Croda International Plc

Good morning, everyone. Many thanks for joining us here at the London Stock Exchange today. And a warm welcome to everyone online as well. I'm here with Stephen Oxley, our CFO, who has been on board since the start of April. Stephen's been a great addition to the team and hit the ground running, not least in helping us to push forward our plan to grow earnings and improve returns. So more on that shortly. So in terms of the agenda, then. normal outline from us today and set out in the slide up there. Stephen and I will run through our performance and the progress we've made with our five point plan before stopping to take your questions. So OK then, starting with some of the key highlights from the half. Overall, our financial performance was very much in line with our expectations at the start of the year. The second quarter moderated slightly versus the first, but group sales increased by 7% for the first half. Sales grew in all three businesses and in all regions. A strong improvement in volumes across the board, more than offset a modest reduction in price mix, leading to a healthy increase in both adjusted operating profit and profit before tax. And whilst we're mindful of the challenging environment, our guidance for the full year remains unchanged. And despite delivering good sales growth in the first half year, we remain a long way off from where we want the business to be. Executing the five point plan we introduced in February has been our major focus. Our actions are helping us navigate this current environment, simplifying and modernising our business and speeding up our efforts to enhance margins. We have accelerated our plans in particular, identifying a further 60 million pounds of cost savings, taking the total to 100 million of annualized savings by the end of 2027. There is much more to do, but our strategic and our operational focus is creating a stable, stronger platform from which to improve earnings and returns going forward. So turning to some of the trends that we're seeing across our core markets. As you'd expect, the environment continues to be tough, starting with beauty, which has remained resilient with growth across all markets, excluding North America. And as you can see from this chart on the left, political uncertainty in the USA has had a negative impact on consumer confidence. We've seen some evidence of US consumers trading down, particularly in beauty actives, which is more exposed to the premium end of customer products. Beauty sales combining actives and care were up 3%, with demand still strongest in Asia, driven by local and regional customers. In pharma, customer confidence has been adversely impacted by policy decisions in the US, with approval processes slowing and more limited public funding impacting some areas. Pharma sales, though, were up 5%. And in agriculture, improved demand has been supported by lower but stable crop commodity prices and lower inventories at our big four crop science customers who've been buying again. Crop and seed sales combined were up 13%, driven by good demand, especially in Europe. So overall, whilst we delivered a good sales performance, we cannot assume that our markets will pick up any time soon, which is why we're accelerating this five-point plan. So I'll come back to talk about some of these actions in a moment. But first, let me hand over to Stephen to run through the numbers in more detail. Stephen. Thanks, Steve.

Good morning, everybody. It's great to be here for my first results presentation at CRODA and to be able to report a solid performance despite challenging market conditions. I'll start with the financial headlines. In constant currency, sales were up 7% at $856 million. Adjusted operating profit was up 12% at $147 million. and adjusted profit before tax also grew 12% to 138 million. Reported profit before tax of 85.5 million includes a 7 million exceptional restructuring charge, 18 for the amortization of inquired intangibles, and a 27 million impairment charge, which includes 22 as a result of a recent decision to rationalize our warehousing in Europe. Free cash flow was 34 million as a result of higher working capital and net debt was 580 million after payment of the 2024 final dividend. Leverage remains conservative at one and a half times EBITDA and we've declared an interim dividend of 48 pence, a slight increase on the prior year. Turning first to sales when my comparisons are in constant currency. We delivered sales growth across all businesses and all regions. Volumes were up 11% as we drove strong growth in each of our businesses. Price mix was 4% lower as we selectively reduced prices to regain share at the bottom end of our agriculture and beauty care portfolios. The average cost of raw materials was broadly flat. Looking at sales by region, Europe led the way with sales up 12%, reflecting a strong performance in both consumer care and life sciences. Asia continued to perform well, increasing 6%. North American sales were up 3%, impacted by tougher consumer spending, as you just heard from Steve. And Latin America grew 5%. Turning to sales performance by quarter, you'll recall first quarter sales growth was particularly strong at 9%. In the second quarter, there was a more normalized rate of 6% as the political and economic environment became less predictable. Sales growth in consumer care continued to hold up well at 7%. Life Sciences was up 6% after double digit growth in the first quarter due to the crop rebound in Europe. and industrial specialties grew 2% in the second quarter after a good first quarter. Looking at the performance of each business, consumer care sales grew 7%. This comprised an increase in volumes of 9% and a reduction in price mix of 2%. Sales to local and regional customers were up 11% as they continue to outperform the market. By business unit, Fragrances and Flavors continues to be the standout performer, growing ahead of its underlying markets at 17%. Beauty Care is the largest business within consumer care, where sales were up 3%. Volumes in Beauty Care were 8% higher, but price mix was 5% lower, as we selectively reduced prices to win business in the bottom 20% of our Beauty Care portfolio. Beauty actives grew 1% as a good performance in Asia was offset by North America, where demand for our customers' premium products weakened as consumers traded down. Adjusted operating profit of 86 million was up 7%, with an operating margin of 17.4%, broadly in line with the prior year. While margin did benefit from volume growth and cost initiatives, it was impacted by mix due to the relative outperformance of FNF and home care. In life sciences, sales grew 9% to 261 million. Volumes were up 16%, with price mix down 7%. As you can see, growth was driven by our agriculture businesses, where seed enhancement benefited from strong vegetable demand, and there was good demand for crop protection, especially in Europe. Farmer sales grew 5%. The recovery in consumer health continues, and in biopharma sales grew in lipids for drug research and excipients for protein-based drugs. But there's no doubt that the US regulatory environment is creating uncertainty, which is likely to continue for the foreseeable future. Life Sciences adjusted operating profit was up 30% to 56 million, with higher operating margin improving from 18.3 to 21.5%, mainly due to higher volumes. Finally, sales industrial specialties were up 4% at 103 million, with volume growth of 10%, partly offset by price mix of 6%. Direct sales were up 12%, while sales through Cargill, which we don't control, were down 16%. Turning now to operating margin. This chart shows how operating margin increased from 16.6% to 17.2% year-on-year. You can see here the 11% increase in sales volumes contributed to a 3.8% increase in margin as we regained share. This was partially offset by the impact of price mix, the majority of which was price, as well as currency with the strengthening of sterling. As expected, the early benefit from cost savings offset the impact of inflation and the incremental cost of recent investments. We said in February that we'll deliver 25 million of cost savings this year that will be an equal mix of payroll savings and lower operating costs. We're on track to reach our target and this delivered a benefit in the first half to profits of 10 million. we have identified opportunities for much greater savings and deficiencies, which I'll come back to later. Looking now at debt, as you can see, there was a working capital outflow of 61 million compared to an inflow in the prior year when we benefited from a large payment from Pfizer, which was our COVID receivable. Given our good sales growth, we would expect some working capital outflow, in particular at F&F, which has longer collection terms. Nevertheless, we need to improve our working capital management as inventory levels are higher than expected. Net debt increased to 580 million, or 1.5 times EBITDA, the middle of our stated range. Capital expenditure was 60 million and our full year guidance for CAPEX remains at 135 million. After paying the final dividend, there was a net cash outflow of 61 million. Turning now to our capital allocation framework. I don't want to make any changes to the framework, but we will apply it with greater rigour. we have four clear priorities. First is organic investment, where there's been a period of heightened intensity, including the farmer investment program. We expect CapEx to continue to reduce as a percentage of sales from 2026 onwards. And I intend to bring a strong focus to returns, risk and execution to the process of appraising capital investment. In particular, future capex decisions will prioritise opportunities for faster cash payback. Second, we remain committed to growing the dividend. Third is M&A, and after significant activity in recent years, our focus now is on driving greater returns from these investments and across the whole portfolio. We'll continue to look at small technology-led bolt-on acquisitions, but any spend here will be modest. In other words, a few million. Fourth, we will maintain net debt within the range of one to two times EBITDA, so we can return surplus cash to shareholders over time. Finally, I want to reiterate our full year guidance. Despite operating in an uncertain political and economic environment, our performance in the first half was in line with our expectations and our full year guidance is unchanged. We continue to expect adjusted profit before tax of between 265 and 295 million in constant currency. There was a negative impact from currency translation of 4.5 million in the first half. And based on current exchange rates, we would expect the full year impact to be around 10 million. And with that, I'll hand back to Steve.

Great. Many thanks, Stephen. As I mentioned at the start, we've made good progress with our five-point plan to improve earnings and returns. Our actions are enabling us to navigate a more challenging macro environment, and they're also strengthening Crota for the future, making sure we can grow faster with a simpler, more efficient and effective organisation. I'm going to run through the three points along the top of this slide, the areas that we're focused on to drive growth, and Stephen will then pick up on what we're doing to maximise efficiency as well. So our first priority then, to maximise returns from our portfolio following a period of peak investment. We must get much more out from our recent investments than we currently. The plan to increase growth is company-wide, but let me highlight three examples on the slide of where we're taking action. Starting on the left, our portfolio of ceramides came to us through the acquisition of Solus in 2023 and offers significant sales growth and margin potential everywhere. And when you see fast growing brands boasting rapid moisturising, moisturisation or even skin barrier protection, their products are very likely to contain the ceramide. So far, commercialisation has taken longer than we would have liked. But to address this, we've now rapidly exited all distribution agreements, and our global sales network is selling ceramides in every location around the world. And we're supporting them by doing things like upgrading the technical data packages for existing ceramides, essential information for new customers, and leveraging our R&D and formulation expertise to develop new actives and mechanisms to deliver ceramides to the skin. Our actions are starting to have encouraging results, with ceramide sales up 50% in the first half, albeit from a pretty low base. Sales have grown in all regions, from the most well-known beauty multinationals to a lot of smaller on-trend brands. We've got a great pipeline of new products, having recently launched a ceramide for stronger hair, one of the first applications anywhere in the world beyond skincare. So turning to pharma, our eyes have been off our heritage business whilst we've been ramping up by a pharma. So we're increasing our focus on selling ingredients for consumer health and veterinary applications. Progress that has been accelerated by Thomas Rehmeyer, who joined us from Evonik in April to lead our life sciences business. And under his leadership, we've initiated project flagship to reinvigorate sales into over-the-counter consumer health products, reprioritising resources and generating new claims data, initially for topical and oral delivery applications. This is helping us regain share, delivering 10% sales growth in consumer health and three consecutive quarters of steady progress. So finally, on the right, whilst expansion in emerging markets has been a focus for us for the best part of a decade, like many peers, we have more manufacturing in Europe and North America than we do in Asia. We're continuing to shift our footprint towards fast growth countries, particularly in Asia, where consumer care sales grew 8%. And in half two, we're commissioning a new surfactant plant in India, where consumer care sales grew 30% in the first half of the year. Our second priority is leveraging our proximity to local and regional customers. You've heard that a lot before from Crota. They're innovating faster and winning market share. We've seen that for some time now, and that market data supports that. That will continue. Given the pace at which they're growing, there is more we can do. But investing in our footprint to get closer to our customers has been a key part of our strategy for some time, particularly in higher growth markets. So in beauty, we're seeing the rise of regional giants, companies like Boticario, Quala in Brazil, Arma in Egypt, Colmar in Korea and Milbon in Japan. We are replicating our successful China model to help these key players in the market grow. And in consumer care, our sales to local and regional customers increased 11% in constant currency, and they now represent 81% of sales, up from 72% in 2019. We are seeing structural change in our customer base in the industry. And by the way, this trend doesn't mean we're turning our backs on multinational customers. Far from it. They continue to drive premium innovation, and maintaining our strong relationships is really important. But we do have to respond to increasingly diverse markets. And that is what we've been doing. So turning to pharma then, Asia is becoming increasingly important for future growth. China alone now accounts for 30% of drugs in development globally, 30%. And Korea and Japan are also in the top 10. So following efforts spanning many years to register our broad portfolio of pharma ingredients with the Chinese pharma capilla, Crota Pharma sales in China have grown double-digit percentage CAGA since 2020. We are implementing further actions to strengthen our presence in all regions that are important for drug development globally. In crop, our strategy continues to prioritise building relationships with smaller tier two and three customers, particularly in Latin America and Asia. That is where we're seeing the most opportunity and hunger for innovation. In crop, we saw sales to local and regional customers increase 11% in constant currency, and they now represent 56% of sales compared to 44% in 2019. And finally, from me, the third priority to support growth is stepping up our innovation. This is both to address the gap created in the aftermath of the pandemic when customers were focused on marketing existing brands rather than developing new products, and to respond to the continued diversification of the customer base. In beauty, we focus more R&D resource on customer-led projects, individual-specific projects, which drive sales at good margins and help us create new ingredients. Peg-free variants of our existing product range are an example of bespoke ingredients created in this way. This approach is particularly effective in more mature markets where collaborative innovation is on the increase. Renewed customer demand and increasing innovation are reflected in increased sample activity for samples of our innovative ingredients, up 12% CAGR in beauty actives and 8% in beauty care over the last two years, good leading indicators of activity. Insight generated through closer relationships helped us identify a gap in the market for a non-animal version of keratin that can be used for deep conditioning of hair, particularly in professional salons. This resulted in us launching Curabio, a vegan-friendly bond builder for hair, and a great example of us commercialising biotech to enhance our portfolio differentiation. And in pharma with Thomas in role, we're increasing focus on our core ingredients and broadening our priority market segments into areas such as generics. So through the acquisition of Avanti in 2020, we acquired a portfolio of more than 2000 lipids and a brand that is recognized by research customers globally. We have since expanded the portfolio through both R&D and partnerships, launching 130 more products so far this year, and partnering with Sirtest to provide our customers access to their proprietary ionisable lipid range. So overall, lipids for drug research have grown double digit percentage CAGR over the last five years. And another one of our core capabilities is specialty excipients. This has been enhanced by the commissioning of a novel super refining process at one of our UK sites. This is proprietary to Kroda, extending our leading position. And one of our new super refined ingredients is in aid to cell culture media, which has been very fast. We've seen a very fast uptake for a new product. So good progress across those three priority areas to drive sales growth. And our foot is firmly on the pedal to do much more. Stephen, over to you to run through the efficiency programme.