Croda International H1 2025 Earnings Report

Croda International EPS Results

• Actual EPS: GBX 72.20
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Croda International Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Croda International Announcement Details

• Quarter: H1 2025
• Date: 7/29/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, July 29, 2025
• Conference Call Time: 4:00AM ET

Founded in 1925 with the aim of turning bio-based raw materials into innovative ingredients, Croda International (LON:CRDA) is a speciality chemicals company focused on consumer care and life sciences markets. The company is focused on creating, making and selling innovative ingredients that deliver real benefits to a diverse range of customers and employs more than 6,000 people around the world. Sustainability is a core part of the Groups strategy with a commitment to be Climate, Land and People positive by 2030. For more information visit https://www.croda.com/en-gb/investors.

Croda International H1 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: H1 results were in line with expectations, with group sales up 7%, adjusted operating profit up 12%, and full-year guidance left unchanged.
• Negative Sentiment: Free cash flow was only £34m as high inventories and working capital outflows weighed on liquidity, despite conservative net debt at 1.5× EBITDA.
• Positive Sentiment: CFO raised the savings target from £40m to £100m of annualized cost reductions by 2027, backed by operations, procurement and portfolio simplification.
• Neutral Sentiment: Market dynamics remain mixed: beauty volumes are resilient outside North America, pharma growth of 5% faces U.S. regulatory headwinds, while agriculture sales jumped 13%.
• Positive Sentiment: Pursuing strategic growth initiatives—ceramide sales +50%, new surfactant plant in India, a refocused pharma “Project Flagship” and innovation in vegan actives like Cura Bio.

Presentation

[Steve Foots, CEO at Croda International]

Good morning everyone. Many thanks for joining us here at the London Stock Exchange today and a warm welcome to everyone online as well. I'm here with Stephen Oxley, our CFO, who has been on board since the start of April. Stephen's been a great addition to the team and hit the ground running, not least in helping us to push forward our plan to grow earnings and improve returns. More on that shortly. In terms of the agenda, the normal outline from us today is set out in the slide up there. Stephen and I will run through our performance and the progress we've made with our five-point plan before stopping to take your questions. Starting with some of the key highlights from the half, overall, our financial performance was very much in line with our expectations at the start of the year.

[Steve Foots, CEO at Croda International]

The second quarter moderated slightly versus the first, but group sales increased by 7% in the first half. Sales grew in all three businesses and in all regions. A strong improvement in volumes across the board more than offset a modest reduction in price mix, leading to a healthy increase in both adjusted operating profit and profit before tax. Whilst we're mindful of the challenging environment, our guidance for the full year remains unchanged. Despite delivering good sales growth in the first half year, we remain a long way off from where we want the business to be. Executing the five-point plan we introduced in February has been our major focus. Our actions are helping us navigate this current environment, simplifying and modernizing our business and speeding up our efforts to enhance margins.

[Steve Foots, CEO at Croda International]

We have accelerated our plans, in particular identifying a further GBP 60 million of cost savings, taking the total to GBP 100 million of annualized savings by the end of 2027. There is much more to do, but our strategic and operational focus is creating a stable, stronger platform from which to improve earnings and returns going forward. Turning to some of the trends that we're seeing across our core markets, as you'd expect, the environment continues to be tough, starting with beauty, which has remained resilient with growth across all markets, excluding North America. As you can see from this chart on the left, political uncertainty in the U.S. has had a negative impact on consumer confidence. We've seen some evidence of U.S. consumers trading down, particularly in Beauty Actives, which is more exposed to the premium end of customer products.

[Steve Foots, CEO at Croda International]

Beauty sales combining actives and care were up 3% with demand still strongest in Asia, drop driven by local and regional customers. In Pharma, customer confidence has been adversely impacted by policy decisions in the U.S., with approval processes slowing and more limited public funding impacting some areas. Pharma sales were up 5% and in agriculture, improved demand has been supported by lower but stable crop commodity prices and lower inventories. At our big four Crop Science customers who've been buying again, crop and seed sales combined were up 13% driven by good demand, especially in Europe. Overall, whilst we delivered a good sales performance, we cannot assume that our markets will pick up anytime soon, which is why we're accelerating this five-point plan.

[Steve Foots, CEO at Croda International]

I'll come back to talk about some of these actions in a moment, but first let me hand over to Stephen to run through the numbers in more detail. Stephen.

[Stephen Oxley, CFO at Croda International]

Thanks Steve. Good morning everybody. It's great to be here for my first results presentation at Croda and to be able to report a solid performance despite challenging market conditions. I'll start with the financial headlines. In constant currency, sales were up 7% at GBP 856 million. Adjusted operating profit was up 12% at GBP 147 million. Adjusted profit before tax also grew at 12% to GBP 138 million. Reported profit before tax of GBP 85.5 million includes a GBP 7 million exceptional restructuring charge, GBP 18 million for the amortization of acquired intangibles, and a GBP 27 million impairment charge which includes GBP 22 million as a result of a recent decision to rationalize our warehousing in Europe. Free cash flow was GBP 34 million as a result of higher working capital and net debt was GBP 580 million after payment of the 2024 final dividend.

[Stephen Oxley, CFO at Croda International]

Leverage remains conservative at 1.5 times EBITDA and we've declared an interim dividend of GBP 0.48, a slight increase on the prior year. Turning first to sales, when my comparisons are in constant currency, we delivered sales growth across all businesses and all regions. Volumes were up 11% as we drove strong growth in each of our businesses. Price mix was 4% lower as we selectively reduced prices to regain share at the bottom end of our agriculture and beauty care portfolios. The average cost of raw materials was broadly flat. Looking at sales by region, Europe led the way with sales up 12% reflecting a strong performance in both Consumer Care and Life Sciences. Asia continued to perform well, increasing 6%. North American sales were up 3% impacted by tougher consumer spending as you just heard from Steve. Latin America grew 5%.

[Stephen Oxley, CFO at Croda International]

Turning to sales performance by quarter, you'll recall first half sales, first quarter sales growth was particularly strong at 9%. In the second quarter there was a more normalized rate of 6% as the political and economic environment became less predictable. Sales growth in Consumer Care continued to hold up well at 7%. Life Sciences was up 6% after double-digit growth in the first quarter due to the crop rebound. In Europe, Industrial Specialties grew 2% in the second quarter after a good first quarter. Looking at the performance of each business, Consumer Care sales grew 7%. This comprised an increase in volumes of 9% and a reduction in price mix of 2%. Sales to local and regional customers were up 11% as they continue to output. The market by business unit, Fragrances and Flavours, continues to be the standout performer, growing ahead of its underlying markets at 17%.

[Stephen Oxley, CFO at Croda International]

Beauty Care is the largest business within Consumer Care, where sales were up 3%. Volumes in Beauty Care were 8% higher, but price mix was 5% lower as we selectively reduced prices to win business in the bottom end of our 20. The bottom 20% of our Beauty Care portfolio, Beauty Actives, grew 1% as a good performance in Asia was offset by North America, where demand for our customers' premium products weakened as consumers traded down. Adjusted operating profit of GBP 86 million was up 7%, with an operating margin of 17.4%, broadly in line with the prior year. While margin did benefit from volume growth and cost initiatives, it was impacted by mix due to the relative outperformance of Fragrances and Flavours and Home Care. In Life Sciences, sales grew 9% to GBP 261 million. Volumes were up 16%, with price mix down 7%.

[Stephen Oxley, CFO at Croda International]

As you can see, growth was driven by our agriculture businesses, where Seed Enhancement benefited from strong vegetable demand and there was good demand for Crop Protection, especially in Europe. Pharma sales grew 5%. The recovery in consumer health continues, and in biopharma, sales grew in lipids for drug research and excipients for protein-based drugs. There is no doubt that the U.S. regulatory environment is creating uncertainty, which is likely to continue for the foreseeable future. Life Sciences' adjusted operating profit was up 30% to GBP 56 million, with higher operating margin improving from 18.3% to 21.5%, mainly due to higher volumes. Finally, sales in Industrial Specialties were up 4% at GBP 103 million, with volume growth of 10% partly offset by price mix of 6%. Direct sales were up 12%, while sales through Cargill, which we don't control, were down 16%.

[Stephen Oxley, CFO at Croda International]

Turning now to operating margin, this chart shows how operating margin increased from 16.6% to 17.2% year on year. You can see here the 11% increase in sales volumes contributed to a 3.8% increase in margin as we regained share. This was partially offset by the impact of price mix, the majority of which was price, as well as currency with the strengthening of sterling. As expected, the early benefit from cost savings offset the impact of inflation and the incremental cost of recent investments. We said in February that we'll deliver GBP 25 million of cost savings this year, that will be an equal mix of payroll.

[Stephen Oxley, CFO at Croda International]

Savings and lower operating costs.

[Stephen Oxley, CFO at Croda International]

We're on track to reach our target, and this delivered a benefit in the first half to profits of GBP 10 million. We have identified opportunities for much greater.

[Stephen Oxley, CFO at Croda International]

Savings and efficiencies which I'll come back to later.

[Stephen Oxley, CFO at Croda International]

Looking now at debt, as you can see there was a working capital outflow of GBP 61 million compared to an inflow in the prior year when we benefited from a large payment from Pfizer.

[Stephen Oxley, CFO at Croda International]

Was our Covid receivable.

[Stephen Oxley, CFO at Croda International]

Given our good sales growth, we would expect some working capital outflow, in particular at FNF, which has longer collection terms. Nevertheless, we need to improve our working capital management as inventory levels are higher than expected. Net debt increased to GBP 580 million or 1.5 times EBITDA, the middle of our stated range. Capital expenditure was GBP 60 million and our full year guidance for CapEx remains at GBP 135 million. After paying the final dividend, there was a net cash outflow of GBP 61 million. Turning now to our capital allocation framework, I don't want to make any changes to the framework, but we will apply it with greater rigor. We have four clear priorities. First is organic investment, where there's been a period of heightened intensity including the pharma investment program.

[Stephen Oxley, CFO at Croda International]

We expect CapEx to continue to reduce as a percentage of sales from 2026 onwards and I intend to bring a strong focus to returns, risk, and execution to the process of appraising capital investment. In particular, future CapEx decisions will prioritize opportunities for faster cash payback. Second, we remain committed to growing the dividend. Third is M&A and after significant activity in recent years, our focus now is on driving greater returns from these investments and across the whole portfolio. We'll continue to look at small technology-led bolt-on acquisitions, but any spend here will be modest, in other words, a few million. Fourth, we will maintain net debt within the range of 1-2 times EBITDA so we can return surplus cash to shareholders over time. Finally, I want to reiterate our full year guidance.

[Stephen Oxley, CFO at Croda International]

Despite operating in an uncertain political and economic environment, our performance in the first.

[Stephen Oxley, CFO at Croda International]

Half was in line with our expectations.

[Stephen Oxley, CFO at Croda International]

Our full year guidance is unchanged. We continue to expect adjusted profit before tax of between GBP 265 million and GBP 295 million in constant currency. There was a negative impact from currency translation of GBP 4.5 million in the first half, and based on current exchange rates we would expect the.

[Stephen Oxley, CFO at Croda International]

Full year impact to be around GBP 10 million.

[Stephen Oxley, CFO at Croda International]

With that, I'll hand back to Steve.

[Steve Foots, CEO at Croda International]

Great. Many thanks, Stephen. As I mentioned at the start, we've made good progress with our five-point plan to improve earnings and returns. Our actions are enabling us to navigate a more challenging macro environment, and they're also strengthening Croda International for the future, making sure we can grow faster with a simpler, more efficient, and effective organization. I'm going to run through the three points along the top of this slide, the areas that we're focused on to drive growth, and Stephen will then pick up on what we're doing to maximize efficiency as well. Our first priority is to maximize returns from our portfolio following a period of peak investment. We must get much more out from our recent investments than we currently. The plan to increase growth is company-wide, but let me highlight three examples on the slide of where we're taking action.

[Steve Foots, CEO at Croda International]

Starting on the left, our portfolio of ceramides came to us through the acquisition of Solus in 2023 and offers significant sales growth and margin potential everywhere. When you see fast-growing brands boasting rapid moisturization or even skin barrier protection, their products are very likely to contain the ceramide. So far, commercialization has taken longer than we would have liked. To address this, we've now rapidly exited all distribution agreements, and our global sales network is selling ceramides in every location around the world. We're supporting them by doing things like upgrading the technical data packages for existing ceramides, essential information for new customers, and leveraging our R&D and formulation expertise to develop new actives and mechanisms to deliver ceramides to the skin. Our actions are starting to have encouraging results, with ceramide sales up 50% in the first half, albeit from a pretty low base.

[Steve Foots, CEO at Croda International]

Sales have grown in all regions, from the most well-known beauty multinationals to a lot of smaller on-trend brands. We've got a great pipeline of new products, having recently launched a ceramide for stronger hair, one of the first applications anywhere in the world beyond skin care. Turning to pharma, our eyes have been off our heritage business whilst we've been ramping up biopharma. We're increasing our focus on selling ingredients for consumer health and veterinary applications. Progress that has been accelerated by Thomas Riermeier , who joined us from Evonik in April to lead our Life Sciences business, and under his leadership we've initiated Project Flagship to reinvigorate sales into over-the-counter consumer health products. Reprioritizing resources and generating new claims data, initially for topical and oral delivery applications, is helping us regain share, delivering 10% sales growth in consumer health and three consecutive quarters of steady progress.

[Steve Foots, CEO at Croda International]

Finally, on the right, whilst expansion in emerging markets has been a focus for us for the best part of a decade, like many peers, we have more manufacturing in Europe and North America than we do in Asia. We're continuing to shift our footprint towards fast-growth countries, particularly in Asia, where Consumer Care sales grew 8%, and in half two, we're commissioning a new surfactant plant in India where Consumer Care sales grew 30% in the first half of the year. Our second priority is leveraging our proximity to local and regional customers. You've heard that a lot before from Croda. They're innovating faster and winning market share. We've seen that for some time now, and that market data supports that that will continue. Given the pace at which they're growing, there is more we can do.

[Steve Foots, CEO at Croda International]

Investing in our footprint to get closer to our customers has been a key part of our strategy for some time, particularly in higher-growth markets. In Beauty, we're seeing the rise of regional giants. Companies like Boticario, Koala in Brazil, Armour in Egypt, Colmar in Korea, and Milbon in Japan. We are replicating our successful China model to help these key players in the market grow. In Consumer Care, our sales to local and regional customers increased 11% in constant currency, and they now represent 81% of sales, up from 72% in 2019. We are seeing structural change in our customer base in the industry. By the way, this trend doesn't mean we're turning our backs on multinational customers. Far from it. They continue to drive premium innovation, and maintaining our strong relationships is really important.

[Steve Foots, CEO at Croda International]

We do have to respond to increasingly diverse markets, and that is what we've been doing. Turning to pharma, then, Asia is becoming increasingly important for future growth. China alone now accounts for 30% of drugs in development globally. 30%. Korea and Japan are also in the top 10. Following efforts spanning many years to register our broad portfolio of pharma ingredients with the Chinese pharmacopeia, Croda Pharma sales in China have grown double-digit percentage CAGR since 2020. We are implementing further actions to strengthen our presence in all regions that are important for drug development globally. In Crop Protection, our strategy continues to prioritize building relationships with smaller tier 2 and 3 customers, particularly in Latin America and Asia. That is where we're seeing the most opportunity and hunger for innovation.

[Steve Foots, CEO at Croda International]

In Crop Protection, we saw sales to local and regional customers increase 11% in constant currency, and they now represent 56% of sales compared to 44% in 2019. Finally, the third priority to support growth is stepping up our innovation. This is both to address the gap created in the aftermath of the pandemic when customers were focused on marketing existing brands rather than developing new products, and to respond to the continued diversification of the customer base. In Beauty, we focus more R&D resource on customer-led projects, individual specific projects which drive sales at good margins and help us create new ingredients. PEG-free variants of our existing product range are an example of bespoke ingredients created in this way. This approach is particularly effective in more mature markets where collaborative innovation is on the increase.

[Steve Foots, CEO at Croda International]

Renewed customer demand and increasing innovation are reflected in increased sample activity for samples of our innovative ingredients, up 12% CAGR in Beauty Actives and 8% in Beauty Care over the last two years. Good leading indicators of activity and insight generated through closer relationships helped us identify a gap in the market for a non-animal version of keratin that can be used for deep conditioning of hair, particularly in professional salons. This resulted in us launching Kurabayo, a vegan-friendly bond builder for hair and a great example of us commercializing biotech to enhance our portfolio differentiation. In Pharma, with Thomas Enroll, we're increasing focus on our core ingredients and broadening our priority market segments into areas such as generics. Through the acquisition of Avanti in 2020, we acquired a portfolio of more than 2,000 lipids and a brand that is recognized by research customers globally.

[Steve Foots, CEO at Croda International]

We have since expanded the portfolio through both R&D and partnerships, launching 130 more products so far this year and partnering with Certest to provide our customers access to their proprietary ionizable lipid range. Overall, lipids for drug research have grown double-digit percentage CAGR over the last five years. Another one of our core capabilities is specialty excipients. This has been enhanced by the commissioning of a novel super refining process at one of our U.K. sites. This is proprietary to Croda, extending our leading position. One of our new super-refined ingredients is an aid to cell culture media, which has been very fast. We've seen a very fast uptake for a new product, so good progress across those three priority areas to drive sales growth and our foot is firmly on the pedal to do much more. Stephen, over to you to run through the Efficiency program.

[Stephen Oxley, CFO at Croda International]

Thanks, Steve. The transformation program is designed to.

[Stephen Oxley, CFO at Croda International]

Deliver the full value of the business.

[Stephen Oxley, CFO at Croda International]

By driving better execution, greater cost efficiency.

[Stephen Oxley, CFO at Croda International]

Improved customer experience.

[Stephen Oxley, CFO at Croda International]

The program is broad based with individual work streams reviewed and approved by the Executive and the Board. There's a detailed action plan underlying each work stream with clear milestones that we'll track regularly and report progress on. We have an appropriately resourced project management team led by a newly appointed Transformation Director with clear accountability for delivery. We aim to transform the business in the following ways. First, by delivering commercial excellence, we're reducing the complexity of our product portfolio and customer base as well as optimizing pricing. Together with improved account management and customer service, this will support sales growth and improved margin. Second, there's a significant opportunity to drive operational and supply chain excellence. We're fast tracking an improvement program to each of our 11 shared manufacturing sites, as well as optimizing manufacturing, warehousing, and.

[Stephen Oxley, CFO at Croda International]

Our logistics footprint.

[Stephen Oxley, CFO at Croda International]

Third, we're improving direct and indirect procurement, almost all of which is currently decentralized at a local or regional level. Fourth, we're reducing management layers and making headcount savings to reduce employee costs, which represent around a third of our cost base. We're also globalizing our enabling functions such as IT, finance, and HR, which have largely been established bottom up, with individual countries and regions deciding the resources that they need. Our initial efficiency program was scoped to deliver GBP 25 million of savings this year, with a further GBP 15 million in 2026, amounting to GBP 40 million in total over two years. As a result of the initiatives that I've just outlined, we are more than doubling our cost savings target to deliver annualized savings of GBP 100 million by the end of 2027, representing around 8% of our 2024 cost base. This excludes benefits from driving commercial excellence.

[Stephen Oxley, CFO at Croda International]

The contribution we expect from each work stream is set out on the slide here, and as you can see, the biggest benefits are expected to come from optimizing operations and procurement. The phasing of these savings builds over the three years, though some of this will of course be offset by inflation. The estimated cash cost of the program will be in the region of GBP 80 million, which we will take as an exceptional item charged over the three years. There will likely be additional non-cash charges, including further impairments as we review our production and distribution assets, our cost base, and working capital. For example, as I mentioned earlier, we've already recorded an impairment charge of GBP 22 million in the first half following a.

[Stephen Oxley, CFO at Croda International]

Decision to rationalize our European warehousing.

[Stephen Oxley, CFO at Croda International]

Overall, this program will improve profitability, offset inflation, and help mitigate any risk to sales growth from the continued macroeconomic uncertainty. Next, I want to turn to the actions that we're taking to optimize capacity.

[Stephen Oxley, CFO at Croda International]

Across our production and distribution network.

[Stephen Oxley, CFO at Croda International]

Our 11 shared manufacturing sites each comprise four or five core processes and account for approximately 70% of volumes and 60% of group sales. They manufacture ingredients for Beauty Care, Crop Protection, and Industrial Specialties as well as Consumer Health. First half volumes were up 8% year on year in Beauty Care, 18% in Crop Protection, and 10% in Industrial Specialties, all of which is a great outcome. As a result, volumes at these shared sites improved to 92% of the pre-COVID 2019 baseline with stable gross margins overall. We expect to be back to 100% of the baseline towards the end of 2026. This information is helpful to understand drivers of profitability in the business. We actually have more than 40 manufacturing sites across Croda and most of our costs are not associated with these 11 shared sites.

[Stephen Oxley, CFO at Croda International]

Our operational excellence and footprint work streams are focused on optimizing production and distribution across Croda as a whole with the aim of maximizing profitability and ensuring capacity for growth. In short, our Croda-wide transformation plan is designed to deliver growth and more than double our ambition on cost savings in order to substantially improve both operating margin and returns on capital. With that, Steve, hand back to you.

[Steve Foots, CEO at Croda International]

Okay, thanks, Stephen. In summary then, we've delivered good growth in the first half and our full year guidance is unchanged. Despite this uncertain economic environment, we still remain a long way off from where we want Croda to be and we're taking action to drive sales growth and profit margins. The Chief Executive remains restless and at the heart of this business is a strong portfolio and we're working hard to maximize its strength and drive value, leveraging our proximity to local and regional customers. They continue to prosper and we're expanding innovation, getting it back to historical levels by doing what we do best. The demand environment will improve, but we're not waiting for that. We are driving further efficiencies to navigate the challenges, and are also simplifying and modernizing our approach in all areas.

[Steve Foots, CEO at Croda International]

Margins are benefiting from volume growth and optimizing our capacity is a critical priority. Ultimately, all of our actions are targeting improving returns, getting more from the investments that we've made and focusing harder on working capital and being more disciplined to enhance return on invested capital too. There is much more to do, but our strategic and operational focus is creating a stable, stronger platform for further progress. Let me stop there and hand over to take your questions.

[David Bishop, Director of Investor Relations and Corporate Affairs at Croda International]

Good morning everybody. For the Q&A, we'll prioritize covering analysts in the room. When Steve invites you to ask a question, please wait for the mic and then give your name and covering institution. We'll also take Q&A over the webcast. Please type your question into the webcast player and I'll ask the question on your behalf.

[David Bishop, Director of Investor Relations and Corporate Affairs at Croda International]

Steve.

[Steve Foots, CEO at Croda International]

Charles, first up.

[Charles Eden, Analyst at UBS]

Hi, good morning. Charles Eden from UBS. Two questions for me please. Firstly, on the free cash flow, as you highlighted, inventories looked a little high in the first half or at the end of the first half. Do you have an inventory days ambition or working capital days ambition in mind? If that's not something you want to share at this point, could you talk about the levers you intend to pull to drive efficiency here? Is it more efficient systems to monitor inventory levels and drive timely receivable collection? Is it ensuring tighter accountability from site and business leads? Any sort of color on that would be helpful. My second question is on the commercial excellence opportunity. Is it fair to assume this is primarily focused on top line rather than cost reduction?

[Charles Eden, Analyst at UBS]

Could you perhaps talk a little bit about the specific areas you're targeting for this opportunity and qualitatively what benefits that can bring to Croda International?

[Steve Foots, CEO at Croda International]

Great, thanks, Charles. Steve, why don't you go for the first question and I'll come back on the commercial excellence.

[Stephen Oxley, CFO at Croda International]

Yeah, yeah.

[Stephen Oxley, CFO at Croda International]

Charles, let me deal with the working capital. It's a great question and a great series of answers.

[Stephen Oxley, CFO at Croda International]

It's all of the above. What's happened in the first half?

[Stephen Oxley, CFO at Croda International]

Inventory has built, and if you go through that, there's lots of very rational examples as to why that's the case.

[Stephen Oxley, CFO at Croda International]

Pre-tariff build, pre-stock ahead of sale.

[Stephen Oxley, CFO at Croda International]

It all looks very sensible.

[Stephen Oxley, CFO at Croda International]

If I stand back, the overall.

[Stephen Oxley, CFO at Croda International]

Inventory levels to me are too high.

[Stephen Oxley, CFO at Croda International]

Okay, we've got to get that down. The focus at the moment is on.

[Stephen Oxley, CFO at Croda International]

Transformation and growth and cost. Very quickly, I want to turn to working capital and I see opportunity everywhere.

[Stephen Oxley, CFO at Croda International]

If you think about some of those transformation programs.

[Stephen Oxley, CFO at Croda International]

Operational excellence as we look at.

[Stephen Oxley, CFO at Croda International]

Warehousing and logistics that will enable us.

[Stephen Oxley, CFO at Croda International]

To squeeze inventory down, the same on rationalizing the product list and SKU list.

[Stephen Oxley, CFO at Croda International]

There is opportunity everywhere. We'll get that right, we'll put the customer first. I think there's a great opportunity.

[Stephen Oxley, CFO at Croda International]

Across all of the areas of working capital, including inventory optimizing, receivables, and looking at our payment terms.

[Steve Foots, CEO at Croda International]

On the commercial excellence, we've been doing a lot of work with Deep Dive update our five year strategy and we're looking at all parts of the business. I mean, one thing that's coming out is that we supply thousands of products to thousands of customers. There's an opportunity to simplify around the edges. We have a profitable tail, as you expect because we're a distribution company that's vertically integrated to manufacture with big R&D in the middle. There's an opportunity in the tail to be much more profitable as well. I think the area of focus there is customer and product profitability, really looking in at a level of detail we haven't before and simplifying the number of SKUs at the complex area of the business. That's really around the edges. That's not changing the model.

[Steve Foots, CEO at Croda International]

It's just good practice, lowering the cost to serve with some of these smaller customers. Can we get them more online in our systems and also taking a different view with minimum order charges and also things like pricing as well to maximize the benefit? Some of these customers have been there for quite some time. The heart of the commercial excellence program is that. Sitting on top of that is also scaling up capabilities in some areas. As we're seeing local and regional customers expand everywhere, it's making sure our skill sets in every country, not probably the obvious ones because we've got that there, but in these emerging countries, Middle East, Africa, parts of Latin America, where you get entrepreneurial businesses starting up, making sure that our skill sets are right there as well.

[Steve Foots, CEO at Croda International]

We think this is structural with local and regional, so building capability to serve those better as well. It's all around that. You'll hear more around that coming forward, particularly as we go into next year. It's about simplification and adding value, adding value commercially.

[Charles Eden, Analyst at UBS]

Thank you.

[Steve Foots, CEO at Croda International]

Sebastian, last in.

[Sebastian Bray, Analyst at Berenberg Bank]

Thank you. Good morning everybody. Sebastian Bray from Berenberg Bank. Could I start with one on group utilization rates, please? I think the group has previously indicated that it was in the mid-80% prior to the pandemic. Striking. If I take the indexed figures for the shared sites shown on the slides, it basically implies it's somewhere in the high 70% as at the end of Q2. This excludes the 30% or so of facilities outside the top 11 sites. The temptation is, from an analyst perspective, just to say, okay, the whole group behaves as if it's in line with the big sites and ignore the remaining 30%. It sounds as if there's potentially a bit of a problem with the remainder. How is the utilization of those other sites performing currently?

[Steve Foots, CEO at Croda International]

I'll start and then we'll let Stephen add. The reason we talk about utilization rates is really a consequence of the pandemic. The main leverage effect is the 11 shared service sites, and you can see that we're making progress. We're not far away from 2019 levels. The others we don't talk about too much because they're all different. There are small sites linked to businesses, so a lot of those small sites are in Iberchem, FNF, everywhere around the world. You can see the performance of Iberchem. Revenue growth is good, profit growth even better. We're fine with the leverage in Iberchem and that covers a lot of sites. You look at the other smaller sites like in pharmaceuticals, like Avanti and also Denmark. We want more business through those. We're happy with Avanti, but we want more business in Denmark and I think that's fair.

[Steve Foots, CEO at Croda International]

The actives business in Sederma is really the other major one. We've never, you know, you never want to hear us talk about leverage in Sederma. You want us to talk about growth in Sederma, and we're fine with that. Underneath all of that, Sederma is growing well. I don't think necessarily we have a problem anywhere else. What you might be looking at is don't forget we've made some strategic capital decisions. Putting a plant in India, putting a plant in China for fragrances, India for surfactants, for Beauty Care, and also Lamar, which is the new pharma plant as well. All of those obviously will be suboptimum from the start because you're trying to grow, you're growing into your market. There will be an element of building returns in there as you grow. We're putting that in because we expect to get the growth.

[Steve Foots, CEO at Croda International]

Steve, any additional color you want to give?

[Stephen Oxley, CFO at Croda International]

Sebastian, looking at it fresh?

[Stephen Oxley, CFO at Croda International]

Look, I'm not worried about utilization. I see that as an opportunity. One of the work streams is very deliberately to look not only at the contribution from the assets site by site, but how we optimize across the whole network. We've not done that before, so there aren't concerns about capacity. It's great to see the volume coming through. That's what we want in the business. Once we've got the volume, which we're getting, we can then optimize the asset base.

[Sebastian Bray, Analyst at Berenberg Bank]

That's helpful, thank you. If I could ask one on pharma as well, if we're on the topic, how well underwritten are the new facility volumes at Lamar? I was interested when I saw the presentation on the pharma results that the consumer part of the portfolio seems to have grown better than the part that is often thought to grow more quickly, which is high purity excipients, maybe even potentially the lipids part of it. It's difficult to tell. Why was that in H1?

[Steve Foots, CEO at Croda International]

Yeah, I mean, if you talk, you know, the question around Lamar, I mean, the plan for Lamar, don't forget most of, well, more than half the investment was with the U.S. government. That was a gift to us and we're very pleased with that because we need that for the future. I'd say that immediate plans are to transfer production from Avanti. Avanti is busy. We want Avanti to be more of a research base and we want production in Avanti to transfer in a systematic way through to Lamar. That's one thing. Second thing, Consumer Care looks quite interesting for Lamar as well in terms of new technologies coming through, which we're deliberately vague about. Some really good opportunities are coming into the heart of what I'd call our premium space in beauty.

[Steve Foots, CEO at Croda International]

That's something that will help us drive returns there as we go forward. Lamar is primarily for lipids going forward and Avanti, you know, start up to first scale and second scale production. It's also going to be for really what I'd call luxury consumer ingredients as well. That's the key driver I think I would add as well. You'll hear a lot more from Thomas and Thomas has come in to refresh the strategy and you heard this project, flagship initiative, which is a lot around the core business, consumer health, veterinary, providing more data, new product launches, renew, refresh activity there. That's the core of that pharma pipeline and platform. You'll hear more about that as well. I think more of a balanced approach around pharma going forward. Did you have a follow up on that or not?

[Stephen Oxley, CFO at Croda International]

No.

[Sebastian Bray, Analyst at Berenberg Bank]

How is your high purity excipient business?

[Steve Foots, CEO at Croda International]

High purity excipient business is doing well. I mean, you know what you find with that? That's been in Croda for nearly 20 years, probably more than 20 years. Don't forget that's as a product of movement of drugs to biological actives. These are injectables, liquid injectables, and Croda's world leaders in high purity excipients. We're introducing, let's just say, new revolutionary technology in this space to how you purify materials. We're launching a number of products like Proxima that you've heard about into cell media, but also into bioprocessing as well, which are new markets for Croda. We expect good growth to follow over the course of the near term and medium term. Okay, David, question from you.

[David Bishop, Director of Investor Relations and Corporate Affairs at Croda International]

Thank you, Steve. I've got three questions on pharma coming through on the webcast. The first comes from Gareth Hayward, who says is technology leadership in pharma moving to Asia. Secondly, one of Katie Richards' questions, the covering analyst at Barclays, is do you have the local production that you need in Asia, and how is this aligned to your Lamar investment in the U.S.? Thirdly, David Neal at Columa Wealth on consumer health says was the issue just a lull in market demand post-Covid, or have you lost market share or missed out on opportunities?

[Steve Foots, CEO at Croda International]

Yeah, let's take them into Gareth for Gareth's point. I mean, whilst you see the uncertainty around the U.S. policy, policy decisions around pharma, you're seeing a very creative and proactive Chinese government putting a lot of money into pharmaceuticals right now. I think in the stats that we just talked about, 30% of new products launched globally from China. 30%. The world of pharma is moving very quickly in innovation to China. We've got tiny market shares and it's a bit like where we started with beauty care many years ago. We can see that, we think that's structural and our job is to put small teams on the ground to help us develop that. We've got R&D locally I think to that point. Katie, about this, around having balanced production in Asia for pharma.

[Steve Foots, CEO at Croda International]

I mean part of our strategy is to put, you know, we bought Solus biotechnology in Korea. There's great ceramide business. There was a great pharma business in there as well. We're looking closely at Korea as a site to manufacture, particularly for North Asia, including China. Part of our plans is to make sure that we've got capacity there. Of course we've got plenty of capacity in Lamar and priority will be to use probably Lamar and Korea to serve the pharma, the Chinese pharmaceutical market. It's growing very quickly and it's quite exciting. In terms of the consumer health point, I think I mentioned in the script, we need to renew our focus. If you can cast your minds back three or four years, there was a massive optimism and really excitement around mRNA and lipids, and there still is today.

[Steve Foots, CEO at Croda International]

These things are taking a little bit longer to get to market. A lot of our focus was that pipeline and growing that pipeline. That pipeline continues to grow very well. Unintendedly you lose a bit of focus from the core business. I think that's fine. That's fair enough. Part of this is regaining some business with renewed focus, but actually with Thomas as well, it's taking it much further than that as well and creating an innovation program that is akin to what we see in beauty in the heart of this business. The heart of this business consumer is a fast returning, high returning business for Croda. We think there's lots of good opportunities there to scale that. It has similar attributes to beauty in terms of customer fragmentation, small local customers coming on the market as well.

[Steve Foots, CEO at Croda International]

I think in the round, hopefully that answers those three questions. Lisa.

[Lisa De Neve, Analyst at Morgan Stanley]

Hi, Lisa, Morgan Stanley. I have two questions. My first question is coming back to the cost savings program. Can you give us an idea on how we should think about the net retention of that cost savings program over the next three, three and a half years? That's the first question. Maybe talking a bit about pricing, can you just detail where you've experienced some negative pricing in the first half and how we should think about that into the second half and onwards? Thank you.

[Steve Foots, CEO at Croda International]

Okay, Stephen, to your first point. I'll do the pricing point.

[Stephen Oxley, CFO at Croda International]

Hi, Lisa.

[Stephen Oxley, CFO at Croda International]

On the net retention, the GBP 100 million of annualized savings, it won't all drop through on a net basis. I mean, you saw on that margin chart how it contributed. We'll continue to present it in that way so you can see the savings benefit. Of course, we'll have inflation and then further startup costs for the investments. Inflation, you'll take your own view. Think of, I don't know, GBP 15 million or something like that a year and then there's a little bit of the startup costs. My expectation clearly is that those savings and the greater level of savings will outpace those headwinds and that will then significantly contribute to an accelerated recovery in margin.

[Steve Foots, CEO at Croda International]

Back to the pricing point, I think pricing comes with volume, particularly in the industry at the moment. You see with the results, volume growth 11% and it's across the board, excluding actives, Beauty Care and Home Care up high single digit volume growth. The rest of them are double digit volume growth. What we should take from that is a recovery in Crop, leading the volumes in the Crop and ag space, but a regain in market share in the beauty space business that's rightfully ours. That's been the sort of, if you like, the summary and probably a highlight of the first half. We have given some price back. You can see that we've been open with that. I think that's inevitable in an environment that we're operating in. In Crop, we've given it back in the bottom of the portfolio, 20%.

[Steve Foots, CEO at Croda International]

The bottom of the portfolio is not increasing, it's just got more competitive and as you can imagine in the industry when everybody's trying to fill factories, if there is a bit of undifferentiated business, guess what, there is a bit of price competition. We've seen that so many times before. The same, slightly different in Beauty Care, but similar in that the bottom end of the portfolio is not changing, it's just got more competitive. On top of that we've gone back to regain business that's rightfully ours and the market saying we want you to have that business back as well. Beauty Care volumes up 8%. We are growing ahead of market but we're conscious we have given some price back. Nicola has been waiting patiently to be fair. David, Nicola first and Chetan, thank you.

[Nicola Tang, Senior Equity Analyst at BNP Paribas Exane]

It's Nicola Tang from BNP Paribas Exane. It's actually a follow-up on the pricing point, so it ties in. Could you talk a little bit about your expectations for the second half, both in terms of the dynamics around raw materials but also whether you think that there may be more strategic pricing to give back? The second one, maybe just on the Beauty Care industry, sort of two separate questions. One would be, you mentioned a structural change in terms of a shift towards local and regional versus multinational customers in terms of the market. Can you talk a little bit about how those multinationals are responding, and how you kind of balance serving more with the local and regionals, but also trying to keep the multinationals on your side?

[Nicola Tang, Senior Equity Analyst at BNP Paribas Exane]

The second part, you mentioned at Q1 that some customers in Beauty Care were considering and thinking about reshoring in response to tariffs. I suppose tariffs are less of a topic now, but could you just give an update on what's happened with those discussions and whether customers have done a bit of reshoring in response to tariffs?

[Nicola Tang, Senior Equity Analyst at BNP Paribas Exane]

Thanks.

[Steve Foots, CEO at Croda International]

I mean, pricing, you know, you're going to see, you know, when we look at the second half, we're not expecting the market to change. That means we're not expecting the environment to be any better or any worse. We expect quarter two into the second half. In the way we look at it, you can get into the price volume discussion, but getting above that, we're expecting quarter two is a normalized period for Croda. We're expecting sort of projections, looking at full year, forecast year to go, similar to quarter two trends. The volumes moderated, but so did some price. I think in terms of that, it all depends on the business mix and the product mix.

[Steve Foots, CEO at Croda International]

Raw materials are sort of flat to slightly up, and there will be some price increases that we're putting through as well just to manage particularly busy sites as well and particular raw materials that are moving up. I think on your point on structural change, of course the MNCs will respond. We could have flashed up three hours of slides on the winning agenda of local and regional and how we're helping them all around the world. This is not just in China now, it's in lots of other places. We expect that. We also expect we have strategic partnerships with a lot of our multinationals. They're responding as you'd imagine. The winners will respond very well, innovating quickly and getting more and more decentralized, which is what some of them are doing. They will acquire as well.

[Steve Foots, CEO at Croda International]

They'll use the balance sheet as well where they can to acquire some of these. I think that will continue. If you look at any stat on Nielsen data or on Mintel, for the first time in a long time, in virtually every category, local and regional are winning share in each of the key categories. We see that as a positive for Croda. As a reminder, a lot, 80%, 81% of our business in consumer is local and regional. One of the big reasons why FNF are growing as well is they are capturing more and more of this local and regional growth coming through. They are responding. We want to help them, we have partnerships with them. It's a combination of innovation and looking to acquire as well I would say will be their response. Your final question is around, yeah, beauty care tariffs.

[Steve Foots, CEO at Croda International]

Yeah, I mean we're not seeing significant new production change from our customers. What we are seeing is like what they have done in the past is a lot of the multinationals particularly have got international manufacturing, so where they can, they will transfer from one site to another, whether that's America to Europe or wherever. I think that's moderated now. I think there's been quite a bit of hesitation in the early part of quarter two about order placement as tariffs were potentially significantly penal. In reality, I think it's sort of got to a normalized state now. No big manufacturing change, more tactical movements of products for some of our bigger customers. Okay, Nicola, Chetan, come back and David, I'll come back to you.

[Chetan Udeshi, Analyst at J.P. Morgan]

Hi, Chetan from J.P. Morgan. I was just wondering on your distribution strategy. I'm a bit confused what exactly is going on because you're talking about, on one hand, shutting down warehouses, rationalizing your distribution network, and then you're talking about taking away distributors from your ceramide business. Maybe just curious what's going on with your strategy around distribution. I remember many years ago you started insourcing from distributors. You know, it's a debate out there whether that's really helped Croda or not, at least in terms of growth. I'm just curious, what's the latest on the distribution strategy? The second question on the utilization, pricing, etc., cost savings, what is the end impact of this on margin? I remember a few months back we talked about 20% margin as the sort of new run rate.

[Chetan Udeshi, Analyst at J.P. Morgan]

If you get to 80% utilization, is that still the case or can you do better now with these cost savings?

[Steve Foots, CEO at Croda International]

Okay, I mean we'll flash up the margin bridge in a minute. On your point about distribution, just to be clear, for the avoidance of doubt, we're a direct selling company and anytime we acquire a business that's got a lot of distribution we put it into Croda. That is, it's a sort of no brainer, it's the right thing to do. I think the two meaningful points to your question are don't align the warehouse strategy to the distribution. Our direct model is there. What we've seen, don't forget, is we've taken a big industrial business away from Croda, so our footprint for warehousing has changed subtly. In some places, like in the U.K., one of the impairments in the U.K. is a consequence of it's just too big. Brexit has forced us to look at actually redistribution of products from Europe instead of coming to the U.K..

[Steve Foots, CEO at Croda International]

You know, why wouldn't you ship them locally into Germany or into France? The site becomes less of a strategic site because of regulation change and also because of demand. The footprint, the volume footprint we need is smaller than we need. That was more of a review that we have had in the business for about 12 months and that was the end product of the review. Some of that is, and that's what Stephen, to Stephen's point, is looking at the supply chain network. When you don't have a big industrial business in there and slightly different businesses which are more skewed to emerging markets, how do you just make sure you move the products in a more effective, effective way? Underneath all of this is to deliver better customer service. The model doesn't change, it's better customer service.

[Steve Foots, CEO at Croda International]

As we grow, we want the customer service to improve. I think all of you know, that's making sure that with the growth that we've got, customers actually can see an improvement in service. Steve, do you want anything to add to that?

[Stephen Oxley, CFO at Croda International]

No, I mean, there's no change in the strategy. Just think about it as how we efficiently serve or deliver that strategy. It's just optimizing the footprint, optimizing capacity across the whole network. Simple as that.

[Stephen Oxley, CFO at Croda International]

Maybe I'll just pick up the margin.

[Stephen Oxley, CFO at Croda International]

You can see the benefit of volume in the first half that's coming through in the margin accretion that will continue, amplified by the operational transformation savings that I've talked about. The margin's too low, let's be clear, but it's going in the right direction. We're going to get it back up north of 20%.

[Stephen Oxley, CFO at Croda International]

I'm not going to give a target.

[Stephen Oxley, CFO at Croda International]

Here and now, we can see the steps that we have in place quarter by quarter to get the margin back up to an acceptable level.

[Steve Foots, CEO at Croda International]

Thank you. Three from behind you, behind you first. No, go on, no, you go, you can.

[Artem Chubarov, Equity Research Analyst at Rothschild & Co Redburn]

Thank you.

[Steve Foots, CEO at Croda International]

You can ask David's question if you want.

[Artem Chubarov, Equity Research Analyst at Rothschild & Co Redburn]

This is Artem Chubarov from Redburn Atlantic. I've got a question on pharma. You've talked a lot about pharma already, so probably mainly just plug some gaps in my question. I want to reference back to a pharma seminar from October 2022 which actually took place here. When you look at this business first at the category level, so excipients, lipids, adjuvants. At the same time, there was a platform level view, nucleic acid, protein delivery, small molecule. How are you thinking about this business today? I'm just trying to understand to what extent these items are working together. To what extent are they overlapping? To what extent your capacity is flexible to switch from one to another? Maybe just a quick color on performance of lipids. Specifically, I'm not sure we talked a lot about this today and specifically you mentioned a double-digit growth of Avanti since 2020.

[Artem Chubarov, Equity Research Analyst at Rothschild & Co Redburn]

Is that including the Pfizer contract or not? Lastly, back in 2022 they had an ambition to grow the pharma business to GBP 1 billion of sales. Probably a lot of things have changed since then. Have you had any plans to revisit these ambitions given what's happening to date? Thank you.

[Steve Foots, CEO at Croda International]

Five questions there. I'll try and decode some of that and help you out. I mean, look, you're going to get a very clear strategy from Thomas. There's no big changes, but the subtle changes, you know, here we'll call it a pharma solutions business, which is more than you call it the new pharma business, which is, you know, Leek. You've got, you know, Avanti and Lamar in the U.S., and you've got Denmark and Leake, which is more into what I'd call clinical programs. That's relatively small at the moment, but we put a lot of investment in there. To your point, just for that bit, to your point on Avanti, the research arm is the most productive. It's the big area of focus because of course that feeds the pipelines.

[Steve Foots, CEO at Croda International]

Preclinical is the most important thing, and you can get revenue from that preclinical before it even gets publicized. In clinical one, that's growing double digits. It's that bit that continues to grow double digits. 130 new products coming out of the lipid stable in the first half, and when we look at that, we can see where it's going as well. I think our point about China is well made. A lot of this is ending up in China, in China innovation. I think we're pleased with that. I'll come back to your wider point about 2022. In terms of the rest, the rest is really nuts and bolts heritage Croda, it's the consumer health business, it's the veterinary business, and it's this high purity excipient, you know, the injectable business that's hardcore Croda and has been for many years. That has got good growth in it.

[Steve Foots, CEO at Croda International]

You're going to get a renewed focus on that. We're starting to see that with good growth coming through. That in many ways is like the main core business in beauty. It's got lots of customers, it's got lots of growth potential. Slightly different, that's more of the pharma ingredients business that we would see, which is more the classic nuts and bolts of Croda. You're going to hear more of that. I think in terms of 2022, when we were back, way back then, the world was just talking about mRNA, and what you've seen since then is policy decisions which have slowed some of the launches down and also funding, funding handbrakes in particular in some areas, which has slowed the longer term pipeline down.

[Steve Foots, CEO at Croda International]

Net net still looks very, very exciting for Croda and we'll update you with and refresh you with our strategy and what that means for the growth. We're still very excited, but you're going to see some temporary blips because of FDA and short-term positioning in the U.S. At the same time, you've got a really interesting growth agenda now in Asia for pharma, which looks much bigger and more exciting than we've had before. You've got to balance all of that. We'll square the circle with that because we're very aware that we want to update you on the equity story for pharma, and I think we can do a very nice job with that when the time's right. Sorry, Matthew. Go on, David. I mean, I know online.

[David Bishop, Director of Investor Relations and Corporate Affairs at Croda International]

Thank you. I was beginning to think you had something against me. Three questions from the webcast. First, another one from Katie Richards. She said you've been guiding to Crop Protection being tougher in Q2. Actually, overall H1 was strong. Why was that? Secondly, Ranulf Orr, our covering analyst at Citi, said you've been able to double your savings, time target. Why were these targets not initially there? Does this have any implications for your ability to grow? Thirdly, Araceliya Ananda is asking, would profits in Industrial Specialties go to zero if there was no cargo of supply agreement? She's trying to understand the flow law for profits in the Industrial Specialties business.

[Steve Foots, CEO at Croda International]

Let me do Crop Protection and then I can let Stephen pass on to you for the savings targets. Just on Crop Protection, in simple terms, Europe has been much stronger. Europe has really rebounded very strongly and actually in seed as well. Europe's been the big strength and it's been above our expectations in the first half. The rest of the world all okay. I think a lot of that has been that surprise in Crop Protection, but I don't think we probably need to go into too much detail about that cost.

[Stephen Oxley, CFO at Croda International]

Just stand back, Ranulf, on that. The way I'm thinking about transformation and efficiency, this is about growth and cost savings. It's not one or the other, it's enabling growth and then driving a bigger business more efficiently. All right, we had GBP 40 million.

[Stephen Oxley, CFO at Croda International]

Originally that we talked about in February. As we've got into that, we've.

[Stephen Oxley, CFO at Croda International]

Taken a really close look at that and getting into the detail, it's just abundantly clear that there's more that we can get at both tactical savings and then, more importantly, structural savings, particularly in operations, manufacturing, and procurement that I talked about. It's just getting under the skin. I'm confident of GBP 100 million, and let's see where we go after that.

[Stephen Oxley, CFO at Croda International]

We talked about the change in.

[Stephen Oxley, CFO at Croda International]

The mix of that business, the Cargill business now is down to a few tens of millions. It's a handful of, I mean it's not a massive business, but the business overall, both within that segment and our direct sales, it's all profitable.

[Steve Foots, CEO at Croda International]

Okay, Matthew, you've been waiting patiently.

[Matthew Yates, Analyst at Bank of America Merrill Lynch]

Thanks, Steve. Stephen, if I can just come back to the cash flow. It was Charles' question at the beginning when you said that you're not happy with the inventory. Was that in the context of the order book here and now, or in the broader sort of structural levels that the business should have?

[Stephen Oxley, CFO at Croda International]

Yeah. Thanks, Matthew.

[Stephen Oxley, CFO at Croda International]

Very much the latter. Nothing to do with the short term order book at all? Look, if you think about our model, we are going to carry more inventory than a business that's selling to a distributor. That's for sure. We have sort of two, two lots of inventory.

[Stephen Oxley, CFO at Croda International]

If I just look at the.

[Stephen Oxley, CFO at Croda International]

If I just look at inventory across the cost base, across the asset base, it's clear that we've just not optimized that. It is just literally going through SKU by SKU, site by site, and bringing that mindset and shifting the mindset more to cash and optimizing capital, and it's right across the board.

[Steve Foots, CEO at Croda International]

I think just to add to why it's up as well, for the first half, you've got volumes up. We've planned ahead for some tariffs changes, you know, we put stock on the ground in locations, and also we've had a couple of shutdowns as planned shutdowns as well. You're putting stock on the ground. Reinforcing Stephen's point, once you look at this above, end to end, you can take a different view about working capital. It's always been in the region, hence the reason to try and simplify and standardize.

[Stephen Oxley, CFO at Croda International]

Maybe if I think about the FNF business, there we very, very much make to order with a rapid turnaround from agreeing the product with the customer. The rest of the business is more.

[Stephen Oxley, CFO at Croda International]

Made to shelf, and that will be the case.

[Stephen Oxley, CFO at Croda International]

The more we can squeeze that down and carry less inventory overall, particularly linked to the product or SKU rationalization, that's where the opportunity is. It's not just a kind of a magic wand on working capital. It's looking at the whole of operations, supply chain, warehousing, and the product portfolio.

[Matthew Yates, Analyst at Bank of America Merrill Lynch]

Second question is around pricing and I'm struggling a little bit with the consistency of messaging and communication here. On the one hand you've got slide, I think it was 27, showing gross product margins pretty similar, although it's hard to tell from that axis. Clearly on slide 14 in the profit bridge, you're showing you've lost basically half the operating leverage on pricing. Give back. Can you help me understand how much of the portfolio falls into this sort of less differentiated bucket? I think you helpfully said on Beauty Care, maybe about 20%. My simple math would suggest that you've cut prices 20%-25% in that business. The problem is you're bundling price and mix together, so my math is probably wrong, so you're welcome to correct that.

[Matthew Yates, Analyst at Bank of America Merrill Lynch]

If we look at Life Sciences, what sort of proportion of the healthcare or the ag business falls into that non-differentiated piece and how much pricing are you having to give back in those areas.

[Steve Foots, CEO at Croda International]

Yeah, I'll start.

[Stephen Oxley, CFO at Croda International]

You start in the knockout.

[Steve Foots, CEO at Croda International]

Yeah, I mean, the analysis that we've done consistently now for two or three years is, you know, the price give is in the most undifferentiated part of your business. Otherwise, it would be different. It would be differentiated 20% in Crop Protection for customers and probably 10-15 customers in Beauty Care. It's about 20% there as well. That's a coincidence rather than a rounded number, by the way. What you're saying is the price give, you've got to be careful with this because it's quite tricky, but three quarters of this is price that we're giving back in the mix. Of that 3/4 of price we're giving back, more than half of that is price. Some of that is a product mix effect within the business as well.

[Steve Foots, CEO at Croda International]

What you've got is a double particularly, and you're seeing that particularly in places like beauty, where we're regaining more business. You're regaining more business in the tail, or, sorry, not in that part of the undifferentiated space. You've got an average selling price that's slightly down. If you look at the gross, our gross margin percentage, virtually every business is up. The one that's slightly down is Beauty Care, and we expect that because of the regain in some business, but that's temporary. I think we look at it across the businesses as a good proxy of quality. Quite a lot of the businesses are up in our terms in gross margin, in gross margin percentage year on year. The quality of the business going in is fine. I think that margin bridge tells you a lot.

[Steve Foots, CEO at Croda International]

When you're growing volumes at that level deliberately, you're going to get a bit of a trade off. As we go forward, clearly that volume is going to moderate. I'll tell you what, the price will as well because you're going to see Croda International starting to do what we normally do, which is demarket and refine and purify the margins, and that will come through. It's mainly focused in two businesses, in Crop Protection number one and then Beauty Care second. I mean, Steve, you add.

[Stephen Oxley, CFO at Croda International]

Matthew, I think you've got to.

[Stephen Oxley, CFO at Croda International]

Look at those two bars together at the start there. There is a direct correlation between where we're giving some price and the volume recovery, which is exactly what you want. We're regaining share that we had to cede through Covid because we didn't have sufficient capacity, and of course to bring that business in, one element of it is being competitive as you'd expect. We're better off having that business within our stable that we can then manage and optimize, including pricing. That's the key thing. I think you talked about the gross margin.

[Stephen Oxley, CFO at Croda International]

When we have that gross margin percentage.

[Stephen Oxley, CFO at Croda International]

Percentage, it's quite simple. It's kind of sales less very direct cost. It's not the see-through cost of the entire cost base that flows down to operating margin. That's why we want to think about individual customers and products to think about see-through profitability all the way down, understanding the complexity of the supply chain.

[Steve Foots, CEO at Croda International]

Are a lot of people with negative price mix in the industry. There are not many with good volume growth, and you have to put them together. I think we'll stop there. Great. All right, thank you very much for finding the time to come and also for your very interesting questions. We'll stop there. Thank you.

Participants

Executives

• David Bishop, Director of Investor Relations and Corporate Affairs
• Steve Foots, CEO
• Stephen Oxley, CFO

Analysts

• Lisa De Neve, Analyst at Morgan Stanley
• Chetan Udeshi, Analyst at J.P. Morgan
• Sebastian Bray, Analyst at Berenberg Bank
• Charles Eden, Analyst at UBS
• Artem Chubarov, Equity Research Analyst at Rothschild & Co Redburn
• Matthew Yates, Analyst at Bank of America Merrill Lynch
• Nicola Tang, Senior Equity Analyst at BNP Paribas Exane