REG - Croda International - Results for the year ended 31 December 2023
27/02/2024 07:00
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RNS Number : 5217E Croda International PLC 27 February 2024
Press Release
27 February 2024
Results for the year ended 31 December 2023
Strategic delivery in a challenging macroeconomic environment; well positioned
for market recovery
Croda International Plc ("Croda" or the "Group") announces its full year
results for the year ended 31 December 2023.
Highlights
Statutory results (IFRS) Adjusted results Pro forma estimates(1)
Full year ended 31 December 2023 2022 change 2023 2022 change 2022 Pro forma change
pro forma
Sales (£m) 1,694.5 2,089.3 (18.9)% 1,694.5 2,089.3 (18.9)% 1,898 (11)%
Operating profit (£m) 247.5 444.7 (44.3)% 320.0 515.1 (37.9)% 476 (33)%
Operating margin (%) 18.9 24.7 (5.8)ppts 25 (6)ppts
Profit before tax (£m) 236.3 780.0 (69.7)% 308.8 496.1 (37.8)% 463 (33)%
Basic earnings per share (p) 122.5 465.8 (73.7)% 167.6 272.0 (38.4)%
Ordinary dividend per share declared (p) 109.0 108.0 0.9%
Free cash flow (£m) restated(2) 165.5 157.4 5.1%
Net debt (£m) 537.6 295.2 (82.1)%
(1)Pro forma (pf) 2022 estimated results have been adjusted for the divestment
of the majority of Performance Technologies and Industrial Specialities
(PTIC) on 30 June 2022 so that they exclude the divested business from the
entirety of 2022.
(2)2022 free cash flow has been restated in line with the revised definition
on page 4.
2023 performance impacted by prolonged destocking and a weak macroeconomic
environment
• Sales down 11% on a pro forma basis as customers reduced inventory levels
across multiple markets
⁰ Consumer Care sales down 1% with underlying sales down 11% in Beauty Care, 1%
lower in Beauty Actives and Home Care, and up 18% in lower-margin F&F
business
⁰ Life Sciences sales 5% lower, excluding Covid-19 lipid sales, with sales up 3%
in Pharma on that basis, up 9% in Seed Enhancement and down 19% in Crop
Protection due to continued destocking
⁰ Pro forma sales down 35% in Industrial Specialities reflecting destocking and
reduced demand
• Adjusted profit before tax down 33% to £308.8m (2022 pf: £463m) in line with
updated expectations
⁰ 18.9% adjusted operating margin (2022 pf: 25%) due to the negative operating
gearing impact from lower sales volumes, lower Covid-19 lipid sales and the
negative mix impact of strong F&F sales
⁰ Implemented immediate actions to protect profits; employee costs broadly flat,
freight and energy lower
• £236.3m IFRS profit before tax (2022: £780.0m); prior period benefitting
from £356.0m divestment profit
• Strong balance sheet underpins ongoing investment and shareholder returns
⁰ £162.9m improvement in working capital; free cash flow up 5% to £165.5m
(2022 restated: £157.4m)
⁰ £537.6m net debt (2022: £295.2m) post Solus Biotech acquisition; leverage at
1.3x
⁰ 1p increase in full year dividend with 32 years of unbroken dividend
progression
Megatrends intact; continued strategic investment through the downturn; well
positioned for market recovery
• Consumer Care - leadership in innovation and sustainability driving customer
demand
⁰ Sales of new and protected products (NPP) improved to 42% of total sales
(2022: 41%)
⁰ Strong demand for sustainable and lower carbon ingredients - ECO sales up over
20% and first sales of biotech-derived ceramides
⁰ Prioritising investment in Asia, particularly China and India, where sales
grew 12%; new R&D labs in Shanghai and manufacturing site in India to be
commissioned in 2025
• Life Sciences - excellent progress building industry-leading positions in
high-growth markets
⁰ New Pharma delivery systems, including vaccine adjuvants, bioprocessing aids
and phospholipids, supporting rapid expansion of customer drug pipelines
⁰ Scaling up Pharma; new R&D lab in India and capacity for nucleic acid
delivery on-stream in 2025
⁰ Seed Enhancement winning market share through leadership in microplastic-free
coatings
• Simpler operating model implemented to enhance customer responsiveness
Reported sales 2023 Price/mix Volume Acquisition Currency Change 2022
£m £m
Consumer Care 886.1 1.9% (3.6)% 1.0% (0.6)% (1.3)% 897.8
Life Sciences 602.3 3.2% (15.4)% 0.7% (0.2)% (11.7)% 682.3
Industrial Specialties 206.1 (3.9)% (55.1)% 0.0% (0.5)% (59.5)% 509.2
Group 1,694.5 10.9% (30.0)% 0.6% (0.4)% (18.9)% 2,089.3
Estimated pro forma sales
Group 1,695 11% (30)% 1% (1)% (19)% 2,089
Pro forma adjustment (191)
Group (pro forma) 1,695 5% (16)% 1% (1)% (11)% 1,898
Full year ended 31 December
Adjusted profit 2023 Underlying growth Acquisition impact Currency Change
£m £m £m impact 2022
£m £m
Consumer Care 160.3 (41.3) 0.4 (3.5) 204.7 (21.7)%
Life Sciences 150.3 (73.9) 0.0 (5.2) 229.4 (34.5)%
Industrial Specialties 9.4 (70.0) 0.0 (1.6) 81.0 (88.4)%
Operating profit 320.0 (185.2) 0.4 (10.3) 515.1 (37.9)%
Net interest (11.2) (19.0) (41.1)%
Profit before tax 308.8 496.1 (37.8)%
2023 Change
Estimated pro forma profit £m 2022
£m
Operating profit 320 515 (38)%
Pro forma adjustment - (39)
Operating profit (pro forma) 320 476 (33)%
Net interest (11) (13) (15)%
Profit before tax (pro forma) 309 463 (33)%
Steve Foots, Chief Executive Officer, commented:
"Our performance this year reflects the prolonged destocking and weaker
macro environment that has followed two record years post the pandemic.
Despite the financial impact of this ongoing uncertainty, the technology
trends that will drive our future growth have not changed with a continued
transition to sustainable ingredients and biologics. We have successfully
realigned our portfolio with these megatrends and our strategy is delivering
with continued customer demand for innovation and sustainable ingredients.
"In Consumer Care, sales of new and protected products increased, and F&F
outperformed once again. In Life Sciences, our Pharma business is leading the
industry in biologics drug delivery with more partnerships and product
launches strengthening our pipeline. Despite the challenging macroeconomic
backdrop, we have continued to invest for the future, adding biotech-derived
active ingredients to our portfolio through our acquisition of Solus Biotech
and expanding capacity in Pharma whilst maintaining strict capital and cost
discipline.
"With our strong balance sheet, improving cash flow and consistent investment
in our refocused portfolio, Croda is well positioned to take advantage of the
demand recovery when it occurs. We expect the Group's performance to
accelerate from 2025, generating continued increasing returns for our
shareholders."
Outlook
Consumer Care has started the year well and we are cautiously optimistic about
the improving demand trend we experienced in January. Within Life Sciences, we
expect the non-Covid Pharma business to grow but that destocking will continue
in Crop Protection. Demand in Industrial Specialties is expected to remain
weak.
Given the ongoing uncertainty in our end markets, the recovery trajectory for
each of our business units remains difficult to predict and the range of
possible outcomes in 2024 is therefore wider than usual at this stage of the
year. Overall, however, the Group expects to deliver mid to high single digit
percentage sales growth in 2024, excluding the c.$60m of Covid-19 lipid sales
in 2023, with higher sales volumes more than offsetting lower price/mix.
We expect 2024 Group adjusted operating margin to be two to three percentage
points lower than 2023 due to the following:
• Different business mix effects year-on-year, with no Covid-19 lipid
contribution and continued strong growth in Fragrances and Flavours.
• Low overhead recovery is expected to persist as sales volumes remain depressed
in Crop Protection and Industrial Specialties, two of the three businesses
with the highest production volumes, alongside Beauty Care.
• To support the return to sales growth, the cost base will reset back to a more
normalised level from its low point in 2023. This will include the likely
unwind in 2024 of the c.£25m benefit we saw in 2023 from a negligible
variable remuneration charge. Some of this will be offset by modest cost
savings from our recent reorganisation.
• We will continue to invest to support our long-term strategy. Customer
interest in innovation and sustainable ingredients remains strong, despite the
current destocking cycle.
Using these assumptions and at current exchange rates, we expect Group
adjusted profit before tax to be between £260m and £300m in full year 2024.
Croda will report sales performance quarterly during 2024 and we will provide
an update on first quarter trading at the AGM on 24 April 2024. Croda expects
to return to its normal cycle of half yearly reporting in 2025.
Further information:
An investor presentation will be available via webcast at 0900 GMT on 27
February 2024 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:
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. The definition of constant currency profit has been revised in the
year to reflect the impact on the Group of its operations in hyperinflationary
countries. 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 before the application of IAS 29 hyperinflation and any
associated one-off foreign exchange gains or losses;
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;
• Underlying results: these reflect constant currency values adjusted to exclude
acquisitions in the first year of impact. They are used by management to
measure the performance of each sector before the benefit of acquisitions are
included, in order to assess the organic performance of the sector, thereby
providing a consistent basis on which to make year-on-year comparison. They
are seen as similarly useful to shareholders in assessing the performance of
the business. Underlying results are reconciled to reported results in the
Finance Review;
• Pro forma results: these reflect the current year performance measured against
2022 adjusted for the estimated impact of the divestment of the majority of
Performance Technologies and Industrial Chemicals 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 Specialties 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, net retirement benefit
assets/(liabilities), earlier goodwill written off to reserves and accumulated
amortisation of acquired intangible assets. The definition of ROIC has been
revised in the year to exclude the Group's net retirement benefit balances
from invested capital, given they are not operating in nature. Comparative
information has been restated to reflect the new definition, resulting in
restated ROIC of 14.4% for 2022 (previously 14.1%). 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 at least two 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 net cash generated from operating activities
adjusted for the cash effect of exceptional items less net capital expenditure
and payment of lease liabilities, plus interest received. The definition of
free cash flow has been revised in the year to better align with the most
directly reconcilable line in the Group's IFRS cash flow statement.
Comparative information has been restated to reflect the new definition
resulting in restated free cash flow of £157.4m for 2022 (previously
£167.4m). 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 Alternative Performance Measures to assist in presenting
information in this statement which are defined on page 3. Pro forma 2022
estimated results have been adjusted for the divestment of the majority of
Performance Technologies and Industrial Chemicals (PTIC) on 30 June 2022 so
that they exclude the divested business from the entirety of 2022.
A challenging year with destocking and a weaker macro environment
Croda's performance in 2023 reflects challenging market conditions throughout
the year with customer destocking and weaker economic conditions. It follows a
record performance in 2021 and 2022 when the Group significantly benefitted
from customers building up inventory levels in the face of strong consumer
demand, escalating prices and supply chain disruption. As central banks raised
interest rates to manage inflation and market conditions softened, customers
subsequently reduced inventory levels, albeit at different times across the
different market segments and geographies that we serve. For Croda and the
wider chemical industry, this resulted in a prolonged period of destocking
that was unprecedented in the breadth of its impact across most markets,
compounded by a slower economic recovery in China than some of our customers
had anticipated.
As a consequence, sales volumes were down across all sectors. Adjusting for
the divestment of the majority of the Performance Technologies and Industrial
Chemicals (PTIC) business to Cargill on 30 June 2022, Group sales fell by 11%
on a pro forma basis to £1,694.5m (2022 pro forma (pf): £1,898m), comprising
positive price/mix, lower volumes, a contribution for the Solus Biotech
acquisition completed in July and a small headwind from currency
translation.
In 2023, average customer inventories were below 2022 levels but remained
elevated compared to pre-pandemic levels. In Consumer Care, indications are
that destocking has largely worked its way through the supply chain with a
slow improvement in sales volumes in the year. By contrast, weak industrial
demand globally impacted Industrial Specialties where volumes remained weak.
Similarly, customers in agriculture markets continued to reduce inventory
levels throughout the second half year having started destocking in the second
quarter, later than in other markets. In Pharma, our ability to react quickly
with valuable lipid technology allowed us to support mRNA vaccine sales
through the Covid-19 pandemic. Inevitably, as Covid demand fell, this resulted
in lower shipments in 2023, contributing to just over half of the Life
Sciences variance from prior year, but we still supplied c.$60m of Covid
lipids in 2023 (2022: c.$120m). The Covid experience did allow us to establish
our technology and provided us with valuable insights, facilitating resilient
non-Covid sales as customer drug pipelines continue to develop.
Significant volume declines across most of our markets at a similar time led
to low levels of capacity utilisation at our manufacturing sites, particularly
those that produce ingredients for multiple business units, with negative
operating leverage impacting profit margins. Whilst there are likely to be
some bounce-back costs as trading normalises, there are also opportunities for
margin expansion from higher sales volumes and improved mix particularly if
the recovery is broad-based across our markets.
IFRS operating profit was £247.5m (2022: £444.7m) and adjusted operating
profit was £320.0m (2022 pf: £476m), adjusting for the one-off exceptional
items outlined in the Finance Review. The adjusted operating margin of 18.9%
(2022 pf: 25%) was negatively impacted by the operating leverage effect of the
reduction in volumes and lower sales of high-margin lipid systems for Covid-19
vaccine applications. Profit before tax (on an IFRS basis) was £236.3m (2022:
£780.0m), with the prior year including a gain on the PTIC business
divestment of £356.0m, and adjusted profit before tax was £308.8m (2022 pf:
£463m).
Despite the impact of the prevailing macroeconomic uncertainty, the technology
trends that will drive our future growth have not changed with a continued
transition to sustainable ingredients and biologics. We have successfully
realigned our portfolio with these megatrends and are making strategic
progress with continued investment through the downturn in R&D and
capacity. Demand for innovation has remained strong among our customers, which
will be key to driving a recovery in Croda's performance as the
macro-environment improves. Sales of New and Protected Products (NPP) held up
well at 34% of total sales (2022: 35%), with an increase in the proportion of
NPP sales in Consumer Care. Customer demand for our ingredients that are
differentiated by their sustainability characteristics has also been resilient
with sales of ECO surfactants, for example, up by more than 20% year-on-year.
Our commitment to sustainability is demonstrated by the progress we have
continued to deliver in our non-financial performance. We remain on track to
meet our 2030 Science Based Targets for emissions reduction, the Croda
Foundation has already sustainably improved the lives of more than 22 million
people and we delivered more than 4,500 hours of training to leaders as we
embed safety as a value. Our sustainability leadership was recognised by CDP,
which awarded us leadership status for the first time, complementing our
long-standing triple A rating from MSCI.
Managing challenging market conditions
To mitigate the impact of tough trading conditions, we took some immediate
actions to actively manage cash flow and address costs to protect
profitability, while increasing customer sales activity to drive incremental
sales growth. Production schedules were optimised to meet lower demand,
reducing energy and freight costs. Underlying employee costs were broadly flat
as inflation-based salary increases were offset by a hiring freeze and natural
attrition. In addition, Group margin benefitted by one and a half percentage
points due to negligible charges for variable remuneration. Cash flow improved
through proactive management of working capital and our balance sheet remains
strong, enabling us to pay an increased full year dividend and to continue to
invest the £665m proceeds from the divestment of PTIC, the business we sold
in 2022.
Alongside these temporary cost reduction measures, we have been driving
improvements that will deliver sustained benefits to our operational
effectiveness over the longer term. Priorities have included consolidating our
site footprint and delivering our 'doing the basics brilliantly' programme to
drive ongoing efficiencies. This programme will improve customer experience
and employee productivity through a combination of customer insights, digital
technology, and streamlined processes. Our customer net promoter score (NPS)
has improved further from +23 in 2022 to +34 in 2023.
Following rapid portfolio transition in recent years through the acquisitions
and divestments we have made, a new organisational structure has been in place
since the start of 2024 to further streamline our operating model. Previously,
the Consumer Care and Life Sciences sectors were responsible for strategy
whereas the regions were responsible for performance. Now, all regional teams,
including sales, R&D, marketing, customer service and manufacturing,
report directly into Consumer Care and Life Sciences. The Presidents of these
sectors are now fully accountable for their performance and strategy including
innovation, sustainability and the acquisition of technologies aligned with
our strategic priorities. This clarifies accountability, simplifies the
organisation for our employees, is more cost efficient and will ensure we
deliver faster and more effectively for our customers, positioning us well to
take advantage of the recovery.
Regional summary
Key drivers of performance were similar globally in 2023, notably a slow but
steady improvement in Consumer Care in the second half year as customers
worked through heightened inventory levels but a weakening performance in Life
Sciences mainly driven by rapid destocking by Crop Protection customers which
began in the second quarter. Performance in Asia reflected these global
drivers, with Consumer Care improving and Life Sciences weakening during the
year. Despite demand in China not recovering as quickly as some of our
customers had anticipated, our direct Consumer Care sales to China were
robust, partly owing to strong relationships with regional customers who value
our innovation expertise. Sales fell in North America although the declines
were less significant in the second half year and we began to win back some
sales in Consumer Care which were lost in 2022 through our inability to supply
ingredients for certain periods. Consumer Care sales grew in Europe,
particularly in Beauty Care and Home Care. Latin America was the strongest
region but saw adverse impacts from destocking in Crop Protection as well as
significant currency movements during the second half year.
Sector summary
Consumer Care - leadership in innovation and sustainability driving demand
Consumer Care sales fell 1% to £886.1m (2022: £897.8m) with strong
double-digit percentage sales growth in Fragrances and Flavours (F&F) but
lower underlying sales in Beauty Actives, Beauty Care and Home Care. Price/mix
was up 2%, mainly due to a positive mix impact from Beauty Actives, with
pricing broadly flat. Sales volumes were down 4% year-on-year but were up 9%
in the second half year compared with the second half of 2022. Acquisitions
added 1% due to sales of ceramides following the Solus Biotech acquisition,
with foreign currency translation a small headwind for the full year.
IFRS operating profit was £127.8m (2022: £144.5m) and adjusted operating
profit was £160.3m (2022: £204.7m), resulting in adjusted operating margin
reducing to 18.1% (2022: 22.8%). Four and a half percentage points of the
margin decline was due to the operating gearing effect of continued weak
volumes in Consumer Care, compounded by lower volumes in Life Sciences and
Industrial Specialties which share the same manufacturing assets, with
overheads therefore allocated across all sectors. Two percentage points of the
margin decline was due to weaker mix, primarily as a result of strong growth
of lower margin F&F sales, with the lower variable remuneration charge and
earn out accrual release providing a two percentage point offset.
In Consumer Care, our leadership in sustainability and innovation continues to
drive customer demand for Croda's differentiated ingredient portfolio. NPP
improved to 42% of total sales (2022: 41%) and sales of sustainable
ingredients such as ECO surfactants and biotech-derived ingredients were
stronger than other ingredients in our portfolio. To support demand for lower
carbon ingredients, we can now provide carbon footprint data for three
quarters of the Beauty Care portfolio so that customers can quantify the
benefits associated with using our ingredients in their products. Sales to
Asia exceeded sales to North America for the first time with significant
potential for further growth. We are prioritising the region for investment in
R&D and manufacturing, particularly in China and India where underlying
sales grew 12%.
The stand-out performer in 2023 was F&F which delivered 18% underlying
sales growth, benefitting from its distinctive positioning in fast-growing
markets and agile, cost competitive model. F&F sales were up in all
product categories and established regions, with the Middle East particularly
strong. F&F's excellent sales growth principally reflects its high
exposure to local and regional customers outside North America and Europe, as
well as sales synergies that are being realised under Croda's ownership.
In Beauty Actives, reported sales were up 4% or down 1% on an underlying basis
(i.e. excluding the Solus Biotech acquisition). Positive mix helped offset
weaker volumes as sales of Sederma active ingredients grew, particularly in
China, whereas sales of lower value botanical ingredients fell. Beauty Actives
supported customer product launches including the new Boots No7 Future Renew
range and a new Deciem product that repairs scars caused by acne. Having
completed our acquisition of Solus Biotech in July, we are excited about the
opportunities that the addition of further fermentation-derived active
ingredients, notably ceramides, are starting to open up.
Performance remained weakest in Beauty Care with sales down 11% driven by
lower volumes. Our approach here is to manage sales volumes in the less
differentiated parts of the portfolio to help base-load our manufacturing
assets and cover fixed costs, while accelerating differentiation by driving
innovation, enhancing the sustainability profile of our ingredients, and
transitioning our manufacturing processes to biotech and other low carbon
technologies. The 20% plus growth in sales of ECO surfactants during a
challenging year, and a continued increase in sales of sulphate-free 'clean'
surfactants, illustrate continued customer demand for bio-based, lower carbon
and biodegradable ingredients.
The recovery of sales volumes in Home Care accelerated as the year progressed,
with underlying sales down 1% year-on-year but up 12% in the second half
compared with the second half of 2022. Once again it was sales of innovative
ingredients differentiated by sustainability that led the way, including our
range of biopolymers which extend the life of fabrics with future growth
underpinned by a long-term contract with a key customer.
Life Sciences - continued progress building industry-leading positions in high-growth markets
Life Sciences sales were down 12% to £602.3m (2022: £682.3m), with
approximately seven percentage points of the reduction due to lower sales of
lipid systems for Covid-19 vaccine applications. On a reported basis, positive
price/mix of 3% partly offset a 15% decline in volume, the majority of which
was due to destocking by Crop Protection customers with a small effect from
similar trends in consumer health. There was also a contribution from six
months of phospholipid sales following completion of the Solus Biotech
acquisition in July and a small foreign currency headwind.
IFRS operating profit was £131.7m (2022: £220.3m) and adjusted operating
profit was £150.3m (2022: £229.4m), resulting in an adjusted operating
margin of 25.0% (2022: 33.6%). Six percentage points of the margin reduction
was the result of adverse price/mix mainly due to lower Covid lipid sales, and
four percentage points was the result of the negative operating leverage
effect of lower volumes, mainly in Crop Protection, partly offset by the
benefit from a negligible variable remuneration charge.
Crop Protection is developing sustainable crop care solutions as well as
delivery systems for biopesticides, launching two new delivery systems, one
specially designed for biologicals and the second for drone delivery.
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, but began to experience rapid customer destocking in
the second quarter. Volume weakness continued throughout the second half year,
to fall 21% year-on-year with a small offset from positive price/mix,
resulting in sales falling 19% overall. In Seed Enhancement, most sales are
derived from providing just-in-time enhancement services for vegetable seeds
so the business only saw a limited impact from destocking, delivering 9% sales
growth driven by strong structural growth trends. Seed Enhancement is winning
market share through its leadership in microplastic-free seed coatings which
are in high demand following the EU's decision to ban the use of microplastics
in agriculture in the next five years.
Pharma continued to make good progress with its industry-leading position in
biologics drug delivery as well as recent partnerships and new product
launches further strengthening the pipeline of opportunities. Pharma sales
fell 11% but grew 3% excluding lipid sales for Covid-19 vaccine applications.
Whilst we were not immune from the challenges impacting the market, including
customers reducing inventory levels, Covid normalisation and funding
constraints for early-stage biotech companies, the breadth and diversification
of our pharma portfolio enabled the business to deliver a resilient
performance. Destocking primarily affected the heritage consumer health
business where customer products are often sold over the counter, with lower
Covid-19 demand adversely impacting Adjuvant Systems sales as well as lipids
for Covid-19 mRNA vaccines. By contrast, drug delivery technologies for Small
Molecule, Protein and Nucleic Acid applications continued to grow.
To drive the growth of Protein/Small Molecule Delivery we opened an
applications centre in 'Genome Valley', Hyderabad, India, and launched our
first processing aid for biopharma (technologies which are integral to the
production of therapeutic proteins) which secured its first sales within three
months of launch. The future growth of Adjuvant Systems will benefit from the
launch of a new proprietary lipid-based adjuvant and two new adjuvant
partnerships agreed with Amyris and BSI. One of these is for a sustainable
squalene adjuvant that is produced by fermentation, which is already being
qualified by three major vaccine companies. In Nucleic Acid Delivery,
shipments of c.$60m of lipid systems to our principal Covid vaccine customers
occurred as planned at the end of the fourth quarter, benefitting sector
operating profit margin. Continued growth will be driven by the
commercialisation of new nucleic acid drugs with the number in development
continuing to expand, and Croda supporting most of those that specify a lipid
delivery system. The strong medium-term growth trajectory for Nucleic Acid
Delivery is likely to be realised in three phases: firstly, mRNA vaccines for
infectious diseases, where we are working closely with the Big Pharma
companies driving this development; secondly, oncology applications which
require more targeted delivery systems; and thirdly, gene editing therapies
such as a CRISPR treatment for sickle cell anaemia which we are supporting and
was recently approved by the US FDA.
Industrial Specialties - contributing to the efficiency of our manufacturing assets
Following the PTIC divestment, the retained business became Industrial
Specialties (IS), operating a supply contract to the new owner of the divested
business and contributing to the efficiency of our shared manufacturing site
model by helping to optimise utilisation rates. On a pro forma basis, sales
fell 35% to £206.1m principally due to lower volumes, reflecting destocking
and weak industrial demand globally, and limiting the ability of IS to help
optimise site utilisation. Pro forma adjusted operating profit fell 78% to
£9.4m 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 taken at the 30 June
2023 balance sheet date. Including the impairment charge, the reported IFRS
operating loss was £12.0m (2022: £79.9m profit), with the prior period
including the full contribution from the divested business.
Continued balance sheet strength
Our focus on active cash flow management in 2023 delivered excellent results
with improved free cash flow reflecting a £29.1m working capital inflow
(2022: £133.8m outflow) more than offsetting lower profit and higher capex.
In particular, we focused on managing down our own inventories, with stock
days falling approximately 20% during 2023. We expect our finished goods
inventories to be back to pre-pandemic levels by the end of the first quarter
of 2024, mitigating the risk that selling from stock (manufactured from higher
cost raw materials) has a detrimental impact on profit margins.
With improved free cash flow of £165.5m (2022 restated: £157.4m), our
balance sheet remains strong and we closed the year with net debt of £537.6m
(2022: £295.2m), including the £227.4m consideration paid on completion of
the Solus Biotech acquisition in July 2023. The resulting debt leverage ratio
was 1.3x (2022: 0.5x), within our one to two times target range, despite the
lower EBITDA.
Given the challenging market conditions, we reviewed the pace of in-flight
capital expenditure projects, as well as all new proposals for
non-safety-critical projects, whilst continuing to invest in our refocused
portfolio to drive profitable growth. This resulted in some capital
expenditure originally planned for 2024 being delayed until 2025. Organic
capital expenditure in 2023 was broadly as expected at £170.1m (2022:
£138.5m), focused on growing our R&D capability, in Asia especially, and
expanding our manufacturing footprint to increase capacity.
With our strong balance sheet, we have been able to continue to invest despite
the weaker macroeconomic environment. R&D investment included a new
Consumer Care laboratory in Shanghai, China and a new applications centre in
Hyderabad, India to support growing demand for protein and small molecule
delivery from pharma customers. With our Pharma business a top priority for
capital allocation, we also opened an adjuvant systems lab in Denmark and are
due to expand our R&D capabilities for nucleic acid delivery at Alabaster
in the USA and in Singapore in 2024.
Alongside investments that help deliver the carbon reduction roadmaps that we
have put in place for all Croda sites, we have also invested in capacity
expansion focused on Asia, including starting construction of a new
surfactants plant in Dahej, India, and the first stage of a £30m investment
in a combined Beauty Actives and F&F manufacturing facility in Guangzhou
to grow domestic sales in China. In addition to our typical capital investment
of around 6-8% of sales, we are investing an extra £175m over the period 2021
to 2024 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, with the US and UK Governments co-investing up to an
additional £75m combined. We have invested over £110m in the programme to
date. As a result of the review of phasing of current capital projects, total
capital expenditure is expected to fall slightly in 2024, but with heightened
levels of capex (compared to the pre-2021 period) continuing through 2025 as
the Pharma facilities are built and capacity in Asia comes on-stream.
We complement organic investment with selective acquisitions of adjacent
technologies, particularly those which can accelerate our transition to
greater use of natural raw materials or build new technology platforms,
enhancing future growth. The acquisition of Solus Biotech from Solus Advanced
Materials 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. We will drive sales growth by
leveraging Croda's global selling network and formulation science expertise.
Capital deployment will be executed within our consistent capital allocation
policy, set out in the Finance Review. Alongside organic and inorganic
investment, the policy provides for a regular and increasing ordinary dividend
to shareholders, while operating an appropriate balance sheet. With 32 years
of unbroken dividend progression, consistent distribution to shareholders is a
critical consideration for the Board. Therefore, despite temporarily taking us
outside our stated through-the-cycle payout ratio of distributing 40-50% of
earnings, we have proposed a small increase in the full year dividend at 109p
a share (2022: 108p). The Board is keeping the Company's future capital
requirements under close review.
Strategy - megatrends intact; continued strategic investment through the downturn; well positioned for market recovery
Strategy overview
Despite the challenging market conditions in 2023, the technology trends that
will drive our future growth have not changed with continued demand for
sustainable ingredients and a continued transition from small molecule active
ingredients to large molecule biologics. Through the acquisitions and
divestments we have made in recent years, we have successfully realigned our
portfolio with these megatrends and our strategy of combining sustainability
leadership with market-leading innovation is unchanged.
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 can now provide cradle-to-gate
product-level carbon footprint data for approximately 1,300 of our ingredients
so that customers can quantify the benefits associated with using them in
their products. We are continuing to expand this data set to cover more of our
ingredient portfolio and a broader range of sustainability factors.
Innovation is at the heart of what we do, creating new market and technology
niches. We filed more than 100 new patents in 2023 and have stepped up our
rate of innovation through more external partnerships, for example with Amyris
and BSI for sustainable vaccine adjuvants. Even in the unprecedented market
conditions that we have seen this 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. Our R&D teams now report
directly into Consumer Care and Life Sciences, ensuring that our priorities
are customer driven. This is complemented by 'big bet' projects often
delivered with partners from our open innovation network which provides access
to universities and SMEs, helping develop new intellectual property.
Strategic priorities
We are implementing specific strategic priorities to ensure our refocused
portfolio delivers consistent top and bottom-line growth. Alongside our sector
strategies we are (1) scaling biotech, (2) exploring acquisition opportunities
to supplement organic capital deployment, (3) investing in fast growth in
Asia, and (4) improving our customer and employee experience through our
'doing the basics brilliantly' programme.
'Scaling biotech' will transform our approach to sustainability, particularly
in reducing customers' 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 with the acquisition of Solus Biotech in
South Korea completed in the year.
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 simplifying our operating
processes to improve employee productivity and driving efficiencies within our
well-established customer-centric model including a new online ordering portal
complemented by more self-serve data for customers. The programme is
delivering good results including a 6% improvement for 'ease of doing
business' alongside a further increase in overall net promoter score in our
latest customer survey.
Sector strategies
Our sector strategies are to 'strengthen to grow' Consumer Care and 'expand to
grow' Life Sciences. 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 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-level 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 we are
'expanding 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 specifically 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 relationships
spanning drug discovery through to commercial supply.
Future performance drivers
In Consumer Care, average customer inventory levels have fallen and volume
recovery should be an important driver of near-term performance, particularly
in Beauty Care which has broad market exposure and is larger than the other
business units. Our approach in Beauty Care is to manage sales volumes in
those parts of the portfolio where there is less differentiation to underpin
consistent plant utilisation while also accelerating portfolio differentiation
through innovation, sustainability and biotech. More recent additions to
Consumer Care, including ceramides in Beauty Actives - which have significant
growth potential, and the F&F business - which is delivering impressive
sales growth albeit at margins which are below the average for Consumer Care,
can also influence our future performance. Geographically, Asian consumer care
markets are likely to grow faster than the rest of the world, particularly in
India and China. While our direct sales to China have remained robust, a
broad-based recovery in Chinese consumer spending and travel would underpin
improved global demand for consumer care products.
In Life Sciences, an end to destocking in Crop Protection markets would be an
important driver of improved performance in the near term. However, the timing
of this inflection point is uncertain as destocking started later, and
customer concentration is higher, so demand can be determined by the buying
decisions of four or five major customers. In addition, agriculture markets
are seasonal, so a lack of demand can mean that a whole season is missed, but
conversely when a recovery comes it is likely to have a more immediate effect.
Historically, the market for field crop seeds experiences changes in demand
later in the cycle, so the market environment could be tougher in 2024, but
for Croda, this risk is mitigated by our focus on vegetable seeds as well as
market leadership in microplastic-free seed coatings and the incremental
opportunities that are being created by regulation change.
The challenges that faced pharmaceutical markets in 2023, including the reset
of demand post Covid-19, destocking and contraction in the availability of
early-stage funding, appear to be temporary rather than structural, but their
effects could continue into 2024. Over the longer term, accelerating growth
and margins will be driven by incremental revenue from our own innovation
pipeline and the commercialisation of new biologic drugs. The drivers of
future performance in Pharma are therefore the rate of growth of our new
delivery systems and vaccine adjuvants that we are bringing to the market,
many of which are already generating revenue and have meaningful peak sales
projections, and the pace of approval of new mRNA drugs and vaccines, a high
proportion of which we are supporting during clinical trials and have invested
capital in to be able to produce at scale when launched.
Outlook
Consumer Care has started the year well and we are cautiously optimistic about
the improving demand trend we experienced in January. Within Life Sciences, we
expect the non-Covid Pharma business to grow but that destocking will continue
in Crop Protection. Demand in Industrial Specialties is expected to remain
weak.
Given the ongoing uncertainty in our end markets, the recovery trajectory for
each of our business units remains difficult to predict and the range of
possible outcomes in 2024 is therefore wider than usual at this stage of the
year. Overall, however, the Group expects to deliver mid to high single digit
percentage sales growth in 2024, excluding the c.$60m of Covid-19 lipid sales
in 2023, with higher sales volumes more than offsetting lower price/mix.
We expect 2024 Group adjusted operating margin to be two to three percentage
points lower than 2023 due to the following:
• Different business mix effects year-on-year, with no Covid-19 lipid
contribution and continued strong growth in Fragrances and Flavours.
• Low overhead recovery is expected to persist as sales volumes remain depressed
in Crop Protection and Industrial Specialties, two of the three businesses
with the highest production volumes, alongside Beauty Care.
• To support the return to sales growth, the cost base will reset back to a more
normalised level from its low point in 2023. This will include the likely
unwind in 2024 of the c.£25m benefit we saw in 2023 from a negligible
variable remuneration charge. Some of this will be offset by modest cost
savings from our recent reorganisation.
• We will continue to invest to support our long-term strategy. Customer
interest in innovation and sustainable ingredients remains strong, despite the
current destocking cycle.
Using these assumptions and at current exchange rates, we expect Group
adjusted profit before tax to be between £260m and £300m in full year 2024.
Croda will report sales performance quarterly during 2024 and we will provide
an update on first quarter trading at the AGM on 24 April 2024. Croda expects
to return to its normal cycle of half yearly reporting in 2025.
With our strong balance sheet, improving cash flow and consistent investment
in our refocused portfolio, Croda is well positioned to take advantage of the
demand recovery when it occurs. We expect the Group's performance to
accelerate from 2025, generating continued increasing returns for our
shareholders.
Non-financial Performance
Delivering our Sustainability Commitment
We use smart science to create high performance ingredients that improve lives
and aim to have positive global impacts on climate, nature, and society in
line with our commitment to be Climate, Land and People Positive by 2030. We
are enabling this by measuring and sharing data about the environmental and
social impacts of our products, and developing sustainability competencies
across Croda. Our sustainability leadership was recognised by CDP, which
awarded us A- across their key Climate, Forest and Water metrics for the first
time, complementing our long-standing triple A rating from MSCI. Our
sustainability targets have been updated for the divestment of the majority of
PTIC.
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.
Delivering on our 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 2023, our scope 1 and 2 emissions were 101,246 tonnes CO2e (2022:
121,122 tonnes CO2e), tracking well below our SBT principally due to low sales
volumes. Although volumes are expected to recover in 2024, we remain confident
in achieving 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 are also
targeting material upstream supply chain emissions reductions, introducing a
new Scope 3 dashboard, proactively managing our product portfolio, and
prioritising work with like-minded key suppliers, 83% of whom (by raw material
volume) now meet our prescribed Ecovadis standard (2022: 72%).
We are already Land Positive, 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, and have challenged ourselves to go further.
Our target now is to save at least 200,000 hectares more land per year in 2030
than in our 2019 baseline; at the end of 2023, we are on track to meet our
2024 interim target of 80,000 hectares. We announced in 2022 our aspiration to
build on our Land Positive Commitment to contribute to a Nature Positive
world. Our focus has been on understanding our impacts and dependencies on
nature, where we have identified and started taking action on land use change
and freshwater as priorities in our supply chains and operations.
Our People Positive objective covers both our employees and wider society. We
focus on using our smart science to improve more lives globally, with the
Croda Foundation sustainably improving the lives of more than 22m people
worldwide since it was founded as a charity in 2021. Internally, our Purpose
and Sustainability Commitment (PSC) score generated from an all-employee
survey was maintained at 68% in the recent survey despite the tough trading
environment which led to greater challenges for our teams. 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
39% (2022: 38%), a leading position in our sector.
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. The 2023 rate fell to 0.72 (2022: 0.74), excluding
Covid-19 cases. In line with our commitment to embed safety as a value, safety
practices were incorporated into the annual bonus scheme metric for the first
time and more than 4,500 hours of training were delivered to over 500 leaders.
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 34% (2022: 35%), as the benefit of the
divestment of the majority of PTIC was offset by lower Covid-19 lipid sales.
By sector, NPP as a proportion of total sales improved to 42% in Consumer Care
(2022: 41%), reflecting continued customer demand for innovation. It fell from
41% in 2022 to 29% in Life Sciences or by one percentage point from 32% in
2022 to 31% excluding the impact from Covid-19 lipid sales.
NPP growth is a key performance indicator that is used for remuneration. In
the year, Group NPP sales fell by 4%, excluding the impact of Covid-19 lipid
sales and the PTIC divestment, a less significant decline than for Group sales
as a whole.
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
Focused on profit protection and active cash management
Given the challenging trading conditions in 2023, we took some immediate
actions to address costs, at the same time as driving incremental sales growth
by increasing customer sales activity and using quieter time during 2023 to
bring forward maintenance and focus on other capital projects. Prioritising
customer-facing activities will help ensure we can take advantage of the
demand recovery when it occurs.
Tight cost control measures were implemented from the second quarter of 2023
to maximise profitability. A refreshed operational dashboard was also
introduced to provide up-to-date performance data to leaders. As we saw
volumes reset downwards, we optimised production to match the lower demand
through plant shutdowns, reduced shift patterns, and introducing more 'make to
order' contracts with customers. This helped us avoid costs, with energy and
freight costs falling through the year and second half costs 12% lower than
the first half. Outside of production, our main focus was on budgeted cost
avoidance such as restricting travel, curtailing headcount and other
common-sense measures.
Annual salary increases were granted at the start of 2023 but a hiring freeze
from Q2 onwards meant underlying employee headcount fell. In addition, a
negligible charge for variable remuneration versus 2022 benefitted operating
profit margin. A new organisational structure has been in place since the
start of 2024, with all regional teams now reporting into Consumer Care and
Life Sciences. This will ensure we deliver more effectively for our customers
and should result in annual cost savings of £9m from 2025. A £5.4m
exceptional restructuring charge was recognised in the 2023 accounts
associated with the introduction of this simpler operating model and we expect
a charge of low single-digit millions in 2024 as further benefits are
realised. In addition, we regularly review our site footprint and closed a
site at Cikarang in Indonesia which principally served industrial customers.
There are further opportunities to drive efficiency savings by simplifying our
business processes and driving improvements to the way we work that will
deliver sustained benefits to our operational effectiveness over the longer
term. A number of workstreams are already underway under our 'doing the basics
brilliantly' programme, including through the use of artificial intelligence,
data analytics, an online ordering tool that is saving hundreds of employee
hours, and a multi-year SAP upgrade.
We have actively managed our cash flow, encouraging all employees to focus on
generating cash, managing down our own inventories and collecting payments
promptly. This delivered excellent results with improved free cash flow due to
a working capital inflow and a significant reduction in inventory days which
fell by around 20%. We expect our finished goods inventories to be back to
pre-pandemic levels from a high point at the end of 2022 by the end of the
first quarter of 2024, mitigating the risk that selling from stock
(manufactured from higher cost raw materials) has a detrimental impact on
profit margins. Enhanced by this improved free cash flow, our balance sheet
remains strong with our debt leverage ratio within our target range of one to
two times.
During the year we reviewed the pace of all in-flight capital expenditure
projects, as well as every new proposal for non-safety-critical projects. This
ensured that we maintained strong capital discipline whilst continuing to
invest through the downturn in our refocused portfolio to drive profitable
growth.
A balanced approach to capital allocation
Our continued capital deployment was executed within our consistent capital
allocation 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 Consumer Care and expanding in
Life Sciences and a particular emphasis on pharma technologies; 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 is keeping the Company's future capital requirements under close
review.
In addition to continued organic capital expenditure to support significant
opportunities for growth across Consumer Care and Life Sciences, on 4 July
2023, we completed the acquisition of Solus Biotech from Solus Advanced
Materials for a total consideration of £227.4m, funded from cash and debt
facilities. This brings biotechnology-derived ingredients into our portfolio
including ceramides and phospholipids.
With a track record of more than 30 years unbroken dividend progression,
consistent distribution to shareholders is a key consideration for the Board.
We have proposed a small increase in the full year dividend at 109p a share
(2022: 108p).
Currency translation
The US Dollar and the Euro together represent approximately 65% of the Group's
currency translation exposure. Sterling was broadly flat against the US Dollar
at an average for the year of US$1.243 (2022: US$1.237) and weakened slightly
against the Euro to €1.149 (2022: €1.174) on a similar basis. The impact
of changes in exchange rates for other smaller currencies, which represent 35%
of the exposure, was more significant. Overall, the negative impact from
currency translation was £9.1m on sales and £10.3m on adjusted operating
profit. The disproportionate impact on adjusted operating profit reflected a
£6m adverse effect from the application of IAS 29 ('Financial Reporting in
Hyperinflationary Economies') to reporting in Argentina and Turkey, and a £2m
foreign exchange loss from the devaluation of the Argentine peso, with the
balance from the net effect of other currency movements. The transactional
impact of foreign currency exchange was not material.
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 Industrial Specialties (IS). 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 2022 would have been approximately
£191m lower at £318m and 2022 adjusted operating profit would have been
approximately £39m lower at £42m. Pro forma 2022 results have been adjusted
for the divestment. On this basis, IS sales fell 35% to £206.1m and adjusted
operating profit fell 78% to £9.4m.
Sales
Sales 2023 Price/mix Volume Acquisition Currency Change 2022
£m £m
Consumer Care 886.1 1.9% (3.6)% 1.0% (0.6)% (1.3)% 897.8
Life Sciences 602.3 3.2% (15.4)% 0.7% (0.2)% (11.7)% 682.3
Industrial Specialties 206.1 (3.9)% (55.1)% 0.0% (0.5)% (59.5)% 509.2
Group 1,694.5 10.9% (30.0)% 0.6% (0.4)% (18.9)% 2,089.3
Estimated pro forma sales
Group 1,695 11% (30)% 1% (1)% (19)% 2,089
Pro forma adjustment (191)
Group (pro forma) 1,695 5% (16)% 1% (1)% (11)% 1,898
Reported sales were down 18.9% to £1,694.5m (2022: £2,089.3m). On a pro
forma basis they were down 11%. Within this, price/mix improved by 5%,
supported by positive mix in Consumer Care and weaker IS sales. Group volumes
reduced by 16% pro forma, with a weaker macroeconomic environment and
continued customer destocking across consumer, crop and industrial markets
having a significant impact. While sales volumes remain significantly lower
than 2022, they are slowly improving in Consumer Care and were 9% higher in
the second half of 2023 than they were in the second half of 2022. Sales of
ceramides and phospholipids contributed 1% following completion of the Solus
Biotech acquisition in July, with a 1% headwind from currency translation
mainly due to movements in smaller currencies to which the Group has less
exposure.
Profit and margin
2023 2022
IFRS Adjustments Adjusted IFRS Adjustments Adjusted
£m £m £m £m £m £m
Sales 1,694.5 - 1,694.5 2,089.3 - 2.089.3
Cost of sales (964.5) - (964.5) (1,103.7) - (1,103.7)
Gross profit 730.0 - 730.0 985.6 - 985.6
Operating costs (482.5) (72.5) (410.0) (540.9) (70.4) (470.5)
Operating profit 247.5 (72.5) 320.0 444.7 (70.4) 515.1
Gain on business disposal - - - 356.0 356.0 -
Net interest charge (11.2) - (11.2) (20.7) (1.7) (19.0)
Profit before tax 236.3 (72.5) 308.8 780.0 283.9 496.1
Tax (64.2) 9.5 (73.7) (126.7) (13.8) (112.9)
Profit after tax 172.1 (63.0) 235.1 653.3 270.1 383.2
2023 2022
Operating profit IFRS Adjustments Adjusted IFRS Adjustments Adjusted
£m £m £m £m £m £m
Consumer Care 127.8 (32.5) 160.3 144.5 (60.2) 204.7
Life Sciences 131.7 (18.6) 150.3 220.3 (9.1) 229.4
Industrial Specialties (12.0) (21.4) 9.4 79.9 (1.1) 81.0
Group 247.5 (72.5) 320.0 444.7 (70.4) 515.1
Adjustments excluding gain on business disposal 2023 2022
£m
£m
Business acquisition costs (9.6) -
Restructuring costs (5.4) -
Impairments (20.8) (42.2)
Fair value movement on contingent consideration - 6.1
Unwind of discount on contingent consideration (net interest) - (1.7)
Amortisation of intangible assets arising on acquisition (36.7) (34.3)
Total adjustments (72.5) (72.1)
Full year ended 31 December
Adjusted profit 2023 Underlying growth Acquisition impact Currency Change
£m £m £m impact 2022
£m £m
Consumer Care 160.3 (41.3) 0.4 (3.5) 204.7 (21.7)%
Life Sciences 150.3 (73.9) 0.0 (5.2) 229.4 (34.5)%
Industrial Specialties 9.4 (70.0) 0.0 (1.6) 81.0 (88.4)%
Operating profit 320.0 (185.2) 0.4 (10.3) 515.1 (37.9)%
Net interest (11.2) (19.0) (41.1)%
Profit before tax 308.8 496.1 (37.8)%
2023 Change
Estimated pro forma profit £m 2022
£m
Adjusted operating profit 320 515 (38)%
Pro forma adjustment - (39)
Adjusted operating profit (pro forma) 320 476 (33)%
Net interest (11) (13) 15%
Adjusted profit before tax (pro forma) 309 463 (33)%
Cost of sales benefitted from a 12% reduction in raw material costs in 2023,
with freight and energy costs also reducing as we progressed through the year.
In addition, underlying employee costs were broadly flat as a hiring freeze
and natural attrition offset inflation-based salary increases.
Significant volume declines across most of our markets at a similar time led
to low levels of capacity utilisation at our manufacturing sites, with
negative operating leverage impacting profit margins. IFRS operating profit
was £247.5m (2022: £444.7m) and profit before tax £236.3m (2022: £780.0m),
the prior period having included the gain on the PTIC divestment of £356.0m.
IFRS profit before tax included a charge for adjusting items of £72.5m (2022:
£72.1m charge excluding the gain on business disposal), comprising 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 £36.7m (2022: £34.3m), acquisition costs of £9.6m (2022: £nil)
and restructuring costs associated with changes to the Group's operating model
of £5.4m (2022: £nil). Prior year adjusting items included a gain on
contingent consideration on a previous acquisition of £6.1m and an impairment
charge of £42.2m, reflecting a £34.6m write-down of goodwill in the Flavours
cash generating unit and a £7.6m write-off of unusable manufacturing
equipment in Japan. The adjusting charge within net interest related to unwind
of the discount on contingent consideration of £1.7m.
Group adjusted operating profit reduced by 33% on a pro forma basis to
£320.0m (2022 pf: £476m), with an adjusted operating margin of 18.9% (2022
pf: 25%). With a large reduction in sales volumes, 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 lower Covid-19 lipid sales, also had an
impact, reducing operating margin by around three percentage points.
There were a number of non-trading impacts that benefitted the adjusted
operating margin by a total of approximately two percentage points. The most
significant of these was a one and a half percentage point benefit from a
negligible variable remuneration charge due to the impact of a lower share
price on share scheme costs and because the annual bonus for 2023 was not
triggered. Consumer Care also benefitted from the release of an accrual 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 benefitted Industrial Specialties but reduced the
operating margin in Consumer Care and Life Sciences by approximately half a
percentage point each.
Whilst there are likely to be some bounce-back costs in 2024 as trading
normalises, including a higher charge for variable remuneration and higher
employee costs, there are also opportunities for margin expansion from higher
sales volumes and improved mix, particularly if volume recovery is broad-based
across all markets.
Net finance costs were £11.2m (2022: £19.0m), with receipt of £665.0m
proceeds from the PTIC divestment on 30 June 2022 and payment of the £227.4m
consideration for Solus Biotech on 4 July 2023 being the main drivers of
changes over recent periods, as well as higher interest rates. Net finance
costs are expected to be £15-20m in 2024. Adjusted profit before tax was
£308.8m (2022 pf: £463m). The effective tax rate on adjusted profit was
23.9% (2022: 22.8%) and the effective tax rate on IFRS profit was 27.2% (2022:
16.2%). The 2023 IFRS tax rate was higher than the effective tax rate on
adjusted profit as the exceptional costs were mainly capital in nature and
therefore not tax deductible. The prior year IFRS tax rate was lower than the
effective tax rate on adjusted profit having benefitted from corporate tax
exemptions available on the PTIC divestment. Releases of prior year tax
provisions benefitted the Group's adjusted effective tax rate by approximately
two percentage points, otherwise 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 122.5p (2022: 465.8p) and
adjusted basic EPS were 167.6p (2022: 272.0p).
Improving free cash flow
As a result of active cash management during 2023, free cash flow improved to
£165.5m (2022 restated: £157.4m), with a working capital inflow of £29.1m
(2022: £133.8m outflow). The working capital inflow was principally driven by
lower inventory with stock days falling by approximately 20%. The improvement
in working capital was despite the impact on receivables of approximately $60m
of lipid sales shipped to our principal Covid-19 vaccine customers during the
final quarter.
Net capital expenditure was £170.1m (2022: £138.5m), driving future growth
opportunities and supported by government funding grants in the Pharma
business.
Full year ended 31 December
Cash flow Restated
2023 2022
£m
£m
Adjusted operating profit 320.0 515.1
Depreciation and amortisation 89.5 86.4
EBITDA 409.5 601.5
Working capital 29.1 (133.8)
Interest & tax paid (93.5) (154.0)
Non-cash pension expense (4.4) 4.5
Share-based payments (4.2) (11.0)
Other cash movements 1.0 1.0
Net cash generated from operating activities 337.5 308.2
Net capital expenditure (170.1) (138.5)
Interest received 8.3 5.1
Payment of lease liabilities (17.0) (17.4)
Exceptional items cash outflow add back 6.8 -
Free cash flow 165.5 157.4
Dividends (150.7) (144.4)
Acquisitions (241.8) (21.2)
Business disposal net of cash in disposed business (4.6) 579.0
Exceptional items cash outflow (7.9) (1.0)
Other cash movements (10.3) (7.5)
Net cash flow (249.8) 562.3
Net movement in borrowings 125.1 (381.8)
Net movement in cash and cash equivalents (124.7) 180.5
Closing net debt was £537.6m (2022: £295.2m), including payment of the
£227.4m consideration for the Solus Biotech acquisition that was funded from
cash and debt facilities. The balance sheet remains strong with a leverage
ratio of 1.3x EBITDA (2022: 0.5x), within our 1-2x target range. As at 31
December 2023, the Group had committed funding in place of £1,050.0m, with
undrawn committed facilities of £381.2m and £172.5m in cash. We received the
most favourable rate of interest on our sustainable banking facility as our
emissions reductions met the specified targets.
Retirement benefits
The post-tax asset on retirement benefit plans at 31 December 2023, measured
on an accounting valuation basis under IAS 19, was £64.9m (2022: £75.2m).
Cash funding of the various plans is driven by the schemes' ongoing actuarial
valuations. The Trustee and Company are working on the 30 September 2023
triennial actuarial valuation for the largest pension plan, the UK Croda
Pension Scheme. Initial results shared with the Company show that the funding
position has improved and that the cost of providing benefits has fallen.
Sector Performance
Consumer Care
Strategy - positively contributing to everyday life
Croda creates critical Consumer Care ingredients that are both sustainable and
underpinned by performance. Our business model helps us to win; operating in
over 120 countries, Croda supports customers large and small globally.
The Consumer Care strategy anticipates and responds to the megatrends
influencing consumer behaviour and shaping our customers' needs. In an era
defined by rapid global economic shifts and evolving consumer desires, our
strategy positions us at the forefront of the market, ready to meet the
demands of an increasingly discerning consumer base. Consumers will pay a
premium for high-quality, innovative formulations and substantiated product
claims. They also want to live their lives more sustainably and this is
impacting their decisions when it comes to the products to buy.
Our ambition is to be the world's most sustainable, innovative and responsive
solution provider. Already recognised as a market-leading innovator, our
strategy is to continue to strengthen Consumer Care in fast growth niches, by
accelerating innovation, expanding our sustainable product portfolio and
enhancing our customer intimacy. Leadership requires us to deliver sustainable
ingredients with the best performance and data to support customer claims. We
will also lead in formulation science and application technologies.
Our innovation is improving the sustainability of our ingredients and finding
high performance replacements for fossil-based products. We showcase our
ingredients, educate customers on their use and develop finished formulations
for customers, incorporating both our performance-based ingredients and
emotion-driven fragrances and botanicals to deliver complete solutions. This
is particularly attractive to smaller companies, who can partner with Croda to
launch products to the market at pace.
With the personal care market in Asia developing rapidly, we have a 'fast
grow' programme to expand our technical and sales presence. This is being
supported by selective expansion in manufacturing and a focus on acquisition
opportunities, targeting adjacent active technologies and natural ingredients.
We have completed the acquisition of Solus BioTech, a global leader in
premium, biotechnology-derived materials located in South Korea. With over 30
years of expertise in the development of naturally derived ceramides, the
acquisition broadens Croda's offering of high performance, natural ingredients
for luxury beauty customers in Asia and globally.
Consumer Care comprises four business units (with sales percentages rounded to
the nearest 5%):
· Beauty Actives (c.15% of sector sales) operates in the highest
premium part of the market, offering customers scientific expertise for
unparalleled product efficacy. Croda is a market-leader with a large actives
portfolio across two ranges: Sederma Actives for high efficacy skin actives
derived from peptides and biotech; and Croda Botanicals for natural
plant-based actives.
· Beauty Care (c.50% of sector sales) delivers differentiated
ingredients across skin, hair and solar care. The strategy is to strengthen
Beauty Care through a focus on growth and agility in the target market
segments, innovate in sustainable effect ingredients, deliver a full-service
formulation capability for customers and differentiate our products through a
rich data set which customers can leverage to meet their specific market
needs.
· Fragrances and Flavours (F&F) (c.30% of sector sales) is a
preeminent emerging market provider, with global reach and innovative
technologies that meet customer needs with agility and quality. This is
delivered through two fragrance brands: Iberchem, differentiated by its
customer intimacy and responsiveness; and Parfex, with its excellent
reputation in prestige markets for fine and natural fragrances, as well as
Scentium in Flavours. The strategy is to develop the business as a leader in
sustainable fragrances, unlocking the potential of F&F through organic
growth and driving synergies with Croda's technology and customer bases.
· Home Care (c.5% of sector sales) is focused on bringing Croda's
ingredients to selective premium home care markets. This is delivered through
two technology platforms which deliver improved efficacy and sustainability:
fabric care, with biopolymers that increase the lifetime of clothes; and
household care, with sustainable alternatives to fossil-based surfactants.
Performance summary - leadership in innovation and sustainability driving
demand
Consumer Care sales fell 1% to £886.1m (2022: £897.8m) with strong
double-digit percentage sales growth in F&F but lower underlying sales in
Beauty Actives, Beauty Care and Home Care. Price/mix was 2% mainly due to a
positive mix impact from Beauty Actives, with pricing broadly flat. Sales
volumes were down 4% year-on-year but were up 9% in the second half compared
with the second half of 2022. Acquisitions added 1% due to sales of ceramides
following the Solus Biotech acquisition, with foreign currency translation a
small headwind particularly in the second half year.
IFRS operating profit was £127.8m (2022: £144.5m) and adjusted operating
profit was £160.3m (2022: £204.7m), resulting in adjusted operating margin
reducing to 18.1% (2022: 22.8%). Four and a half percentage points of the
margin decline was due to the operating gearing effect of continued weak
volumes in Consumer Care, compounded by lower volumes in Life Sciences and
Industrial Specialties which share the same manufacturing assets. Two
percentage points of the margin decline was due to weaker mix as a result of
strong growth of lower margin F&F sales, with the negligible variable
remuneration charge and provision release associated with an earn-out on the
Iberchem acquisition providing a partial offset.
In Consumer Care, our leadership in sustainability and innovation continues to
drive demand for Croda's differentiated ingredient portfolio. Sales of New and
Protected Products (NPP) improved to 42% of total sales (2022: 41%) and sales
of sustainable ingredients such as ECO surfactants and biotech-derived
ingredients were stronger than other ingredients in our portfolio. We can now
provide product-level carbon footprint data to our customers so that they can
quantify the benefits associated with using around 1,300 of our ingredients in
their products, supporting a structural shift in behaviour by customers and
consumers towards sustainable ingredients. The focus of our work has been on
Beauty Care where Product Carbon Footprints are now available for three
quarters of our portfolio.
Sales to Asia exceeded sales to North America for the first time with
significant potential for further growth, particularly for premium products
driven by the increasing number of middle-class consumers. To maximise fast
growth in Asia, we have prioritised investment in R&D, sales and
production in China and India in particular where underlying sales grew 12% in
2023. While our performance in China has remained robust, owing to strong
relationships with regional brands built on our innovation expertise, a
broad-based recovery in Chinese consumer spending and travel would underpin
improved global demand for consumer care products.
The stand-out performer in 2023 was Fragrances and Flavours (F&F) which
delivered 18% underlying sales growth, benefitting from its distinctive
positioning in fast-growing markets and agile, cost competitive model. F&F
sales were up in all product categories and established regions, with the
Middle East particularly strong. This excellent sales growth principally
reflects F&F's high exposure to local and regional customers outside North
America and Europe as well as sales synergies that are being realised under
Croda's ownership. These include a new multi-million pound a year sales
opportunity to supply fragrances to a multinational company in regions where
F&F has local production. Projects are also underway to further increase
the proportion of bio-based fragrance ingredients, to continue the move
towards lower carbon and a more natural footprint. Approved R&D and
manufacturing investment programmes are underway in China, Indonesia, France
and Spain to continue the growth momentum.
In Beauty Actives, reported sales were up 4% but down 1% on an underlying
basis (i.e. excluding the Solus Biotech acquisition.) Positive mix helped
offset weaker volumes as Sederma active ingredients grew, particularly in
China, whereas sales of lower-value botanicals fell. 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, both plant stem cells
and fermentation, and we recently launched Luceane(TM), an anti-ageing active
with its origins in marine biotechnology, and an active ingredient that fades
age spots caused by the sun. Having completed the Solus Biotech acquisition in
July 2023, we are excited about the opportunities that the addition of further
fermentation-derived active ingredients to our portfolio are starting to open
up, with strong customer demand already evident for ceramides. We will drive
rapid sales growth of Solus ingredients by leveraging Croda's global selling
network and formulation science expertise.
Performance remained weakest in Beauty Care, which has broad market exposure
and is larger than the other business units, with sales down 11% driven by
lower volumes. Our approach in Beauty Care is to manage sales volumes in the
less differentiated parts of the portfolio to underpin consistent plant
utilisation and cover fixed costs. We are also working to win back business in
North America which we lost in 2022 through our inability to supply. In
parallel, we are accelerating the differentiation of the Beauty Care portfolio
by driving innovation, enhancing the sustainability profile of our
ingredients, and transitioning our manufacturing processes to biotech and
other low carbon technologies. 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 at our innovation centres
globally where we offer to co-create customer products.
The recovery of sales volumes in Home Care accelerated as the year progressed,
with underlying sales down 1% year-on-year but up 12% in the second half
compared with the second half of 2022. Once again it was sales of two
technology platforms that are differentiated by sustainability that led the
way - bio-based ECO surfactants for household care and biopolymers which
extend the life of fabrics. We also agreed a long-term contract with a key
customer that underpins future sales of our biopolymer range.
Alongside investments that help deliver the carbon reduction roadmaps that we
have put in place for all sites, Consumer Care investment is focused on Asia
to support continued growth momentum. In China, we opened a new laboratory in
Shanghai and started work on £30m combined Beauty Actives and F&F
manufacturing facility in Guangzhou to grow domestic sales. In India, we
commenced construction of a new surfactants plant at a greenfield site in
Dahej. The acquisition of Solus Biotech in South Korea has also given us
another state-of-the-art plant in the region and strengthened our presence
across Asia.
Life Sciences
Strategy - empowering biologics delivery
In Life Sciences, Croda focuses on providing delivery systems for active
pharmaceutical and crop ingredients. Our technologies deliver the active,
improve its efficacy and solve challenges of stability and sustainability in
customer formulations.
Our global footprint gives us presence in the major crop regions and access to
leading pharma R&D. Our strength in North America and Western Europe is
now leveraged through expansion in Asia and Latin America. Working as an
innovation partner to the major crop science companies, we have also expanded
with medium and smaller-sized customers, especially local customers in Latin
America, India and China. Our acquisition of research-focused Avanti in 2020
expanded our pharma customer base to span drug discovery and clinical trial
stages, alongside our established commercialisation business. These
relationships extend beyond global brands to academia, start-ups and biotech,
where significant breakthrough discovery happens.
Our strategy is to expand Life Sciences to empower biologics delivery,
enabling the move from small chemically synthesised molecules to large and
complex biologics, a megatrend which is transforming the pharmaceutical market
and which will transform agriculture. In Pharma, we focus on segments with the
strongest growth and highest innovation needs, leveraging our delivery systems
and technology platforms to create new solutions for customers. In our
Agriculture business, we are reinforcing our leadership with sustainable
solutions and leveraging our expertise to accelerate the transition to
biopesticides, which will enable greater targeting of actives and reduced
biodiversity impact.
To deliver this strategy, we are investing in innovation, knowledge and
capacity. Our R&D investment is creating an extensive innovation pipeline.
We are increasing our knowledge base in innovation, sales and manufacturing,
co-investing with national governments who recognise the importance of
biologics in the 21st century. We are supplementing organic growth with
acquisition of new technology platforms, building on the successful growth of
our vaccine adjuvant platform, acquired in 2018 and already doubled in sales,
and our lipid systems platform, acquired in 2020, the first to deliver a
commercial Covid-19 mRNA delivery system and widely utilised within the
fast-evolving gene editing market.
Life Sciences comprises three business units (with sales percentages rounded
to the nearest 5%):
· Crop Protection (c.30% of sector sales) has leading relationships
with the major crop science companies, offering ingredients that improve
performance and delivery of crop formulations. Our strategy is to deliver
sustainable solutions using technology platforms and expertise in complex crop
formulation systems, improving yields, accelerating the transition to
biopesticides and contributing to food security.
· Seed Enhancement (c.15% of sector sales) leverages our leadership
in seed coating systems and enhancement technologies to improve germination,
stimulate healthy development of seeds and increase crop yield. Our strategy
is to be the leader in sustainable seed enhancement solutions for both field
and vegetable crops.
· Pharma (c.55% of sector sales) targets leadership in biologics
drug delivery, delivering drug and vaccine systems through synthesis, system
formulation and application technology know-how. Our innovation portfolio is
designed to selectively support customers, large and small, who are driving
emerging pharma technologies, and to unlock value from our technology
strengths. Pharma comprises three technology platforms:
o Protein/Small Molecule Delivery has an established record of providing
delivery systems for complex protein drugs. These large, sensitive molecules
are typically injected. Our differentiated range delivers the highest purity
excipients to customers, including 'Big Pharma'. Our strategy is to support
established small molecule drugs and develop excipients for complex protein
and monoclonal antibody (mAb) applications, and expand our portfolio of high
purity reagents for bioprocessing.
o Adjuvant Systems is the most advanced third-party supplier of adjuvants
(immune response boosters) for vaccines. There is a large, recognised need for
innovation in vaccine adjuvant systems as a result of the development of novel
therapeutic vaccines that cure diseases previously only treatable with
symptomatic treatments. Croda is well-positioned with the broadest range of
vaccine adjuvant systems and is embedded within vaccine pipelines across many
indications. Our strategy is to accelerate use of innovative adjuvant systems,
comprising multiple building blocks, supporting WHO vaccine programmes and the
development of future preventative and therapeutic vaccines.
o Nucleic Acid Delivery was created after our 2020 acquisition of Avanti and
enabled the world's first commercial lipid system for mRNA vaccines for
Covid-19. Our innovation pipeline looks to improve lipid delivery systems and
create new transfection agents for cell and gene therapy. We are included in a
high proportion of the rich pipeline of nucleic acid drugs that are in
development and due to commercialise from 2025.
o In addition, our Avanti Research catalogue continues as a distinct
strategic arm targeting early-stage R&D and academic relationships. This
embeds our technologies in clinical development and, if successful, we
position ourselves as the partner of choice for commercialisation.
Performance summary- continued progress building industry-leading positions in
high-growth markets
Life Sciences sales were down 12% to £602.3m (2022: £682.3m), with
approximately seven percentage points of the reduction due to lower sales of
lipid systems for Covid-19 vaccine applications. On a reported basis, positive
price/mix of 3% partly offset a 15% decline in volume, the majority of which
was due to destocking by Crop Protection customers with a small effect from
similar trends in consumer health. There was also a contribution from
phospholipid sales following completion of the Solus Biotech acquisition in
July 2023 and a small foreign currency headwind. Sales of New and Protected
Products (NPP) as a percentage of total sector sales fell to 29% (2022: 42%)
or by one percentage point to 31% (2022: 32%) excluding the impact from
Covid-19 lipid sales.
IFRS operating profit was £131.7m (2022: £220.3m) and adjusted operating
profit was £150.3m (2022: £229.4.m), resulting in an adjusted operating
margin of 25.0% (2022: 33.6%). Six percentage points of the margin reduction
was the result of adverse price/mix mainly due to lower Covid lipid sales, and
four percentage points was the result of the negative operating leverage
effect of lower volumes mainly in Crop Protection, partly offset by the
benefit from a negligible variable remuneration charge. Shipments of c.$60m of
lipid systems to our principal Covid vaccine customers occurred as planned at
the end of the year benefitting second half operating profit margin.
Crop Protection is meeting the 'innovation gap' created by regulatory pressure
to reduce pesticide use by developing sustainable crop care solutions as well
as delivery systems for crop biologics that are enabling customers to
transition to biopesticides. We recently launched our first delivery system
specially designed for biopesticides, which has secured sales in all regions,
and a new product that meets the growing demand for drone application
particularly in Asia. 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, but began to experience rapid
customer destocking in the second quarter, with Q2 volumes down more than 30%
compared with Q1. Volume weakness continued throughout the second half year,
to fall 21% year-on-year with a small offset from positive price/mix,
resulting in sales falling 19% overall. An end to destocking in Crop
Protection markets would be an important driver of improved Life Sciences
performance in the near term but the timing of this inflection point is
uncertain as destocking started later than in other markets, and customer
concentration is higher, so demand can be determined by the buying decisions
of four or five major customers. In addition, agriculture markets are
seasonal, so a lack of demand can mean that a whole season is missed, but
conversely when a recovery comes it is likely to have a more immediate effect.
In Seed Enhancement, a significant proportion of sales are derived from
providing just-in-time enhancement services for vegetable seeds. As such, the
business only sees a limited impact from stocking cycles and delivered a 9%
sales increase, driven by strong structural growth trends. Seed Enhancement is
winning market share through its leadership in microplastic-free seed coatings
which are in high demand globally following the European Union's recent
adoption of measures that will ban the use of microplastics in agriculture in
the next five years. Historically, the market for field crop seeds experiences
changes in demand later in the cycle, so the market environment could be
tougher in 2024, but for Croda, this risk is mitigated by our focus on
vegetable seeds, our sustainability leadership and the incremental
opportunities that are being created by regulation change.
Pharma continued to make good progress with its industry-leading position in
biologics drug delivery as well as recent partnerships and new product
launches further strengthening the pipeline of opportunities. Pharma sales
fell 11% but grew 3% on an underlying basis excluding lipid sales for Covid-19
vaccine applications. The period also saw the first sales of phospholipids for
drug delivery and intravenous nutrition following the completion of the Solus
Biotech acquisition in July 2023. Whilst we were not immune from the
challenges impacting the market, including customers reducing inventory
levels, Covid normalisation and funding constraints for early-stage biotech
companies, the breadth and diversification of our pharma portfolio enabled the
business to deliver a resilient performance. Destocking primarily affected our
heritage, consumer health ingredients for over-the-counter medicines, with
lower Covid-19 demand adversely impacting Adjuvant Systems sales as well as
lipids for Covid-19 mRNA vaccines. These challenges appear to be temporary
rather than structural, but their effects could continue into 2024. By
contrast, drug delivery technologies for Small Molecule, Protein and Nucleic
Acid applications continued to grow.
Over the longer term, accelerating growth and margins will be driven by the
commercialisation of new biologic drugs, many of which we are supporting
during clinical trials, augmented by incremental revenue from our own
innovation pipeline.
Protein/Small Molecule Delivery provides delivery systems for both the more
mature small molecule drugs and the higher growth protein and monoclonal
antibody (mAb) applications. Through the Solus Biotech acquisition, we have
added naturally derived phospholipids to our portfolio which can be used as
delivery systems for protein and small molecule actives, and for intravenous
nutrition. In line with our strategy, we also expanded into bioprocessing
aids, a target adjacency, launching Virodex as an aid for biopharma
manufacturing and a superior alternative to a competitor product that is now
banned in Europe. The first sales of Virodex were secured within three months
of launch.
Adjuvant Systems is the leading independent supplier of adjuvants which are
used as immune response boosters in both commercialised vaccines and those in
development. It will benefit from two new adjuvant partnerships agreed during
the year with Amyris and BSI. One of these is a sustainable squalene adjuvant
that is produced by fermentation and is free from shark-derived material that
forms the basis of competing adjuvants, and is already being qualified by
three major vaccine companies. We have also expanded our adjuvants portfolio
through new launches from our own innovation pipeline including PHAD, a new
proprietary lipid-based adjuvant already sampled into over 20 vaccine
projects.
The growth of Nucleic Acid Delivery will be driven by the commercialisation of
new nucleic acid drugs with the number in development continuing to grow, and
Croda supporting the majority of those that specify a lipid delivery system.
Clinical trials of nucleic acid-based drugs have increased rapidly over the
last 12 months as pharma industry pipelines continue to grow. The strong
medium-term growth trajectory for our Nucleic Acid Delivery platform is likely
to be realised in three phases: firstly, mRNA vaccines for infectious diseases
which are expected to come to the market from 2025, where we are working
closely with the Big Pharma companies driving this development; secondly,
oncology applications which require more targeted delivery systems; and
thirdly, gene editing therapies such as a CRISPR treatment for sickle cell
anaemia which we are supporting and was recently approved by the US FDA.
During the year, we opened an applications centre in 'Genome Valley',
Hyderabad, India to support growing demand for protein and small molecule
delivery. With our Pharma business a top priority for capital allocation, we
also opened an adjuvant systems lab in Denmark and are due to expand our
R&D capabilities for nucleic acid delivery at Alabaster in the USA and in
Singapore in 2024. We are investing an extra £175m over the period 2021 to
2024 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, with the US and UK Governments co-investing up to an
additional £75m combined. We have invested over £110m in the programme to
date.
Industrial Specialties - contributing to the efficiency of our manufacturing assets
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, became Industrial
Specialties (IS). IS leverages investments in Consumer Care and Life Sciences,
our core sectors, and plays a critical role in our shared manufacturing site
model. This includes contributing sales volumes to our production assets and
thereby enhancing overall asset utilisation, cost absorption, and ultimately
profitability, as well as monetising co-streams so that we maximise the value
of all our products. The business is regionally led, to enable flexible
optimisation of manufacturing capacity matched against local demand, with
global leadership from an Executive Committee member. It also operates a
medium-term supply contract to Cargill, the new owner of the divested
business.
The 2022 comparator year comprised the full PTIC business in the first half
year and the retained business in the second half year. It is estimated that,
had the divestment occurred at the start of 2022, sales in 2022 would have
been £191m lower at £318m and 2022 adjusted operating profit would have been
£39m lower at £42m. On this pro forma basis, sales fell 35% to £206.1m
principally due to lower volumes, reflecting destocking and weak industrial
demand globally. The effect of weak demand was similar on both sales direct
from Croda and to Cargill as part of the supply agreement and limited the
ability of IS to help optimise site utilisation. Pro forma adjusted operating
profit fell 78% to £9.4m 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
taken at the 30 June 2023 balance sheet date. Including the impairment charge,
the reported IFRS loss was £12.0m (2022: £79.9m profit), with the prior
period including the full contribution from the divested business.
Other matters
Principal risks
The Group's principal risks are 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.
During our periodic risk reviews, we confirmed that all principal risks
reported in 2022 remain relevant and no new principal risks were identified.
Revenue generation risk increased during 2023 as the risk of continuous
escalation of geopolitical conflicts may exert further downward force on
demand, consequently impacting revenue. Despite a difficult year with
significant revenue and profit reductions, Croda's business model has remained
resilient as evidenced by strong cash generation.
Security of business information and networks risk also heightened in
likelihood during 2023 because of evolving technologies and increasingly
sophisticated malicious activities worldwide.
The rapid evolution and transformative potential of artificial intelligence
present a significant emerging risk with associated potential opportunity,
demanding close monitoring and proactive management.
Croda International Plc
Summary Financial Statements for the Year Ended 31 December 2023
Group Income Statement
for the year ended 31 December 2023
Note 2023 2023 2023 2022 2022 2022
Reported
Reported
Adjusted
Adjustments
Total
Adjusted
Adjustments
Total
£m
£m
£m
£m
£m
£m
Revenue 2 1,694.5 - 1,694.5 2,089.3 - 2,089.3
Cost of sales (964.5) - (964.5) (1,103.7) - (1,103.7)
Gross profit 730.0 - 730.0 985.6 - 985.6
Operating costs (410.0) (72.5) (482.5) (470.5) (70.4) (540.9)
Operating profit 2 320.0 (72.5) 247.5 515.1 (70.4) 444.7
Gain on business disposal 13 - - - - 356.0 356.0
Financial costs 3 (26.0) - (26.0) (24.1) (1.7) (25.8)
Financial income 3 14.8 - 14.8 5.1 - 5.1
Profit before tax 308.8 (72.5) 236.3 496.1 283.9 780.0
Tax 4 (73.7) 9.5 (64.2) (112.9) (13.8) (126.7)
Profit after tax for the year 235.1 (63.0) 172.1 383.2 270.1 653.3
Attributable to:
Non-controlling interests 1.1 - 1.1 4.0 - 4.0
Owners of the parent 234.0 (63.0) 171.0 379.2 270.1 649.3
235.1 (63.0) 172.1 383.2 270.1 653.3
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
Reported
Reported
Adjusted
Total
Adjusted
Total
Earnings per 10.61p ordinary share
Basic 5 167.6 122.5 272.0 465.8
Diluted 167.4 122.3 271.4 464.8
Ordinary dividends paid in the year
Interim 6 47.0 47.0
Final 6 61.0 56.5
Group Statement of Comprehensive Income
for the year ended 31 December 2023
2023 2022
£m
£m
Profit after tax for the year 172.1 653.3
Other comprehensive (expense)/income:
Items that will not be reclassified subsequently to profit or loss:
Remeasurements of post-retirement benefit obligations (23.3) 88.9
Tax on items that will not be reclassified 5.5 (22.4)
(17.8) 66.5
Items that have been or may be reclassified subsequently to profit or loss:
Currency translation (58.4) 104.2
Reclassification of currency translation - (14.8)
Cash flow hedging (19.3) 2.8
Reclassification of cash flow hedging - (6.5)
Reclassification of cost of hedging reserve - 6.0
Tax on items that may be reclassified - (0.4)
(77.7) 91.3
Other comprehensive (expense)/income for the year (95.5) 157.8
Total comprehensive income for the year 76.6 811.1
Attributable to:
Non-controlling interests 0.1 4.4
Owners of the parent 76.5 806.7
76.6 811.1
Arising from:
Continuing operations 76.6 811.1
Group Balance Sheet
at 31 December 2023
Note 2023 2022
£m
£m
Assets
Non-current assets
Intangible assets 7 1,408.5 1,253.2
Property, plant and equipment 8 1,044.0 964.5
Right of use assets 87.5 96.9
Investments 1.9 3.4
Deferred tax assets 14.4 10.3
Retirement benefit assets 9 113.5 123.2
2,669.8 2,451.5
Current assets
Inventories 341.2 464.0
Trade and other receivables 395.7 375.8
Cash and cash equivalents 172.5 320.6
909.4 1,160.4
Liabilities
Current liabilities
Trade and other payables (252.0) (320.0)
Borrowings and other financial liabilities (36.7) (121.9)
Lease liabilities (13.7) (12.9)
Provisions 9 (8.6) (6.1)
Current tax liabilities (9.2) (26.9)
(320.2) (487.8)
Net current assets 589.2 672.6
Non-current liabilities
Borrowings and other financial liabilities (588.4) (401.8)
Lease liabilities (71.3) (79.2)
Other payables (1.1) (4.5)
Retirement benefit liabilities 9 (26.8) (23.1)
Provisions 9 (10.5) (11.5)
Deferred tax liabilities (192.8) (172.9)
(890.9) (693.0)
Net assets 2,368.1 2,431.1
Equity
Ordinary share capital 15.1 15.1
Share premium account 707.7 707.7
Reserves 1,629.7 1,692.8
Equity attributable to owners of the parent 2,352.5 2,415.6
Non-controlling interests in equity 15.6 15.5
Total equity 2,368.1 2,431.1
Group Statement of Changes in Equity
for the year ended 31 December 2023
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 year - - - 649.3 4.0 653.3
Other comprehensive income - - 90.9 66.5 0.4 157.8
Total comprehensive income for the year - - 90.9 715.8 4.4 811.1
Transactions with owners:
Dividends on equity shares 6 - - - (144.4) - (144.4)
Share-based payments - - - 8.3 - 8.3
Transactions in own shares - - - (7.3) - (7.3)
Total transactions with owners - - - (143.4) - (143.4)
Changes in ownership interests:
Acquisition of a non-controlling interest - - - 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 31 December 2022 15.1 707.7 47.1 1,645.7 15.5 2,431.1
At 1 January 2023 15.1 707.7 47.1 1,645.7 15.5 2,431.1
Profit after tax for the year - - - 171.0 1.1 172.1
Other comprehensive expense - - (76.7) (17.8) (1.0) (95.5)
Total comprehensive (expense)/income for the year - - (76.7) 153.2 0.1 76.6
Hedging losses transferred to goodwill - - 19.3 - - 19.3
Transactions with owners:
Dividends on equity shares 6 - - - (150.7) - (150.7)
Share-based payments - - - 1.6 - 1.6
Transactions in own shares - - - (9.8) - (9.8)
Total transactions with owners - - - (158.9) - (158.9)
Total equity at 31 December 2023 15.1 707.7 (10.3) 1,640.0 15.6 2,368.1
Other reserves include the Capital Redemption Reserve of £0.9m (2022: £0.9m)
and the Translation Reserve of £(11.2)m (2022: £46.2m).
Group Statement of Cash Flows
for the year ended 31 December 2023
Note 2023 2022
£m
£m
Cash generated by operations
Adjusted operating profit 320.0 515.1
Exceptional items 2 (35.8) (36.1)
Amortisation of intangible assets arising on acquisition (36.7) (34.3)
Operating profit 247.5 444.7
Adjustments for:
Depreciation and amortisation 126.2 120.7
Fair value movement on contingent consideration - (6.1)
Impairments on intangible assets and property, plant and equipment 22.0 42.2
Impairment of investment 1.5 -
Loss on derivatives 4.6 -
Loss on disposal and write-offs of intangible assets and property, plant and 0.2 0.2
equipment
Net provisions charged 5.6 1.6
Share-based payments (4.2) (11.0)
Non-cash pension expense (4.4) 4.5
Net-monetary adjustment 6.3 -
Cash paid against operating provisions (3.4) (0.8)
Movement in inventories 117.8 (98.1)
Movement in receivables (19.0) (43.3)
Movement in payables (69.7) 7.6
Cash generated by operations 431.0 462.2
Interest paid (24.2) (23.2)
Tax paid (69.3) (130.8)
Net cash generated from operating activities 337.5 308.2
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired (204.3) -
Payment of contingent consideration (9.6) (13.7)
Purchase of property, plant and equipment (180.4) (141.2)
Receipt of government grants 10.9 6.1
Purchase of other intangible assets (8.6) (11.2)
Proceeds from sale of property, plant and equipment 4.0 1.7
Proceeds from business disposal, net of cash in disposed business - 583.6
Tax paid on business disposals (4.6) (4.6)
Settlement of acquisition-related FX derivatives (23.9) -
Cash paid against non-operating provisions (1.6) (1.2)
Interest received 8.3 5.1
Net cash (used in)/generated from investing activities (409.8) 424.6
Cash flows from financing activities
New borrowings 336.0 232.6
Repayment of borrowings (210.9) (614.4)
Payment of lease liabilities (17.0) (17.4)
Acquisition of non-controlling interests - (1.4)
Net transactions in own shares (9.8) (7.3)
Dividends paid to equity shareholders 6 (150.7) (144.4)
Net cash used in financing activities (52.4) (552.3)
Net movement in cash and cash equivalents (124.7) 180.5
Cash and cash equivalents brought forward 281.6 94.3
Exchange differences (6.7) 6.8
Cash and cash equivalents carried forward 150.2 281.6
Cash and cash equivalents carried forward comprise:
Cash at bank and in hand 172.5 320.6
Bank overdrafts (22.3) (39.0)
150.2 281.6
Reconciliation to net debt
Note 2023 2022
£m
£m
Net movement in cash and cash equivalents (124.7) 180.5
Net movement in borrowings and other financial liabilities (108.1) 399.2
Change in net debt from cash flows (232.8) 579.7
Loans in acquired businesses (6.1) -
Non-cash movement in lease liabilities (12.9) (13.4)
Non-cash preference shares reclassification - (1.1)
Exchange differences 9.4 (37.2)
(242.4) 528.0
Net debt brought forward (295.2) (823.2)
Net debt carried forward (537.6) (295.2)
Notes to the Summary Financial Statements
1. Basis of preparation
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.
The financial information set out above does not constitute the Group's
statutory financial statements for the years ended 31 December 2023 or 2022
but is derived from those financial statements. Statutory financial statements
for 2022 have been delivered to the Registrar of Companies and those for 2023
will be delivered following the Company's Annual General Meeting. The auditor
has reported on those financial statements; their reports were unqualified,
did not draw attention to any matters by way of emphasis without qualifying
their report and did not contain statements under s498(2) or (3) of the
Companies Act 2006.
Going concern basis
The consolidated financial statements for the year ended 31 December 2023 have
been prepared on a going concern basis which the Directors believe to be
appropriate for the following reasons:
At 31 December 2023 the Group had £1,050m of committed debt facilities
available from its banking group, USPP bondholders and lease providers, with
principal maturities between 2026 and 2030, of which £381.2m (2022: £579.3m)
was undrawn, together with cash balances of £172.5m (2022: £320.6m). The
Group's debt facilities have funding covenant requirements, principally the
leverage covenant with a maximum level of 3.5x net debt to covenant EBITDA,
and interest cover.
The Directors have reviewed the liquidity and covenant forecasts for the
Group's going concern assessment period covering at least 12 months from the
date of approval of the financial statements. Given the time horizon of these
forecasts, the risk of climate change is not expected to have a material
impact on these forecasts. 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 over 74% to trigger an event
of default as at 30 June 2025. This scenario includes some mitigating actions
to conserve cash, including reducing dividends and capital expenditure.
Throughout this scenario, the Group continues to have significant liquidity
headroom. The Directors do not consider this a plausible scenario. This is
consistent with the bottom-up risk scenario modelling for the long-term
viability statement which considered severe but plausible, individual, and
combined scenarios, none of which trigger an event of default. Accordingly,
the consolidated financial statements have been prepared on a going concern
basis.
Climate change
The Group has long recognised the scale of the climate emergency and considers
this to offer both opportunities and risks in the future. The Group's current
climate change strategy focuses on reducing its carbon footprint and
increasing its use of bio-based raw materials, whilst the benefits in using
its ingredients will enable more carbon to be saved than were emitted through
operations and supply chain.
The impact of climate change has been considered in the preparation of these
financial statements. None of these risks had a material effect on the
consolidated financial statements of the Group. In particular, the Directors
have considered the impact of climate change in respect of the following
areas:
· Going concern and viability of the Group over the next three
years;
· Post-retirement benefit obligations;
· Carrying value and useful economic lives of property, plant and
equipment; and
· The discounted cashflows included in the value in use calculation
used in the annual goodwill impairment testing.
Whilst there is currently no material impact expected from climate change, the
Group is aware of the ever-changing risks related to climate change and will
continue to developing its assessment of the impact on the financial
statements.
Changes in accounting policy
In preparing this financial information, management has used the principal
accounting policies that will be detailed in the Group's Annual Report for
2023 and which are unchanged from the prior year.
(a) New and amended standards adopted by the Group
A number of new amendments to standards and interpretations are effective for
annual periods beginning on or after
1 January 2023 and have been applied in preparing these consolidated financial
statements. None of these had a significant effect on the consolidated
financial statements of the Group.
A detailed risk assessment was performed in relation to IFRS 17 'Insurance
Contracts', including consideration of the captive insurance company, with no
material impact identified to the Group financial statements.
(b) New standards and interpretations not yet adopted
A number of new standards and amendments to standards and interpretations are
effective for annual periods beginning on or after 1 January 2024 and have not
been applied in preparing the consolidated financial statements. The Group is
assessing the impact of these new standards and the Group's financial
reporting will be presented in accordance with these standards from 1 January
2024 or 1 January 2025 as applicable.
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.
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.
2023 2022
£m
£m
Income statement
Revenue
Consumer Care 886.1 897.8
Life Sciences 602.3 682.3
Industrial Specialties 206.1 509.2
Total Group revenue 1,694.5 2,089.3
Adjusted operating profit
Consumer Care 160.3 204.7
Life Sciences 150.3 229.4
Industrial Specialties 9.4 81.0
Total Group operating profit (before exceptional items and amortisation of 320.0 515.1
intangible assets arising on acquisition)
Exceptional items and amortisation of intangible assets arising on acquisition (72.5) (70.4)
Total Group operating profit 247.5 444.7
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.
Europe, Middle East & Africa North Latin Asia Reported
£m
Total
America America £m
£m
£m £m
Revenue 2023
Consumer Care 375.1 189.7 89.4 231.9 886.1
Life Sciences 245.9 167.6 87.7 101.1 602.3
Industrial Specialties 69.2 39.3 8.3 89.3 206.1
Total Group revenue 690.2 396.6 185.4 422.3 1,694.5
Revenue 2022
Consumer Care 353.2 232.5 91.2 220.9 897.8
Life Sciences 297.5 186.1 89.8 108.9 682.3
Industrial Specialties 220.0 111.3 23.1 154.8 509.2
Total Group revenue 870.7 529.9 204.1 484.6 2,089.3
Adjustments
2023 2022
£m
£m
Exceptional items - operating profit
Business acquisition costs (note 12) (9.6) -
Restructuring costs (5.4) -
Goodwill impairment (note 7) (20.8) (34.6)
Property, plant and equipment impairment (note 8) - (7.6)
Fair value movement on contingent consideration - 6.1
Exceptional items - financial costs
Unwind of discount on contingent consideration - (1.7)
Gain on business disposal (note 13) - 356.0
Exceptional items (35.8) 318.2
Amortisation of intangible assets arising on acquisition (36.7) (34.3)
Total adjustments (72.5) 283.9
The exceptional items in the current year relate to a goodwill impairment to
the carrying value of the Chinese SIPO Cash Generating Unit (CGU) in
Industrial Specialties, acquisition costs and restructuring costs associated
with changes to the Group's operating model. The goodwill impairment,
acquisition costs and restructuring costs have all been presented as
exceptional due to their size and one-off nature. The exceptional items in the
prior year related to the gain on business disposal, discount unwind and fair
value adjustment both in respect of contingent consideration, the goodwill
impairment of the Group's Flavours CGU and an impairment relating to the
write-off of unusable manufacturing plant in Japan.
3. Net financial costs
2023 2022
£m
£m
Financial costs
Interest payable on borrowings 20.2 17.4
Interest on lease liabilities 2.6 2.5
Other bank loans and overdrafts 3.1 2.9
Other interest costs - 1.2
Unwind of discount on contingent consideration (exceptional) - 1.7
Preference share dividend 0.1 0.1
26.0 25.8
Financial income
Bank interest receivable and similar income (9.4) (2.7)
Net interest on post-retirement benefits (5.4) (2.4)
(14.8) (5.1)
Net financial costs 11.2 20.7
4. Tax
2023 202
£m
£m
Analysis of tax charge for the year
United Kingdom current tax (1.5) 28.1
Overseas current tax 62.1 100.0
Deferred tax 3.6 (1.4)
64.2 126.7
The effective adjusted corporate tax rate before exceptional items of 23.9%
(2022: 22.8%) is slightly higher than the UK's standard tax rate of 23.5%. The
reported corporate tax rate after exceptional items is 27.2% (2022: 16.2%).
Croda operates in many tax jurisdictions other than the UK, both as a
manufacturer and distributor, with the majority of those jurisdictions having
rates higher than the UK; considerably so in some cases. It is the exposure to
these different tax rates that increases the effective tax rate above the UK
standard rate and also makes it difficult to forecast the Group's future tax
rate with any certainty given the unpredictable nature of exchange rates,
individual economies and tax legislators.
Croda's effective corporate tax rate has also increased as a result of
incurring expenditure which is deemed capital in nature for tax purposes,
including the impairment of goodwill, which is not tax deductible. The factors
increasing the effective tax rate are largely offset by the prior year release
of tax provisions. Otherwise, there are no significant adjustments between the
Group's expected and reported tax charge based on its reported accounting
profit. Given the global nature of the Group, and the number of associated
cross-border transactions between connected parties, we are exposed to
potential adjustments to the price charged for those transactions by tax
authorities. However, the Group carries appropriate provisions relating to the
level of risk.
5. Earnings per share
2023 2022
pence
pence
Adjusted earnings per share 167.6 272.0
Impact of exceptional items, amortisation of intangible assets arising on (45.1) 193.8
acquisition and the tax thereon
Basic earnings per share 122.5 465.8
6. Dividends paid
Pence per 2023 Pence per 2022
share
£m
share
£m
Ordinary
Interim
2022 interim, paid October 2022 - - 47.0 65.6
2023 interim, paid October 2023 47.0 65.6 - -
Final
2021 final, paid June 2022 - - 56.5 78.8
2022 final, paid May 2023 61.0 85.1 - -
108.0 150.7 103.5 144.4
The Directors are recommending a final dividend of 62.0p per share amounting
to a total of £86.5m in respect of the financial year ended 31 December 2023.
Subject to shareholder approval, the dividend will be paid on 29 May 2024 to
shareholders registered on 19 April 2024. The total proposed dividend for the
year ended 31 December 2023 will be 109.0p per share amounting to £152.1m.
7. Intangible assets
2023 2022
£m
£m
Opening net book amount 1,253.2 1,271.6
Exchange differences (24.7) 62.6
Additions 8.8 11.0
Acquisitions 233.8 -
Disposals and write offs (1.0) (20.5)
Reclassifications from property, plant and equipment 0.2 0.4
Amortisation charge for the year (41.0) (37.3)
Impairments (20.8) (34.6)
Closing net book amount 1,408.5 1,253.2
During the year an impairment of £20.8m was recorded in relation to goodwill
arising on the acquisition of Sipo. 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. This impairment is recorded in the
income statement as an exceptional item within operating costs and is within
the Industrial Specialties operating business segment. Intangible asset
amortisation is also recorded in operating costs. During the prior year,
goodwill was impaired by £34.6m. This impairment was recorded in the income
statement as an exceptional item within operating costs and was within the
Consumer Care operating business segment.
8. Property, plant and equipment
2023 2022
£m
£m
Opening net book amount 964.5 988.1
Exchange differences (37.4) 72.3
Additions 181.1 135.9
Acquisitions 9.2 -
Disposals and write offs (2.3) (155.2)
Reclassifications to intangible assets (0.2) (0.4)
Depreciation charge for the year (69.7) (68.6)
Impairments (1.2) (7.6)
Closing net book amount 1,044.0 964.5
During the year the Group recognised government grant funding of £18.3m
(2022: £6.1m) relating to the US cGMP scale up project and UK Pharma
production capacity expansion project. Grant income is deducted from the cost
of the associated asset within the additions line above. Also, during the year
plant and equipment was impaired by £1.2m. This impairment is recorded in the
income statement as a non-exceptional item within operating costs. During the
prior year, plant and equipment was impaired by £7.6m relating to the
write-off of unusable manufacturing plant in Japan. This impairment was
recorded in the income statement as an exceptional item within operating costs
and was within the Consumer Care (£5.0m) and Life Sciences (£2.6m) operating
business segments.
9. Significant accounting judgements and estimates
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 significant if it has a
significant effect on the amounts recognised in the financial statements or if
the estimates have a risk of material adjustment to assets and liabilities
within the next financial year.
The significant 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
£19.3m FX loss being deferred in other comprehensive income, and subsequently
reclassified to goodwill, rather than being recognised in the income
statement. During the year, a hedge ineffectiveness loss of £4.6m was
recognised in the income statement within administrative expenses and reported
as an exceptional item as part of business acquisition costs. The forward
contract was settled during the year resulting in a cash outflow of £23.9m.
The significant accounting estimates 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. Year-end 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 significant
accounting estimate specifically relates to the Group's UK scheme, given the
size of the liabilities and their sensitivity to underlying assumptions,
including the impact of climate change on life expectancy. Small changes in
these assumptions could result in a material adjustment to carrying values in
the next financial year.
2023 2022
£m
£m
Opening net retirement benefit surplus 100.1 7.9
Current service cost (10.0) (16.2)
Net interest income 5.4 2.4
Employer contributions 14.2 11.5
Benefits paid 0.2 0.2
Past service cost - 3.9
Remeasurements (23.3) 88.9
Acquisitions (0.4) -
Business disposal 0.5 1.5
Closing net retirement benefit surplus 86.7 100.1
Total market value of assets 967.1 969.3
Present value of scheme liabilities (867.3) (858.4)
Net pension plan asset 99.8 110.9
Post-employment medical benefits (13.1) (10.8)
Net retirement benefit surplus 86.7 100.1
Analysed in the balance sheet as:
Retirement benefit assets 113.5 123.2
Retirement benefit liabilities (26.8) (23.1)
Net retirement benefit surplus 86.7 100.1
The sensitivity of the defined benefit obligation to changes in the
significant assumptions is as follows:
Impact on retirement benefit obligation
Sensitivity Of increase Of decrease
Discount rate 0.5% -6.3% 7.1%
Inflation rate 0.5% 4.4% -4.5%
Mortality (assumes a one-year change in life expectancy) 1 year 4.0% -4.1%
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions, the same method (present value of the defined benefit
obligation calculated with the projected unit credit method at the end of the
reporting year) has been applied as when calculating the retirement benefit
obligation recognised in the Group balance sheet.
Goodwill impairment
Management are required to undertake an annual test for impairment of
indefinite lived assets such as goodwill. Accordingly, the Group tests
annually whether goodwill has suffered any impairment by comparing the
carrying value of the underlying Cash Generating Units ('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:
· Cash flow projections - based on management's most recent
risk-adjusted view of future trading specific to the individual CGU, with
assumptions on term and EBITDA growth (calculated as operating profit before
depreciation and amortisation) as a result of fluctuating revenue and
operating margins through the ability to pass on future raw material price
increases.
· Terminal value growth in EBITDA- 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%.
· Discount rate - set using a weighted average cost of capital
adjusted for the specific risk profile of each CGU.
The significant accounting estimate relates to the goodwill impairment review
of the Flavours and Croda Korea CGUs. Given the impairment charge reported in
the prior year the Flavours CGU has low headroom. The recoverable amount, and
therefore level of headroom, is predominantly dependent upon judgements used
in arriving at these key assumptions. The assumptions selected and
associated sensitivity analysis are disclosed below. Although it is not
management's current expectation, these sensitivities provide the impact on
the recoverable amount when applying a reasonably possible change in the
assumptions. The goodwill impairment review of Croda Korea CGU represents a
further source of significant estimation uncertainty due to the proximity of
acquisition and resultant low level of headroom. Post-acquisition trading is
in line with expectations. Given the size of the goodwill balances and the
carrying values' sensitivity to the underlying assumptions, small changes
could result in a material adjustment to the carrying values in the next
financial year.
Assumption Sensitivity Increase Decrease
% % £m £m
Flavours
Headroom / (Impairment charge): £4m (2022: £(35)m)
Incremental increase/(decrease) in recoverable amount
Change in EBITDA compound annual growth rate by: 18.5% 5.0% 44.6 (39.7)
Change in terminal value growth rates by: 3.0% 1.0% 21.7 (16.3)
Change in pre-tax discount rate by: 12.3% 1.0% (17.7) 22.1
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. The Directors consider these sensitivities to be reasonably
possible for Flavours.
10. 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.
These summary financial statements do not include all financial risk
management information; full disclosures will be available in the Group's
annual financial statements for the year ended 31 December 2023.
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, other investments and lease
liabilities, 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 continent 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.
In January 2020 the existing US$100m fixed rate 10 year note matured and was
repaid, this was replaced with a new US$100m fixed rate 10 year note (27
January 2020). On 27 June 2016, the Group issued £100m (£70m and £30m) and
€100m (€70m and €30m) of fixed rate notes. On 6 June 2019, the Group
issued a further £65m, €50m and US$60m of fixed rate notes. In June 2023,
the existing £30m and €30m fixed rate 7 year notes matured and were repaid.
The table below details a comparison of the Group's financial assets and
liabilities where book values and fair values differ.
Book Fair Book Fair
value
value
value
value
2023
2023
2022
2022
£m
£m
£m
£m
US$100m 3.75% fixed rate 10 year note (78.5) (71.5) (83.0) (74.4)
€30m 1.08% fixed rate 7 year note - - (26.5) (26.3)
€70m 1.43% fixed rate 10 year note (60.8) (58.2) (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) (66.1) (70.0) (64.8)
€50m 1.18% fixed rate 8 year note (43.5) (40.9) (44.2) (40.1)
£65m 2.46% fixed rate 8 year note (65.0) (59.8) (65.0) (58.1)
US$60m 3.70% fixed rate 10 year note (47.1) (43.7) (49.8) (45.4)
11. Related party transactions
The Group has no related party transactions, with the exception of
remuneration paid to key management and Directors.
12. Business combinations
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 cash consideration of
£227.4m. 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.
Post-acquisition the entity has changed its name to Croda Korea Ltd.
Acquisition-related costs of £9.6m have been charged to administrative
expenses in the income statement for the year ended 31 December 2023 (2022:
£nil). Post-acquisition, Solus contributed revenue of £13.3m and adjusted
operating profit of £0.4m. Had the acquisition been made on 1 January 2023,
the Group's revenue would have been £1,707.9m with adjusted operating profit
of £320.9m.
The following table summarises the Directors' assessment of the consideration
paid in respect of the acquisition, and the fair value of assets acquired and
liabilities assumed.
£m
Cash consideration 227.4
Fair value of assets and liabilities acquired
Intangible assets 104.3
Property, plant & equipment 9.2
Right of use assets 0.9
Lease liabilities (1.0)
Cash 3.8
Borrowings (6.1)
Working capital 8.4
Retirement benefit liabilities (0.4)
Deferred tax (21.2)
Total identifiable net assets 97.9
Goodwill 129.5
13. Business disposal
On 30 June 2022, the Group completed the disposal of the majority of its
Performance Technologies and Industrial Chemicals business for cash
consideration of £651.0m. The divested business comprised four manufacturing
facilities, together with associated laboratory facilities and sales
operations, and formed part of Croda's integrated operating model prior to
disposal. The following table summarises the effect of the disposal on the
Group's consolidated financial statements.
£m
Cash consideration received 651.0
Intercompany settlement (24.1)
626.9
Net assets of the divested business (262.6)
Associated transactions and costs
Pension curtailment gain 3.9
Disposal and separation costs (33.9)
Foreign exchange gains 6.9
Reclassification of currency translation 14.8
Gain on business disposal before tax 356.0
Income tax on business disposal (21.5)
Gain on business disposal after tax 334.5
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