Croda International Plc

Jeremy Maiden - Group Finance Director Martin Flower - Former Non-Executive Chairman Stephen Foots - Group Chief Executive

Gunther Zechmann - Sanford Bernstein Andrew Stott - UBS Adam Collins - Liberum Capital Limited Martin Flower - Croda International Chetan Udeshi - JPMorgan Chase Paul Walsh - Morgan Stanley Tom Wrigglesworth - Citi Martin Evans - HSBC

Morning to you all, and welcome to another Croda webcast 2018 Half Year Results. The coolest room in London, today.

And it's really cool. But well done for the air conditioning anyway.

As usual, it's me for a little bit of the highlights and then Jez on the numbers and then back to me on strategy and where we're going. So let me -- let's get straight into it.

Yes, it's been a very good start to the year. The sales growth that we've seen in 2017 has continued at that pace in the first half, and we expect that to continue, that's mid-sales -- mid-single-digits sales growth coming through.

We're growing the core, and the core to you and to Croda is we're growing the organic business. As always, classic philosophy in Croda, it's profits ahead of sales value, and it's sales value ahead of sales volume.

That's the spirit of what we do in growing the core. We've got record profits as a consequence of that.

And it's robust topline momentum that's driving that, all sectors and geographies, I'll come back to that, shine a light on that. And we're seeing further improvements in margin, which is driving return on sales improvement too.

Stretching the growth all about thinking bigger, and how do we stretch the financial targets by doing the right things. Those of you that came to the Capital Markets Day will hear us talk about 6 different buckets of growth.

And a lot of that's coming about bigger -- talking about bigger R&D bets, looking at technology acquisitions and smart partnership arrangements, getting Croda to think more external in our R&D as much as internal. And we're seeing innovation continue to grow, just under 28% of group sales, and 2 technology acquisitions this year already, Plant Impact and Nautilus.

And it's robust financial platform, strong free cash flow and the dividend up again, 27th year, 8.6%. Delving deeper into the numbers.

The sales growth core business is up 4.7% in the 3 legs. We have got 3 strong legs of growth, all of them growing well.

The 50 basis points is driven largely by the Performance Technologies business. And we'll come back to that, but 25.4% return on sales.

And for the first time, a new milestone, over 100p for EPS growth for the group, 12% EPS growth. So very strong performance in the business, and we're very pleased with that.

Taking a broader look at sales, the really encouraging thing in the numbers is the breadth of the sales growth. In the sectors the pick is, obviously, Personal Care, 9.3% sales growth in the first half, but good resilient performance in Life Sciences and Performance Technologies.

Innovation, again, up a lot of the philosophy in Croda is it's clever growth, not any growth. We don't want to fill our factories with everything, we fill it with selective materials.

So we want to improve the intellectual property in the business all the time. So from January to now, we have more intellectual property in the business.

That's the sort of fundamental deep philosophy that we have in Croda, all driven by innovation. And the regions, comment on the regions, good broad-based growth across all the regions.

Asia continues to outperform and is the highlight. We've been investing heavily in Asia, up 6%.

But I think the big recovery play for Croda has been in Latin America. It's been headwinds there for the last 2 or 3 years.

Interesting to see that, that starting to come back. A lot of that is self-help measures for Croda.

We've invested heavily in our Brazil operations, factory and R&D, and we expect that to continue. Europe strong at 4% and North America, 5%.

So the western economy is growing pretty well, but our emerging markets still growing pretty strongly too. So really well -- very pleased with the breadth of the geography of the growth.

Into Personal Care then. It's been a terrific performance in the first half, 9.3% for the first half, 11% for quarter 2.

We had to look back in the history books for a double-digit quarter and we still can't find it. But it's certainly beyond 15 years since we've had a double-digit sales growth in a quarter for Personal Care, in very good shape.

The 60% -- the minus 60 basis points negative is predominantly FX. It's a trade flow from Europe into the dollar world, and don't forget, Sederma is in there as well, so Sederma entity is selling, it's got its factory in France, but it's selling predominantly in dollars.

We -- there's a little bit of a mix effect there too. We expect that margin to reverse in the second half, as you see the -- this year, the exchange rates remain the same.

But the margin is improving through the first half, so that should continue. And the big thing in the industry, and you've heard it from us for a number of quarters now, this big move to barriers to entry for customers reducing, more customers are coming into this industry in a phenomenal rate.

It's driven by the Indie revolution. So the small Indie companies, we're picking up a lot more of innovation.

So you've got a double whammy of more customers coming on, and the pace at which they're getting products on the market is quicker than the multinationals. That's been very helpful to the group.

We've targeted that for several years. We are seeing the benefit of that now.

But we're also seeing the benefit of the multinationals responding positively. And they're responding in two ways: they're innovating more, some more than others, we're capturing some big growth now in some big product launches for one or two of the multinationals.

But also, they're acquiring these Indies as well, and it's a virtuous circle. That's driving more Indies to come in the market and look for their big exit multiple, 3 years or 4 years down the line, if a multinational can buy them.

So you've got this very dynamic customer activity, which is driving more innovation. And that's helping Croda both at the small and medium-sized customers and at the big multinationals.

It's really helpful. So one of the big reasons that it's moving from low to mid-single-digit sales growth to the higher sales growth is the MNCs are coming back.

So the pace of MNC growth in the first half has been excellent for the group. And if you look at across the businesses.

Actives, effects and formulations, all growing at 6% to 9% sales growth, solid sales growth in all of those regions, in all of those businesses and supported by double-digit innovation. The NPP growth in this business is phenomenal.

It's an outstanding performance on NPP, and the pipeline will continue. So Personal Care in very good shape.

And then -- and some of that has to be commendable to Sandra and her team for -- you've got 3 businesses now, there's self-help there, we've got three Managing Directors that you saw on the Capital Markets Day, it's driving extra focus, driving more innovation. So Personal Care in good shape.

We're also encouraged with the Life Science performance. We call it resilience, it's -- on the surface, it's moderate sales growth and moderate profit growth, but don't forget, we have 1 API piece of business, which is masking the strong performance of the non-API or the mainstream business in Croda.

So 5.1%, in simple language, is £8 million headwind in the first half from Par. We expect about a £4 million headwind in the second half.

So we've had significant amount, 2/3 of the headwind in the first half, so some modest headwind coming for Par. So we're nearly through the Par headwind.

But if you look at the 7.4%, that's built up of Incotec and Crop protection plus Health Care, all those are growing at 6% to 9% as well. So as I said, very similar to the 3 businesses in Personal Care.

So we've got very good strong growth in our consumer businesses. And it's driven by -- if you look at it, it's driven by Crop.

I mean, the Crop business has been outstanding. It's still growing very well.

And the Incotec returns are starting to come through, we've doubled the profit in Incotec over the last 2.5 years. So we're hitting our 20% returns, and we feel that's the start of the growth.

We've got it to first base, our job now is to expand that further, and we are investing heavily in China and America, particularly in R&D in Incotec. So it's classic Croda, we're shrinking the business to its core, and now we're fast-growing it around the world.

And there's exciting opportunities there. And we're starting to see the use of Croda's ingredients into these coatings -- seed coatings, which is driving some new innovation too.

We shouldn't forget biostimulants and Plant Impacts, they are in the numbers, and they're masking the underlying profit or the mainstream profit performance of the business. We bought Plant Impact a few months ago, probably going to be a £4 million loss to the year-end, as we would expect.

But the biostimulant technology that we have got is every bit as exciting as we thought it was going to be. This is disruptive technology for the Crop industry for the next 5 years.

And we've got very exciting plans to commercialize that through the Croda selling network, so we're in good shape. And a word on Health Care.

Health Care behind the non-API business is growing high single-digit sales growth. So that's the -- effectively the delivery systems we call high-purity excipients, very strong performance there, and it sometimes gets masked with the other moving part.

So resilient, but we would say, behind the scenes, very encouraging performance in the business. And last but not least, we don't use the word impressive very much in Croda, we'd rather just get on with it.

But that is an impressive performance, profit performance, outstanding profit performance and -- on modest sales growth, but 15.2% profit growth. And not far away from our 20% return on sales, 19.3% now, 230 basis point increase.

We're really impressed with the performance of this business. And it's the third year running that we've had double-digit sales -- double-digit profit growth in the business.

And the more encouraging thing is that's on a flat NPP sales. So we're getting there by doing the right thing with value-over-volume strategy, and the better profitability is coming through the key two businesses.

There's more focus on that business like in Personal Care, as we're very organized and is driving further innovation, and we're improving our knowledge intensity. Our job -- Croda's job is to commercialize people's knowledge, it's not to commercialize [mental] capacity.

And once you start to do that, you can see the profitability can move up much quicker than you think. And very good sustainability profile as well in this business.

Smart Materials has -- about 80% of its business is from renewable ingredients. People forget about that, so we're starting to see the benefit of the biodegradable and the quest for renewable ingredients.

And I'll come back to that at the back of the pack, as it's an important driver for the group, unstoppable trends. But the new technology as well, an IonPhasE are coming through well.

We've had that business for a few months, and we're already starting to see double-digit sales growth in IonPhasE, and we haven't really started yet. But good work from Croda.

But we feel we can take that business to somewhere exciting too. So in summary, we've got strong commercial growth in Personal Care.

We've got strong mainstream growth in Life Sciences, and we've got strong profit growth in Performance Technologies. So the 3 businesses, we really believe, we've got 3 strong legs of growth.

Let me stop there, and let Jez take you through some more of the numbers. Thank you.

Thank you, Steve. Morning, everybody.

Start by looking at the overall numbers on the income statement. As you're all aware, Croda is a global manufacturing and chemicals company, that happens to be based in the U.K.

95% of our sales are outside the U.K. So clearly, we've had stronger sterling.

So on a reported currency basis, you can see a small decline in the sales number and an increase in operating profit, and in profit before tax. Obviously, we manage the business on a constant-currency basis.

And there, you can see this -- the much stronger growth, 3.6% improvement in sales for the business as a whole, 4.7% improvement for the 3 core sectors that form our core business. And of course, growing profit faster than sales, which is important for us.

So profit before tax up 7.7% in constant-currency terms. Now those are presented on a adjusted basis before exceptional items and amortization of intangibles.

So the IFRS profit before tax is £170.8 million, we don't have a lot of bad stuff in those numbers. So you're seeing numbers in IFRS that are very similar to our adjusted number.

And as Steve said, 100.2p first half adjusted EPS, so great to be over that £1 mark on that basis. So let's look at sales growth in more detail.

And what's really encouraging for us is to see now 3 consistent halves of growth, since we really saw a return to good growth in the first half of 2017. So very strong growth in the second half of last year, but really good growth in the first half of this year at 4.7% for the core business.

And we expect to continue to see mid-single digit sales growth to continue when we look at our markets going forward. So that's very encouraging.

So that topline momentum is carrying on. And that's really building on our market positions, our technologies and our innovation, which continue to drive.

Very encouraging to see the volume growth that we have across the consumer businesses, and I'll talk about that in a moment. And we are continuing to invest in new markets and new technology opportunities.

So just decomposing the movement in sales from 2017 first half to 2018. We have, first of all, the Industrial Chemicals impact.

Now actually we're quite happy if Industrial Chemicals goes down. It is primarily an outlet for coproducts, by-products that we produce in the other three sectors.

So we really don't have a problem with that number being negative. So overall, the reduction in Industrial Chemicals, overall impact on the group number, 1.1% on a constant-currency basis.

Offsetting that, we have the existing core business growing by 3.9%, and the acquisition impact primarily from the IonPhasE business that we acquired in Performance Technology in December last year, adding 0.8%. So you can see the 3.9% and the 0.8%, that's your 4.7% of the core business; take off the Industrial Chemicals, 1.1%, you've got 3.6% growth for the business as a whole.

And then you can see, the significant impact of currency translation, 4.2% on sales, little larger in profit terms to give us the reported number, just over £700 million of sales in the first half year. Now breaking that growth down into how is it developed across each of the sectors.

So as Steve said, Personal Care, very encouraging, 9% growth overall, really good balance there between volume and price and mix going on there. So we're very comfortable with that sort of shape to the growth.

In Life Science, you can see a bit of a negative price mix effect, which is due to the API contract coming through there. But some good volume growth despite the exit from that API contract, so 2% growth overall in sales.

And then for Performance Technologies, you can see that effect that Steve talked about, as we transition that business towards higher value, higher-margin products. So we have a 9% reduction in volume, that's a quite significant first half as we demarketed business and came out of lower-margin product.

But you can see the 11% improvement in price and mix. Although there is a little bit of a raw material price recovery going on in that number and that's mostly driven by mix.

So a much richer portfolio. And of course, when Croda changes its portfolio in this way, we make more money as I'll show you on a subsequent slide.

So very happy with that shape. Overall for the group, therefore, 5% growth -- or 4.7% overall, comprising 9% improvement in price/mix and minus 4% volume.

That minus 4% may feel a little odd, but of course it's so driven by the big volumes that go through the Performance Technology business. And generally, much bigger volumes in PT than in the two consumer businesses.

So the group shape might look a little odd, but of course it's driven by that restructuring of the portfolio in Performance Technologies. So we're very comfortable with that.

And as I say, some limited raw materials increases in first half year, which we fully recovered. So turning to profit, how has that flowed through?

The big profit increases, as you can see, are in Personal Care and in Performance Technologies. So we changed the shape, we take a lot of volume out of Performance Technologies, we make more money out of that.

At the same time, the growth in Personal Care and in the rest of the Life Science business, has utilized that spare capacity in a very productive way. And so driving good profit growth, at £11 million overall, including a slight reduction in profit in Industrial Chemicals.

So if we look at how that profit change has flowed through into EPS. Overall, as Steve said, 12% increase in the constant-currency EPS, 7.3% in the reported currency EPS.

First of all, the sales growth component, as I said, 3.6% increase for the group. Improvement in operating margin, 50 basis points, is worth 2.4% growth in EPS, giving us the 6% growth overall at the operating profit level and then another 1.7% coming from lower interest.

Now two things going on in interest: firstly, we have a lower pension interest charge due to the fact that we have a surplus position on our main pension scheme, the U.K.-based pension scheme. And that will be an ongoing benefit.

And secondly, we have continued to capitalize interest associated with the North American biosurfactant plant. So we're required on very large projects to capitalize the interest.

And that's been worth about £3 million in the first half. We don't expect that to continue in the second half, because we are just approaching the end of the commissioning of that plant.

So we would expect that £3 million benefit in the first time to go away in the second; of course, it's a noncash issue. So that overall 7.7% growth in PBT and then the other big benefit to EPS is the tax rate.

So as we highlighted at the year-end, the reduction in U.S. federal taxes, primarily is a big benefit to us.

The effective tax rate has come down from just under 28% to just under 25%. And again, we see that as an ongoing rate for the group, and that's added another 4.3%.

So 12% growth in constant-currency EPS, and a minus 4.7% impact from currency translation. So turning to some of the cash components for us.

First of all, in terms of CapEx, as we indicated, we expect to end the ramp now that we've seen in CapEx due to the North American biosurfactant plant being built. It was £41 million for the biosurfactant plant in the first half last year.

We spent £25 million in that first half of this year, and we're pretty much at the end of that. So we expect a fairly small residual spend in the second half.

As you can see, if you strip that out, the rest of the business is spending £30 million consistently. I did guide you at the year-end to around £75 million as the ongoing level of CapEx.

I still think that's about right, although we may fall a little short of £75 million in the full year on that non-bio spend. As a result of the reducing level of CapEx, and also, the tax benefit we get in the U.S., free cash flow is improving, saw an increase of over 50%, and we are only partway there.

So again, second half cash flow, I'd expect to continue to strengthen. Overall, the leverage has stayed about equal, the debt -- net debt stayed about equal, so just under £400 million, and a fairly conservative 1x leverage ratio.

And then finally, just a word on pensions. We've had our 3 yearly actuarial valuation of the U.K.

pension scheme, which is our key pension scheme and that is in surplus on a technical provision basis. And therefore, there are no deficit funding payments required for that scheme over the next 3 years.

And if you look at the IAS 19 pension deficit, which of course, is the P&L effect, rather than the more important cash effect, that is pretty flat. We're at £16 million deficit overall, so fairly trivial on that basis.

Okay, so that's the finances, and I'll pass back to Steve, to talk about some of our strategic developments.

Thanks, Jez. So we're back to connecting to faster-growth markets.

That -- picking up that theme from the Capital Markets Day, we're growing the core. You can see that in the numbers, really happy with the performance of the 3 businesses.

And we're stretching the growth. So growing the core and stretching the growth.

It's not a Pilates class. Some people think it is, who were in the board when I took them through this, but it is core to strategy, so I don't want you to get carried away with that activity.

But if you want to do Pilates, that's fine with me. When we talked about Capital Markets -- at the Capital Markets Day, we identified 6 growth buckets, which are important to the group.

I mean, there's more than that, but they are the big 6 that we're trying to focus on in the business. What I want to bring to life with you today is sustainability.

And you shine a sustainability lens on the group, and it's very powerful. A lot of our growth is coming from that sustainability mega trend.

And we mustn't lose sight of that. It's an unstoppable mega trend.

If everybody -- anybody out there thinks this is a fad or a fashion, or a short-term trend, think again. We are talking to customers on a regular basis every day.

This is here to stay. It's creating a number of great opportunities.

So the mega trends, I won't spend too much time, but you've heard it -- you've heard me talk about beauty and aging and health and well-being, people want to look good, feel good. They want to take medication where they feel they need to and they'll do that on a regular basis, that's increasing.

But added to that is living a balanced life with the planet that we have got. It chimes really well with our Crop business; food consumption is doubling, the land isn't, everybody wants more bang for their buck with the chemicals and the ingredients that they use; big powerful trend for the group.

And if I look at the Performance Technologies business and this energy revolution and this circular economy, using waste streams in the business. And for your own factories, but also for your customers' factories, really important.

And you know this unprecedented technology change is creating a lot of opportunities, particularly in Performance Technologies. There's lots of niches coming.

And Croda's philosophy is we are here to create markets, not destroy markets. So we see a number of these trends as a source of new innovation opportunities for the group, really important.

And if you look at how it's driving the group, top left, we've had 10 years of sustainability reporting, and for investors and analysts alike, start -- have a look at the reports, some really interesting projects in there that's driving some significant growth for Croda. And in the appendix in the pack, there's a slide that describes a strong financial performance for the group over the last 10 years, but also the strong sustainability performance as well.

So we're decoupling our financial performance from doing the right things, energy down, landfill down, water usage down significantly, big numbers. But our profit up significantly, 5.5 time increase in profit over that period.

So we're doing the right things, and we think that's important. And the stats don't lie, consumer trends are accelerating.

So this is a stat for beauty care. You just look in 2007, those products on the market with -- what I'd call a sustainability claim, hardly any.

2017, a tenfold increase in that. And the more important stat is, over about 11,000 products are on the market now.

These are finished products that have got a sustainability claim. That's 11,000 opportunities for the group to launch products into those formulations.

That's big opportunities. And for number of year the United Nations sustainable development goals are probably well know for others maybe not, again, we see this is a great source of new market opportunity for the group.

So this is a framework from [indiscernible] and 200 countries together, government businesses, opinion farmers effectively it's trying to reduce climate change. Behind that is about 167 objectives.

If you really want to look at them, you can. But the important point for Croda is it's not a theoretical exercise.

We've mapped some of these objectives onto our business, and we can see, with government change in policy, that we're starting to open up new markets for the group. And through that last 10 years of reporting, we've taken a leadership position in sustainability.

We are an industry leader. We're very recognized for that.

We're proud of that. We're really delighted with that.

And that strong track record is starting to come through in the numbers as well. So we see it is a powerful growth driver.

But I think with the appendix, that's classic CSR, as we would say, customer -- the sustainability reporting. That takes you to one step, and that -- and we should be proud of that.

We are. But really the exciting bit is the new markets that are coming, and how do we take advantage of that.

And I want to try and bring that to life in the sectors for you. So in Personal Care, there's lots of stats around this book, that's a big number, 65%, effectively just over 1 in 2 products now have got a sustainability tag to them in marketing, environmental or social positioning; and for Croda, that's excellent, because a lot of our ingredients chime with them.

The sustainability development goals that really sort of look strong against our business, 12 and 9 so the responsible consumption and production, that's all about every day now. Our customers want safer ingredients and ingredients free from pollutants, preservatives, phosphates, sulfates, and, and, and.

And if you look at the innovation, people want sustainable innovation. How can we reduce our carbon burden, but how can we also reduce our customers' carbon burden?

And we can have a much bigger impact on our customers' carbon burden -- carbon reduction then we can on our own. And we think that -- some great opportunities.

But just -- I won't go through all the examples. Ethical sourcing is a big area for all of our customers at the moment.

So we led the industry through responsible palm oil. And as you know, we've moved the industry to sourcing palm oil in a responsible way Sales growth over the last 2 years, 60% for the group in responsible palm oil derivatives.

We've led that, we've captured the growth. And you might be surprised, but we now have skin creams on the market with antipollution actives.

So when you're walking around big cities, you're putting cream on your face to protect you from the pollution, exhaust fumes and the like, and Sederma have got antipollution actives. So if you're walking around London, you know where we are.

But these are markets that weren't there 2 years ago. These are markets that are starting to be created as a consequence either government policy, consumer interest and customer innovations, and that's really important.

And you know, you'll never get anywhere in sustainability without good solid innovation, and Croda's got a great track record. So you combine innovation and sustainability and you capture growth.

And we think we're just on the cusp of significant growth. Because this powerful mega trend is unstoppable and it's creating opportunities all the time.

And it's not just in Personal Care. I look in Life Science, and 60% increase in agricultural productivity needed in the next 30 years, about the -- to the point around food production and the lack of land around that.

We shouldn't be surprised that the fastest-growing business in Croda in the last 10 years has been our Crop Care business. And the reason we bought Incotec is because of that trend.

This is an unstoppable trend, and every day, people want better delivery systems, more intelligent delivery systems. So it's chiming to that.

The life on land and the good health and well-being probably speak for themselves, but big pressure now to reduce -- to improve the quality of land, restore the land, stop the land being eroded any further, and how do you get better soil fertility and the like and -- one of our examples are drift reduction. We're world leaders in the drift reduction market.

It wasn't there 3 years ago. Legislation in America forced it, imposed it.

So it's the penal reforms for farmers spraying outside their boundaries, big fines. So drift reduction is helping the environment, it's helping the farmers, and it's delivering great growth for Croda.

And if anybody wants to go through our Edison laboratories, you'll see this drift reduction laboratory now, which is world-class. So we take a lead.

But the point I'm trying to make is, these markets are becoming -- they're opening up and they weren't there before, and that's really important. And I think on the other point, the point around the sustainability development goal, number three, health and well-being, high-purity excipients is the fastest-growing technology in the group and has been for probably 5 years.

Why? Why do people want it?

Well, it takes out trace impurities, takes out heavy metals like no other material can. So in topical creams or in cancer drugs, they want the purest of the pure.

They need that, customers want that and they formulate with that. So that market is developing on the back of, we would say, powerful sustainability trends.

So we're encouraged with the Life Science performance around that. I think in Performance Technologies too, it's all about greenhouse gas reduction, greenhouse gas emissions, the whole sustainable development goal.

Philosophy is driven by greenhouse gas emissions really, but big numbers, greater than 80% needed. What that -- what's that doing?

It's driving clean energy, green energy, Box #7, the sustainability development goal. And purity of water, less water pollution, and how do we stop the plastic getting into the water, creating great opportunities.

So examples. There are reduced emissions, we've got lubricity additives that improve biodegradability of the formulation, reduce the carbon dioxide emissions, new markets and water purity.

We've got dispersants that improve the quality of the water. These are growing markets for Croda, and it's all on the back of legislation and investment by companies and by government too.

So sustainability is not just about Personal Care for the group, it's about all 3 businesses. And that's why we see -- we're encouraged again with the results starting to come through.

A lot of the growth is coming from these trends. We don't expect these trends to reduce, we expect them to accelerate over the next few years.

So really important. And again, it's all about innovation, delivering innovation against this.

And making sure that we can meet the unmet needs as they come along, rather than a year or 2 afterwards. And if you look at our big projects, these are now our biggest growth projects, these are the things we get really excited about in the company.

It's all sustainability. Again, you know a lot of these from the Capital Markets Day, but just to pick a couple of examples out, biosurfactant plant, just about onstream, will be on stream before the end of quarter three.

And the excitement that we are starting to see with our customers is really good. They're going to see -- it gives them a chance to look at developing new brands, consolidating existing brands, and we're being overwhelmed by the interest.

So that will be onstream, and financially for you, it will be -- you should see that come through -- start to come through for quarter 4 in the numbers. All of our interest really is about positioning the products correctly in the eyes of our customers.

But our customers are starting to see this as a new source of differentiation for them. Nobody else is on the market with it, nobody else is think -- well, people may be thinking about it, but we're not seeing anybody else on the market too.

So we're in a very strong position to capitalize on that going forward. And back to the high-purity excipients, we're doubling capacity in North America, because of this big trend for reducing trace impurities in your products.

So we're in a good position, and we are investing heavily around the sustainability trend, which is important. And we shouldn't forget our technology-led acquisitions.

This is the central focus in the group. It's driving a lot of passion and interest and excitement from our commercial teams.

This is where we want to go, and we want a lot more of these. But I don't need to spend any time on them, because you know them all.

But a lot of them are based on sustainability, plant stem cells, marine biotechnology in Nautilus, the next generation sustainable surfactants, disruptive surfactants for Enza and it's crop and so on. So we are investing heavily around sustainability, and we -- a lot of companies talk about sustainability as a parallel universe, because I think sometimes they think they have to.

We're embedding that in the organization, because it is driving a lot of the growth, and that's really important. So in conclusion then, priorities remain unchanged.

It might come across boring for you, but the three priorities remain the most important priorities for the group. We apologize for being boring, but we deliver around the boringness.

The consistent top and bottom line growth have started to come through now. We screen well for mid-single-digit sales growth now, we expect that to continue.

The innovation continues to increase, and we're accelerating the capture of new sustainable technologies. I'm just giving you some examples of how we are starting to do that in the pack.

I think on outlook, the word we use a lot is encouraging. The first half, if you get behind the numbers, the three businesses are in very good shape.

Consumer business has got momentum, Performance Technologies transitioned into this high-quality knowledge-based business, NPP. And we're improving the cash generation, and it has -- it does underpin our confidence in the full year.

I think, I would say around second half, mid-single-digits sales growth on improving margins. We expect those margins that we see in the first half to continue around that -- those levels too.

So we screen well for that in the second half and that's what underpins the confidence, so that's the sort of figures that we're talking about. Let me stop there, and take your questions.

Thank you.

Gunther?

Hi, thanks. Can I start with two please?

The first one on M&A. There were some headlines this morning on, one, your potential interest in Ashland, and two, that you wouldn't be deterred by currently high multiples being paid from the industry.

So if you could comment either in general terms on what your M&A strategy or however specific you want to go?

I haven't seen what you've got, but let me be very clear. I mean, Croda's strategy, you sort of see it lit up there, is all about organic growth and it's all about technology bolt-ons.

That's where we get our excitement. That's our general focus, it's a laser-like focus.

The spirit of what we do, and we've taken the Board through our strategy two or three times over the last year or two, and they're really excited about that as well. So the excitement for Croda is not buying big businesses for the sake of big businesses, it's buying technologies.

We really get excited. And the technology stable that we have got now, is starting to really look disruptive in a positive way, going forward.

So our core plan is organic growth, growing the organic growth, the core as we call it, and stretching, and the stretching part is lots of technologies. We want this to be an incubator.

So if we look forward in 3 years' time, we don't have 6 or 7 technology businesses, we have 20 or 25. And we're commercializing those, we're good at commercializing those things, and we get the best out of our businesses when we link it to technology So the parity focus is that.

Whether it's miscommunication, or whether it's a little bit of an artificial artistic license from some -- you know what Bloomberg are like. That's our focus.

That is our focus. That is our focus.

And we won't move away from that. And it's a deep passion for the business because the business are much more excited about growing technologies than buying a big business just for the sake of it.

We're not -- we don't feel like we have to buy anything significant. We just want to do the right thing by bringing on a lot of this -- these technologies, and it's fertile ground.

I know it's fertile ground in Crop, but it is fertile ground. There's great opportunities for us in technologies.

And to that point, just so you know we're putting our money where our mouth is, we've -- it's like a football team, but we've just trained up 24 scouts, not boy scouts, but 24 scouts in the business to look at and search for technology acquisitions. So we're ramping up our technology acquisition quest and we're being overwhelmed by the opportunities.

So our job there is to sieve those heavily and then make sure that we're bringing on the conveyor belt of about 3 to 5 per year. And we want to talk to you more and more about these bolt-ons because, as you know, these are -- some of them will win a very handsomely, some might not.

But overall, the net impact for the group is extremely positive. It's rich in NPP and its rich in technology.

Just moving to a second question just on that one point, Steve. So you didn't say it to anybody at Bloomberg this morning you were interested in Ashland?

Just to put that to bed.

No, no, we didn't. And the message that we said was that message, that the excitement is all about these small bolt-on technologies.

That's the core way that Croda wants to get in involved in seeing our growth shape, grow forward. It's the right thing to do.

So yes, so for the avoidance of doubt as they say in the legal terms, our priority is that. And I think you saw that in the Capital Markets Day.

And you see that in how we talk. If you talk to the Croda people, that's what they are interested in, that's the priority.

Okay, so you're not going to buy PSF either. And my second question is...

Definitely not.

Second question is on raw materials. You're starting to see some cost inflation on the feed stock side.

Can you quantify that, and can you highlight what areas you're seeing raw material cost inflation, what you're doing to pass that on?

Yes, I mean we're not really seeing it, to be honest. I mean, we would say in the first half numbers, it's about -- we were talking about this just before, about 1% raw material inflation in group numbers for RMs in the first half, mainly skewed to Performance Technologies.

Second half -- we talked to Stuart, our Head of Operations, as we look at the RM picture, pretty benign, we would say. Similar to the first stuff.

We're not -- don't forget, a lot of our materials are quite unique materials. I mean, we're buying wool grease, we're buying fish oil, we buying high [indiscernible] grape oils.

Those are the things that we worry about more than the petrochemical feedstocks in the market. So don't basket us with others in that case.

But yes, pretty benign. Andrew?

Andrew Stott, UBS. Steve, could I go back to your comments on guidance for second half.

Just thinking about the comps from last year, especially in Personal Care. And I get the point you made on Par.

It doesn't look easy to get to mid-single-digit, even if your exit rate was pretty good in Q2. So what gives you that confidence?

Is it specific contracts in the multinationals, something you obviously emphasized? Is it other issues?

Just wanted to -- because I get to sort of 3% or 4% with nothing changing.

So where we get to with that is, we look at it -- that's the overall figure, margins for the group, slightly ahead, similar to first half. There'll be some moderation in turnover in personal care, because let's be honest, 11% is a perfect quarter for the group.

If we could have 11% every quarter, Chief Exec would be delighted. But it's on weaker comps, you can see that from last year.

And we have had 1 or 2 new product launches for multinationals that haven't hit the market yet. So there's a bit of pipeline fill in there as well.

So how we look at Personal Care is around mid-single digits for the second half on improving margins. We expect the margin to move forward there, given the exchange rates where they are and if they stay there.

So profitably-wise, will be similar to first half for Personal Care. Life Sciences, don't forget, we've had a bigger impact in Par in the first half than in the second.

We were about £8 million out of £12 million, so we were at £4 million in the second half. And the core businesses are growing pretty well underneath that.

So we're happy with that. At then Performance Technologies, we're expecting some sales growth to come through on moderation of margin improvement in there.

So the sort of reverse of Personal Care if you see that. That all adds up in our mind to mid-single digits.

Yes, and remember on Performance Technologies, the big growth particularly in the oil and gas markets was first half of '17. So from July, we were starting the demarketing process around that.

As Steve said, you've got a change in the mix of the 3 sectors in there. But overall, we still feel that should be 4% to 5% core business growth similar to the first half.

And can I just follow-up on Performance Tech? It's on the maths of the leverage.

I mean, I think it was 2 -- I think it's 2% growth in sales, 15% growth in EBIT. Is that really just mix?

I mean, that seems pretty extraordinary.

Yes. Do you want to handle that?

Yes. So yes, it's about -- again, I think we had 26% growth in oil and gas in the first half of last year.

So a lot of that was quite low margin business, as U.S. shale production came back in, and there were a lot of orders and they were taking a lot of capacity as well.

So, you have the bottom slicing of all of that business coming out. You have general move to improve the mix of the products we have got.

And of course, we don't -- because we have multisector plants, the fact that Personal Care and Life Science ex the API, which is in one particular plant in the U.K., because that -- those two are both growing in terms of volume, you're not getting any stranded cost. So clearly, we've got to allocate the cost between the 3 sectors.

And we do that broadly on a volume basis. So clearly, if you were taking that sort of volume out of Performance Technologies and not growing the other 2 business, then clearly, you've got a fixed cost operating leverage issue.

But because you've got the other 2 growing at the same time as this, then basically, you see that improvement coming through. So fundamentally, bottom slicing improving mix, but you do get the benefit of more volume going through the other two sectors.

Yes. Adam?

Yes, I had a couple. On the value over volume in PT, this has been a feature for a long time, but was clearly quite a big impact in the first half.

You mentioned just now that some of this perhaps is down to lower value oil business dropping out. I wondered if you could just set out against the overall.

And with the overall, give us a sense of what the main movements have been, where have you tackled this most and a sense of how this might develop looking forward? And the second one is on the API business.

You are talking about a £4 million headwind in the second half and then that drops out. What are you doing in terms of replacing the Omega-3 API business, and just an update please on the prospects elsewhere in Omega-3?

Yes. Well, let me do value volume and then, Jez, pick up API as well.

I mean, the value to volume, so what you saw in 2017 first half was in the industrial businesses, in all of our industry was a big demand increase which was led by construction, led by oil. And what that means for most people is, obviously commodity prices go up and everything else.

In our world, our oil business is at the lower end of the pricing and big volume. So it's big volumes going through, relatively low average selling prices in the Performance Technologies area.

So that had a significant impact, just that alone, because you have got that big surge so the comparators were easier. But what we did is that we -- our plant got very busy.

We filled our factory Now what a lot of the industry do is they just tolerate that and then they bring the CapExs on and we of course will bring CapEx on it the right way, but what we do in-between is we demarket. So we look at the lowest quality business at 5 or 6 of our sites, which are largely driven by Performance Technologies.

And so you have got a double whammy. So you've got that mix effect and then you have got a demarketing campaign, which is -- it's a well trodden path for Croda.

And that has a mix improvement effect. I think the third thing on that would be, the self-help he's got -- in Martin's team now we've got Smart Materials and Energy Technologies, and we've got more focus in those businesses which is driving better thinking, better decision-making in those businesses.

So we're probably responding quicker to that. So those 3 things are helping the story and delivering the mix.

I mean API, Jez, do you want to comment on that now?

Yes, so we still think Omega-3s are an interesting area in pharmaceutical APIs. We've got a couple of products which are -- which have been and still are in clinical trial, obviously where we are making an API for pharmaceutical majors, which may or may not lead to drugs coming to the market.

And of course, those would be patented drugs with long protections as opposed to, obviously, the North America contract, which was a generic and we always thought that was going to be relatively short-lived. And in the end, of course, it lasted for about 3.5 years.

We were into it in 2014 and exited at the end of '17. And since then, the market pricing has dropped rapidly in that space, so we were right to pull out.

Otherwise we would have had the sales this year but no profit. So there is still interest in there.

But it is a sort of small ring-fenced part of the Health Care business within Life Sciences. So we've got a plant in Leek, which can make the products.

And if something comes through, that will be great and we will see some significant growth as we go into the next decade. But we have no control over it, we have no visibility over it.

So we don't -- it's not sort of core to the health strategy, but it's an interesting adjacency, really. The key thing for us in Health Care is it's all about a broad portfolio of excipients, particularly the high-purity ones that Steve talked about.

Hundreds of products to hundreds of customers in lots of applications. And the reason that is so exciting is just that when you look at the pharmaceutical development pipeline, something like 50% of the products in the pipeline are biologics.

Biologics need these complex excipients to deliver them into the body. And we are seeing the high-growth coming through so much so that we've started a £25 million investment in North America to expand, really to double our capacity of high-purity excipients.

So the core Health Care business, very typical Croda, high-technology, lots of products, lots of customers. The APIs, a couple of quarters, couple of customers, maybe interesting.

But we don't just control that at all. So...

Yes, just to translate just so people get it. The API of sales in context to the total sales in Life Sciences, percentage-wise?

All, right, so we're probably now doing -- we're doing less than £10 million in existing APIs. And that's in a Life Sciences business over £200 million.

The returns in Life Sciences are definitely not driven by API. That's, as we move away from the Par contract, it's all about the 3 businesses, the 2 Crop businesses and the Health Care delivery system business.

They are the drivers and they're all growing very strongly, 6% to 9% odd. So we're really pleased with that.

We'll go to Martin because he's been holding on for a while down here.

Yes, just following up on Andrew's Performance Tech question, really. I mean, I think historically, that division, possibly wrongly, has been seen to be maybe the poor relation within the group and all the attention elsewhere.

But these sorts of returns now, approaching 20% EBIT, those are high level specialty returns, and you're talking about sort of new products in areas such as water purity, reduced emissions and so on. So internally within Croda now, do you think, given how PT has essentially proved itself, that it will get more attention and focus in terms of NPP development and so on?

Yes, you must have been talking to the Head of Performance Technologies, have you Martin? No, but he's probably on the call listening, chuckling away.

It absolutely does, and they deserve the right for us to invest more and more in the business. And it's classic Croda, not just because of the results, it's because the markets are opening up.

There's some great opportunities in some of these areas. And we're always consumed and led as an organization, and we'll always look for the next best thing in Consumer, Personal Care and Life Sciences, but we will start looking more and more in Performance Technologies.

So this scouting network that we've put in place for 24 -- training -- trained up for all three businesses. Their priority is balanced across the three.

And I'm quite frankly, Jez and myself, we'll be happy if a lot of them come in Performance Technologies, but if they come in Personal Care, we'll be happy, too. But what we are looking for is the same criteria.

They have to have this rich technology, lots of IP and they're going into fast new growth markets. And as long as we can find more in Performance Technologies, we'll be comfortable with that.

Because the returns are getting to levels that we would expect any Croda business to be at. And 20% returns for this business, when you compare that to other industrial businesses out there, it's significantly ahead.

But it should be because it's Croda. That's how we work.

Chetan?

Two questions, one on Personal Care. I just wanted to confirm, did you say the margin in second half in Personal Care will be same as first half?

No, I didn't. I didn't say that at all.

What I said was the moderate -- sales will moderate from 11%, and we expect broadly mid-single-digit sales growth on improving margins. So the margins down 60 basis points.

We've got an FX short-term issue, so it's assuming the FX remains where it is. We've got Sederma selling to the dollar world in euros, you do the maths on it.

That's likely to moderate through the second half.

Euro strengthened really probably from August against the USD last year. So at today's rates, we'd expect that headwind to start to moderate.

That was the main driver to the reduction in the first half. Clearly, our margins tend to be a bit stronger first half than second half.

We're seasonally a little quieter in the second half. So you don't tend to get exactly the same margin.

And the second question again, sorry to follow up on PT, but we've had this environment of tightness in chemicals, generally pricing going up. Is there some element of maybe just stronger pricing because of tightness in some of the markets driving up the earnings, do you think?

Yes, not much. I mean there is some but not much not much.

We -- is this a cyclical event for Croda? And is it going to return to normal?

We think a lot of it isn't. It's doing the right thing in the business, the quality of the products in our factories now are much higher.

We think the raw material climate is reasonably benign and so we don't expect -- it's certainly not going down so we don't expect price attrition, nor do we expect further price increases. So there is a tightness, but it's mainly linked to the -- what I call the diversified companies out there.

They are impacted more than we are. We think it's there to stay.

And as I said earlier, the encouraging thing is, they haven't really started with NPP yet. And there's a lot of good opportunities in the pipeline.

So as we start to really do more to -- with the NPP growth program for them, we think that's really supportive of the 20% return on sales. So yes, classic Croda, more innovation.

Paul?

Just a couple of quick ones. In terms of the biosurfactants launch, Jez, into the fourth quarter, contribution, I think, Steve, you said it starts then.

What kind of profit impact do you think that business can have in 2019? That's my first question.

Okay, so the -- with 2018, first of all, we've probably had a headwind of around £1.5 million a quarter from, obviously costs associated with the plant. We have offset that.

From Q1?

No, from -- for this year. Yes, for each of this year.

For each quarter of this year.

For each quarter of this year we've had that. And, of course, in the first half, that's been broadly offset at the interest level by the fact that we have been capitalizing the interest.

So we'll have that headwind in the third quarter, we expect that to disappear in the fourth quarter and as -- and therefore, as we go into next year, you'll have productive value for that sort of £6 million of headwind. And, of course, we'll start to pick up the margin that is currently made by our suppliers on the ethylene oxide into that.

The exciting part, of course, is to then to start to move sales ahead. But simply at the margin level, yes, we'll avoid the headwind of costs we have got and we'll start to pick up the margin benefit.

A follow-up to that, so something around £8 million is a good starting point?

A few million pounds, we've said yes, is a good basis.

And then the second piece is just on the acquisitions. I know plant impact is negative for this year, you're hoping to get it to break even next year, so that's a [4] delta.

What about the acquisitions? Any profit impact from those next year?

Yes, so the other ones that we've done, it's pretty trivial because we have -- just a very small handful of people in Nautilus, Enza. As Steve said, plant impact £4 million, of which the best part of £3 million is to come through in the second half year.

And then, the other one is IonPhasE, which is currently loss-making. So collectively, the two acquisitions impacted us just over £2 million in the first half year, in terms of additional operating losses that we wouldn't have had if we hadn't had the acquisitions.

IonPhasE, we see moving into profit as we go through the second half year. And then next year, we're looking for Plant Impact to be breakeven as we guided on the first quarter call.

Now that's a function of sales. It's got early stage sales at the moment, but they clearly don't cover its cost, because we have the £4 million loss.

So the key is the rate at which we can bring those sales of biostimulants into the market. But right now, we're targeting to get that to breakeven.

So we wouldn't expect to drag in '19, but in the second half of this year it's primarily about a £3 million drag around Plant Impact.

Tom Wrigglesworth from Citi. So two questions, if I may, Steve.

The first one is, just squaring up the kind of the mix of the Performance -- Personal Care growth, it was noted Beauty Actives being very strong, obviously, in the new Sederma plant. How is that going to affect the mix versus the margin improvement that you've guided for the second half and into 2019?

Are you expecting Beauty Actives to be the major driver there? And second question focused on cash tax, seemed to be very low in the first half.

So obviously, the net income -- the P&L tax was low, but I think there was a £20 million delta on cash tax, if -- any detail on that would be helpful.

Just on the Personal Care mix, so the message around margin improvement is assuming the mixes that we know probably happen in the second half. So we will see a margin improvement.

What's driving it is all of them in the first half are growing at similar rates actually. Effects and Actives in percentage levels are growing a bit higher.

But they're all between the 6% and 9%, and Formulations business a little bit lower. But Formulations is a bigger business, so do the maths on it.

You get -- you do get a slight mix skew. Going forward, we don't expect the mix change too much in the second half, but probably a little bit more with the exchange rate benefit of Actives to drive that a bit more.

So -- and we have seen the sort of a typical exit rates of quarter two, are encouraging and we expect that to go forward. And so they're all in good shape.

And at the gross margin level, which is what we look at it, is a good indicator. They're all at or better than last year, the three businesses.

The three businesses are in good shape. We just got an FX sort of optic, which is a short-term issue which will reverse hopefully the second half.

So cash tax...

Oh, yes, the tax - the cash tax. Yes.

Yes, So two different things going on. P&L driven by the lower federal rate coming down from 35% to 21%.

Cash tax driven by not paying any U.S. -- not expecting to pay any U.S.

federal tax, probably for this year and next year. And that's a function of the accelerated depreciation we can take on, the North America biosurfactant plants.

So effectively, we can -- in principle, you can take the capital out in a year, although we don't actually make enough money in the U.S. to take it in a year.

So that basically removes, effectively, U.S. federal cash tax for 2 years.

Clearly in the P&L, you still -- that still goes through the P&L rate, that goes to deferred tax. But from a cash tax point of view, no cash in the U.S.

for 2 years.

Yes, Martin?

Just a -- Jez, to follow up on Atlas Point comment about the exciting thing next year could be new revenues. Just -- and this is obviously early days.

Are you saying the hope is that you'd replace existing contracts when they roll off at essentially higher rates because of the green nature of the new product? Or that you're hoping to generate new demand?

Because I would've thought, amongst existing customers, demand is pretty static that you can't generate a new market, it's just that you can sell the new product on different terms.

Yes, the -- so clearly, the economics -- there were 3 potential components to the economics of the Atlas Point biosurfactant plant. The first is capturing the margin, currently with our suppliers because we'll make the feedstock ourselves.

And then, the second component is to grow that market space, and then the third is potentially to capture a premium around the fact that it's a green product, it's biosurfactant rather than a petroleum-based product. So those are the three components.

And we expect them to sort of come in that sequence in terms of timing. So we clearly capture the margin as soon as we start to get into production and so we're looking at fourth quarter.

And then, during next year, start to see some sales benefits of that coming through. In terms of the -- obviously, we're not really there to make bio-ethylene oxide, we're there to make our costs of a downstream plant.

That market is probably growing about 3%. So there is some market growth there.

But it's really substitution. So it's really the fact that we think that more of our customers, particularly in those markets that Steve talked about in sustainability, particularly Personal Care, particularly Home Care, that you will see customers wanting to, a, substitute our competitors product and, b, growing their own market because they are now offering a product which for the first time will perform as well as the petroleum-based products, where, of course, up till now, the problem has been, yes, you can get some green products but they don't perform as well.

Whereas here, we're going to make an identical chemical product. So basically, we think substitution and the opportunity to grow the market are very exciting in this project.

It's a bit like technology acquisition in Incotec. All you have to do is you bring it online, you add the margin improvement because we are substituting, we'll substitute all the products straight away.

So within a week one, week two, we're on to the change from petrochemicals to bioeconomics. But the really interesting and exciting thing is, how do we talk to the marketing teams of our customers and reposition that?

Because we are having those discussions now. But we got to get the products onstream, and then it takes just inertia, just takes a 6 months, maybe 12 months, to reposition their brands for the new generation products.

And we call it whitespace, but a lot of good whitespace opportunities here. But you're going to really see it towards the end of '19 and into, I think, into 2020.

So next year is really a margin improvement story, because you're taking the intermediate out. Then you're really, in 2020, is when we should start to see the strong sales growth as a consequence of having that.

Great. Well, thank you very much, and I'll leave you to your other 5 or 59 chemical reporting today.

All right. Thank you.

Cheers.