Croda International Plc

Good morning, everyone. Great to see so many of you here at the London Stock Exchange. Welcome to all of you who've joined us virtually as well. I'm here with Anthony Fitzpatrick, our interim CFO, and we'll both run through our respective sections of the presentation set out on this slide. And as soon as we've done that, we'll be very happy to take your questions. So it's been another transitional year for Crota, following two exceptionally strong years in 21 and 22. Sales growth was weaker than we'd hoped, but proactive actions to reduce cost and drive efficiency enabled us to deliver profits in line with expectations. Overall, this performance is still a far cry from where we want to be. And we've continued to take further steps to strengthen the business by making Crota more focused and more efficient. So I'll start with a summary of the results and talk about constant currency changes to give you a better understanding of the underlying trends. Group sales were down 1% or up 2%, excluding the 48 million of covered lipid sales in the prior year. Sales volumes started to recover and increased demand for innovation helped sales of new and protected products to grow by 6%. The adjusted operating margin was down year on year, with 2023 having benefited from high margin covered lipids. However, it improved half on half, supported by strong operating execution with price discipline and proactive cost control. So overall, whilst PBT was 12% lower than last year, it was within our guidance range at £273 million or £260 million on a reported basis. Cash flow remained strong and we applied working capital discipline and reduced our capex after several years of significant investment. The performance across our businesses was mixed. Sales grew 7% in consumer care and 2% in industrial specialties, with higher volumes partly offset by a lower price. Sales in life sciences declined 6%, but were back to growth in the second half, excluding COVID-19 lipid sales, and helped by a recovery in crop. Crop's starting to come back. And as a result, the margin in life sciences also increased from 18.3% in the half one to 22.9% in half two. 2025 has started well, as you can see with the arrows at the bottom. Good revenue growth in all businesses and markets. And I will come to Outlook later, but as you can see from these arrows on the bottom of the slide, we expect consumer care and life sciences to grow this year, with industrial specialties broadly flat. So turning to the market itself and the environment we're operating in, it remains subdued throughout the year, but with more stable inventories and demand in most businesses and regions. In consumer care, as you see on the left-hand side, we saw a continuation of the trend we talked about previously, with local and regional customers winning share from multinational customers, for whom conditions remain more challenging. You can see that on the left hand side, as I mentioned, it illustrates the shift in hair and skin markets, the two largest beauty categories. This is good for Kroda as our average selling prices are higher to local and regional customers and a reflection of the additional value we add through our formulation expertise and our broader offer. These smaller customers are innovative and fast to market with high quality and competitively priced products. And we've responded to this shift by leveraging our local footprint and reallocating resource to support these smaller customers in the regions. In life sciences, the picture is more mixed. In pharma, consumer health and veterinary markets remain quite challenging, particularly in Europe. whereas biopharma markets have seen more improvement, reflected in the performance of our excipients and lipids, and more encouraging consensus data for the major biopharma companies, as illustrated, as you can see in the middle of the slides. In agriculture, we've seen increasingly stable crop commodity prices, and that correlated with an improved demand during the second half. Inventory levels are mixed, so it's too early to say how demand will evolve through 2025, but we are cautiously optimistic. So whilst we're feeling better about the market environment and trends we're seeing, we're not sitting back and simply waiting for these markets to rebound. They will, but we're going further with the actions that we've talked about last July to drive sales growth, increase our margins and improve returns. So there are five challenges that we are focused on. First, it is clear that our markets are continuing to fragment, with local and regional customers continuing to grow. Secondly, we're seeing renewed customer appetite for innovation, which requires us to re-establish this R&D intensive relationship post the pandemic with our customers. Thirdly, while most strategic investments we've made are performing well, we need to see a bigger contribution to profits. Next, inefficient utilisation remains a drag on our margins. And finally, the cost base inflation has been running ahead of revenue delivery, so our cost base needs to be realigned with the current sales. So our ability to address these challenges whilst prudently managing our invested capital will lead to improved returns. I'll come back to these priority areas in turn shortly, but let me hand across to Fitz to go through the numbers in detail. Fitz.

Thanks, Steve. Morning, everyone. So, running through a summary of our performance. Sales of 1.6 billion declined by 4% on a reported basis, or by 1% at constant currency, with adjusted operating profit down 13% to £280 million. As you will recall, our guidance for full year adjusted profit before tax was 260 to 280 million at constant currency. We have delivered 260 million pounds on a reported basis, equivalent to 273 million at constant currency. So profit performance was in line with guidance. We have modestly increased the dividend by one pence to 110 pence per share despite lower earnings, reflecting our confidence in the future earnings growth and strong cash performance with free cash flow of 181 million up over 9%. Bridging from adjusted profit before tax to reported profit before tax at the bottom of the slide, you can see there was a 37 million pound charge for the amortization of acquired intangibles and exceptional items were a further 15 million pound charge. Turning to the group sales bridge and moving from left to right on the chart. As you will recall, in the fourth quarter of 2023, we shipped around $60 million of COVID-19 lipids, which did not repeat in 2024, equivalent to a 3% headwind to group sales in the year. On average, our raw material basket was 4% lower in 2024, following a 12% reduction in 2023, which enabled us to selectively reduce prices to customers as part of our regain efforts, contributing to the price mix decline of 5.5%. Despite the volatility over the last two years, not least with raw material costs and sales volumes, we've remained disciplined on price, with our gross margin remaining consistently high and stable above 60%. For 2025, we're expecting modest raw material cost inflation, meaning the price mix headwinds that we saw in 2024 are likely to diminish. Volumes were up by 7%, with an encouraging performance in consumer care and industrial specialties, and the beginnings of a recovery in crop protection in the second half of the year. Along with the modest inorganic contribution from the acquisition of Solus Biotech, which completed in July 2023, constant currency sales were up by 2%. Currency translation was a 3% headwind in the year, leading to an overall reported sales decline of 4%, inclusive of COVID-19 lipid sales. Now looking at sales performance by region. Delivering fast growth in Asia continues to be a strategic priority, and it was encouraging to see growth in a tough environment, with sales up by 7% in constant currency. In LATAM, sales were flat with good growth in consumer care, offset by lower sales in crop and pharma. Sales in North America were also broadly flat, aided by resilient demand in biopharma. Sales in EMEA were down 6% due to weak demand in life sciences, but were flat excluding COVID-19 lipids as the majority of these sales in 2023 were booked in Europe. Now bridging the operating margin from 2023 to 2024. We saw a headwind to margin of 1.3% from the absence of COVID lipid sales, as well as the mixed impact of F&F continuing to outperform. Bounce back costs, including return of a variable remuneration charge in 2024, were a further 1.8% headwind. We were, however, able to offset a proportion of these bounce back costs with proactive cost actions, which Steve will talk more about shortly. As a result of continued investment to capture future growth opportunities, investment costs were a headwind of just under one percentage point to margin in 2024, although clearly we are confident these investments will drive future returns. Driven by higher sales volumes, we saw 2.3 percentage points of margin expansion because of these higher activity levels and the effect of volume re-leverage. Overall, these movements resulted in operating margins moving from 18.9% in 2023 to 17.2% in 2024 at the top end of our 16 to 17% guidance range we gave at the start of the year. The sequential margin improvement shown on the right-hand side from 16.6% in the first half to 17.7% in the second half was encouraging and reflected higher sales volumes as well as these cost actions. Turning to divisional performance, consumer care sales of £920 million were up by 4% on a reported basis or by 7% at constant currency. This comprised a 5% reduction in price mix, an 11% increase in sales volumes, and a 1% contribution from the sales of ceramides following the acquisition of Solus Biotech. Sales to local and regional customers were up by 11% as these customers continued to outperform the market, and because our go-to market model enables us to serve customers of every size. By business unit, F&F was the standout performer, growing by 18% in constant currency, ahead of the underlying markets it's pointed towards. Beauty Actives delivered sales growth of 6% in the year, led by Asia. Beauty Care was flat with growth in all regions at constant currency apart from EMEA. As you can see on the right hand side call out, lower prices and lower raw materials helped enable a 9% increase in sales volumes. Encouragingly, our gross margin percentage was up modestly year on year, helped by a higher proportion of sales to local and regional customers, which are higher priced. Demand for innovative ingredients as well as ingredients differentiated by sustainability remains strong with MPP sales grown by 11% of constant currency and MPP sales increasing to 43% of total sales in consumer care. Moving to life sciences. Overall sales of 504 million were down by 16%, or by 6% when adjusting for currency translation and prior year contribution from sales of COVID-19 lipids. Pharma sales were down 2% on this basis, with lower sales in consumer health and veterinary markets, particularly in Europe, but growth in our strategic focus areas, such as lipids for drug research and delivery systems for protein-based drugs. Sales in crop protection were down 16% in constant currency, comprising a 31% decline in the first half against a strong 2023 comparator and 6% growth in the second half as we saw volume start to recover. MPP as a proportion of total sales increased to 31%, with our strategic focus areas in pharma being a higher proportion of sales. Without the higher margin COVID-19 lipid sales in 2024, the operating margin was down year on year, though positively, it did increase from 18.3% in the first half to 22.9% in the second half due to higher sales volumes in crop protection and again, careful cost control actions. Turning to industrial specialties, industrial specialties plays an important role in our operations, contributing to the efficiency and profitability of our shared manufacturing sites by leveraging core technologies in high value industrial markets and providing volume demand on all shared sites. Sales of 204 million were down 1% on a reported basis, but up by 2% in constant currency, comprising a decline in price mix of 7%, more than offset by volume growth of 9%. While most of our sales and industrial specialties are direct to customers, a proportion are made through a supply agreement with the purchaser of our divested businesses, and we do not directly control this demand. Encouragingly, direct sales, where we do control, were up by 5% on a constant currency basis, reflecting our proactive efforts to drive sales. The adjusted operating margin of 7.6% was up by 300 basis points due to favorable price mix, particularly in the first half, as well as higher sales volumes. Turning now to cash flow. Cash generated from operating activities of 319 million pounds was supported by a 21 million pound inflow of working capital following payments of the COVID-19 lipids shipped in the fourth quarter of 2023. As you can see in the chart on the right hand side, we've managed our working capital position very carefully with working capital days on hand reducing from 105 to 94. Capital expenditure of 138 million also reduced, reflecting careful scrutiny of all investment programs. As a result, free cash flow increased from 166 million pounds to 181 million pounds. After accounting for the covered dividend payments and other cash movements, net cash flow was positive 7 million, with net debt reducing slightly to 532 million. This net debt position translates to a conservative leverage ratio of 1.4 times, which is comfortably within our range, guidance range of one to two times adjusted EBITDA. Over the last five years, we have invested selectively in projects as a key element of realigning our portfolio in line with the structural growth drivers. Strengthening our position as a high value added ingredients business. As you can see from this slide, you can think of this investment in three parts. Capital expenditure in the core business, acquisitions and the farmer capital investment programme. Our total capital expenditure has been elevated in recent years because of this strategic commitment. However, we would expect CAPEX to moderate as assets are commissioned in 2025 with two new greenfield sites and we utilise the capacity we have built. Future capital investment will therefore be highly selective. With the acquisitions of Avanti and Iberchem in 2020, and more recently Solus Biotech in 2023, we've also deployed capital on acquisitions to refocus the portfolio. Our priority is now about delivering returns from these investments. And so we would expect any investments in the near term to be limited to complementary next generation technologies and partnerships. We are also nearing the completion of our farmer investment program, which received both US and UK government support and provides us with the capacity necessary to deliver commercial scale volumes. We are carefully controlling our capital base, contributing to delivering consistent improvements in our returns on capital. To finish up my section, there's some technical factors on this slide, but let me highlight just a couple of these aspects. Firstly, we believe that raw material cost deflation has bottomed out, and we expect a 1% increase in the first quarter. In line with my comments about the recent period of intensive investment, we expect a modest increase in the depreciation charge following CapEx in recent years, as well as a small working capital outflow. So with that, back to you, Steve.

Many thanks, Fitz. Okay, as I said at the beginning of our performance, it's not where we want it to be. And I'm going to expand on the actions that we're taking to address that. There are three things that we're doing to drive sales growth. Leveraging our proximity to customers, converting our innovation pipelines whilst continuing to strengthen them, and driving further value from recent investments. And there are two actions that underpin the margin recovery. Driving higher sales volumes to enhance utilization rates and implementing operational efficiencies to offset inflation and the incremental costs of investments coming online. So through these actions, we will restore earnings and returns to where they should be in Crudit. So, starting with customer intimacy with local and regional customers. Investing in our footprint to get closer to our customers has been a key part of our strategy over the last five years, particularly in the higher growth markets. Consumer needs vary significantly, especially in emerging countries, and this has fueled the rise of fast-growing local and regional brands. We're adapting to these changes by increasing our local innovation capabilities, and that's driving growth, with the proportion of sales to local and regional customers growing 11% to 80% now of total sales in our consumer care business. It's a similar story in crop where fragmentation is accelerating and there are important new players beyond the big four. Again, you can see that represented in our sales figures with local customers and the graph in the middle, our sales are up 7% with these local and regional customers in a very challenging market. So as I've said, our prices are normally higher to small customers because we provide them with additional support. So less concentration in our customer base is creating more opportunities for us in multiple markets at good margins. And in Asia, this remains a very exciting market for us, particularly for consumer care, where we are seeing strong growth in key markets such as India, China and South Korea. We're benefiting from prior year investment in sales and R&D, which has brought us closer to customers there. And we are selectively building manufacturing capacity in those fast-growing countries as well. So in response to ongoing market fragmentation, we are reimagining the innovation to ensure that we are supporting both local customers and global brands. We have also rejuvenated our interactions with customers, leveraging clever science and R&D to build deeper relationships built on our technical expertise. So this is addressing the gap created in the aftermath of the pandemic when customers were dealing with huge supply chain issues and were focused on marketing existing brands rather than developing new brands. We've sustained investment in R&D, increasing research intensity in both consumer care and life sciences to well above 4% of sales in each. And we've seen a big uptick in customer-driven innovation, where we work in close collaboration with them to meet their precise performance requirements or go after a specific opportunity. And we are launching more new products, which is driving higher NPP. So we will bring more new ingredients to the market in 2025 than in 2024. You can see that in our stats. Such as Lucian, a new skin active obtained from Marine Biotech, which reduces your premature skin ageing by five years in one month. So a few of us... So a few of us might need a bit of that soon. I'm not looking at anybody in particular. But we're also continuing to expand into adjacent pharma markets, launching a bioprocessing aid, which significantly reduces the risks associated with biomanufacturing for our customers. So coming on to strategic investments in more detail. And as I said, we're seeing benefits from much of what we've done. But that is not a universal picture. And we need to work harder to ensure investments deliver strong returns. You should see this in three buckets. Firstly, core capex investment, which Fitz talks about, is focused on fast-growth countries. So, for example, our new surfactant plant being commissioned this year in Dahesh to meet very strong demand in India. And as Fitz has said already, we're in the latter stages of a period of intense investment that has taken total capex above historic run rates of 6% to 8% of sales. We expect it to trend back towards those levels as we utilise the capacity we've built and future capex will be highly selective. So next on M&A, which saw us acquire Iberchem and Avanti in 2020, followed by Solus Biotech in 2023, as we focused our portfolio on the big structural drivers of growth. We're very pleased with how our F&F business is performing, with sales growth 17% CAGR, significantly ahead of our competitors. This reflects its strong position with local and regional customers, particularly in emerging markets. We will continue to allocate capital to drive growth in this business, including the construction of a new fragrance facility in China. And we're very focused on driving Solus Biotech forward too. As we saw with Iberchem, new businesses in Kroda always need a year or two to start delivering to their true potential. But we've more work to do to ensure the acquisition delivers the growth rate and profit conversion it is capable of. So SOLUS is now fully embedded into our South Korean operations, and we're driving the sales of ceramides and phospholipids through our global selling network, which is generating a great response from customers. We're also increasing innovation with a new product launched recently to promote scalp health, taking ceramides traditionally used for skincare into the hair care market. And finally, Avanti, which covered its acquisition costs in record time due to our involvement in the COVID vaccine. But beyond that, sales of lipids for drug research have grown strong double-digit percentage CAGA since 2020. And the third bucket is investment to position pharma for a strong future, a program that has been running since 2021. So as well as establishing the site we acquired in Alabama, as a global centre of excellence for lipid development, we're scaling up production capacity as well with a new multi-purpose facility in Lamar and a second scale-up site in Europe, both being built with government support. So whilst new mRNA drugs are yet to be commercialised by our customers, we have strong commercial relationships with big pharma companies who are leading this development and are very well positioned for this breakout growth which will come. and we're just as focused on growing our margins and therefore driving a further improvement in utilisation rates at our 11 shared manufacturing assets. These sites are regional production centres and each comprise four or five core processes, principally for beauty care, crop protection and industrial specialties. They account for approximately 70% of group sales volumes and 60% of group sales. An overall utilization rate for these sites may be directionally helpful, but does not provide an accurate picture as the optimum rate varies from one process to the next. So instead, we've provided the rolling average of absolute sales volumes at these sites. So you can see the impact of the sale of the majority of our industrial business in June 2022. and the restocking, destocking cycle evident through the pandemic, as well as the volume recovery through 24. The start of that recovery is very much underway. So if the recovery continues at that current rate, we should be back to pre-pandemic levels within the next two years in our facilities. We're also reviewing the efficiency of our footprint to ensure we strike the right balance between profitability in the short term and providing us with the capacity we need for medium term growth. So we are driving higher sales volumes, particularly of less differentiated ingredients, whilst making sure we maintain our gross margin, that margin that we make on raw materials in our selling prices. This is already having a positive effect, as you can see on the chart, with volumes up 9% year-on-year in both beauty care and IS, which combined account for about 70% of the volumes at these sites. And of the remaining 30%, crop protection is the most important business, where we started to see volumes recover in the second half. So as I mentioned, the new organisation structure that we implemented at the start of the year has had a big impact on the way that we do business. We are faster and more effective with our customers. And we've identified ways to modernise our processes and simplify the way we do things, thereby reducing costs. We've created a new centre of a business excellence centre to share best practice and coordinate work streams that are targeting operational efficiencies across supply chain, operations, distribution and back office support. Cost disciplines that were established in 2024 are also being embedded to ensure that the benefits are captured permanently. So the near-term benefits of this programme are set out on the right-hand side, totalling £40 million, versus a 2024 baseline. We're targeting £25 million of savings this year in 2025, derived pretty equally from payroll costs and other OPEX, with a further £15 million of incremental savings in 2026. And more beyond that, as we begin to benefit from these modernisation initiatives. So the estimated cash costs to realise these benefits total around £20 million, which we expect to take as exceptional restructuring charge split across 2025 and 2026. So finally, coming to the year ahead and what we see as the building blocks of our 2025 profit performance. Firstly, the impact of inflation is expected to represent a headwind of about £10 million in 2025. Secondly, we continue to invest. We're a company that wants to invest in assets and OPEX to support our long-term strategy and expect incremental headwinds from additional depreciation and other costs of about £15 million in 2025. Much of this relates to the two greenfield sites I mentioned, the new surfactant plant in Dahej in India and a new multi-purpose facility in Lamar, Pennsylvania for farmer scale-up. Both of those got great growth opportunities for the future. 25 million of operational efficiencies will offset a large proportion of these costs in 2025 and as shown in the final bar we anticipate growth will further drive profit performance so in terms of outlook we expect both consumer care and life sciences to grow sales in 2025 with continued volume recovery and the price mix headwinds that we've seen are diminishing So operational efficiencies should significantly offset inflation and the incremental costs that we expect to incur, as I've said. So overall for 2025, we expect group adjusted profit before tax to be between 265 million sterling and 295 million at constant currency. So in summary, then, as I said at the start, whilst we've seen progress this year, as we continue to emerge from a very unusual period, we're a long way off from where we want to be. But there is a lot to do in the year ahead. And we are laser focused on restoring profitability, leveraging this great portfolio that sits at the heart of the business. And we will do this by driving sales, by leveraging our proximity to customers and stepping up innovation and maximising returns from all of those recent investments, driving margins through increased utilisation and reducing our cost base and delivering strong earnings growth and improved returns through progress in these areas alongside prudent management of invested capital. So let me stop there and hand over to you for your questions.