Croda International Plc

Hello and welcome to this presentation on our results for the first half of 2024. With a focus on relentless innovation at the heart of Crudda's business model, I'm pre-recording this in the R&D Centre at our head office in Yorkshire. And as a chemist by background, I like to come into our labs regularly, although it has been many years since I was let loose at the bench. In terms of the agenda, I'll start with an overview of our performance and the progress we're seeing from both a macro and Crudda-specific perspective. Anthony Fitzpatrick, our interim CFO, will then run through our financial results in detail before I come back to talk about how we're continuing to strengthen the business for a future that we're confident will be even stronger than before. Okay, let me start with the results themselves and highlight the key takeaways that underpin our confidence as we emerge from what has been a tough 18 months. First, our overall performance was in line with expectations at the beginning of the year. Revenues were down 7%, but with sales improving sequentially versus the second half of 2023. On the top right, you see a breakdown of that sequential improvement. Consumer care was stronger than anticipated, growing sales at 9% versus the second half of last year, with good volume growth across all regions and more stable market conditions. Life sciences was weaker than expected, with continued destocking in consumer health and crop, but the core pharma business, excluding COVID-19 lipids, continued to grow, increasing sales by 3% versus half to last year. Industrial specialties also improved, with sales up 21% sequentially. Bottom left, the sales of innovative products across the business grew to record levels. NPP increased to 36% of total sales, with an especially good result in consumer care. where NPP sales grew 11% on a constant currency basis. And in the bottom right, we've seen a sequential recovery in our operating margin, which was 1.6 percentage points higher than the second half of 2023, ex-COVID. That reflects the positive impact of both higher sales volumes and better capacity utilization, as well as ongoing price discipline and robust cost control across the business. We have applied a laser-like focus to costs. Nothing knee-jerk, but we're doing much better at controlling what we can control. And then finally, free cash flow was very strong, up 69% in the half, supported by a working capital inflow. And our balance sheet strength has been sustained with leverage at 1.4 times, well within our targeted range. So encouraging progress across the group. And we're starting to see the benefits of steps taken over the last few years. Building on that point, if I compare Crota today to what it looked like in 2019, the change is very significant. Pre-COVID, whilst Crota was generating mid-single digits year-on-year growth, we're also exposed to a number of lower growth and cyclical markets. Our acquisition of Iberchem and even more so Avanti, as well as the post-pandemic boom in demand, helped to support exceptional growth through 2021 and 2022, as illustrated at the bottom of the slide. That gave us the opportunity to successfully divest the majority of our industrial businesses and use the proceeds to support a period of significant investment. We've transformed the quality of our portfolio and expanded the global reach of our business that is beginning to come through at the top line and the bottom line will follow. In addition to that, We've also taken several learnings from the recent trading environment and strengthened the business further with a number of self-help initiatives. Firstly, due to significant demand, relationships with customers have become more transactional, reflecting our focus on firefighting supply issues. We've now simplified our organisational structure, moving accountability and decision-making closer to customers to develop even deeper relationships with them based on our technical expertise. Our impressive NPS scores indicate the progress we've made. Secondly, in beauty care, we were seeing a dip in innovation as customers focus more on marketing existing brands rather than new product development. And we've tackled this by increasing local innovation in country and by prioritising R&D investment in faster growth markets such as China, India and Brazil. The increase in NPP sales and growth with local and regional customers demonstrating the impact that this is starting to have. And thirdly, rapid destocking resulted in strong competition in the bottom of our portfolio, where we are less differentiated, eroding volumes. And we've now adopted a more flexible pricing policy for ring-fenced customer product combinations, carefully monitoring new performance metrics so we balance price with volume. And we're seeing this positive effect of this coming through already in industrial specialties, and beauty care, where volumes are up significantly and we are regaining share. So whilst 23 and to a lesser extent 24 have seen our end markets resetting, Kroda is now reshaped and repositioned. We are a stronger business than before, more aligned to the megatrends driving growth, closer to our customers, and more innovative and more efficient. And that bodes well for the future. And as you can see on this slide, Despite volatility not seen since 2008, with significant raw material inflation and subsequent deflation, and the unprecedented fluctuations in sales volumes, we've remained disciplined on price, and the margin we make in our sales prices on raw materials has remained high and stable. Top right, relentless innovation, very much the lifeblood of Crota's business, has continued, with NPP growing as a proportion of total sales in the last year. We filed more than 50 patents in the first half of this year, an acceleration on the 2023 rate, taking the group to more than 1,600 patents today. And bottom left, we carefully balance investment with capital discipline, with core capex as a percentage of sales staying fairly consistent over the last six years. As additional investment to support future growth in our pharma business comes online, We expect overall capex to trend downwards from 2026 onwards. And finally, cash conversion has always been very strong and consistent for Crota, and we expect it to remain so going forward. Turning to our thoughts on the macro environment, in consumer care, based on what we can see, customer inventories are now at a more normal level, and destocking is at an end. That is supporting more stable demand, demonstrated by the sales growth that we've seen in the first half year. And what's interesting is that it's local and regional customers who are driving this growth. Signs of a shift in the consumer care industry. These businesses are generally more innovative and fast to market with high quality and competitively priced products. We preempted that shift, expanding our regional footprint and investing in R&D facilities close to customers, particularly in Asia and Latin America, which has put us in a strong position to win from this trend. In CROP, Whilst customer inventory data is mixed, the industry has also been hampered by volatile weather conditions and lower commodity prices. Conversations with customers suggest that there are no signs of an immediate recovery, but our job here is to continue to innovate irrespective of the weaker demand. And finally, pharma, where we've experienced some headwinds but have also seen both sequential sales growth both in half one versus half two, ex-COVID lipids, and in quarter two versus quarter one. Now, whilst the demand environment hasn't fully recovered, we're feeling more positive than we have previously, not least the medium-term opportunity for significant growth. So bringing all of that together, And looking at Crota's portfolio today, it is very well positioned for the future, reflecting both the actions we've taken over recent years and what we're doing today, which I'll come on to. In consumer care, our beauty actors business is a market leader in peptides and biotech ingredients, areas that are shaping the industry now and will do so long into the future. We are very excited about the potential of biotech derived ceramides that we added to the portfolio last year. And in beauty care, our innovation is critical for skin, hair and sun care products. And as the trend to sustainable ingredients grow, our formulation ingredients are increasingly in demand. The F&F business is doing what we thought it would, growing quicker than tier one peers. And there is a lot more growth to come in home care with our fabric care biopolymers and eco-ranged. Our pharma business remains the most exciting part of our future growth story, supported by the market-leading positions we've established across three critical technology platforms. And our focus on innovation and sustainability will enable us to lead the way in crop and seed. And as I've said already, all of these businesses have excellent alignment with the technology trends that will underpin future growth in our markets. So whilst the macro environment remains choppy, we're continuing to apply our strategy, further strengthening the business to support progress in the near term and to set us up for the next phase of growth. I'm going to come back to the progress that we've made against the near term priorities we talked to you about in February set out on this slide. But first, over to Fitz for a detailed review of the numbers.

Thank you, Steve. So as you've heard, our first half performance was very much in line with expectations. Overall, sales of 816 million declined by 7% on a reported basis, with adjusted operating profit down 23% to 136 million. The operating margin reduced by 3.4 percentage points to 16.6%, but improved versus the second half of last year ex-COVID lipids. Profit before tax of £127 million was down by 27%, including a £6.5 million headwind from currency translation. Profit before tax at constant currency was £134 million. We have held the interim dividend flat at 47 pence, despite lower earnings, reflecting our confidence in the longer-term opportunities and the strong cash flow performance. with free cash flow of 123 million, up 69%. Bridging from adjusted to IFRS profit before tax, the exceptional charge of 2.4 million is ongoing restructuring costs associated with the new operating model launched at the start of the year. There was also a small increase in amortization of acquired intangibles to 19 million following the acquisition of Solus Biotech in July 2023. Turning to the group sales bridge and moving from left to right on the chart. Group volumes were broadly flat, with volumes in consumer care up 14%, while volumes in life sciences were down by 17%, principally in crop protection. Raw material prices ended the first half approximately 4% lower than the start of 2024, adding to the 12% decline seen through 2023. This has enabled us to selectively reduce prices, contributing to a 5% decline in price mix. The acquisition of Solus Biotech added 1% to sales, resulting in a constant currency sales decline of 4%. Currency translation was a 3% headwind in the first half, leading to a reported sales decline of 7%. Now let's look at divisional performance. Consumer care delivered an encouraging performance in the first half, with sales up 3% versus the prior year and up 9% versus the second half of last year. Beauty actives delivered sales growth of 9%, with an encouraging performance in Asia, where the strength of our relationships with local and regional customers is driving growth. In beauty care, sales were down 6%, but were up 9% versus the second half of last year as we saw a return to more stable demand and North America regained market share. Homecare and F&F delivered double-digit sales growth. Our F&F business continues to grow ahead of the market, reflecting its niche position with local and regional customers in faster-growing markets. Demand for innovative ingredients, as well as ingredients differentiated by sustainability, remained strong, with MPP sales growing by 11% at constant currency and MPP sales increasing to 42% of total sales in consumer care. Moving to margins, the operating margin of 17.6% was 3.3 percentage points below the prior year but was 2.5 points above the second half of last year, supported by improving sales volumes. Performance in life sciences was weaker, with sales down 19%, principally reflecting the strength of the performance in crop protection in the first quarter of 2023 before destocking began. Excluding the 48 million of COVID lipids that were shipped in the fourth quarter of 2023, sales were down 2% compared with the second half of last year. Farmer sales were down 11% versus the prior year, with some of the challenges that impacted healthcare markets in 2023, including COVID-19 normalization and destocking in consumer health, continuing into the first half of this year. Despite this, sales in our strategic focus areas, such as lipids and delivery systems for protein-based drugs, continued to grow. And ex-COVID, pharma sales were higher, both compared to the second half of last year and in the second quarter, compared with Q1. Sales in crop protection were down 33%, with a prolonged period of destocking and lower commodity prices. Sales were also down by 10% in seed enhancement, a seasonally second-half weighted business, which we expect to have a better second half. MPP as a proportion of total sales increased to 33%, with our strategic focus areas in farmer-growing and the lower proportion of crop protection sales. Operating margin was 18.3%, with the impact of lower volumes in crop protection partly offset by careful cost control. Turning next to industrial specialties, whilst this business isn't a strategic priority, it plays an important role in our operations, contributing to the efficiency of our shared manufacturing model, with the opportunity to leverage core technologies in high-value industrial applications. Sales in the first half were down 17% against the prior year, but were up 21% compared with the second half of last year, as industrial demand fell through 2023 before starting to recover in early 2024. Operating margins of 8% were 6.7 percentage points above the second half of last year, with higher volumes and improving mix benefiting profitability. Moving to the next slide. On the left, we are bridging the operating margin from the first half of 2023 to the first half of 2024. You can see the margin fell by 3.4 percentage points from 20% to 16.6%. Volume leverage was broadly neutral, while price mix was a two percentage point headwind to the operating margin. Importantly, on a business by business basis, 1.9 points of that negative impact on margin, came from a significant reset in crop protection sales and profit contribution. Variable remuneration was a further one-point headwind. On the right, we are bridging from the second half of 2023 to the first half of 2024, adjusting the second half margin in 2023 to remove the three percentage point benefit from the high margin COVID-19 lipids shipped in that period earlier. gives a base of 15%. With group volumes improving versus the second half of last year, volume leverage was a five-point tailwind to the operating margin. Price mix was a two-point headwind, with variable remuneration reducing the margin by a further one point. Overall, the margin was a little stronger than we anticipated, benefiting from careful cost control. Turning to cash flow, first half performance was encouraging, with cash from operations increasing despite lower profits due to a 44 million working capital inflow. This reflects the payment from COVID-19 lipids, which was shipped in the fourth quarter of last year, with disciplined working capital management enabling a modest inventory build in the first half without offsetting this benefit. Capital expenditure in the first half was 70 million, broadly in line with our full-year guidance for 150 million, including the farmer expansion program. Overall, free cash flow of 123 million was up 69%. After accounting for the dividend payment and other cash movements, net cash flow was positive 28 million, with net debt reducing to 508 million. This net debt position translates to a conservative leverage ratio of 1.4 times, well within our guidance range of 1 to 2 times EBITDA. Our capital allocation policy remains unchanged and following a significant portfolio transition in recent years, we are focused on delivering returns from recent investments. And with that, I'll hand back to Steve.

Many thanks, Fitz. I want to spend a few minutes talking about our strategy in more detail and what we're doing to position CRODA for a strong future. This slide is one that you will have seen from us before. and it illustrates how everything flows from the key technology trends highlighted here on the left. And together with the learnings and actions we've taken to strengthen the business that I touched on earlier. And on the right-hand side, we've continued to focus on a clear set of near-term priorities, which I'll go through now. So I'm actually in one of our consumer care labs, part of a large network of local R&D labs, which help ensure our innovation is tailored to local trends. It's also where I started my career with Crota nearly 35 years ago. Beauty care is the largest business in consumer care and has seen the greatest volatility. Our strategy here is to accelerate innovation whilst managing volumes at the bottom of the portfolio where there is less differentiation to ensure consistent plant utilisation. This slide highlights some of the leading indicators that show our progress. By localising our approach, we've pushed innovation to record levels in consumer care, and that includes in beauty care, where new and protected products grew by 1.5 percentage points as a proportion of total sales. We're also seeing a marked increase in innovation projects with customers benefiting from localising our approach. Customers are looking for ways to be more sustainable across all areas. We're responding to that by providing carbon footprint data on our products, with 80% of our beauty care portfolio now covered. We've also expanded our eco range, where sales increased by 34% in the half, reflecting strong demand from customers in both beauty care and home care. And as I mentioned earlier, decision-making is now closer to customers and we've implemented a more flexible pricing policy for defined customer product combinations in the less differentiated part of beauty care. This is enabling us to capture lost share in the US, where we've regained over 40% of the sales volumes we lost because we weren't able to meet all of the demand for certain ingredients at the peak of restocking. And better, sales volumes are helping to improve capacity utilization, averaging 65% in half one across our shared manufacturing sites. That's compared to 50% to 55% at the end of last year. I mentioned earlier that we're seeing significant change in the beauty market, driven by the rise of local and regional customers and their increasing appetite for innovation. The left-hand column shows that while customers large and small have been increasing new product launches over the last 10 years, local and regional share has grown very significantly in both the skin and hair care markets. And that is reflected in our own sales data at the bottom, with 78% of consumer care sales now coming from local and regional customers in the first half versus 72% in 2020. And moving to the middle column, by investing in R&D across our fastest growing markets, we're enhancing our proximity to customers and helping regional customers in particular reduce time to market and respond to local needs. The best example of that in action is China, where Chinese brands such as Cannes and Preuer are now ranking higher than multinational brands. Again, another statistic that highlights the change that we're seeing, a change that we've been positioning ourselves for over the last few years. Our sales to local and regional customers grew by 28% in half one, compared with our average globally of 9%. Our F&F business is another good example of where our exposure to local and regional customers and developing markets is enabling us to grow well ahead of our peers. Over 95% of our sales are local and regional, and whilst 80% of revenues are outside Europe and the US, the bar chart in the middle of the slide illustrates how we've consistently outperformed Tier 1 competitors. We are investing to support continued growth, with new innovation centers in Grasse, in the south of France, the world capital of fine fragrances, and also in Dubai, a critical hub for the Middle East. I'm now in one of our crop protection laboratories, To talk about two examples of recent innovations. Despite the dominance that a handful of large players have in the crop market, we are seeing a greater proportion of our sales going to local and regional customers here too. And with the balance shifting in their favor for the first time ever. Again, we are well positioned to respond to this trend whilst continuing to work closely with their global peers. As you can see from the middle column, We are doing this very successfully across Asia, where our drift reduction technology, specially formulated for drone applications, is now being rolled out across the region, following an excellent response from customers in China. And our seed business, sales of novel microplastic-free seed coatings, grew strongly, reflecting Crota's market-leading position and the EU's decision to ban the use of microplastics in seed coatings by 2028. Our innovative MPF coatings are now being sold across Europe, North America and Latin America, where they are also in final test stages with the major seed companies. Staying on the move, I've come to one of our pharma labs here, part of a growing network of innovation centres across the world, working to bring new drug delivery systems to the market. We are making further progress building industry-leading positions in high growth markets, with customer pipelines across biologics, vaccines and nucleic acid drugs continuing to expand. The growth in industry drug pipelines, both clinical as well as preclinical, is impressive. And as you can see on the left, we're all well exposed to that growth due to our market position and technology portfolio. Years of investment to establish strong competitive positions in critical areas such as specialty excipients, adjuvants for next generation therapeutic vaccines, and more than 2,000 lipids for new mRNA drugs is beginning to pay off. Accelerating medium-term growth will be driven by the commercialisation of new mRNA vaccines for infectious diseases and oncology, where we are working closely with big pharma companies driving this development. And it will be driven by increasing sales of new delivery systems that we are bringing to the market. So for example, our newly launched proprietary lipid-based adjuvants are now sampled into 80 projects and are expected to contribute meaningful sales in the second half year as a customer's clinical trials progress towards regulatory drug submission. I want to finish by touching on what we have been doing to enhance efficiency and cost control. Having acquired several businesses in recent years, we're integrating them deeper into the Crota organization. This includes driving growth synergies with the Crota brand, opening the door for Iberchem with multinational customers, great collaboration between our teams at Avanti in Alabama and in Denmark to launch the new lipid adjuvants I talked about, and leveraging our global selling network to fast-grow ceramides for solace. We have also found ways to drive efficiencies by better sharing functional support and consolidating sites or offices such as for our seed treatment business in China. The new organisational structure is getting us closer to customers and is on track to deliver at least £9 million of savings from 2025 that we indicated at the start of this year. Broader operational improvements are also helping to drive a big increase in our NPS scores. Customers are finding us easier to work with. Our robust cost control is expected to benefit group operating margin by about half a percentage point this year, compared with our initial expectations. And we will continue to scrutinise spend across the businesses going forward if we need to. So, OK, wrapping things up with our outlook for the rest of the year. We're encouraged by the progress we've seen during the first half in consumer care, our strategic pharma platforms and IS, helped by more stable conditions. The sequential improvement in the ex-COVID operating margin reflects higher sales volumes, price discipline and robust cost control. And as I mentioned earlier, crop protection and consumer health have remained weak and without any signs of immediate recovery in crop protection, we now expect adjusted PBT to be between £260 million and £280 million sterling in constant currency. So in summary, it's been a good first half in many respects, highlighted by sequential sales growth, record levels of innovation and an improved operating margin in most areas, as well as strong free cash flow. We're emerging from a tough environment as a very different looking business, more focused on and more exposed to fast growth markets. And we are increasingly ready for another period of exciting innovation led growth.