time data. The graphic on the right hand shows how our new organization that has been in place since the 1st of January, all regional teams, including sales, R&D, marketing, customer service, and manufacture, now directly report into the sectors, you know, full P&L ownership. This structure will ensure we deliver faster and more effectively for our customers. And it also passes accountability down the organization more. So turning now to the outlook for the year ahead, the ongoing uncertainty makes it hard to predict what will happen in each of our businesses. Overall, we expect to deliver mid to high single digit percentage sales growth in 24, excluding the $60 million of COVID-19 lipid sales in 23, with higher sales volumes more than offsetting low price mix. Consumer care has started the year well and we're cautiously optimistic given the improving demand trends we've seen so far. In life sciences, we expect the non-COVID pharma business to continue growing, but destocking to continue in crop and demand to remain weak in industrial specialties. Moving to the right-hand side of the slide, we expect 24 group operating margin to be two to three percentage points lower than 23. Four reasons for that. Business mix with no contribution from COVID-19 lipids this year, fully rebased, and a continued strong growth in F&F. Lower overhead recovery, second point, at our manufacturing sites, due to the continued lower volumes in crop and industrial, not fully coming back yet, both of which have high production volumes alongside beauty care. And a further reset in our cost base, back to a more normalised level that Louisa talked about, from a low point in 23. And finally, of course, ongoing investment in our strategy, particularly in pharma, which is going to give us breakout growth for the future. So based on these assumptions... And at current exchange rates, we expect group adjusted profit before tax to be between 260 million and 300 million in 2024. We plan to report sales performance quarterly this year with a quarter one update on the 24th of April. And finishing on the key takeaways, you know, 2023, a challenging year, 12 months for Crota and the wider industry. But the technology trends that we drive our future haven't changed. It's important. And we continue to invest in the downturn. We will see the benefits of that in the years to come. And we're focused on executing our strategy, innovating and investing for the future with a clear set of priorities that will drive our near-term performance. Croda is very well positioned for the macro recovery when it comes. Now, Louisa and I are very happy now to take questions. Thank you. Come on, Gunther. You're always first. He beat you by a second. He had his hand up. He had his hand up on the last slide.