Croda International Plc

Hello and welcome to CRODA International Q3 2025 Fails Update. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen only mode. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to read the say a question. I will now send you over to your host, Seafood, to begin today's conference. Thank you.

Morning, everyone, and thanks for being on the call. I'm here with Stephen. He'll join me in answering your questions in a moment. I'll let me start by quickly highlighting three key points coming from the Q3 update. Firstly, group sales are up 6.5% in constant currency, a sixth consecutive quarter of sales growth, and we're pleased with that. Quarter three hasn't seen any big surprises for us, with customer demand for our ingredients broadly the same as quarter two. And most encouragingly, we're seeing sales growth with innovation led, driven by an improvement in beauty actives, continued strength in F&F, and an ongoing recovery in crop. Secondly, we continue to optimize utilization at our shared production sites, through targeted sales and ingredients in beauty care, crop and industrial specialty, as part of the actions we've been taking since 2024 to increase operating margins. Alongside good growth in actives and F&F, this resulted in another quarter of low double-digit sales volume increases, compared with the same period last year. And as a result of these actions, the mix continued to be negative year on year, due to both product mix and business mix, And like for like prices, we made largely consistent for prior year. Thirdly, we continue to make good progress with our transformation plan to improve earnings and returns. We're driving sales by maximizing returns from our portfolio, leveraging our proximity to local and regional customers and stepping up innovation with all customers where we are seeing strong demand. And we're driving margin recovery by finding more ways to optimize capacity and by taking out costs as we simplify and modernise the business. We're on track to realise £25 million of cost savings this year and continue to expect to deliver £100 million of annualised savings by the end of 2027, all contributing to marginal recovery. Finally, our guidance for the full year is unchanged. We expect the more challenging trading environment and low order book visibility to continue for the remainder of the year But in line with previous years, absolute sales in quarter four are likely to be seemingly lower than in the first three quarters, as customers typically manage their working capital into the year end. Despite this, the combination of good sales growth year to date and anticipated cost savings means that we continue to expect 265 to 295 million pounds of group adjusted profit before tax at constant currency. Let me stop there, hand over to you for questions from the sell side analysts. So thanks for that.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you. We'll now take our first question from Lisa, the niece of Morgan Stanley. Please feel free.

Hi, good morning. Thank you for taking my questions. I have two. Could we just run through the full year guidance, which was unchanged on a currently neutral element, but just taking into consideration the unchanged translation FX guidance, but small incremental negative transactional effects, but then your third quarter volumes were slightly ahead. How do we picture that into the full year against market expectations? Would be very helpful to get a little bit of color on that. And then secondly, in terms of the fourth quarter, you called out the normal seasonal slowdown, but it would be very helpful to get some comments on what you're seeing more globally, specifically in Asia and LATAM in terms of trading trends and how the customer is feeling and what the implementation is on that in terms of life signs and consumer care demands. Thank you.

Yeah, let's leave them to the guidance and I'll come back on the wider, broader customer points.

Yeah, morning, Lisa. Good to hear from you. So look, we've reiterated full year guidance. That shows the confidence, obviously, in the business. We're on track. We have highlighted market uncertainty and just shorter visibility on the order book. So that's why we're keeping the guidance unchanged. Worth saying that on Forex, you pointed out two elements there, both headwinds. We have translational forex of around 10 million for the full year. And then on a transactional level, you recall we had an adverse impact in underlying profit of seven in the first half. We expect that to be about three in the second half. So again, think 10 million overall for the year as a headwind.

Yeah, in terms of the broader point, Lisa and Yeah, I mean, we expect the trends to continue from quarter three into quarter four. What you're saying is consumer care. You've got consumer care growing well, particularly with innovation-led growth in actors and beauty care as well. I think crop is recovering well too as well. And you say that F&F has been consistent with its growth. I think we're cautious on quarter four, like many others, because of the order book more than anything else. The order book visibility is very low. But customer sentiment is not changing. You know, innovation will win in the end in this market. And as long as we continue to innovate, we'll be fine. But we're just taking a cautious view because of the low level of visibility in the order book.

Okay, that's great. Thank you so much.

Thank you. Emila Peker, Max Kassin from Charles Eden of UBS. Please go ahead.

Hi, good morning, Steve. Good morning, Stephen. Two questions for me also, please. Firstly, you mentioned you're implementing the actions required to realise the 25 million cost savings in 2025. I wonder if you could just give us a couple of examples of specific measures you've already taken and what you're seeing in terms of the reward or cost savings as a result of those. And then my second question and the comment, I guess, as well, is thanks, Thursey, for breaking out the mix and the pricing components separately in the release are very helpful. Can I just ask, given pricing is broadly flat year on year now, is the expectation that that will remain the case? And then I guess at some point through 26 return to positive territory? and back to sort of the old code, if you like, where pricing is an accretive component to group organic sales grade or group constant FX sales grade going forward. Thank you very much.

Yeah, a few questions in there, Charles. But we'll let Steve do the cost transformation examples and then also the mix.

Yeah. Hi, Charles. Let me just start with the mix. So, yes, we expect pricing for trends and pad both in the first half and then this quarter to continue. What we said Next year, as volumes come in and the business normalizes, we would expect to see that volume price mix trend essentially reversing. So volume growth will come to an end as we get to the end of next year. And then you'll see positive trends on price and mix. And as you pointed out, prices are largely consistent, new on a like-for-like basis, which is important. On the cost savings, we're on target for the 25 million of savings for this year. We've set out in the Summer of Clear programme to deliver 100 million savings by the end of 2027. If you imagine the savings at the moment are what I call slightly more tactical, so early procurement savings, hit count reduction, across the business, in the back office, sort of early moves on shared services. As we go into next year, we start to tackle the more structural opportunities that we've outlined, particularly in supply chain and logistics.

Very clear. And just for clarification, I think I know the answer, but you talk about volume trends normalising. You still expect volumes to grow in 26, just to be clear?

Absolutely. Absolutely.

So we've talked about getting back the historic levels of utilization in our core plants. That will take 2026 to achieve that level. And that will give us good operational leverage that drops through some margin accretion, as you saw in the first half. That will continue. Once we're at those levels, Charles, we'll then see the price next margin accretion from that.

Very clear. I appreciate your comments. Thanks.

Thank you. And we'll take our next question from Chaitan Deshi of Gleapy Morgan. Please go ahead.

Yeah, hi. Thanks for taking my question. The first question was, you know, I think this is probably the first quarter in many quarters where your active business has grown double digit. I'm just curious, is this some... you know, a freak accident because of the launches from your customers, timing, et cetera, or do you see now a clear trajectory here where we should see at least some positive growth in coming quarters because of the new products that you are referencing in terms of innovation? The second question was, I mean, I'm a bit curious, you know, you are almost now, you know, in Q4, The range of your guidance still seems pretty wide, even though we have only one quarter left. Are you still suggesting that we should be anchoring to the midpoint of the guidance, or do you want us to take a view on either low or top end of the guidance? And the last quick question would be on crop. you know, very, very strong growth again in Q3. It seems some of your customers are starting to sound a bit more cautious. Is that something you see in your order book or any of your discussions with customers? Thank you.

Okay, Chetan, thanks for the questions. I'll do actors in crop and Stephen on guidance. Yeah, actors. I mean, I was in for Derma last week for two days, just running the rule of the business. And I mean, you know, great progress there, innovation-led growth. We have been growing, by the way, Chet, in the last few quarters, but this is bigger growth, and we're very pleased with that. Well-balanced across local and regional and multinationals, actually. It's USA-led, and there's many behind the growth figures. It's not one or two customer wins. It's many product launches with customers of all different shapes and sizes. Primarily, virtually all of it is on innovation, some great new products coming out and some existing products with new data. So, yeah, we feel very confident about the active business. I think in crop, the good recovery continues. You know, Europe is getting stronger, which is where the recovery started. And that's now supported by America as well. So it's mainly multinational driven. But tier three customers are growing as well, too. And we don't see any deterioration in the order book as we look at that into the remaining part of the year. So we're okay with that.

Yeah. And then, Chetan, just on the Q4 and guidance. So look, we're very happy with the way the business is trading. It's in line with our expectations. Just given the external environment and uncertainties, the reason why we've just not changed the guidance at all. Don't forget when we set that back in early in the year, we weren't expecting those FX headwinds that are hitting our underlying profit. So I think the key takeaway for me is that I'm absolutely comfortable with where consensus sits, and I would not expect that to change.

That's great. Thank you.

And we'll now take our next question from Nicola Tang of C&C ProRiver. Please go ahead.

Thank you. Hi, everyone. I wanted to just verify on the comments around seasonality for Q4. I think we only really have disclosure on a quarterly basis for the past two years, which perhaps weren't normal years, but wasn't necessarily down Q1-Q in Q4 versus Q3. I think if I look at Bloomberg consensus, it implies Q4 sales would be down around six or 7%. So just wanted to check that versus Q3. So just wanted to check if that was roughly in line with the usual seasonality that you're referring to. Um, and then the second question, um, you reference, um, in the release lower, um, the fact that, uh, lipid sales, adjuvant sales, um, were a bit lower due to uncertainty relating to US regulation. Um, or the regulatory environment even, does this relate to fails going towards existing commercial applications, i.e. lower uptake of vaccinations by U.S. consumers today, or does it relate more to development projects, i.e. consumers slowing down their pipelines or slower SDA approvals? Thanks so much.

Yeah, let's go to the order of the questions then, Stephen, on the Q4 seasonality, and I'll come back on pharma.

Q4 has always been traditionally the smallest quarter, and that just simply reflects the buying patterns with our customers. What we would expect to see are the trends that we've seen through the years so far. In other words, in Q4, year-on-year growth, but just the quarter being smaller in absolute terms.

Yeah, good. I think on pharma, I mean, you know, I would make a wider point. It's good to see the early signs of growth in pharma ingredients. As a reminder for everybody, that's two-thirds of the business. The lipids point, it's slightly behind driven by America, but that's against tough comparators in the quarter and some customer hesitancy. But outside of America, it's fine. So we don't see any, we're not overly concerned with anything in lipids. You know, the Avanti preclinical lipid pipeline will continue to grow. We have no problem with that.

Thanks. Thank you. And we'll now take our next question from Archon of Redmond. Please go ahead.

Hello, good morning. Thanks for taking my question. Firstly, on the shared size, I remember after the first half results, you provided this chart where you indexed your volumes of the shared size to the pre-COVID levels. I think last time you showed that slide, it was 8% down relative to the pre-COVID levels. Would you get any indication of where these volumes are today? Or in other words, how do you feel about your capacity utilization rates right now?

Yeah, well, it's a little bit better than that, as you'd expect. And I think more broadly, back to Stephen's point, you know, we've got one more year to get back to optimised rates. So, you know, the plan's working for us and we're pleased with that.

Thank you.

Thank you. And we'll take our next question from Sebastian Bray of Boundary. Please go ahead.

Hello, good morning and thank you for taking my question. So I'd have two, please. The first is on life sciences. Can I ask about your thoughts on the run rate of this business into 26? And what I'm referring to is the following. If the lipids plus vaccines part is roughly one third and constant currency sales were flat, let's say high purity and other excipients were up mid-single digit, it implies that this fraction was down by a close to 10% when there is quite a lot of new facility coming online that introduces fixed costs that needs to be covered for 26. Do you think life sciences as a whole is going to grow very much if ag is flat-ish because it's pretty tough comps in 26? How to think about the moving parts for that segment? In other words, are you comfortable with the balance of expectations for consumer care EBIT and life sciences EBIT for 26? And then secondly, fragrances, any science cycle, which has been very nice, is starting to soften or is everything... pretty much as it was in Q2. Thank you.

Thanks, Sebastian. Let Stephen go first on the life sciences trajectory, and then I'll come back on FNF.

Yeah, morning, Sebastian. So, look, in terms of If I deep out next year, you will absolutely see year-on-year growth across the life sciences portfolio. What you've seen in the core series is a sort of a slowing or flatter pharma business overall. But as we've said, only a third of that is in lipids and adjuvants. and better growth in the excipients business and pharma. I'd expect that to continue in terms of accelerated growth in the excipients as we focus on that and rejuvenate that part of the portfolio. Look, we're really excited about the pharma opportunity. We're coming to the end of the investment cycle there in our facilities We're really excited about what that gives us, particularly U.S.-based manufacturing. We will grow into that. I think it's just worth saying that that environment, the Olympics environment, is a little bit more difficult than we thought, even U.S. policy. But we're still very excited about the long-term potential of the business.

And just to add to that, on the Lamar site, we've got potential revenue streams for consumer care. going in there as well to protect profitability. Well, so just to add to that, on F&F, it's broad-based growth virtually everywhere. This quarter is led by both fragrances and flavours and also the Parfex business, which is more the business pointing to beauty care. Regionally, the big growth is Middle East, Africa, and Europe driving that. The research and commercial pipelines are being expanded as we move research capability more locally there. Back to your point, we would expect the revenue growth to moderate from 15% to 17%, but it still should be pretty strong for the next couple of years. We're not weighted on a high level of what I call really fine fragrances. in the portfolio as well. So, you know, we expect that business to continue good growth trajectory.

That's helpful. Thank you for taking my questions. Thank you.

Thank you. And I'll take our next question from Katie Richards of Barclay. Please go ahead. Hi, good morning, everyone.

Thank you for taking my questions. First, could you just provide us some more colour on how adjusted EBIT margins have trended this quarter versus the first half of the year? I know you haven't disclosed them explicitly. There was also some criticism of potential lack of operating leverage exhibited in the first half of the year as you've been winning back some volumes. So what would you say towards this? Just another question on the transformation program, please, as well. You're targeting 35 million of cost savings for optimizing operations. Can you give some more color on what this part of the program means towards you? Would you consider targeted divestment, for example, maybe of the shared manufacturing assets or elsewhere in the portfolio? And then finally, I just want to pick up on the six points that the fixed cost points of Athergine just need. You've guided towards 15 million Athergine inflation per annum going forward as part of the transformation program with 10 million expected this year. But given the ramp up of what looks to be about 200 million in new assets, including the Lamar site, the Indemnifactants and the Triner F&S site, how can we expect the SD&A inflation to trend into next year? I'm just struggling with the timing of the ramp up of these businesses and the fixed costs that come with them. Thank you.

Okay, a few questions there. So we point them to Steve and margins, op leverage, transformation program detail and fixed costs going into next year for the plants.

Yeah, morning, Casey. Thanks for the questions. Just on my, obviously, we've not given margin for Q3. It's a trading update. All I say is we're very comfortable with the progression of the business and the continuation of what you saw in the first half. On operating leverage, the point here is that we're bringing back business into the company as rightfully ours. If you look at the first half, the benefits of that volume growth on a net basis were around 2%. improvement in our operating margin. That's the plan that we're executing on, and that will continue, as I said earlier, through to the end of next year. On the cost savings Yeah, remember 100 million by the end of 27. The largest individual costs of that around supply chain and logistics. We talked there about optimizing the footprint globally. So that is both within individual facilities and the network as a whole. And you saw a good example in July where we've announced the trojure of one of our distribution centers to optimize that footprint. What we're looking at is both both manufactured within the individual sites. So we expect to see a rebalancing of where we produce products to bring it closer to where we're seeing customer growth, so particularly in Asia. And then on the fixed costs, you're right. So we're coming to the end of our major CapEx investment program. That finishes at the end of Q126. And thereafter, we'll see a significant reduction in CapEx. It is bringing on, as we start up those facilities, around 10 million of incremental fixed costs that we've talked about previously. into the business. So that's one element of inflation. Beyond that, I just point you to sort of normal inflation in the cost base and particularly salary inflation. But the point here is that with 100 billion of savings transformation program we've got, that overall we'll see that contributing to margin recovery as we get back to our ambition of mid-20s operating margin.

Amazing. Thank you. Thank you. And we'll take our next question from Georgina Fraser of Golden Sacks. Please go ahead.

Hi, thank you so much for taking my questions. Kind of follow-ups to Katie's questions. I just wanted to understand, you've highlighted a continuation of negative mix. Could you talk about what's driving that, given the strength in beauty actors? And then you did, Stephen, give some helpful comments about the trends that you're seeing in margins. Do you mean that we should still expect margins to be up year on year in the second half, even though we have that negative mix? And then final question, thinking a bit more about profitability levels or margins for next year. You've repeated quite a few times, so I think he wants us to all get this message very, very clearly, that next year is going to be another year of getting back to optimised utilisation rates. So should we be thinking about 2026 as another year of volumes at the expense of mix before we get into positive mix territory into 2027? And what does that mean for margin expectations next year? Thank you.

Yeah, fine. Thanks, Georgina. I mean, let me do the negative mixed effect in the quarter and then pass the statement for the others. I mean, it's simple. The majority of that is in the negative mix is in the industrial specialties and the crop businesses for the quarter three. You know, you've got positive mix starting to come through, particularly with actives growing in consumer. But on the margin profitability, I'll pass the statement.

Yeah, so Georgina, as I say, Q3 is exactly in line with our expectations. You will continue to see that mixed effect into next year. And that's just as we bring in those volumes that we talked about before, where we saw a significant drop in volumes post-COVID, particularly relating to the sale of part of our industrial business. But that will cease as we get towards the end of next year.

Thank you. Once again, as a reminder, if you would like to ask a question, please press power one on your telephone keypad. Thank you. And we'll now move on to a follow-up question from Sebastian Bray of Barenburg. Please go ahead.

Hello, good morning again. I had one follow-up on cash flow. The release doesn't mention it, but H1, it seemed to be the source of some investor concern. Have the working capital balances improved in H2? How is cash flow shaping up?

Yeah, hi, Sebastian. Thanks for the follow-up. So again, working capital chucking as we would expect. What I said at the half, Obviously, we are investing in working capital to support the growth of the business. But I do see opportunities for us to be more efficient in the way that we manage working capital. just as we will be more efficient in the way that we manage the cost base. So if you think about a supply chain optimization rationalization, there's a cost element to that, but there's also an inventory carrying level to that as we drive efficiency around the network. So I've talked about an opportunity of several tens of millions. That won't come out instantly because it does link to the transformation of the business. But I'd expect that improvement in working capital broadly to map the cost savings program. And the rest of the balance sheet is strong. We're banging or we're banging in the middle of the range. And I expect that to continue. And with CapEx coming down, obviously, we will we will delever.

Thank you.

Thank you. That was our last question. I will now hand it back to Steve for closing remarks.

Okay. Thanks very much, everybody, for your questions. I think three key points we wanted to get across today. We've got good sales growth continuing. Good quarter for that. Five-point plan remains on track and full-year guidance unchanged. So thanks very much, and we'll see you in February.