REG - Croda International - Results for the six months ended 30 June 2023
25/07/2023 07:00
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RNS Number : 0264H Croda International PLC 25 July 2023
Press Release
25 July 2023
Results for the six months ended 30 June 2023
Continued investment and strategic progress despite a challenging environment
Croda International Plc ("Croda" or the "Group") announces its half year
results for the six months ended 30 June 2023.
Highlights
( )
Statutory results (IFRS) Adjusted results Pro forma estimates(*)
Half year ended 30 June 2023 2022 change 2023 2022 change 2022 Pro forma change
pro forma
Sales (£m) 880.9 1,127.3 (21.9)% 880.9 1,127.3 (21.9)% 936 (6)%
Operating profit (£m) 130.2 288.6 (54.9)% 175.8 300.4 (41.5)% 261 (33)%
Operating margin (%) 20.0 26.6 (6.6)ppts 28 (8)ppts
Profit before tax (£m) 128.7 636.5 (79.8)% 174.3 288.8 (39.6)% 256 (32)%
Basic earnings per share (p) 63.1 389.6 (83.8)% 92.9 155.2 (40.1)%
Ordinary dividend per share (p) 47.0 47.0 0%
Free cash flow (£m) 76.4 21.1 262.1%
Net debt (£m) 349.3 331.3 (5.4)%
Pro forma H122 estimated results(*) have been adjusted for the divestment of
the majority of Performance Technologies and Industrial Specialities
(PTIC) on 30 June 2022
Group performance in line with revised June 2023 expectations; full year 2023 guidance reaffirmed
· Pro forma sales down 6% as customers reduce inventory levels in
consumer, crop, and industrial markets
o Flat sales in Consumer Care, against a strong prior period
o Sales up 8% in Life Sciences, excluding $62m prior period Covid-19 lipid
sales
o Sales fell 20% in Industrial Specialties, after adjusting for the PTIC
divestment in the prior period
· £128.7m IFRS profit before tax (H122: £636.5m); prior period
benefiting from £360.6m divestment profit
· Adjusted profit before tax £174.3m (H122 pro forma (pf): £256m)
o 20.0% operating margin (H122 pf: 28%), impacted by lower volumes and
phasing of Covid-19 lipid sales
o Temporary cost measures introduced to protect profitability
· Improved free cash flow; lower working capital outflow more than
offsetting lower profit and higher capex
· Interim dividend maintained at 47.0p (H122: 47.0p), reflecting
confidence in future performance
Sector performance benefiting from diversification across seven growth businesses
· Continued sequential improvement in Consumer Care with sales
volumes up 8% vs H222
o Sales of new and protected products (NPP) remain strong at 40% of total
sales (H122: 40%)
o Sales up slightly in Beauty Actives with positive mix; volume improvement
strongest in Beauty Care
o 20% sales growth in F&F; driving synergies and Croda-enabled growth
· Continued progress across Life Sciences
o Good sales growth in Seed Enhancement and Pharma, excluding prior period
Covid-19 lipid sales
o Crop Protection grew sales but experienced rapid destocking in Q2
o Covid-19 lipid shipments still expected in Q4; supporting growing pipeline
of other nucleic acid drugs
· Lower Industrial Specialities sales and operating margin
reflecting destocking and reduced demand
Continued investment and strategic progress
· Leveraging strong balance sheet to invest in fast-growing niches
o Investing in innovation in Asia with new R&D labs in Shanghai, China
and Hyderabad, India
o Partnering to access critical technology and scaling up Pharma; new
capacity on-stream in 2025
o Completed KRW350bn (c£232m) Solus Biotech acquisition on 4 July 2023,
adding biotech-derived actives
· 'Doing the basics brilliantly' programme to drive ongoing
efficiencies
o Improving employee productivity and responsiveness by simplifying
operating processes
o Continuing to enhance customer experience with new online order portal and
self-serve data
Sales 2023 Price/mix Volume Currency Change 2022
£m £m
Consumer Care 455.6 10.2% (13.7)% 3.7% 0.2% 454.9
Life Sciences 303.2 (2.6)% (8.8)% 3.4% (8.0)% 329.7
Industrial Specialties 122.1 (0.4)% (65.0)% 1.0% (64.4)% 342.7
Group 880.9 15.3% (40.0)% 2.7% (21.9)% 1,127.3
Estimated pro forma sales
Group 881 15% (40)% 3% (22)% 1,127
Pro forma adjustment (191)
Group (pro forma) 881 9% (18)% 3% (6)% 936
Adjusted profit 2023 Constant currency change Currency Change
£m £m impact 2022
£m £m
Consumer Care 95.2 (28.0) 2.1 121.1 (21.4)%
Life Sciences 72.3 (47.9) 1.4 118.8 (39.1)%
Industrial Specialties 8.3 (52.0) (0.2) 60.5 (86.3)%
Operating profit 175.8 (127.9) 3.3 300.4 (41.5)%
Net interest (1.5) (11.6) 87.1%
Profit before tax 174.3 288.8 (39.6)%
2023 Change
Estimated pro forma profit £m 2022
£m
Operating profit 176 300 (42)%
Pro forma adjustment - (39)
Operating profit (pro forma) 176 261 (33)%
Net interest (2) (5) 60%
Profit before tax (pro forma) 174 256 (32)%
Steve Foots, Chief Executive Officer, commented:
"The speed and scale of the post-Covid stocking and subsequent destocking has
been unprecedented, leading to a decline in first half sales volume and also
impacting profit margin. Despite this difficult market backdrop, it is
testament to the strength of the Croda business that Consumer Care delivered
sequential improvement on the second half of 2022, driven by customer demand
for innovation and sustainability. Excluding the impact of Covid-19 lipid
sales in the prior period, we also saw growth across all areas of Life
Sciences. With continued low visibility, we are taking some actions to protect
profitability ahead of conditions returning to normal, while continuing to
leverage our strong balance sheet to invest in future growth. The confidence
we have in Croda's strategy is undiminished and the opportunities ahead remain
very exciting for our business."
Outlook
With customer destocking in Consumer Care, Crop Protection and Industrial
Specialities continuing into the second half of the year, we continue to
expect full year 2023 Group adjusted profit before tax to be between £370m
and £400m. We will leverage our strong balance sheet to sustain ongoing
investment in our repositioned portfolio, focused on fast-growing niches, to
create significant future value.
Further information:
An analyst presentation will be available via webcast at 0900 BST on 25 July
2023 at www.croda.com (http://www.croda.com) /investors.
For enquiries contact:
Investors: David Bishop,
Croda
+44 7823 874428
Press: Charlie Armitstead,
Teneo
+44 7703 330269
Notes:
All comparisons are with the 2022 first half year, unless otherwise stated.
Alternative Performance Measures (APMs): We use a number of APMs to assist in
presenting information in this statement. We use such measures consistently at
the half year and full year, and reconcile them as appropriate. Whilst the
Board believes the APMs used provide a meaningful basis upon which to analyse
the Group's financial performance and position, which is helpful to the
reader, it notes that APMs have certain limitations, including the exclusion
of significant recurring items, and may not be directly comparable with
similarly titled measures presented by other companies.
The measures used in this statement include:
• Constant currency results: these reflect current year performance for existing
business translated at the prior year's average exchange rates. Constant
currency results are the primary measure used by management to monitor the
performance of overseas business units, since they remove the impact of
currency translation into Sterling, the Group's reporting currency, over which
those overseas units have no control. Constant currency results are similarly
useful to shareholders in understanding the performance of the Group excluding
the impact of movements in currency translation over which the Group has no
control. Constant currency results are reconciled to reported results in the
review of financial performance below. The APMs are calculated as follows:
a For constant currency profit, translation is performed using the entity
reporting currency;
b For constant currency sales, local currency sales are translated into the most
relevant functional currency of the destination country of sale (for example,
sales in Latin America are primarily made in US dollars, which is therefore
used as the functional currency). Sales in functional currency are then
translated into Sterling using the prior year's average rates for the
corresponding period;
• Pro forma results: these reflect the current year performance measured against
H1 2022 adjusted for the estimated impact of the divestment of the majority of
Performance Technologies and Industrial Specialities on 30 June 2022. Given
the divested business did not meet the requirements for classification as a
discontinued operation, the first half of 2022 included the full PTIC business
and the second half year only included the retained business. The Board
believes that the pro forma information assists shareholders by providing a
meaningful basis upon which to analyse business performance and make
year-on-year comparisons. Pro forma analysis is used by management for
budgeting and reporting purposes including the internal assessment of
operating performance across the Group. In the first half of 2022, it is
estimated that the divested operations contributed revenue of £191m, adjusted
operating profit of £39m and adjusted profit before tax of £33m. Pro forma
results are presented on a rounded basis due to the estimated nature of the
measures. The level of estimation risk in arriving at the pro forma numbers is
not considered material for the Group. Pro forma adjustments only impact
Industrial Specialities and the Group, with no changes to Consumer Care or
Life Sciences;
• Adjusted results: these are stated before exceptional items (as disclosed in
the review of financial performance below) and amortisation of intangible
assets arising on acquisition, and tax thereon. The Board believes that the
adjusted presentation (and the columnar format adopted for the Group income
statement) assists shareholders by providing a meaningful basis upon which to
analyse business performance and make year-on-year comparisons. The same
measures are used by management for planning, budgeting and reporting purposes
and for the internal assessment of operating performance across the Group. The
adjusted presentation is adopted on a consistent basis for each half year and
full year results;
• Operating margin or return on sales: this is adjusted operating profit divided
by sales, at reported currency. Management uses the measure to assess the
profitability of each sector and the Group, as part of its drive to grow
profit by more than sales value, in turn by more than sales volume, as set out
in the Chief Executive's Review;
• Return on invested capital (ROIC): this is adjusted operating profit after tax
divided by the average adjusted invested capital. Adjusted invested capital
represents net assets adjusted for net debt, earlier goodwill written off to
reserves and accumulated amortisation of acquired intangible assets.
Calculations and reconciliations are provided in the five year record of the
Group's Annual Report. The Board believes that ROIC is a key measure of
efficient capital allocation, in line with its policy set, with its aim being
to maintain a ROIC of two to three times the cost of capital over the cycle,
and that it is useful to shareholders in assessing the superior returns
delivered by the Group and the impact of deploying more capital to grow future
returns faster;
• Net debt: comprises cash and cash equivalents (including bank overdrafts),
current and non-current borrowings and lease liabilities. Management uses this
measure to monitor debt funding levels and compliance with the Group's funding
covenants which also use this measure. It believes that net debt is a helpful
additional measure for shareholders in assessing the risk to equity holders
and the capacity to invest more capital in the business;
• Leverage ratio: this is the ratio of net debt to Earnings Before Interest,
Tax, Depreciation and Amortisation (EBITDA) adjusted to include EBITDA from
acquisitions or disposals in the last 12 month period. EBITDA is adjusted
operating profit plus depreciation and amortisation. Calculations and
reconciliations are provided in the five year record of the Group's Annual
Report. The Board monitors the leverage ratio against the Group's debt funding
covenants and overall appetite for funding risk, in approving capital
expenditure and acquisitions. It believes that the APM is a helpful additional
measure for shareholders in assessing the risk to equity holders and the
capacity to invest more capital in the business;
• Free cash flow: comprises EBITDA less movements in working capital, net
capital expenditure, payment of lease liabilities, non-cash pension expense,
and interest and tax payments. The Board uses free cash flow to monitor the
Group's overall cash generation capability, to assess the ability of the
Company to pay dividends and to finance future expansion, and, as such, it
believes this is useful to shareholders in their assessment of the Group's
performance.
• New and Protected Products (NPP): these are products which are protected by
virtue of being either newly launched, protected by intellectual property or
by unique quality characteristics. NPP is used by management to measure and
assess the level of innovation across the Group.
Croda International Plc
Group Performance
We use a number of APMs to assist in presenting information in this statement
which are defined on page 3. Pro forma H122 estimated results have been
adjusted for the divestment of the majority of Performance Technologies and
Industrial Chemicals (PTIC) on 30 June 2022.
Group performance impacted by market conditions; continued strategic progress
As previously disclosed, Croda's first half year performance was negatively
impacted by a challenging environment with customers reducing their ingredient
inventories in consumer care, crop and industrial end markets in most
developed regions of the world. While it is normal for customer inventory
levels to fluctuate, we have not previously seen the speed and scale of the
rapid stocking that followed Covid-19 and subsequent destocking first
experienced in North America a year ago.
Adjusting for the divestment of the majority of the Performance Technologies
and Industrial Chemicals (PTIC) business on 30 June 2022, Group sales fell by
6% on a pro forma basis to £880.9m (H122 pro forma (pf): £936m). Pro forma
constant currency sales fell by 9%, with price/mix 9% higher and volume 18%
lower, with favourable foreign exchange rates adding 3%. Profit before tax (on
an IFRS basis) was £128.7m (H122: £636.5m), the prior period having
benefited from a profit of £360.6m on the divestment of the majority of PTIC.
Adjusted profit before tax fell to £174.3m (H122 pf: £256m) as Group
operating margin of 20.0% (H122 pf: 28%) was negatively impacted by the
reduction in volumes, and the phasing of high-margin lipid sales to our
principal vaccine customers due in the second half of 2023.
In this environment, we have implemented some temporary cost measures to
protect profitability. This is supported by our existing 'doing the basics
brilliantly' programme which aims to drive ongoing efficiencies. We are
currently improving employee productivity and responsiveness by simplifying
operating processes, and continuing to enhance customer experience with a new
online order portal and self-serve data.
Our innovation pipelines remain robust, with customers continuing to invest in
new product development. Across Consumer Care, sales of new and protected
products (NPP) remain strong at 40% of total sales (H122: 40%). In Life
Sciences, our focus on empowering biologics delivery is a key strategic driver
of medium-term growth in both Pharma and Crop Care.
In Consumer Care, customers remain committed to sustainability and innovation,
driving continued demand for Croda's R&D-led approach. Fastest growth is
coming from sustainable ingredients including mineral sunscreens and
sustainable hair care ingredients. The completion of the acquisition of Solus
Biotech at the beginning of July added further fermentation-derived active
ingredients into our portfolio, notably ceramides. Consumer Care has the
deepest formulation science expertise and the broadest portfolio in the
industry, with over 15,000 customer/product combinations in Beauty Actives and
more than 23,000 combinations in Beauty Care. In addition, there are emerging
opportunities for growth across Asia particularly for premium products. Our
Fragrances and Flavours (F&F) business grew sales by 20%, reflecting its
agile, cost competitive model and focus on emerging markets.
In Life Sciences, the move to biologics is the major technology trend with new
mRNA vaccines expected to come to the market in the next two years, helping to
drive accelerated growth in our Pharma business from 2025. Through execution
of our strategy, we have established an industry-leading position in
empowering biologics delivery, acquiring and entering partnerships with
businesses with critical knowledge and technology, then building scale through
capital expenditure in partnership with national governments, with new
capacity due on stream in 2025. This approach has ensured our Pharma business
has excellent competitive positioning focused on segments with the highest
innovation needs and a broad, well diversified portfolio.
Across Consumer Care and Life Sciences, we are continuing to invest in our
refocused portfolio to drive profitable growth, with disciplined returns
metrics and a focus on improved cash generation. Organic capital expenditure
was £76.1m (H122: £61.8m), and free cash flow improved to £76.4m (H122:
£21.1m) with a lower working capital outflow of £9.7m (H122: £183.8m
outflow) more than offsetting lower EBITDA and higher capital expenditure, the
prior period having seen a significant increase in working capital due to
inflation in raw materials and other costs.
Sector summary
Consumer Care - continued destocking; sequential performance improvement
In Consumer Care, first half performance improved sequentially compared with
the second half of last year with volumes up 8%. However, customers have
continued to reduce inventory levels and this industry trend continues to
negatively impact volumes which were down 14% compared with the same period
last year. Price/mix was up 10%, of which price increases implemented in 2022
contributed approximately six percentage points of the improvement, and
improved mix, particularly in Beauty Actives, contributed approximately four
percentage points. Positive price/mix and favourable foreign exchange rates,
which added 4% in the first half year, meant sales were flat at £455.6m
(H122: £454.9m).
IFRS operating profit was £79.2m (H122: £110.9m) and adjusted operating
profit was £95.2m (H122: £121.1m). Consumer Care operating profit margin was
20.9% (H122: 26.6%), a small improvement on the second half of 2022 (18.9%)
but below the first half of 2022 due to negative operating leverage from lower
volumes.
Fragrances and Flavours (F&F) delivered 20% sales growth, or 16% at
constant currency, benefiting from its emerging market exposure and agile,
cost competitive positioning. F&F sales were up in all established
regions, with the Middle East particularly strong. Delivery of sales synergies
from the Iberchem acquisition continues, including a new multi-million pound a
year sales opportunity to supply fragrances to a multinational company for
premium hand wash products manufactured in regions where Iberchem has local
production.
Other than F&F, the balance of Consumer Care experienced similar trends
with favourable price/mix offsetting weaker volumes resulting in flat sales
but at lower margins. Volume recovery has been strongest in Beauty Care albeit
from a lower base. Encouragingly sales were up slightly in Beauty Actives as
positive mix helped offset weaker volumes due to strong sales of Sederma's
industry-leading portfolio of premium active ingredients.
The sequential improvement continued throughout the period with sales volumes
in June higher than the monthly average for the first half year. Importantly,
customers are continuing to invest in new product development and demand for
innovation remains strong with continued strong sales of new and protected
products.
Life Sciences - growth across all areas excluding prior period Covid-19 lipid sales
Life Sciences sales fell 8% to £303.2m (H122: £329.7m), the prior period
having benefited from $62m of lipid sales to our principal vaccine customers.
Excluding this impact, sales increased 8%, comprising good sales growth in
Pharma and Seed Enhancement, and more modest sales growth in Crop Protection.
On a reported basis, price/mix decreased by 2%, while volume was 9% lower and
currency translation added 3%.
IFRS operating profit was £63.6m (H122: £118.2m) and adjusted operating
profit was £72.3m (H122: £118.8m). Life Sciences' operating profit margin of
23.8% (H122 36.0%) was negatively impacted by adverse mix including lower
sales for Covid-19 applications in the Pharma business, which accounted for
approximately eight percentage points of the margin decline, with negative
operating leverage principally in Crop Protection accounting for approximately
four percentage points.
The Pharma business delivered 8% sales growth, excluding prior period lipid
sales to our principal vaccine customers. With applications spanning
commercialised patented and generic drugs and vaccines, clinical trials and
drug discovery, the business has a broad, well-diversified portfolio. Due to
this attractive positioning, we have only seen a limited impact on performance
from destocking and funding constraints for early-stage biotech businesses
that are reported to have affected other companies. The Protein/Small Molecule
Delivery platform performed well and will benefit from the addition of
phospholipids from the Solus Biotech acquisition. Adjuvant Systems supports
both commercialised vaccines and those in development; it will benefit from
two new adjuvant partnerships agreed during the period. Our Nucleic Acid
Delivery pipeline continues to develop well with Croda supporting more than
half of nucleic acid drugs in clinical trials that specify a lipid delivery
system. Shipments of lipid systems to our principal Covid vaccine customers
are expected to occur as planned in the final quarter of 2023 benefiting
sector operating profit margin in the second half year.
Following an exceptional 2022, when Crop Protection delivered both strong
double-digit percentage volume growth and price/mix, the business started the
year with good momentum, delivering positive volumes and flat pricing in the
first quarter on a sequential basis. It began to experience rapid customer
destocking in the second quarter, which was a factor originally expected to
materialise more gradually later in the year, with volumes down more than 30%
compared with Q1. Overall, the business grew sales in the half, with price
increases and a favourable foreign exchange rate more than offsetting negative
volume.
In the Seed Enhancement business, which is approximately one third of the size
of Crop Protection, a significant proportion of sales are derived from
providing enhancement services for vegetable seeds. As such, the business only
sees a limited impact from stocking cycles and delivered an 18% sales increase
in the first half year, driven by strong structural growth trends.
Industrial Specialties - performance reflecting destocking and lower global demand
With the divestment of the majority of Croda's Performance Technologies and
Industrial Chemicals (PTIC) business on 30 June 2022, the retained industrials
business, including the SIPO joint venture in China, has become the Industrial
Specialties sector. Although the sector is not a priority for capital
allocation and strategic growth, it plays an important role in our
manufacturing model, supporting the Consumer Care and Life Sciences sectors on
shared sites and operating a medium-term supply contract to the new owner of
the divested business. The first half of 2022 included the full PTIC business
and the second half year only the retained business. It is estimated that, had
the divestment occurred at the start of 2022, sales in H122 would have been
£191m lower at £152m and H122 adjusted operating profit would have been
£39m lower at £22m. On this basis, sales fell 20% in the first half of this
year to £122.1m principally due to lower volumes, reflecting destocking and
weak industrial demand globally, and adjusted operating profit fell 62% to
£8.3m as negative operating leverage compounded the impact of lower volumes.
The impact of these adverse market conditions on the SIPO joint venture in
China resulted in a goodwill impairment charge of £20.8m. Including the
impairment charge, the reported IFRS loss was £12.6m (H122: £59.5m profit),
with the prior period including the full contribution from the divested
business.
Regional summary
Latin America grew sales in the period, driven by continued strength in
Pharma, good momentum in Crop Protection and some recovery in Consumer Care
volumes. Asia was negatively impacted by weak industrial demand but Consumer
Care sales in the region grew high single digit percentage, reflecting Croda's
strong positioning. North America remains weak, with Consumer Care impacted by
destocking and some reduction in end-consumer demand. Whilst first half year
Consumer Care sales and volumes in North America have remained significantly
below the same period last year, order volumes in the region have improved
progressively from the beginning of the year. Performance in Europe is
tracking broadly in line with the Group, with the region beginning to see some
destocking by Crop Protection customers in the period as well as Consumer
Care.
Delivering our strategy
Strategy overview - leadership in sustainability and innovation
We combine leadership in sustainability with market-leading innovation with
the objective of delivering profit growth ahead of sales growth, ahead of
volume growth.
In line with our Purpose of using Smart science to improve lives(TM), we
enable customers to realise their sustainability ambitions through the
application of our innovation and the creation of sustainable ingredients. We
are reinforcing our sustainability leadership by reducing the adverse impact
of our operations, by replacing fossil-based ingredients with bio-based
materials, reducing emissions, promoting biodiversity and ensuring our
sourcing activities make a positive contribution to communities in our supply
chains. Our sustainability leadership delivers benefits that are increasingly
valued by our customers; for example, we are introducing a 'Scope 3 Index' of
carbon footprint data for our ingredients incorporating the benefit of
decarbonisation to 2030.
Innovation is at the heart of what we do, creating new market and technology
niches. We have stepped up our rate of innovation through more external
partnerships, for example with Amyris and BSI for sustainable vaccine
adjuvants, and a focus on 'big bet' projects. This will support higher growth,
improved mix and better margin as we become a more knowledge-intensive
company, capturing more intellectual property. Even in the unprecedented
market conditions that we have seen in the first half year, customers are
continuing to invest in new product development, drawing on Croda's deep
scientific expertise and application-focused innovation.
The foundation of our innovation model is internal R&D investment,
applying the expertise of our scientists at our global innovation centres to
meet customer needs. This is complemented by our open innovation network,
providing access to universities and SMEs to help develop new intellectual
property. We also invest externally in disruptive technologies, the benefits
of which can be seen in recent product launches, such as the launch of an
encapsulated retinol by our Beauty Actives business that leveraged expertise
in encapsulation to improve efficacy.
Our 'big bet' projects are reinforcing our leadership in formulation science
and harnessing the potential of biotech, alongside our conventional chemical
technologies. We are sharing our expertise in chemistry, biotechnology and
formulation science with customers through our new Formulation Academies.
Over the last three years, through the acquisitions and divestment we have
made, we have successfully realigned our portfolio with faster growing niches
in life science and consumer markets. We are implementing six strategic
priorities to ensure our refocused portfolio delivers consistent top and
bottom-line growth.
Six strategic priorities to deliver consistent top and bottom-line growth
Alongside our sector strategies of (1.) 'strengthening to grow' Consumer Care
and (2.) 'expanding to grow' Life Sciences, we are (3.) scaling biotech, (4.)
exploring acquisition opportunities to supplement organic capital deployment,
(5.) investing in fast growth in Asia, and (6.) improving our customer and
employee experience through our 'doing the basics brilliantly' programme.
Scaling biotech will transform our approach to sustainability, particularly in
reducing customer Scope 3 carbon emissions. Projects are underway to develop
bio-based fragrance ingredients, prioritising aroma chemicals which are used
in a high proportion of our fragrance references. Our Beauty Care business is
adding biotech-derived surfactants to our existing ECO range, and Beauty
Actives is launching novel anti-ageing actives developed through collaboration
between our biotech and high throughput screening centres in the UK, France
and Canada. This is one example of how Croda is reinforcing its leadership in
biotechnology, established over more than a decade in plant cell cultures and
fermentation, and now being enhanced by investment in processing for scale up,
biocatalysis and synthetic biology.
We are supplementing our organic investment with acquisitions, where our
global scouting network identifies potential adjacent technology opportunities
in Consumer Care and Life Sciences. On 4 July 2023, we completed the Solus
Biotech acquisition in South Korea, which adds fermentation-derived active
ingredients (notably ceramides), a new biotech hub and establishes a new
manufacturing facility for Croda in North Asia. We will drive rapid sales
growth by leveraging Croda's global selling network and formulation science
expertise.
There are significant emerging opportunities for Croda across Asia
particularly in consumer care and pharmaceutical markets. We are driving fast
growth in Asia, by investing in innovation and sales resource plus selective
expansion in manufacturing.
Our 'doing the basics brilliantly' programme is improving our customer
experience and employee productivity through a combination of customer
insights, digital technology, new data architectures, and enhanced
manufacturing capability. In addition to the temporary cost measures
introduced to protect profitability as destocking continues, the programme is
driving efficiencies within our well-established customer-centric model
including a new online ordering portal complemented by more self-serve data
for customers, and simplifying operating processes to improve employee
productivity.
Sector strategies to deliver consistent growth and even stronger margins
We are 'strengthening to grow' Consumer Care to be the most innovative,
sustainable and responsive solution provider globally. Even in the current
trading environment, demand for innovation remains strong, particularly for
differentiated active ingredients. The fastest growth is coming from
sustainable ingredients such as mineral sunscreens and sustainable hair care
ingredients, and we are continuing to enhance our portfolio by adding more
fermentation-derived ingredients and high-performance replacements for
fossil-based products. Similarly, we are broadening our unrivalled ability to
substantiate ingredient claims to include product carbon footprint data,
incorporating the impact of decarbonisation to 2030. Finally, the continued
fragmentation of consumer markets plays to our strengths as we partner with
customers large and small globally enabling smaller customers to partner with
us to launch their products quickly.
The move to biologics is the key structural driver of growth in both
pharmaceutical and agriculture markets over the next decade, and our strategy
is to 'expand to grow' Life Sciences to empower biologics delivery. In
agriculture, this move will enable greater targeting of actives and reduced
biodiversity impact. In this market we are positioned as an innovation partner
for delivery systems, creating new systems for the delivery of biopesticides
and meeting the sustainability challenges of conventional pesticide delivery.
In pharma markets, the move from chemical to biological active pharmaceutical
ingredients is already underway and we have developed a portfolio focused on
segments with the highest development and innovation needs. As a result, our
pharma portfolio has a well-diversified risk profile and opportunity set,
which we are expanding through new technologies from our own innovation
pipeline and via partnerships. The competitive positioning of our pharma
business is extremely strong, providing delivery systems that are critical to
next-generation drugs and with excellent customer relationship spanning drug
discovery through to commercial supply.
Leveraging our balance sheet strength to invest in the business
Last year's divestment of the majority of our industrials business
strengthened our balance sheet, giving us greater optionality to invest in
growth opportunities in the consumer care and life sciences markets. All
investments are subject to disciplined returns metrics and are considered
alongside our commitment to continued strong cash generation. Our priority is
organic capital expenditure, supplemented by targeted acquisitions, in line
with our preferred approach where we acquire and enter partnerships with
businesses with critical knowledge and technology then build scale through
organic investment.
The first half year saw investment in capital expenditure of £76.1m (2022:
£61.8m). This investment included new Consumer Care laboratory capabilities
in Shanghai, China and a new application centre in Hyderabad to support
growing demand for protein and small molecule delivery from pharma customers
in India. With our Pharma business a top priority for capital allocation, we
are also continuing to expand R&D capabilities for adjuvant systems in
Denmark and for nucleic acid delivery at Alabaster in the USA.
In addition to investments that help deliver the carbon reduction roadmaps
that we have put in place for all sites, we are selectively expanding our
manufacturing capability in Asia, including starting construction of a new
surfactants plant in Dahej, India, and early-stage investment in a combined
Beauty Actives and F&F manufacturing facility in Guangzhou to grow
domestic sales in China. Over the period 2021 to 2024, we are also investing
an extra £175m to scale up Pharma production, particularly to meet forecast
market demand for new nucleic acid drugs which are widely expected to come to
the market from 2025. £12m was invested in the programme in the first half
year and over £100m invested to date. Alongside our investment, the US and UK
Governments are co-investing up to an additional £75m, recognising the
importance of new generation delivery systems to future drug discovery. We
have historically invested 6-8% sales on capex. Heightened levels of capex are
expected to continue through 2025 as the Pharma facilities are built,
alongside the investments in Asia mentioned above to support our Consumer Care
businesses in this important market.
We supplement our organic investment plan with selective acquisitions to add
adjacent and complementary technologies. On 4 July 2023, we completed the
acquisition of Solus Biotech, a global leader in premium,
biotechnology-derived beauty actives, from Solus Advanced Materials for a
total consideration of KRW350bn (approximately £232m) funded from cash and
debt facilities. Employing 95 people in South Korea, the business generated
approximately KRW43bn (c.£28m) of sales in 2022. The acquisition has
excellent alignment with our strategic priorities, expanding our Asian
manufacturing capability, adding a new biotechnology R&D hub in the
region, and providing our Beauty Actives and Pharma businesses with access to
Solus' existing biotech-derived ceramide and phospholipid technologies, and
its emerging capabilities in natural retinol. Separately, we also signed two
new licensing agreements with Amyris and BSI during the first half year to
develop a sustainable supply chain for vaccine adjuvants.
Capital allocation will be in line with our stated policy which is to:
1. Reinvest for growth - investment in organic capital expenditure to drive
shareholder value creation through new capacity, product innovation and
expansion in attractive geographic markets to drive sales and profit growth;
2. Provide regular returns to shareholders - pay a regular dividend to
shareholders, representing 40 to 50% of adjusted earnings over the business
cycle;
3. Acquire disruptive technologies - to supplement organic growth, we are
targeting a number of exciting technology acquisitions in existing and
adjacent markets, with a focus on strengthening our Consumer Care business and
expanding in Life Sciences; and
4. Maintain an appropriate balance sheet and return excess capital - maintain an
appropriate balance sheet to meet future investment and trading requirements,
targeting a leverage ratio of 1 to 2x over the medium-term cycle. We consider
returning excess capital to shareholders when leverage falls below our target
range and sufficient capital is available to meet our investment
opportunities.
The Board maintained the interim ordinary dividend at 47.0p (2022: 47.0p)
reflecting its confidence in Croda's future performance. Debt leverage
increased to 0.7x (31 December 2022: 0.5x) before completion of the Solus
acquisition which closed after the period end, or 1.1x including payment of
the acquisition consideration. The Board will monitor the Group's ongoing
capital requirements, alongside any surplus capital, in line with our policy.
Outlook
With customer destocking in Consumer Care, Crop Protection and Industrial
Specialities continuing into the second half year, we continue to expect full
year 2023 Group adjusted profit before tax to be between £370m and £400m. We
will leverage our strong balance sheet to sustain ongoing investment in our
repositioned portfolio, focused on fast-growing niches, to create significant
future value.
Non-financial Performance
Delivering our sustainability commitment
Our sustainability strategy is built on 23 UN SDG targets grouped around the
themes of climate, nature and society, supporting our commitment to be
Climate, Land and People Positive by 2030.
To be Climate Positive, the use of our ingredients will enable consumers to
avoid more carbon than is associated with our operations and supply chain. Our
industry-leading carbon emission reduction targets will ensure we contribute
to limiting the global temperature rise to no more than 1.5°C above
pre-industrial levels. In line with our verified science-based target (SBT),
we will reduce operational greenhouse gas emissions by 46.2% between 2018 and
2030. In the first half year our scope 1 and 2 emissions were 56,184 tonnes
CO2e (H122: 65,229 tonnes CO2e), with reductions tracking in line with our
SBT. We are focused on implementing our externally validated decarbonisation
roadmaps for every Croda location, supported by a higher internal carbon price
of £124/tonne (previously £55/tonne) to ensure investment decisions align
with our sustainability ambitions. We have also continued our focus on
upstream supply chains, with key suppliers representing 24% of raw material
volume publicly committed to SBTi carbon reduction targets.
To be Land Positive, we are committed to saving more land through the use of
our crop protection, biostimulant and seed enhancement technologies, than is
used to grow our bio-based raw materials, by at least a factor of two. We have
an intermediate target to save a minimum of 80,000 hectares a year more in
2024 than in 2019. In the first half year we saved 25,449 hectares more than
in the first half of 2019. We are expanding the scope of our Land Positive
Commitment to consider biodiversity and ecosystem impacts, with the aim of
adopting science-based targets for nature and aspiring to become Net Nature
Positive by 2030. Our current focus is on understanding our impacts and
dependencies on nature as a foundation for achieving this commitment.
Our People Positive objective covers both our communities and our people. We
focus on using our smart science to improve lives globally, and the Croda
Foundation has committed £3.3m in 28 grants across 20 countries since it was
registered as a charity in 2021. The People Positive KPI is our Purpose and
Sustainability Commitment (PSC) score generated from an all-employee survey
which rose 3% to 63% in the recent survey. With a target to achieve gender
balance in Croda leadership roles by 2030, we have maintained a gender
balanced Board and increased the number of women in leadership roles to 40.2%
(H122: 38.2%).
The Fundamentals element of our Commitment represents the 2030 license to
operate for a multinational company such as Croda. Reflecting our absolute
commitment to be a safe company for our communities and our employees, we have
set a stronger safety target to reduce our Total Recordable Incident Rate
("TRIR") to 0.3 by 2025, requiring us to more than halve our 2022 rate. The
current rate is 0.83 (H122: 0.77), excluding Covid-19 cases. Recorded
occupational safety incidents saw a slight increase mainly driven by slips and
trips. Significant training is underway across all sectors and locations
globally, in line with our commitment to safety as a value.
Our sustainability targets have been updated for the divestment of the
majority of PTIC.
Driving innovation
Growth of new and protected product (NPP) sales is our principal established
measure for innovation with NPP sales defined as sales protected by virtue of
being newly launched, protected by intellectual property or by unique quality
characteristics.
NPP as a proportion of total sales was 33% (H122: 33%), as the benefit of the
divestment of the majority of PTIC was offset by the absence of Covid-19 lipid
sales in the first half year. By sector, NPP as a proportion of total sales
was 40% in Consumer Care (H122: 40%), reflecting continued customer demand for
innovation, and 31% in Life Sciences (H122: 43%) due to the Covid-19 lipid
sales impact.
NPP growth is a key performance indicator that is used for remuneration. In
the first half year, Group NPP sales fell by 3%, excluding Covid-19 lipid
sales from the prior period.
Our innovation strategy combines our own R&D with external technology
investments and partnerships to augment Croda's innovation centres globally.
We continue to work with over 500 academic and SME partners, on more than 100
innovation projects.
Financial Performance
Currency translation
Sterling continued to strengthen sequentially but remained weaker than the
same period last year against both the US Dollar, at US$1.234 (H122: US$1.301)
and against the Euro, at €1.141 (H122: €1.189). Currency translation
benefited sales by £31.4m and adjusted operating profit by £3.3m.
Transactional currency impact is correlated with translation, given that the
UK and EU are meaningful centres of production for the Group, with the
weakness of both Sterling and the Euro against the US Dollar having a net
positive impact.
Impact of PTIC divestment
The Group successfully completed the divestment of the majority of the
Performance Technologies and Industrial Chemicals (PTIC) business on 30 June
2022, with the retained industrials business, including the SIPO joint venture
in China, becoming the Industrial Specialties (IS) sector. Given the divested
business did not meet the requirements for classification as a discontinued
operation, the first half of 2022 included the full PTIC business and the
second half year only the retained business. It is estimated that, had the
divestment occurred at the start of 2022, sales in H122 would have been £191m
lower at £152m and H122 adjusted operating profit would have been £39m lower
at £22m. Pro forma H122 results have been adjusted for the divestment. On
this basis, IS sales fell 20% to £122.1m and adjusted operating profit fell
62% to £8.3m.
Sales
Sales 2023 Price/mix Volume Currency Change 2022
£m £m
Consumer Care 455.6 10.2% (13.7)% 3.7% 0.2% 454.9
Life Sciences 303.2 (2.6)% (8.8)% 3.4% (8.0)% 329.7
Industrial Specialties 122.1 (0.4)% (65.0)% 1.0% (64.4)% 342.7
Group 880.9 15.3% (40.0)% 2.7% (21.9)% 1,127.3
Estimated pro forma sales
Group 881 15% (40)% 3% (22)% 1,127
Pro forma adjustment (191)
Group (pro forma) 881 9% (18)% 3% (6)% 936
Reported sales were down 21.9% to £880.9m (H122: £1,127.3m). On a pro forma
basis they were down 6%, or by 9% at constant currency. Within this, price/mix
improved by 9%, principally reflecting the annualisation impact of price
increases in 2022 to recover inflation in raw material and other input costs.
Group volumes reduced by 18% pro forma, with continued customer destocking
across consumer, crop and industrial markets having a significant impact.
While volumes remain significantly lower than the first half of 2022, they
have improved versus the second half of 2022 when destocking was most intense.
Profit and margin
2023 2022
IFRS Adjustments Adjusted IFRS Adjustments Adjusted
£m £m £m £m £m £m
Sales 880.9 - 880.9 1,127.3 - 1,127.3
Cost of sales (498.4) - (498.4) (591.3) - (591.3)
Gross profit 382.5 - 382.5 536.0 - 536.0
Operating costs (252.3) (45.6) (206.7) (247.4) (11.8) (235.6)
Operating profit 130.2 (45.6) 175.8 288.6 (11.8) 300.4
Gain on business disposal - - - 360.6 360.6 -
Net interest charge (1.5) - (1.5) (12.7) (1.1) (11.6)
Profit before tax 128.7 (45.6) 174.3 636.5 347.7 288.8
Tax (40.3) 4.0 (44.3) (90.1) (20.7) (69.4)
Profit after tax 88.4 (41.6) 130.0 546.4 327.0 219.4
2023 2022
Operating profit/(loss) IFRS Adjustments Adjusted IFRS Adjustments Adjusted
£m £m £m £m £m £m
Consumer Care 79.2 (16.0) 95.2 110.9 (10.2) 121.1
Life Sciences 63.6 (8.7) 72.3 118.2 (0.6) 118.8
Industrial Specialties (12.6) (20.9) 8.3 59.5 (1.0) 60.5
Group 130.2 (45.6) 175.8 288.6 (11.8) 300.4
Adjusted profit 2023 Constant currency change Currency Change
£m £m impact 2022
£m £m
Consumer Care 95.2 (28.0) 2.1 121.1 (21.4)%
Life Sciences 72.3 (47.9) 1.4 118.8 (39.1)%
Industrial Specialties 8.3 (52.0) (0.2) 60.5 (86.3)%
Operating profit 175.8 (127.9) 3.3 300.4 (41.5)%
Net interest (1.5) (11.6) 87.1%
Profit before tax 174.3 288.8 (39.6)%
Estimated pro forma profit 2023 Change
£m 2022
£m
Operating profit 176 300 (42)%
Pro forma adjustment - (39) -
Operating profit (pro forma) 176 261 (33)%
Net interest (2) (5) 60%
Profit before tax (pro forma) 174 256 (32)%
IFRS operating profit was £130.2m (H122: £288.6m) and profit before tax
£128.7m (H122: £636.5m). IFRS profit before tax included a charge for
adjusting items of £45.6m (H122: £12.9m), including a goodwill impairment of
£20.8m to the carrying value of the Chinese SIPO joint venture in Industrial
Specialties, a charge for amortisation of acquired intangible assets of
£17.1m (H122: £17.3m) and acquisition costs of £7.7m. Exceptional items in
the prior half year also included a profit on the PTIC divestment of £360.6m,
a gain on contingent consideration of £5.5m and interest on discount unwind
of contingent consideration £1.1m.
Group adjusted operating profit reduced by 33% on a pro forma basis to
£175.8m (H122 pf: £261m), with an operating margin of 20.0% (H122 pf: 28%).
With a large reduction in volumes in the first half year, the biggest impact
on margin was operating leverage, with reduced fixed overhead coverage
accounting for a reduction in operating margin of around five percentage
points. Adverse mix, principally due to the absence of Covid-19 lipid sales in
the first half year, also had an impact, reducing operating margin by around
four percentage points.
There were a number of non-trading impacts that benefited the adjusted
operating margin by just over one percentage point. The lower variable
remuneration charge benefited all sector margins by just under one percentage
point and Consumer Care also saw a benefit from release of accruals for an
earn out associated with the Iberchem acquisition. Following the PTIC
divestment, associated dis-synergy costs that were previously allocated to the
divested business have been reallocated across the Consumer Care and Life
Sciences sectors. This benefited Industrial Specialties but reduced the
operating margin in Consumer Care and Life Sciences by just under one
percentage point respectively.
Net finance costs were minimal in the period due to the proceeds from the PTIC
divestment and pension interest income, with adjusted profit before tax of
£174.3m (H122: £288.8m). The effective tax rate on adjusted profit was 25.4%
(H122: 24.0%). The effective tax rate on IFRS profit was higher at 31.3%
(H122: 14.2%) as the exceptional costs were mainly capital in nature and
therefore not tax deductible. The prior period effective tax rate on IFRS
profit was significantly lower as the Group utilised eligible corporate tax
exemptions on its profit from the PTIC divestment. There were no significant
adjustments between the Group's expected and reported adjusted tax charge
based on its accounting profit. IFRS basic earnings per share (EPS) were 63.1p
(H122: 389.6p) and adjusted basic EPS were 92.9p (H122: 155.2p).
Free cash flow
Cash flow 2023 2022
£m
£m
Adjusted operating profit 175.8 300.4
Depreciation and amortisation 43.4 43.5
EBITDA 219.2 343.9
Working capital (9.7) (183.8)
Net capital expenditure (76.1) (61.8)
Payment of lease liabilities (8.0) (8.8)
Non-cash pension expense (1.7) 5.0
Interest & tax (47.3) (73.4)
Free cash flow 76.4 21.1
Dividends (85.1) (78.8)
Acquisitions (11.2) (14.2)
Business disposal net of cash in disposed businesses (4.4) 613.4
Other cash movements (42.4) (22.1)
Net cash flow (66.7) 519.4
Net movement in borrowings 150.7 154.3
Net movement in cash and cash equivalents 84.0 673.7
Free cash flow improved to £76.4m (H122: £21.1m), with lower EBITDA and an
increase in capital expenditure more than offset by a reduced working capital
outflow of £9.7m. This follows a significant increase in working capital in
the first half of 2022 of £183.8m, principally due to inflation in raw
materials and other costs.
As at 30 June 2023, the Group had committed funding in place of £1,050.7m,
with undrawn long-term committed facilities of £367.7m and £379.5m in cash.
With net debt of £349.3m as at 30 June 2023, net leverage was 0.7x EBITDA,
below our medium-term target range of one to two times EBITDA.
Completion of Solus Biotech acquisition
Post period end, the acquisition of Solus Biotech was completed for a total
consideration of KRW350bn (approximately £232m) on a debt-free, cash-free
basis, with the acquisition funded through existing cash and debt facilities.
Following payment of the acquisition consideration, net leverage increased to
1.1x.
Retirement benefits
The post-tax asset on retirement benefit plans at 30 June 2023, measured on an
accounting valuation basis under IAS19, was broadly flat at £72.0m (31
December 2022: £75.2m). Cash funding of the various plans is driven by the
schemes' ongoing actuarial valuations. The triennial actuarial valuation of
the largest pension plan, the UK Croda Pension Scheme, was performed as at 30
September 2020 and indicated that the scheme was 101% funded on a technical
provisions basis. Consequently, no deficit recovery plan is required. An
updated actuarial triennial valuation will be performed later this year.
Sector Performance
Consumer Care - continued destocking; sequential performance improvement
As previously disclosed, Consumer Care performance was negatively impacted by
a challenging environment, with customers reducing their ingredient
inventories in most developed regions of the world. While it is normal for
customer inventory levels to fluctuate, we have not previously seen the speed
and scale of the rapid stocking that followed Covid-19 and subsequent
destocking first experienced in North America a year ago.
First half performance improved compared with the second half of last year
with volumes up 8%. However, customers have continued to reduce inventory
levels and this industry destocking trend continues to negatively impact
volumes which were down 14% compared with the same period last year. Price/mix
was up 10%, comprising an estimated 4% benefit from mix and 6% benefit from
price mainly due to increases implemented in 2022. Positive price/mix and
favourable foreign exchange rates, which added 4% in the first half year,
meant sales were flat at £455.6m (H122: £454.9m). Other than Fragrances and
Flavours (F&F), the three business units in Consumer Care experienced
similar trends with strong price/mix offsetting weaker volumes resulting in
flat sales but at lower margins.
IFRS operating profit was £79.2m (H122: £110.9m) and adjusted operating
profit was £95.2m (H122: £121.1m). Consumer Care operating profit margin was
20.9% (H122: 26.6%), a small improvement on the second half of 2022 (18.9%)
but below the first half of 2022 due to negative operating leverage from lower
volumes.
The sequential improvement continued throughout the period with sales volumes
in June higher than the monthly average for the first half year. Importantly,
customers are continuing to invest in new product development and demand for
innovation remains strong with sales of new and protected products (NPP)
reflecting this continued demand at 40% (H122: 40%) of total sector sales.
Consumer Care comprises four business units. Beauty Actives (c20% of sector
sales) has the largest actives portfolio in the industry across over 15,000
customer/product combinations. The strategy is to scale our market leadership
by adding innovative technologies and reinforcing our unrivalled
substantiation of ingredient claims. Sales were broadly flat in Beauty Actives
as positive mix, estimated at 13%, alongside 4% price benefit helped offset
weaker volumes (down 19%). Positive mix was driven by strong sales of
Sederma's premium active ingredients particularly to China where Sederma sales
grew over 30%. The business supported new customer products with peptides for
the new Boots No7 Future Renew range and for a new Deciem product that repairs
scars caused by acne. Our ingredients are increasingly derived from
biotechnology with new launches including an active that fades age spots
caused by the sun, and anti-ageing and anti-dandruff actives derived from
marine biotechnology. The acquisition of Solus Biotech at the beginning of
July added further biotech-derived active ingredients into our portfolio,
notably ceramides. We will drive rapid sales growth of Solus ingredients by
leveraging Croda's global selling network and formulation science expertise.
Beauty Care (c50% of sector sales) delivers differentiated ingredients for
skin, hair and solar care across over 23,000 customer/product combinations.
The strategy is to strengthen Beauty Care with sustainable ingredients,
smaller franchises to provide greater focus and by positioning the business as
a go-to-market partner for customers large and small. Volume recovery has been
stronger in Beauty Care than in Beauty Actives and Home Care, albeit from a
lower base. Already a sustainability leader, the business is adding further
high-performance replacements for fossil-based products, such as
biotech-derived surfactants to reinforce a number one position in sustainable
surfactants. In hair care, our focus is on biodegradable hair care ingredients
and non-animal alternatives for hair conditioning. In sun protection we
specialise in mineral sunscreens that deliver superior SPF protection, are
'reef safe' and appear clear on the skin. The continued fragmentation of
beauty care markets plays to our strengths as we partner with customers large
and small enabling them to launch their products quickly. We are leveraging
this position as go-to-market partner through Formulation Academies where we
share our expertise with customers and at our innovation centres globally
where we offer to co-create customer products. We are also broadening our
unrivalled ability to substantiate ingredient claims to include product carbon
footprint data, incorporating the impact of decarbonisation to 2030.
F&F (c25% of sector sales) is the preeminent emerging market provider,
with near-global reach and innovative technologies that meet smaller
customers' needs. The strategy is to drive integration synergies in F&F by
expanding Croda's presence in emerging markets and providing Iberchem with
access to Croda's developed market presence, while supporting one-stop-shop
formulations and developing more sustainable fragrances. F&F is fulfilling
its role in the portfolio, growing sales by 20% comprising an estimated 9%
benefit from volume and 7% benefit from price/mix as the business leveraged
its emerging market exposure and agile, cost competitive positioning. F&F
sales growth was across all established regions with the Middle East
particularly strong. Delivery of sales synergies from the Iberchem acquisition
also continues to make good progress including a new multi-million pound a
year sales opportunity to supply fragrances to a multinational company for
premium hand wash products in regions where Iberchem has local production.
Projects are also underway to develop bio-based fragrance ingredients,
prioritising aroma chemicals which are used in a high proportion of our
fragrance references.
Home Care (c5% of sector sales) is focused on bringing Croda's ingredients to
selective premium home care markets. This is delivered through two technology
platforms which provide improved efficacy and sustainability: fabric care,
with proteins that increase the lifetime of clothes; and household care, with
sustainable alternatives to fossil-based surfactants. Sales fell in Home Care
where volumes were weakest, but price/mix was positive with sales of
sustainable surfactants and fabric care proteins performing best.
We are continuing to invest to drive fast growth in Asia where investment has
included a new innovation centre for Consumer Care customers in Shanghai, a
new surfactants production site in Dahej, India, and initial capital
expenditure for a combined Beauty Actives/F&F facility in Guangzhou,
China, which will provide four times the current capacity and is due to
commission in 2025.
Life Sciences - growth across all areas excluding prior period Covid-19 lipid sales
Life Sciences serves customers in agriculture and pharmaceutical sectors
across three businesses: Crop Protection, which grew sales but experienced
significant destocking in the second quarter, as well as Seed Enhancement and
Pharma where the growth drivers remained strong.
Sales fell 8% to £303.2m (H122: £329.7m), the prior period having benefited
from $62m of lipid sales to our principal vaccine customers. Excluding this
impact, sales increased 8%, comprising good sales growth in Pharma and Seed
Enhancement, and more modest sales growth in Crop Protection. On a reported
basis, price/mix decreased by 2%, while volume was 9% lower and currency
translation added 3%. Sales of new and protected products (NPP) as a
percentage of total sector sales fell to 31% (H122: 43%), reflecting the
absence of Covid-19 lipid sales. Shipments of lipid systems to our principal
Covid vaccine customers are expected to occur as planned in the final quarter
of 2023 benefitting NPP and sector operating profit margin in the second half
year.
IFRS operating profit was £63.6m (H122: £118.2m) and adjusted operating
profit was £72.3m (H122: £118.8m). Life Sciences' operating profit margin of
23.8% (H122 36.0%) was negatively impacted by adverse mix including lower
sales for Covid-19 applications in the Pharma business, which accounted for
approximately eight percentage points of the margin decline, with negative
operating leverage principally in Crop Protection accounting for approximately
four percentage points.
Life Sciences comprise three businesses. Crop Protection (c35% of sector
sales) is positioned as innovation partner to major crop science companies,
and an increasing number of smaller customers, offering ingredients that
improve performance and delivery of crop formulations. Our strategy is to
enable customers to meet the sustainability challenges of conventional
pesticide delivery and help accelerate the move to biopesticides that will
enable greater targeting of actives and reduced biodiversity impact. Following
an exceptional 2022, when Crop Protection delivered both strong double-digit
percentage volume growth and price/mix, the business started the year with
good momentum, delivering positive volumes and flat pricing in the first
quarter on a sequential basis. It began to experience rapid customer
destocking in the second quarter, which was a factor originally expected to
materialise more gradually later in the year, with volumes down more than 30
per cent and price down mid-single digits compared with Q1. Overall, the
business grew sales by 5% in the half year, with a 13% benefit from price/mix
increases and favourable foreign exchange rates which added 4% more than
offsetting a 12% fall in volume.
Seed Enhancement (c10% of sector sales ) leverages our leadership in seed
coating systems to improve germination, stimulate healthy development of seeds
and increase crop yield. With a significant proportion of sales derived from
providing enhancement services for vegetable seeds, the business only sees a
limited impact from stocking cycles and delivered an excellent 18% sales
increase in the first half year, driven by strong structural growth trends.
Our strategy is to be the leader in sustainable solutions for field and
vegetable crops, and our microplastic-free seed coatings have already
delivered more than £1m sales of a multi-million pound opportunity.
In pharmaceutical markets, the move from chemical to biological active
pharmaceutical ingredients is already underway and our Pharma business (c55%
of sector sales) targets leadership in biologics drug delivery. We have
established an industry-leading position in empowering biologics delivery,
acquiring and partnering with businesses with critical knowledge and
technology then building scale through organic investment. This approach has
ensured the business has excellent competitive positioning focused on segments
with the highest innovation needs and with customers spanning drug discovery
through to commercial supply. It delivered 8% sales growth, excluding prior
period lipid sales to our principal vaccine customers. With its broad
portfolio and diversified risk profile, we only saw a limited impact on
performance from destocking and funding constraints for early-stage biotech
businesses that are reported to have affected other companies. We are making
rapid progress expanding the business, adding new technologies from our own
innovation pipeline and partnerships, and scaling operations to support
breakout growth.
Our Pharma business comprises three platforms:
· Protein/Small Molecule Delivery has an established record of
providing excipients for delivery of complex small molecule, protein and
monoclonal antibody (mAb) drugs. Through the Solus Biotech acquisition, we
have added phospholipids to its portfolio for drug delivery and intravenous
nutrition. In line with our strategy, we have also expanded into bioprocessing
aids, a target adjacency, launching Virodex as an aid for biopharma
manufacturing and a superior alternative to a product from another company
that is now banned in Europe.
· Adjuvant Systems is the leading independent supplier of adjuvants
which are used as immune response boosters for vaccines. Our strategy is to
accelerate use of innovative adjuvant systems which are essential to the
development of future preventative and therapeutic vaccines. We have expanded
our adjuvants portfolio through the launch of a new lipid-based adjuvant
developed in-house and already sampled into 70 vaccine projects, and through
licensing agreements for reliable, sustainable alternatives for adjuvant
systems that are essential to many current and future vaccines.
· Nucleic Acid Delivery was created as a result of our 2020
acquisition of Avanti which brought an unmatched portfolio of over 3,000
R&D customer relationships, and a diverse range of lipids and similar
components for nucleic acid delivery. Clinicals trials of nucleic acid-based
drugs have increased rapidly over the last twelve months, with pharma industry
pipelines growing by more than six times for mRNA vaccines for infectious
diseases, over seven times for cancer vaccines and one and a half times for
gene editing where the volumes of genetic material and delivery systems
required are much higher. Croda is supporting more than half of the clinical
programmes that specify lipid delivery systems. New mRNA vaccines are expected
to come to the market in the next two years, helping to drive accelerated
growth in our Pharma business from 2025.
We are continuing to invest in line with our stated Pharma investment
programme with £12m spent in the period and over £100m invested to date.
In June 2023, we opened a new laboratory in Hyderabad, India to meet growing
demand for small molecule and protein delivery and 'broke ground' at Lamar,
USA as part of our partnership with the US Government, where new capacity is
due on stream in 2025.
Industrial Specialties - performance reflecting destocking and lower global demand
On 30 June 2022, Croda divested the majority of the Performance Technologies
and Industrial Chemicals (PTIC) business to Cargill Inc. The retained
industrials business, including the SIPO joint venture in China, has become
the Industrial Specialties (IS) sector.
Although the sector is not a priority for capital allocation and strategic
growth, IS plays an important role in our manufacturing model, supporting the
Consumer Care and Life Sciences sectors on shared sites and operating a
medium-term supply contract to the new owner of the divested business.
The first half of 2022 included the full PTIC business and the second half
year only included the retained business. It is estimated that, had the
divestment occurred at the start of 2022, sales in H122 would have been £191m
lower at £152m and H122 adjusted operating profit would have been £39m lower
at £22m. On this basis, sales fell 20% in the first half of this year to
£122.1m principally due to lower volumes, reflecting destocking and weak
industrial demand globally, and adjusted operating profit fell 62% to £8.3m
as negative operating leverage compounded the impact of lower volumes. The
impact of these adverse market conditions on the SIPO joint venture in China
are expected to continue over the medium term and have resulted in an
impairment charge of £20.8m on goodwill. Including the impairment charge, the
reported IFRS loss was £12.6m (H122: £59.5m profit), with the prior period
including the full contribution from the divested business.
Other Matters
Principal risks
The principal risks and uncertainties facing the Group were set out on pages
52 to 58 of the Group's financial statements for the year ended 31 December
2022. There have been no changes in the Group's principal risks and
uncertainties, risk management processes or policies since the year end. The
Group's principal risks as reported in the financial statements for the year
ended 31 December 2022 were revenue generation; product and technology
innovation and protection; digital technology innovation; delivering
sustainable solutions - Climate and Land Positive; management of business
change; our people - culture, wellbeing, talent development and retention;
product quality; loss of significant manufacturing site; ethics and
compliance; and security of business information and networks. Within revenue
generation risk, we reported that this risk increased in likelihood and impact
during 2022 as greater geopolitical instability, rising inflation and slowing
economic growth increased uncertainty. Whilst customer destocking is the
principal driver of lower volumes in Consumer Care, there is a continued risk
that performance will be affected by reduced end-consumer demand which could
impact our ability to deliver short-term growth in consumer-facing markets.
Statement of Directors' Responsibilities
The Directors confirm that this condensed interim financial information has
been prepared in accordance with IAS 34 as adopted for use in the UK and that
the interim management report includes a fair review of the information
required by DTR 4.2.7 and DTR 4.2.8, namely:
· an indication of important events that have occurred during the
first six months and their impact on the condensed set of financial
statements, and a description of the principal risks and uncertainties for the
remaining six months of the financial year; and
· material related party transactions in the first six months and
any material changes in the related party transactions described in the last
Annual Report.
The Directors of Croda International Plc at 30 June 2023 were as follows (a
list of current Directors is maintained on the Croda website: www.croda.com
(http://www.croda.com) ):
Anita Frew (Chair)
Steve Foots (Group Chief Executive)
Roberto Cirillo
Jacqui Ferguson
Chris Good
Professor Keith Layden
Louisa Burdett
John Ramsay
Julie Kim
Nawal Ouzren
By order of the Board
Steve Foots Louisa Burdett
Group Chief Executive Chief Financial Officer
Independent Review Report to Croda International Plc
Conclusion
We have been engaged by Croda International Plc ("the Company") to review the
condensed set of financial statements in the half-yearly financial report for
the six months ended 30 June 2023 which comprises the Group Condensed Interim
Income Statement, Group Condensed Interim Statement of Comprehensive Income,
Group Condensed Interim Balance Sheet, Group Condensed Interim Statement of
Changes in Equity, Group Condensed Interim Statement of Cash Flows and the
related explanatory notes. Based on our review, nothing has come to our
attention that causes us to believe that the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2023 is not prepared, in all material respects, in accordance with IAS 34
Interim Financial Reporting as adopted for use in the UK and the Disclosure
Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct
Authority ("the UK FCA").
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity ("ISRE (UK) 2410") issued for use in the UK.
A review of interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. We read the other information
contained in the half-yearly financial report and consider whether it contains
any apparent misstatements or material inconsistencies with the information in
the condensed set of financial statements. A review is substantially less in
scope than an audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain assurance that we
would become aware of all significant matters that might be identified in an
audit. Accordingly, we do not express an audit opinion.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention that causes us to believe that the Directors
have inappropriately adopted the going concern basis of accounting, or that
the Directors have identified material uncertainties relating to going concern
that have not been appropriately disclosed. This conclusion is based on the
review procedures performed in accordance with ISRE (UK) 2410. However, future
events or conditions may cause the Group to cease to continue as a going
concern, and the above conclusions are not a guarantee that the Group will
continue in operation.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the Directors. The Directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA. As
disclosed in note 1, the annual financial statements of the Group are prepared
in accordance with UK-adopted international accounting standards. The
Directors are responsible for preparing the condensed set of financial
statements included in the half-yearly financial report in accordance with IAS
34 as adopted for use in the UK. In preparing the condensed set of financial
statements, the Directors are responsible for assessing the Group's ability to
continue as a going concern, disclosing, as applicable, matters related to
going concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Group or to cease operations, or have
no realistic alternative but to do so.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review. Our conclusion, including our conclusions relating to going concern,
are based on procedures that are less extensive than audit procedures, as
described in the Basis for conclusion section of this report.
The purpose of our review and to whom we owe our responsibilities
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the DTR of the
UK FCA. Our review has been undertaken so that we might state to the Company
those matters we are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company for our review work, for this
report, or for the conclusions we have reached.
Ian Griffiths
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London E14 5GL
24 July 2023
Croda International Plc
Interim announcement of trading results for the six months ended 30 June 2023
Group Condensed Interim Income Statement
First half 2023 First half 2022 Full year 2022
Note Adjusted Adjustments Reported Adjusted Adjustments Reported Adjusted Adjustments Reported
£m
£m
Total
£m
£m
Total
£m
£m
Total
£m
£m
£m
Revenue 2 880.9 - 880.9 1,127.3 - 1,127.3 2,089.3 - 2,089.3
Cost of sales (498.4) - (498.4) (591.3) - (591.3) (1,103.7) - (1,103.7)
Gross profit 382.5 - 382.5 536.0 - 536.0 985.6 - 985.6
Operating costs (206.7) (45.6) (252.3) (235.6) (11.8) (247.4) (470.5) (70.4) (540.9)
Operating profit 2 175.8 (45.6) 130.2 300.4 (11.8) 288.6 515.1 (70.4) 444.7
Gain on business disposal - - - - 360.6 360.6 - 356.0 356.0
Financial costs 3 (6.5) - (6.5) (12.4) (1.1) (13.5) (24.1) (1.7) (25.8)
Financial income 3 5.0 - 5.0 0.8 - 0.8 5.1 - 5.1
Profit before tax 174.3 (45.6) 128.7 288.8 347.7 636.5 496.1 283.9 780.0
Tax (44.3) 4.0 (40.3) (69.4) (20.7) (90.1) (112.9) (13.8) (126.7)
Profit after tax for the period 130.0 (41.6) 88.4 219.4 327.0 546.4 383.2 270.1 653.3
Attributable to:
Non-controlling interests 0.3 - 0.3 2.9 - 2.9 4.0 - 4.0
Owners of the parent 129.7 (41.6) 88.1 216.5 327.0 543.5 379.2 270.1 649.3
130.0 (41.6) 88.4 219.4 327.0 546.4 383.2 270.1 653.3
Adjustments relate to exceptional items, amortisation of intangible assets
arising on acquisition and the tax thereon. Details are disclosed in note 2.
Pence Pence Pence Pence Pence Pence
Adjusted
Reported
Adjusted
Reported
Adjusted
Reported
Total
Total
Total
Earnings per 10.61p ordinary share
Basic 92.9 63.1 155.2 389.6 272.0 465.8
Diluted 92.8 63.0 154.9 388.8 271.4 464.8
Ordinary dividends paid in the period
Interim 4 - - 47.0
Final 4 61.0 56.5 56.5
Group Condensed Interim Statement of Comprehensive Income
2023 2022 2022
First half
First half
Full year
£m
£m
£m
Profit after tax for the period 88.4 546.4 653.3
Other comprehensive (expense)/income:
Items that will not be reclassified subsequently to profit or loss:
Remeasurements of post-retirement benefit obligations (10.9) 99.3 88.9
Tax on items that will not be reclassified 2.8 (24.9) (22.4)
(8.1) 74.4 66.5
Items that have been or may be reclassified subsequently to profit or loss:
Currency translation (69.8) 87.8 104.2
Reclassification of currency translation - (14.8) (14.8)
Cash flow hedging (20.8) 2.8 2.8
Reclassification of cash flow hedging - (6.5) (6.5)
Reclassification of cost of hedging reserve - 6.0 6.0
Tax on items that may be reclassified - (0.4) (0.4)
(90.6) 74.9 91.3
Other comprehensive (expense)/income for the period (98.7) 149.3 157.8
Total comprehensive (expense)/income for the period (10.3) 695.7 811.1
Attributable to:
Non-controlling interests (0.8) 3.5 4.4
Owners of the parent (9.5) 692.2 806.7
(10.3) 695.7 811.1
Arising from:
Continuing operations (10.3) 695.7 811.1
Group Condensed Interim Balance Sheet
Note At At
30 June 31 December
2023 2022
£m
£m
Assets
Non-current assets
Intangible assets 5 1,188.1 1,253.2
Property, plant and equipment 6 969.5 964.5
Right of use assets 89.3 96.9
Investments 3.3 3.4
Deferred tax assets 9.0 10.3
Retirement benefit assets 8 117.0 123.2
2,376.2 2,451.5
Current assets
Inventories 419.5 464.0
Trade and other receivables 365.3 375.8
Cash and cash equivalents 379.5 320.6
1,164.3 1,160.4
Liabilities
Current liabilities
Trade and other payables (260.6) (320.0)
Borrowings and other financial liabilities (39.7) (121.9)
Lease liabilities (12.7) (12.9)
Provisions (5.3) (6.1)
Current tax liabilities (18.1) (26.9)
(336.4) (487.8)
Net current assets 827.9 672.6
Non-current liabilities
Borrowings and other financial liabilities (603.7) (401.8)
Lease liabilities (72.7) (79.2)
Other payables (1.1) (4.5)
Retirement benefit liabilities 8 (23.0) (23.1)
Provisions (12.1) (11.5)
Deferred tax liabilities (164.0) (172.9)
(876.6) (693.0)
Net assets 2,327.5 2,431.1
Equity attributable to owners of the parent 2,312.8 2,415.6
Non-controlling interests in equity 14.7 15.5
Total equity 2,327.5 2,431.1
Group Condensed Interim Statement of Changes in Equity
Note Share Share Other Retained Non- Total
capital
premium
reserves
earnings
controlling
equity
£m
account
£m
£m
interests
£m
£m
£m
At 1 January 2022 16.2 707.7 (43.8) 1,073.0 12.8 1,765.9
Profit after tax for the period - - - 543.5 2.9 546.4
Other comprehensive income for the period - - 74.3 74.4 0.6 149.3
Total comprehensive income for the period - - 74.3 617.9 3.5 695.7
Transactions with owners:
Dividends on equity shares 4 - - - (78.8) - (78.8)
Share-based payments - - - 3.5 - 3.5
Transactions in own shares - - - (10.6) - (10.6)
Total transactions with owners - - - (85.9) - (85.9)
Changes in ownership interests:
Acquisition of an NCI - - - 0.3 (1.7) (1.4)
Total changes in ownership interests - - - 0.3 (1.7) (1.4)
Preference share capital reclassification (1.1) - - - - (1.1)
Total equity at 30 June 2022 15.1 707.7 30.5 1,605.3 14.6 2,373.2
At 1 January 2023 15.1 707.7 47.1 1,645.7 15.5 2,431.1
Profit after tax for the period - - - 88.1 0.3 88.4
Other comprehensive expense for the period - - (89.5) (8.1) (1.1) (98.7)
Total comprehensive (expense)/income for the period - - (89.5) 80.0 (0.8) (10.3)
Transactions with owners:
Dividends on equity shares 4 - - - (85.1) - (85.1)
Share-based payments - - - 1.6 - 1.6
Transactions in own shares - - - (9.8) - (9.8)
Total transactions with owners - - - (93.3) - (93.3)
Total equity at 30 June 2023 15.1 707.7 (42.4) 1,632.4 14.7 2,327.5
Other reserves include the Capital Redemption Reserve of £0.9m (30 June 2022:
£0.9m), the Hedging Reserve of £(20.8)m (30 June 2022: £nil) and the
Translation Reserve of £(22.5)m (30 June 2022: £29.6m).
Group Condensed Interim Statement of Cash Flows
Note 2023 2022 2022
First half
First half
Full year
£m
£m
£m
Cash generated by operations
Operating profit 130.2 288.6 444.7
Adjustments for:
Depreciation and amortisation 60.5 60.8 120.7
Fair value movement on contingent consideration - (5.5) (6.1)
Impairments of intangible assets and property, plant and equipment 21.8 - 42.2
(Profit)/loss on disposal and write-offs of intangible assets and property, (0.5) (0.1) 0.2
plant and equipment
Net provisions (released)/charged (0.2) - 1.6
Share-based payments (3.6) (10.4) (11.0)
Non-cash pension expense (1.7) 5.0 4.5
Cash paid against operating provisions (0.3) (0.5) (0.8)
Movement in inventories 30.4 (67.6) (98.1)
Movement in receivables 0.5 (140.3) (43.3)
Movement in payables (40.6) 24.1 7.6
Cash generated by operations 196.5 154.1 462.2
Interest paid (7.9) (11.5) (23.2)
Tax paid (44.4) (62.7) (130.8)
Net cash generated from operating activities 144.2 79.9 308.2
Cash flows from investing activities
Payment of contingent consideration (7.2) (12.8) (13.7)
Purchase of property, plant and equipment (81.8) (60.9) (141.2)
Receipt of government grant 6.5 - 6.1
Purchase of other intangible assets (5.8) (2.8) (11.2)
Proceeds from sale of property, plant and equipment 1.0 1.9 1.7
Proceeds from business disposal, net of cash in disposed business - 613.4 583.6
Tax paid on business disposals (4.4) - (4.6)
Settlement of derivatives (20.8) - -
Cash paid against non-operating provisions (0.5) (0.5) (1.2)
Interest received 5.0 0.8 5.1
Net cash (used)/generated from investing activities (108.0) 539.1 424.6
Cash flows from financing activities
New borrowings 215.7 207.4 232.6
Repayment of borrowings (65.0) (53.1) (614.4)
Payment of lease liabilities (8.0) (8.8) (17.4)
Acquisition of non-controlling interest - (1.4) (1.4)
Net transactions in own shares (9.8) (10.6) (7.3)
Dividends paid to equity shareholders 4 (85.1) (78.8) (144.4)
Net cash generated/(used) from financing activities 47.8 54.7 (552.3)
Net movement in cash and cash equivalents 84.0 673.7 180.5
Cash and cash equivalents brought forward 281.6 94.3 94.3
Exchange differences (6.9) 6.2 6.8
Cash and cash equivalents carried forward 358.7 774.2 281.6
Cash and cash equivalents carried forward comprise:
Cash at bank and in hand 379.5 786.4 320.6
Bank overdrafts (20.8) (12.2) (39.0)
358.7 774.2 281.6
A reconciliation of the cash flows above to the movements in net debt is shown
in note 7.
Notes to the Interim Financial Statements
1. a. General information
The Company is a public limited company (Plc) incorporated and domiciled in
the UK. The address of its registered office is Cowick Hall, Snaith, Goole,
East Yorkshire DN14 9AA. The Company is listed on the London Stock Exchange.
This consolidated interim report was approved for issue on 24 July 2023. The
financial information included in this interim financial report for the six
months ended 30 June 2023 does not constitute statutory accounts as defined in
section 434 of the Companies Act 2006 and is unaudited. The comparative
information for the six months ended 30 June 2022 is also unaudited. The
comparative figures for the year ended 31 December 2022 have been extracted
from the Group's financial statements, as filed with the Registrar of
Companies, on which the auditors gave an unqualified opinion, did not contain
an emphasis of matter paragraph and did not make a statement under section 498
of the Companies Act 2006. These Group condensed interim financial statements
have been reviewed, not audited.
b. Basis of preparation
This consolidated interim financial report for the six months ended 30 June
2023 has been prepared in accordance with IAS 34 Interim Financial Reporting
as adopted for use in the UK.
Tax charged within the six months ended 30 June 2023 has been calculated by
applying the effective rate of tax which is expected to apply, on a
jurisdiction by jurisdiction basis, to the Group for the period ending 31
December 2023 using rates substantively enacted by 30 June 2023 as required by
IAS 34 'Interim Financial Reporting'.
The annual financial statements of the Group for the year ended 31 December
2023 will be prepared in accordance with UK-adopted international accounting
standards. As required by the Disclosure Guidance and Transparency Rules of
the Financial Conduct Authority, the condensed set of financial statements has
been prepared applying the accounting policies and presentation that were
applied in the preparation of the Company's published consolidated financial
statements for the year ended 31 December 2022, which were prepared in
accordance with the requirements of the Companies Act 2006 ("Adopted IFRSs")
and prepared in accordance with international financial reporting standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European
Union.
Going concern basis
The condensed consolidated financial statements have been prepared on a going
concern basis which the Directors believe to be appropriate for the following
reasons:
At 30 June 2023 the Group had £1,050.7m of committed debt facilities
available from its banking group, USPP bondholders and lease providers, with
principal maturities between 2026 and 2030, of which £367.7m (30 June 2022:
£263.4m) was undrawn, together with cash balances of £379.5m (30 June 2022:
£786.4m).
The Directors have reviewed the liquidity and covenant forecasts, which
included the impact of the Solus acquisition, for the Group's going concern
assessment period covering at least 12 months from the date of approval of the
condensed consolidated financial statements. Based on these forecasts, the
Group continues to have significant liquidity headroom and strong financial
covenant headroom under its debt facilities.
A reverse stress testing scenario has been performed which assesses that
adjusted operating profit would need to fall by approximately 80% to trigger
an event of default as at 31 December 2024, before consideration of available
actions to conserve cash. The Directors do not consider this a plausible
scenario. The Directors are therefore satisfied that the Group has sufficient
resources to continue in operation for a period of not less than 12 months
from the date of approval of the condensed consolidated financial statements.
Accordingly, the condensed consolidated financial statements have been
prepared on a going concern basis.
c. Accounting policies
The accounting policies applied in these interim financial statements are the
same as those applied in the Group's financial statements for the year ended
31 December 2022.
A number of new standards are effective from 1 January 2023 but they do not
have a material effect on the Group's financial statements.
2. Segmental information
The Group's sales, marketing and research activities are organised into three
global market sectors, being Consumer Care, Life Sciences and Industrial
Specialties. These are the segments for which summary management information
is presented to the Group's Executive Committee, which is deemed to be the
Group's Chief Operating Decision Maker. Following the divestment of the
majority of the Performance Technologies and Industrial Chemicals business in
2022, the retained business now forms a new Industrial Specialties sector.
Accordingly, the Group has combined the previously reported segment
information for the six months ended 30 June 2022 for both Performance
Technologies and Industrial Chemicals and shown as Industrial Specialties.
This is aligned with the information that is regularly reported to the Group's
Executive Committee.
There is no material trade between segments. Segmental results include items
directly attributable to a specific segment as well as those that can be
allocated on a reasonable basis. There are no significant seasonal variations
which impact the split of revenue between the first and second half of the
financial year.
Adjustments
2023 2022 2022
First half
First half
Full year
£m
£m
£m
Exceptional items - operating profit
Business acquisition costs (7.7) - -
Goodwill impairment (20.8) - (34.6)
Property, plant and equipment impairment - - (7.6)
Fair value movement on contingent consideration - 5.5 6.1
Exceptional items - financial costs
Unwind of discount on contingent consideration - (1.1) (1.7)
Gain on business disposal - 360.6 356.0
Exceptional items (28.5) 365.0 318.2
Amortisation of intangible assets arising on acquisition (17.1) (17.3) (34.3)
Total adjustments (45.6) 347.7 283.9
The exceptional items in the current year relate to a goodwill impairment to
the carrying value of the Chinese SIPO joint venture in Industrial Specialties
and acquisition costs. The goodwill impairment and acquisition costs have been
presented as exceptional due to their size and one-off nature. The exceptional
items in the prior half year related to the gain on the PTIC divestment,
associated business disposal costs and discount unwind and fair value
adjustment both in respect of contingent consideration. The adjustments to
operating profit relate to our segments as follows: Consumer Care £16.0m (30
June 2022: £10.2m), Life Sciences £8.7m (30 June 2022: £0.6m) and
Industrial Specialties £20.9m (30 June 2022: £1.0m).
2023 Restated 2022
First half
2022
Full year
£m
First half
£m
£m
Income statement
Revenue
Consumer Care 455.6 454.9 897.8
Life Sciences 303.2 329.7 682.3
Industrial Specialties 122.1 342.7 509.2
Total Group revenue 880.9 1,127.3 2,089.3
Adjusted operating profit
Consumer Care 95.2 121.1 204.7
Life Sciences 72.3 118.8 229.4
Industrial Specialties 8.3 60.5 81.0
Total Group operating profit (before exceptional items and amortisation of 175.8 300.4 515.1
intangible assets arising on acquisition)
Exceptional items and amortisation of intangible assets arising on acquisition (45.6) (11.8) (70.4)
Total Group operating profit 130.2 288.6 444.7
In the following table, revenue has been disaggregated by sector and
destination. This is the primary management information that is presented to
the Group's Executive Committee.
Reported
Total
Europe North America £m Latin America £m Asia
£m
£m
£m
Revenue
First half 2023
Consumer Care 196.7 99.0 44.3 115.6 455.6
Life Sciences 107.9 92.1 50.4 52.8 303.2
Industrial Specialties 46.7 20.8 5.5 49.1 122.1
Total Group revenue 351.3 211.9 100.2 217.5 880.9
Revenue
First half 2022 (Restated)
Consumer Care 182.4 123.1 43.8 105.6 454.9
Life Sciences 137.5 93.4 41.7 57.1 329.7
Industrial Specialties 162.7 69.7 14.4 95.9 342.7
Total Group revenue 482.6 286.2 99.9 258.6 1,127.3
3. Net financial costs
2023 2022 2022
First half
First half
Full year
£m
£m
£m
Financial costs
Interest payable on borrowings (4.7) (9.8) (17.4)
Interest on lease liabilities (1.2) (1.2) (2.5)
Other bank loans and overdrafts (0.6) (1.4) (2.9)
Other interest costs - - (1.2)
Unwind of discount on contingent consideration (exceptional) - (1.1) (1.7)
Preference share dividend - - (0.1)
(6.5) (13.5) (25.8)
Financial income
Bank interest receivable and similar income 2.3 0.6 2.7
Net interest on post-retirement benefits 2.7 0.2 2.4
5.0 0.8 5.1
Net financial costs (1.5) (12.7) (20.7)
4. Dividends
Pence per 2023 2022 2022
share
First half
First half
Full year
£m
£m
£m
Ordinary
2021 final, paid June 2022 56.5 - 78.8 78.8
2022 interim, paid October 2022 47.0 - - 65.6
2022 final, paid May 2023 61.0 85.1 - -
85.1 78.8 144.4
An interim dividend in respect of 2023 of 47.0p per share, amounting to a
total dividend of £65.6m, was declared by the Directors at their meeting on
20 July 2023. This interim report does not reflect the 2023 interim dividend
payable. The dividend will be paid on 3 October 2023 to shareholders
registered on 1 September 2023.
5. Intangible assets
2023 2022 2022
First half
First half
Full year
£m
£m
£m
Opening net book amount 1,253.2 1,271.6 1,271.6
Exchange differences (31.6) 36.7 62.6
Additions 5.8 2.8 11.0
Disposals and write offs (0.1) (20.0) (20.5)
Reclassifications from property, plant and equipment 0.4 0.2 0.4
Amortisation charge for the period (18.8) (18.7) (37.3)
Impairments (20.8) - (34.6)
Closing net book amount 1,188.1 1,272.6 1,253.2
6. Property, plant and equipment
2023 2022 2022
First half
First half
Full year
£m
£m
£m
Opening net book amount 964.5 988.1 988.1
Exchange differences (34.2) 57.1 72.3
Additions 75.3 61.0 135.9
Disposals and write offs (0.4) (154.8) (155.2)
Reclassifications to intangible assets (0.4) (0.2) (0.4)
Depreciation charge for the period (34.3) (34.8) (68.6)
Impairments (1.0) - (7.6)
Closing net book amount 969.5 916.4 964.5
During the period the Group received government grant funding of £6.5m (FY
2022: £6.1m) relating to the US cGMP scale up and UK Pharma production
capacity expansion projects. Grant income is deducted from the cost of the
associated asset within the additions line above.
7. Reconciliation to net debt
2023 2022 2022
First half
First half
Full year
£m
£m
£m
Net movement in cash and cash equivalents 84.0 673.7 180.5
Net movement in borrowings and other financial liabilities (142.7) (145.5) 399.2
Change in net debt from cash flows (58.7) 528.2 579.7
Non-cash movement in lease liabilities (4.4) (5.2) (13.4)
Non-cash preference shares reclassification - (1.1) (1.1)
Exchange differences 9.0 (30.0) (37.2)
(54.1) 491.9 528.0
Net debt brought forward (295.2) (823.2) (823.2)
Net debt carried forward (349.3) (331.3) (295.2)
8. Critical accounting judgements and key sources of estimation uncertainty
The Group's significant accounting policies under UK-adopted international
accounting standards have been set by management with the approval of the
Audit Committee. The application of these policies requires estimates and
assumptions to be made concerning the future and judgements to be made on the
applicability of policies to particular situations. Estimates and judgements
are continually evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be
reasonable under the circumstances.
Under UK-adopted international accounting standards an estimate or judgement
may be considered critical if it involves matters that are highly uncertain or
where different estimation methods could reasonably have been used, or if
changes in the estimate that would have a material impact on the Group's
results are likely to occur from period to period.
The critical accounting judgement required when preparing the Group's accounts
is as follows:
Hedge accounting
On the 6 February 2023 the Group agreed to acquire Solus Biotech Co Ltd
('Solus') for a total consideration of KRW350bn, a highly probable future
business combination (hedged item). In line with the Group's currency risk
management strategy, the currency exposure for the Group, which has a Sterling
functional and presentational currency, was manged through the execution of a
deal contingent foreign exchange forward contract (hedging instrument). This
instrument was designated as a cash flow hedge and therefore hedge accounting
was applied in the Group's consolidated financial statements.
The application of hedge accounting for a deal contingent instrument requires
significant judgement to determine whether the underlying transaction was
highly probable, which is a requirement for the initial application of hedge
accounting. The Group's assessment that the underlying transaction was highly
probable, and therefore hedge accounting can be applied, is a key judgement.
The primary consideration in forming this conclusion was in relation to the
required regulatory approval, which was considered highly probable to be
achieved based on an assessment of internal and external evidence. This
judgement, and the subsequent application of hedge accounting, resulted in a
£20.8m FX loss being deferred in other comprehensive income, rather than
being recognised in the income statement. During the period, a hedge
ineffectiveness loss of £3.1m was recognised in the income statement within
administration expenses and reported as an exceptional item as part of
business acquisition costs. The forward contract was settled during the period
resulting in a cash outflow of £20.8m.
The critical accounting estimates and assumptions required when preparing the
Group's accounts are as follows:
Post-retirement benefits
The Group's principal retirement benefit schemes are of the defined benefit
type. Recognition of the liabilities under these schemes and the valuation of
assets held to fund these liabilities require a number of significant
assumptions to be made, relating to key financial market indicators such as
inflation and expectations on future salary growth and asset returns. These
assumptions are made by the Group in conjunction with the schemes' actuaries
and the Directors are of the view that any estimation should be appropriate
and in line with consensus opinion.
The majority of the remeasurement gain in the period relates to the Group's UK
pension scheme primarily due to a reduction in the value of the scheme's
assets, partly offset by a rise in corporate bond yields increasing the
discount rate to 5.2% (31 December 2022: 4.8%). The majority of the Group's
retirement benefit asset relates to the Group's UK pension scheme. The UK
pension scheme is open to future accrual and therefore the surplus is
recognised on the basis that this could be recovered through a reduction in
future service contributions.
2023 2022
First half Full year
£m
£m
Opening net retirement benefit surplus 100.1 7.9
Current service cost (4.8) (16.2)
Net interest cost 2.7 2.4
Employer contributions 6.5 11.5
Benefits paid - 0.2
Past service cost - 3.9
Remeasurements (10.9) 88.9
Business disposal - 1.5
Exchange movement 0.4 -
Closing net retirement benefit surplus 94.0 100.1
Total market value of assets 933.1 969.3
Present value of scheme liabilities (828.5) (858.4)
Net pension plan asset 104.6 110.9
Post-employment medical benefits (10.6) (10.8)
Net retirement benefit surplus 94.0 100.1
Analysed in the balance sheet as:
Retirement benefit assets 117.0 123.2
Retirement benefit liabilities (23.0) (23.1)
Net retirement benefit surplus 94.0 100.1
Goodwill impairment
Management are required to undertake an annual test for impairment of
indefinite lived assets such as goodwill. At 30 June 2023, management have
performed an assessment for potential impairment triggers across the Group's
Cash Generating Units ('CGUs') and Operating Segments and no material
impairment indicators were identified, with the exception of Sipo.
The Group tests annually, or more frequently if impairment indicators are
identified, whether goodwill has suffered any impairment by comparing the
carrying value of the underlying CGUs to their recoverable amount calculated
by detailed value in use calculations. These value in use calculations require
the use of estimates to enable the calculation of the net present value of
cash flow projections of the relevant CGU. The critical assumptions are as
follows:
· Terminal value growth in EBITDA (calculated as operating profit
before depreciation and amortisation) - set for each CGU with reference to the
long-term growth rate for the market and territory in which the CGU operates
but not exceeding the Group's long-term average growth rate, estimated at 3%.
· Selection of appropriate market participant real post-tax
discount rates to reflect the specific nature of the CGU.
· Specific risk adjusted, real term cash flow projections including
key assumptions on revenue growth and operating margins over a 5 year period.
An impairment of £20.8m was recorded in relation to goodwill arising on the
acquisition of Sipo, a CGU with a carrying value at 30 June 2023 of £62.8m
including goodwill (pre-impairment). This impairment principally reflected the
decline in the profitability of the business in the period driven by adverse
external market conditions, impacting both demand and pricing, which are
expected to continue over the medium term. The assumptions underpinning the
cash flow projection used in the value in use calculation reflect management's
most recent forecast combined with an appropriate view of past experience,
specifically that operating margins will improve in the medium to long term
and sales growth targets will be achieved resulting in approximately 4.2%
(2022: 4.0%) compound average growth rates ('CAGR') at a sales level and 6.5%
(2022: 4.0%) EBITDA CAGR over the period.
The key assumptions considered by the Directors in assessing the recoverable
amount of Sipo were the EBITDA CAGR, pre-tax discount rate and long-term
growth rate. The recoverable amount, and therefore level of impairment charge,
is predominantly dependent upon judgements used in arriving at these key
assumptions. Although it is not management's current expectation, the impact
on the recoverable amount when applying a reasonably possible change in these
assumptions would be as follows:
Assumption Sensitivity Increase Decrease
£m £m
Incremental increase/(decrease) in recoverable amount
Change in pre-tax discount rate by: 12.3% 1.0% (5.3) 4.7
Change in long-term growth rates by: 3.0% 1.0% 2.1 (2.4)
Change in EBITDA compound annual growth rate by: 6.5% 5.0% 8.2 (10.5)
The above sensitivity analyses are based on a change in an assumption whilst
holding all other assumptions constant. In practice, some of the assumptions
may be correlated.
9. Financial instruments
Financial risk factors
The Group's activities expose it to a variety of financial risks; currency
risk, interest rate risk, liquidity risk, and credit risk. The Group's overall
risk management strategy is approved by the Board and implemented and reviewed
by the Risk Management Committee. Detailed financial risk management is then
delegated to the Group Finance department which has a specific policy manual
that sets out guidelines to manage financial risk. Regular reports are
received from all sectors and regional operating units to enable prompt
identification of financial risks so that appropriate action may be taken. In
the management definition of capital the Group includes ordinary and
preference share capital and net debt.
The condensed interim financial statements do not include all financial risk
management information and disclosures required in the annual financial
statements; they should be read in conjunction with the Group's financial
statements for the year ended 31 December 2022. There have been no changes in
the Group's risk management processes or policies since the year end.
Financial instruments measured at fair value use the following hierarchy;
· Quoted prices (unadjusted) in active markets for identical assets
or liabilities (level 1)
· Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices)
or indirectly (that is, derived from prices) (level 2)
· Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs)
(level 3).
All of the Group's financial instruments are classed as level 2 with the
exception of contingent consideration and other investments, which are classed
as level 3.
Fair values
For financial instruments with a remaining life of greater than one-year, fair
values are based on cash flows discounted at prevailing interest rates.
Accordingly, the fair value of cash deposits and short-term borrowings
approximates to the book value due to the short maturity of these
instruments. The same applies to trade and other receivables and payables
(excluding contingent consideration which is discounted using a risk-adjusted
discount rate). Where there are no readily available market values to
determine fair values, cash flows relating to the various instruments have
been discounted at prevailing interest and exchange rates to give an estimate
of fair value.
Prior to 2016, the Group did not typically utilise complex financial
instruments and accordingly the only element of Group borrowings where fair
value differed from book value was the US$100m fixed rate ten year note that
was issued in 2010. In January 2020 the existing US$100m fixed rate ten-year
note matured and was repaid, this was replaced with a new US$100m fixed rate
ten-year note (27 January 2020). On 27 June 2016, the Group issued £100m and
€100m of fixed rate notes of which £30m and €30m were repaid in June
2023. On 6 June 2019, the Group issued a further £65m, €50m and US$60m of
fixed rate notes.
The table below details a comparison of the Group's financial assets and
liabilities where book values and fair values differ.
Book value Fair value Book value Fair value
First half
First half
Full year
Full year
2023
2023
2022
2022
£m
£m
£m
£m
US$100m 3.75% fixed rate 10 year note (79.3) (71.4) (83.0) (74.4)
€30m 1.08% fixed rate 7 year note - - (26.5) (26.3)
€70m 1.43% fixed rate 10 year note (60.3) (56.3) (61.9) (57.8)
£30m 2.54% fixed rate 7 year note - - (30.0) (29.7)
£70m 2.80% fixed rate 10 year note (70.0) (62.8) (70.0) (64.8)
€50m 1.18% fixed rate 8 year note (43.1) (39.2) (44.2) (40.1)
£65m 2.46% fixed rate 8 year note (65.0) (56.3) (65.0) (58.1)
US$60m 3.70% fixed rate 10 year note (47.6) (43.3) (49.8) (45.4)
10. Related party transactions
The Group has no related party transactions in the first six months of the
year, with the exception of remuneration paid to key management and Directors.
11. Post balance sheet events
On 4 July 2023 the Group successfully completed the acquisition of 100% share
capital of Solus Biotech Co Ltd 'Solus', a global leader in premium,
biotechnology-derived active ingredients for beauty care (Consumer Care
sector) and pharmaceuticals (Life Sciences sector) employing 95 people in
South Korea. The business was acquired for a total consideration of KRW350bn
(approximately £232m) on a debt-free, cash-free basis. The acquisition
provides access to Solus' existing biotech-derived ceramide and phospholipid
technologies, and its emerging capabilities in natural retinol. This
acquisition will significantly strengthen Croda's Beauty Actives portfolio and
increases its exposure to targeted prestige segments. Located in South Korea,
Solus expands Croda's Asian manufacturing capability and will create a new
biotechnology R&D hub in the region. The business generated approximately
KRW43bn (approximately £28m) of sales in 2022.
The initial accounting for the business combination is incomplete given the
proximity of the acquisition date to the authorisation of these financial
statements and therefore disclosures regarding goodwill, fair value of assets
and liabilities acquired along with current period revenue and profit have not
been provided.
Acquisition-related costs of £7.7m, predominantly in respect of Solus, have
been charged to administration expenses in the income statement for the period
ended 30 June 2023 and reported as an exceptional item.
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