Croda International Plc 2014 Interim Results 22 July 2014
Introduction Steve Foots Group Chief Executive
Underlying progress in a tough environment Constant currency turnover up 2.3% 5 out of 8 core markets within target underlying sales growth range in Q2 Strong underlying growth in New and Protected Products (NPP) Impressive underlying sales growth in Asia, up 8% Improved H1 EBIT margins in Consumer Care (32.6%) and Performance Technologies (18.9%) Significant headwinds on exchange rates reduces EBIT by 11.4m Translation 7.8m, transaction 3.6m Strong free cash flow supporting continued investment in new growth channels Interim dividend of 29.5p up 1.7% 3 Constant currency growth rates reflect changes in income from continuing operations translated at constant rates of exchange Underlying growth rates reflect changes in income from continuing operations translated at constant rates of exchange excluding the effect of acquisitions
Consumer Care Mixed performance Personal Care Health Care Crop Care Demand remains subdued Strong growth Returning to growth NPP sales growing faster than market Europe soft Improving trends Q2 vs Q1 Strong demand for excipients Americas strong Many new niches Good demand for adjuvants Latam rebounding well Expansion of customer base in Asia 4
Performance Technologies Encouraging performance Lubricants Polymer Additives Home Care Europe led recovery Stable demand Improving Good demand in Auto OEMs Europe driving recovery Regulatory change accelerating growth Increased polyolefin demand Growth in all regions Sipo Strong I&I demand Growth in Europe Move to sustainable solutions I&I = Industrial and Institutional cleaning 5
Performance Technologies Encouraging performance Geo Technologies European led recovery Coatings & Polymers Stable demand Good demand in niches Europe leading growth Investment in Houston Significant raw material deflation Asian led growth Move to bio-based ingredients 6
Increasing the amount of group turnover that is protected 8% 1% -11% 2013 2014 Tail Differentiated NPP Fast grow Grow Manage % 35 30 25 20 15 10 5 0 % 35 30 25 20 15 10 5 0 Consumer Care ROS 31.7% 32.6% H1 2013 H1 2014 Performance Technologies ROS 18.5% 18.9% H1 2013 H1 2014 % refers to underlying sales growth 7
Performance Technologies Consumer Care Strategy starting to deliver on sales growth targets Turnover targets Q1 Q2 Personal Care Health Care Crop Care Lubricants Coatings & Polymers Home Care Geo Technologies Polymer Additives Consumer Care: Target of 5 10% underlying sales growth based on 1-2x market growth Performance Technologies: Target of 4 8 % underlying sales growth based on 1-2x market growth 8
Personal Care market environment Insights from our customers Modest overall global consumer demand Developed market economies are generally soft Greater focus on high growth markets Several bright spots broadly, especially in high-end demand Mass and mass-tige markets remain difficult Highly competitive environment is both global and regional Regional brands getting stronger and more global 9
Croda Personal Care Croda s robust and defensible model Current market Croda response NPP Growing ahead of market Boosting overall margins Increased focus on R&D Individual customer plans Differentiated Growth in-line with market Slower market growth Moving closer to our customers More global alignment Tail Competitive pressure Negative growth Low differentiation Price flexibility Customer leverage New global customer facing organisation to drive faster growth 10
New global, customer facing organisation Creation of three global business groups Personal Care Health Care & Crop Care Performance Technologies & Industrial Chemicals (PTIC) Combining Sales, Marketing and Research by sector in dedicated global teams Full Executive Committee accountability with responsibility for top and bottom line financial performance Regional strength and local focus Organisational change announced May 2014 11
Executive Committee responsibility Responsibilities Kevin Gallagher Personal Care Sandra Breene Health & Crop Maarten Heybroek PTIC Key benefits of change Fully aligned with our customers needs Separating Personal Care from Health and Crop will provide sharper, tailored management and strategic focus Smarter resource allocation and optimisation Accelerating and capturing sales growth Increased customer intimacy Sharper innovation and more focussed R&D 12
Financial Review Sean Christie Group Finance Director
Currency effects reduced EBIT by 11.4m in H1 Movement v GBP Q1 Q2 Western Europe -2.6% -3.8% EEMEA -5.2% -6.6% North America -7.1% -9.6% Latam -6.9% -10.0% Asia/Australia -12.8% -11.9% Total -6.1% -7.6% Turnover reduced by 38m due to currency effects Adverse currency translation averages 6.8% in H1 EBIT reduced by 11.4m due to currency effects Translation: 7.8m (used to calculate constant currency numbers) A further 3.6m transaction hit (mainly due to $ denominated sales ex Europe) 14 Constant currency growth rates reflect changes in income from continuing operations translated at constant rates of exchange Underlying growth rates reflect changes in income from continuing operations translated at constant rates of exchange excluding the effect of acquisitions
2014 Q2 results Basis of preparation Unless otherwise stated, all profit and earnings numbers are stated before acquisition costs and goodwill amortisation
Q2 sales by segment m 2014 2013 Reported growth Constant currency Consumer Care 143.4 154.4-7.1% +0.8% Performance Technologies 88.5 91.4-3.2% +4.0% Industrial Chemicals 31.5 33.8-6.8% +0.8% Total turnover 263.4 279.6-5.8% +1.8% 7.6% adverse currency translation depresses reported growth 21m reduction in reported sales 1.3% benefit from acquisitions In Q2, both CC and PT saw underlying growth Industrial Chemicals: Acquisition of Sipo masks significant declines in by-product sales due to weak commodity markets and low levels of toll processing 16
Q2 EBIT/ROS by segment m 2014 2013 Reported growth Constant currency* Consumer Care 45.8 49.9-8.2% -1.2% ROS 32.0% 32.3% Performance Technologies 16.6 18.2-8.8% -4.9% ROS 18.8% 19.9% Industrial Chemicals 1.2 3.1-61.3% -56.3 ROS 3.8% 9.2% Total EBIT 63.6 71.2-10.7% -4.8% ROS 24.1% 25.5% Strong Crop Care sales reduce Consumer Care margins slightly Sipo dilutes return on sales in Performance Technologies Significant profit shortfall in Industrial Chemicals Currency effects reduce EBIT by 6.4m (translation 4.1m/transaction 2.3m) * NB Constant currency growth adjusts for translation effects only throughout this presentation 17
2014 interim results Basis of preparation Unless otherwise stated, all profit and earnings numbers are stated before acquisition costs and goodwill amortisation
2014 turnover by destination Europe: Generally weak 11% 7% 39% UK represents 5% of total sales W. Europe -2%* N. America +2% demand esp. Personal Care North America & Latam: Personal Care & Crop weakness. PT saw good growth 17% Asia +16%* Asia: 8% underlying growth LATAM -2%* plus Sipo acquisition 26% EEMEA** +2%* EEMEA**: Modest growth against weak comparatives *Local currency growth before adverse currency translation ** Eastern Europe, Middle East and Africa 19
Sales trends Consumer Care saw underlying sales growth in Q2 as Crop Care recovered Performance Technologies close to minimum growth targets Q1 Q2 H1 Consumer Care -0.6% +0.6% - Performance Technologies +3.7% +2.7% +3.1% Industrial Chemicals +2.7% -5.7% -1.6% Underlying sales +1.3% +0.5% +0.8% Acquisitions +1.6% +1.3% +1.5% Constant currency +2.9% +1.8% +2.3% Currency translation -6.1% -7.6% -6.8% Continuing sales -3.2% -5.8% -4.5% Industrial Chemicals down in Q2 due to weak commodity markets and reduced levels of toll processing 20
Consumer Care m 2014 2013 Growth CC Turnover 291.8 312.8-6.7% +0.3% Sales ( m) 160 120 Operating profit 95.2 99.1-3.9% +2.2% 80 40 ROS 32.6% 31.7% 0 Q1 Q2 Q3 Q4 Flat underlying sales but improving trend Strong underlying growth in Health Care Crop Care much better Q2 EBIT ( m) 60 50 40 Slight decline in Personal Care 30 Strong underlying NPP sales in all areas Tight cost control Return on Sales increases to 32.6% 2013 2014 20 10 0 Q1 Q2 Q3 Q4 CC = constant currency 21
Performance Technologies m 2014 2013 Growth CC Turnover 182.4 185.3-1.6% +4.8% Operating profit ROS 18.9% 18.5% 34.4 34.2 +0.6% +4.1% Strong constant currency performance despite being overweight US/Europe and lack of inflation Asia sales very strong ROS increases despite Sipo dilution and currency transaction pain Sales ( m) EBIT ( m) 2013 2014 120 100 80 60 40 20 0 20 15 10 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 CC = constant currency 22
Industrial Chemicals m 2014 2013 Growth CC Turnover 63.3 64.6-2.0% +5.3% Operating profit ROS 4.3% 9.1% 2.7 5.9-54.2% -45.8% Sales ( m) 35 30 25 20 15 10 5 0 Q1 Q2 Q3 Q4 Weak commodity markets and currency transaction pain put pressure on margins for by-products Reduced levels of toll processing Currency transaction pain and Sipo (at break-even profitability ahead of Croda product launches) further EBIT ( m) 5 4 3 2 1 dilutes ROS 2013 2014 0 Q1 Q2 Q3 Q4 CC = constant currency 23
Pre-tax profit m 2014 2013 Growth CC Total EBIT 132.3 139.2-5.0% +0.5% ROS 24.6% 24.7% Financing (7.0) (6.0) Pre-tax profit 125.3 133.2-5.9% -0.2% Reported EBIT reduced by 11.4m due to currency effects Translation 7.8m and transaction 3.6m Interest on Sipo acquisition (H2 2013) increases financing cost CC = constant currency 24
Interim earnings per share m 2014 2013 Growth CC Pre-tax profit 125.3 133.2-5.9% -0.2% Tax rate 30.2% 30.9% Minority - - Average number of shares 135.4 135.0 Earnings per share 64.6p 68.2p -5.3% +0.3% Lower tax charge due to reduced UK rates and emerging market growth Constant currency EPS up 0.3% 25
Interim dividend increased 2014 2013 Growth CC Earnings per share 64.6p 68.2p -5.3% +0.3% Interim dividend 29.5p 29.0p +1.7% Pay-out ratio 46% 43% Cover 2.2x 2.4x Interim dividend increased 1.7%, broadly in line with EPS growth excluding all currency effects Payable on 30 September 2014 26
Free cash flow m 2014 2013 EBITDA 149.8 155.7 Working capital movement (27.3) (24.4) Cash from operations 122.5 131.3 Capital expenditure (23.3) (19.6) Free cash flow 99.2 111.7 Strong cash generation continues despite currency headwinds Working capital outflow includes Sipo Capex on NPP and Asia growth plus energy saving projects 27
Net debt unchanged despite 48m dividend and 22m pension contribution m 2014 2013 Free cash flow 99.2 111.7 Excess pension contributions (22.0) (38.8) Share purchases/issues - 0.1 Share based payment (3.7) 3.3 Dividends paid (48.1) (44.3) Interest (4.6) (3.6) Tax (25.3) (23.9) M&A (0.6) (7.9) Other (mainly restructuring) (0.7) (2.8) Net cash flow (5.8) (6.2) Exchange differences 6.0 (8.4) Change in net debt 0.2 (14.6) 28
Net debt 202m m 2014 2013 Net debt 202.0 222.3 Committed facilities 479.0 477.5 Committed headroom 277.0 255.2 Net debt/ebitda* 0.7x 0.7x EBITDA interest cover* 31x 39x New 400m banking facility runs to July 2019 $100m fixed rate loan (5.94%) runs to January 2020 * As per loan covenant calculations, rolling 12 months 29
IAS19 Pension deficit m 30 June 2014 31 December 2013 Market value of assets 846.8 808.3 Value of liabilities (979.4) (944.1) Deficit pre-tax (132.6) (135.8) Deferred tax 27.4 31.9 Deficit post-tax (105.2) (103.9) Pre-tax deficit reduced by 3.2m 28.4m company contribution in H1 plus equity outperformance But discount rates fell again! Post-tax deficit 105.2m Triennial review of UK scheme this Autumn 30
Strategy review Steve Foots Group Chief Executive
Investing for growth Investing in new growth opportunities Mega trends Investing in new technology Beauty and ageing Investing in R&D Sustainability Investing in capacity Health and well-being 32
Investing in new growth opportunities Beauty and ageing The scientists at No7 have reformulated the proven anti-ageing classic No7 Protect & Perfect Serums for greater anti-ageing power The serums include greater quantities of Matrixyl 3000, the star ingredient which drives repair of fibrillin To demonstrate how effective the new ADVANCED Serums are, the scientists at No7 undertook their most extensive and comprehensive testing programme ever We help to create multi-million pound brands for our customers 33
Investing in new technology Pharma active ingredient Partnership with PAR Pharmaceutical announced Ultra high purity Pharma grade Omega-3 FDA clearance to supply from GMP compliant facility in UK Access to generic Omacor/ Lovaza market Indicated for the treatment of elevated blood triglycerides (hypertriglyceridemia) Partnering with PAR FDA approved technology Superior quality active ingredient Croda announce active ingredient partnership with PAR Pharmaceutical 34
Investment in R&D in Asia starting to deliver results Sipo, China India Moving closer to our customers Many new niches identified Customer engagement increased Growth in both Consumer Care and Performance Technologies Singapore R&D success is supporting 8% underlying growth in Asia * Underlying sales growth in H1 2014 vs H1 2013 35
Increased capex programme to meet future customer needs Atlas Point, USA Sipo, China Capex 157m invested 2011 2013 240m budgeted 2014 2016 Specific investments for all core markets Chocques, France Jurong Island, Singapore 36
Summary and outlook Visibility limited and market trends remain hard to read Remain confident of further underlying progress in sales and profits in H2 Encouraged by underlying momentum through H1 5 out of 8 core markets in target sales growth range in Q2 Asia 8% underlying sales growth in H1 Strong underlying growth in NPP underpinning industry leading margins New growth initiatives in health and skin actives coming on stream Organisational change will drive sharper commercial focus and customer alignment Robust cash generation to drive continued investment in R&D, technology and capacity 37
Questions