Croda International Plc (CRDA.L) Q3 FY2025 Earnings Call Transcript & Summary

Hello, and welcome to Croda International Q3 2025 Sales Update. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to your host, Steve Foots, to begin today's conference. Thank you.

Good morning, everyone, and thanks for being on the call. I'm here with Stephen, and he'll join me in answering your questions in a moment. But let me start by quickly highlighting 3 key points coming from the quarter 3 update. Firstly, group sales were up 6.5% in constant currency, the sixth consecutive quarter of sales growth, and we're pleased with that. Quarter 3 hasn't seen any big surprises for us with customer demand for our ingredients broadly the same as quarter 2. And most encouragingly, we're seeing sales growth with innovation led, driven by an improvement in Beauty Actives, continued strength in F&F and an ongoing recovery in Crop. Secondly, we'll continue to optimize utilization at our shared production sites through targeted sales of ingredients in Beauty Care, Crop and Industrial Specialties as part of the actions we've been taking since 2024 to increase operating margins. Alongside good growth in Actives and F&F, this resulted in another quarter of low double-digit sales volume increases compared with the same period last year. And as a result of these actions, the mix continued to be negative year-on-year due to both product mix and business mix and like-for-like prices remained largely consistent with prior year. Thirdly, we continue to make good progress with our transformation plan to improve earnings and returns. We're driving sales by maximizing returns from our portfolio, leveraging our proximity to local and regional customers and stepping up innovation with all customers where we are seeing strong demand. And we're driving margin recovery by finding more ways to optimize capacity and by taking out costs as we simplify and modernize the business. We're on track to realize GBP 25 million of cost savings this year and continue to expect to deliver GBP 100 million of annualized savings by the end of 2027, contributing -- all contributing to margin recovery. Finally, our guidance for the full year is unchanged. We expect a more challenging trading environment and low order book visibility to continue for the remainder of the year. But in line with previous years, absolute sales in quarter 4 are likely to be seasonally lower than in the first 3 quarters as customers typically manage their working capital into the year-end. Despite this, the combination of good sales growth year-to-date and anticipated cost savings means that we continue to expect GBP 265 million to GBP 295 million of group adjusted profit before tax at constant currency. So let me stop there and hand over to you for questions from the sell-side analysts. So thanks for that.

[Operator Instructions] We'll now take our first question from Lisa De Neve of Morgan Stanley.

I have 2. Could we just run through the full year guidance, which was unchanged on a currency-neutral element. But just taking into consideration the unchanged translation FX guidance, but small incremental negative transactional FX, but then your third quarter volumes were slightly ahead. How do we picture that into the full year against market expectations? It would be very helpful to get a little bit of color on that. And then secondly, in terms of the fourth quarter, you called out the normal seasonal slowdown, but it would be very helpful to get some comments on what you're seeing more globally and specifically in Asia and Lat Am in terms of trading trends and how the customer is feeling and what the implementation is on that in terms of Life Science and Consumer Care demand.

Yes. Let's Stephen do the guidance, and I'll come back on the wider, broader customer point.

Yes. Lisa, good to hear from you. So look, we've reiterated full year guidance. That shows the confidence, obviously, in the business. We're on track. We have highlighted market uncertainty and just shorter visibility on the order book. So that's why we're keeping the guidance unchanged. Worth saying that on ForEx, you pointed out 2 elements there, both headwinds. We have translational ForEx of around [ 10 million ] for the full year. And then on a transactional level, you will recall we had an adverse impact in underlying profit of [ 7 million ] in the first half. We expect that to be about [ 3 million ] in the second half. So again, I think, [ 10 million ] overall for the year was a headwind.

Yes. In terms of the broader point, Lisa, yes, I mean, we expect the trends to continue from quarter 3 into quarter 4. What you're seeing is Consumer Care. You've got Consumer Care growing well, particularly with innovation-led growth in Actives and Beauty Care as well. I think Crop is recovering well, too, as well. And you're seeing that F&F has been consistent with its growth. I think we're cautious on quarter 4, like many others because of the order book more than anything else. The order book visibility is very low. But customer sentiment is not changing. Innovation will win in the end in this market. And as long as we continue to innovate, we'll be fine. But we're just taking a cautious view because of the low level of visibility in the order book.

And we'll now take our next question from Charles Eden of UBS.

Two questions from me also, please. Firstly, you mentioned you're implementing the actions required to realize the GBP 25 million cost savings in 2025. I wonder if you could just give us a couple of examples of specific measures you've already taken and what you're seeing in terms of reward or cost savings as a result of those. And then my second question and the comment, I guess, as well is thanks, firstly, for breaking out the mix and the pricing component separately in the release. That's very helpful. Can I just ask, given pricing is broadly flat year-on-year now, is the expectation that, that will remain the case. And then, I guess, at some point through '26 return to positive territory and back to sort of the old Croda, if you like, where pricing is an accretive component to group organic -- sales growth or group constant FX sales growth going forward.

Yes, a few questions in there, Charles. But we'll let Stephen do the cost transformation and examples and then also the mix.

Yes. Charles, let me just start with the mix. So yes, we expect pricing trends we've had both in the first half and then this quarter to continue. What we said next year is that volumes -- as volumes come in and the business normalizes, we would expect to see that volume price mix trend essentially reversing. So volume growth will come to an end as we get to the end of next year. And then you'll see positive trends on price and mix. And as you pointed out, prices are largely consistent year-on-year on a like-for-like basis, which is important. On the cost savings, yes, we're on target for the GBP 25 million of savings for this year. We've set out in the summer a clear program to deliver GBP 100 million savings by the end of 2027. You can imagine the savings at the moment are what I'd call slightly more tactical. So early procurement savings, headcount reduction across the business in the back office sort of early moves on shared services. As we go into next year, we start to tackle the more structural opportunities that we've outlined, particularly in supply chain and logistics.

Very clear. And just for clarification, I think I know the answer, but you talk about volume trends normalizing. You'd still expect volumes to grow in '26, just to be clear.

Absolutely. So we've talked about getting back to the historic levels of utilization in our core plants. That will take 2026 to achieve that level. That will give us good operational leverage that drops through to margin accretion, as you saw in the first half. That will continue. Once we're at those levels, Charles, we'll then see the price/mix margin accretion from that.

And we will take our next question from Chetan Udeshi of JPMorgan.

The first question was -- so I think this is probably the first quarter in many quarters where your Actives business has grown double digits. I'm just curious, is there some -- a freak accident because of the launches from your customers', timing, et cetera? Or do you see now a clear trajectory here where we should see at least some positive growth in coming quarters because of the new products that you are referencing in terms of innovation? The second question was, I mean, I'm a bit curious, you are almost now in Q4, the range of your guidance still seems pretty wide given that we have only one quarter left. Are you still anchoring us to -- or sorry, still suggesting that we should be anchoring to the midpoint of the guidance? Or do you want us to take a view on either low or top end of the guidance? And the last quick question would be on Crop. Very, very strong growth again in Q3. It seems some of your customers are starting to sound a bit more cautious. Is that something you see in your order book or any of your discussions with customers?

Okay, Chetan, thanks for the questions. I'll do Actives and Crop, and Stephen on guidance. Yes, Actives, I mean, I was in Sederma last week for 2 days, just running the rule of the business. And I mean, great progress there, innovation-led growth. We have been growing, by the way, Chetan over the last few quarters, but this is a bigger growth. And we're very pleased with that, well balanced across local and regional and multinationals actually. It's U.S.A. led. And there's many behind the growth figures. It's not 1 or 2 customer wins. It's many, product launches with customers of all different shapes and sizes. So primarily, virtually all of it is on innovation, some great new products coming out and some existing products with new data. So we feel very confident about the Actives business. I think in Crop, the good recovery continues. Europe is getting stronger, which is where the recovery started. And that's now supported by America as well. So it's mainly multinational driven. But Tier 3 customers are growing as well, too. And we don't see any deterioration in the order book as we look at that into the remaining part of the year. So we're okay with that.

Yes. And then, Chetan, just on the Q4 and guidance. So look, we're very happy with the way the business is trading. It's in line with our expectations. It's just given the external environment and uncertainties, the reason why we've just not changed the guidance at all. Don't forget when we set that back in early in the year, we weren't expecting those FX headwinds that are hitting our underlying profit. So I think the key takeaway for me is that I'm absolutely comfortable with where consensus sits, and I would not expect that to change.

And we'll now take our next question from Nicola Tang of BNP Paribas.

I wanted to just clarify on the comments around seasonality for Q4. I think we only really have disclosure on a quarterly basis for the past 2 years, which perhaps weren't normal years, but wasn't necessarily down Q-on-Q in Q4 versus Q3. I think if I look at Bloomberg consensus, it implies Q4 sales will be down around 6% or 7%. So I just wanted to check versus Q3. So I just wanted to check if that was roughly in line with the usual seasonality that you're referring to. And then the second question, you referenced in the release slower -- the fact that lipid sales, adjuvant sales were a bit lower due to uncertainty relating to U.S. regulation or the regulatory environment even. And does this relate to sales going towards existing commercial applications, i.e., lower uptake of vaccinations by U.S. consumers today? Or does it relate more to development projects, i.e., consumers slowing down their pipelines or slower FDA approvals?

Yes. Let's go to the order of the question. And Stephen, on the quarter 4 seasonality, and I'll come back on Pharma.

Nicola, yes, just on seasonality, Q4 has always been traditionally the smallest quarter, and that just simply reflects the buying patterns with our customers. What we would expect to see are the trends that we've seen through the year so far. In other words, in Q4, year-on-year growth, but just the quarter being smaller in absolute terms.

Yes, Good. I think on Pharma, I mean, I would make a wider point. It's good to see the early signs of growth in Pharma ingredients. As a reminder to everyone, that's 2/3 of the business. The lipids point, it's slightly behind driven by America, but that's against tough comparators in the quarter and some customer hesitancy. But outside of America, it's fine. So we don't see any -- we're not overly concerned with anything in lipids. The Avanti preclinical lipid pipeline will continue to grow. We have no problem with that.

And we will now take our next question from Artem of Redburn.

Firstly, on the shared slide, I remember after the first half results, you provided this chart where you indexed your volumes of the share slide of the pre-COVID levels. I think last time you showed that slide, it was 8% down relative to the pre-COVID levels. Would you get any indication where these volumes are today? Or in other words, how do you feel about your capacity utilization rates right now?

Yes. It's a little bit better than that, as you'd expect. And I think more broadly, back to Stephen's point, we've got one more year to get back to optimized rates. So the plan is working for us, and we're pleased with that.

And we will take our next question from Sebastian Bray of Berenberg.

I have 2, please. The first is on Life Sciences. Can I ask about your thoughts on the run rate of this business into '26? And what I'm referring to is the following. If the lipids plus vaccines part is roughly 1/3 and constant currency sales were flat, let's say, high purity and other excipients were up mid-single digits, it implies that this fraction was down by close to 10% when there is quite a lot of new facility coming online that introduces fixed costs that needs to be covered for '26. Do you think Life Sciences as a whole is going to grow very much if ag is flattish because it's pretty tough comps in '26? How to think about the moving parts for that segment? In other words, are you comfortable with the balance of expectations for Consumer Care EBIT and Life Sciences EBIT for '26? And then secondly, Fragrances, any signs of a cycle, which has been very nice is starting to soften? Or is everything pretty much as it was in Q2?

Yes. Thanks, Sebastian. We'll let Stephen go first on the Life Sciences trajectory, and then I'll come back on F&F.

Sebastian, so look, in terms of -- as I think about next year, you will absolutely see year-on-year growth across the Life Sciences portfolio. What you've seen in the quarter is a sort of a slowing or flatter Pharma business overall. But as we've said, only 1/3 of that is in lipids and adjuvants, and better growth in the excipients business in Pharma. I'd expect that to continue in terms of accelerated growth in excipients as we focus on that and rejuvenate that part of the portfolio. Look, we're really excited about the Pharma opportunity. We're coming to the end of the investment cycle there in our facilities. We're really excited about what that gives us, particularly U.S.-based manufacturing, and we will grow into that. I think it's just worth saying that, that environment, the lipid environment is a little bit more difficult than we thought given U.S. policy, but we're still very excited about the long-term potential of the business.

And just to add to that, on the Lamar side, we've got potential revenue streams for Consumer Care going in there as well to protect profitability as well. So just to add to that. On F&F, it's broad-based growth virtually everywhere. This quarter is led by -- well, both Fragrances and Flavors and also the Parfex business, which is more the business pointing to Beauty Care. Regionally, the big growth is Middle East, Africa and Europe driving that. And the research and commercial pipelines are being expanded as we move research capability more locally there. We're not -- back to your point, we would expect the revenue growth to moderate from 15% to 17%, but it still should be pretty strong for the next couple of years. And we're not weighted on a high level of what I'd call really fine fragrances in the portfolio as well. So we expect that business to continue good growth trajectory.

And we'll now take our next question from Katie Richards of Barclays.

First, could you just provide us some more color on how adjusted EBIT margins have trended this quarter versus the first half of the year? I know you haven't disclosed them explicitly. There was also some criticism of potential lack of operating leverage exhibited in the first half of the year as you've been winning back some volumes. So what would you say towards this? Just another question on the transformation program, please, as well. You're targeting GBP 35 million of cost savings for optimizing operations. Can you give some more color on what part -- what this part of the program means towards you? Would you consider targeted divestments, for example, maybe of the shared manufacturing assets or elsewhere in the portfolio? And then finally, I just want to pick up on the fixed point -- the fixed cost point Sebastian just made. You've guided towards GBP 15 million SG&A inflation per annum going forward as part of the transformation program with GBP 10 million expected this year. But given the ramp-up of what looks to be about GBP 200 million in new assets, including the Lamar sites, the Indian surfactants and the China F&F site, how can we expect the SG&A inflation to trend into next year? I'm just struggling with the timing of the ramp-up of these businesses and the fixed costs that come with them.

Okay. A few questions there. So really point them to Steve in margins, op leverage, transformation program detail and fixed costs going into next year for the plants.

Katie, thanks for the questions. Just on margin, obviously, we've not given margin for Q3. It's a trading update. Just all I'd say is we're very comfortable with the progression of the business and the continuation of what you saw in the first half. On operating leverage, the point here is that we're bringing back business into the company that's rightfully ours. If you look at the first half, the benefits of that volume growth on a net basis were around 2% improvement in our operating margin. That's the plan that we're executing on, and that will continue, as I said earlier, through to the end of next year. On the cost savings, Yes, remember, GBP 100 million by the end of '27, the largest individual parts of that around supply chain and logistics. We've talked there about optimizing the footprint globally. So that is both within individual facilities and the network as a whole. And you saw a good example in July, where we've announced the closure of one of our distribution centers to optimize that footprint. What we're looking at is both supply -- both manufactured within the individual sites. So we expect to see a rebalancing of where we produce product to bring it closer to where we're seeing customer growth, so particularly in Asia. And then on the fixed costs, you're right. So we're coming to the end of our major CapEx investment program. That finishes at the end of Q1 '26. And thereafter, we'll see a significant reduction in CapEx. It is bringing on as we start up those facilities around GBP 10 million of incremental fixed costs that we've talked about previously into the business. So that's one element of inflation. Beyond that, I'd just point you to sort of normal inflation in the cost base and particularly salary inflation. But the point here is that with the GBP 100 million of savings, the transformation program we've got that overall, we will see that contributing to margin recovery as we get back to our ambition of mid-20s operating margin.

And we'll take our next question from Georgina Fraser of Goldman Sachs.

Kind of follow-ups to Katie's questions. I just wanted to understand, you've highlighted a continuation of negative mix. Could you talk about what's driving that given the strength in Beauty Actives? And then you did Stephen, give some helpful comments about the trends that you're seeing in margins. Do you mean that we should still expect margins to be up year-on-year in the second half, even though we have that negative mix? And then final question, thinking a bit more about profitability levels or margins for next year. You repeated quite a few times. So I think you want us to all get this message very, very clearly that next year is going to be another year of getting back to optimized utilization rates. So should we be thinking about 2026 as another year of volumes at the expense of mix before we get into positive mix territory into 2027? And what does that mean for margin expectations next year?

Yes, fine. Thanks, Georgina. I mean let me do the negative mix effect in the quarter and then pass to Stephen for the others. I mean, simple, the majority of that is in the negative mix is in the Industrial Specialties and the Crop businesses for the quarter 3. You've got positive mix starting to come through, particularly with Actives growing in Consumer. But on the margin profitability, I'll pass to Stephen.

Yes. So Georgina, as I said, Q3 is exactly in line with our expectations. You will continue to see that mix effect into next year. And that's just as we bring in those volumes that we talked about before where we saw a significant drop-off in volumes post-COVID, particularly relating to the sale of part of our Industrials business. But that will cease as we get towards the end of next year.

[Operator Instructions] And we'll now move on to a follow-up question from Sebastian Bray of Berenberg.

I have one follow-up on cash flow. The release doesn't mention it, but H1, it seemed to be the source of some investor concern. Have the working capital balances improved in H2? How is cash flow shaping up?

Yes. Sebastian, thanks for the follow-up. So again, working capital tracking as we would expect. Look, what I said at the half, obviously, we are investing in working capital to support the growth of the business. But I do see opportunities for us to be more efficient in the way that we manage working capital just as we'll be more efficient in the way that we manage the cost base. So if you think about supply chain optimization rationalization, there's a cost element to that, but there's also an inventory carrying level to that as we drive efficiency around the network. So I've talked about an opportunity of several tens of millions. That won't come out instantly because it does link to the transformation of the business. But I'd expect that improvement in working capital broadly to map the cost savings program. Look -- and Sebastian, the balance sheet is strong. We're in -- we're bang in the middle of the range, and I expect that to continue. And with CapEx coming down, obviously, we will delever.

That was our last question. I will now hand it back to Steve for closing remarks.

Okay. And thanks very much, everybody, for your questions. I mean 3 key points we wanted to get across today. We've got good sales growth continuing a good quarter for that, 5-point Plan remains on track and full year guidance unchanged. So thanks very much, and we'll see you in February.

This concludes today's call. Thank you for your participation. You may now disconnect.