Croda International Plc (CRDA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Croda Interim Results Presentation Call. My name is Hardy, and I'll be coordinating today's call. [Operator Instructions] I'll now hand over to your host, Steve Foots, CEO, to begin. Steve, please go ahead.

Good morning. Many thanks for joining the call today and I hope you're all safe and well. We're sorry not to be with you in-person, but the presentation as usual will follow the normal format for Croda. Some comments from me then to Jez for the financials, and then I'll come back to talk about some key aspects of our strategy. We'll take questions over the telephone and via the webcast at the end of the presentation, too. So overall, our strong business model has delivered a resilient performance, and we've managed through a very challenging period, it goes without saying. I use the word resilient for a number of reasons. On the supply side, all of our 19 principal manufacturing sites have remained in operation and nearly all of our workforce has continued to function as normal. So limited impact operationally around the world, and that's great credit to our teams and great credit to the local government support that we're getting as well. On the demand side, we've seen a modest reduction in sales, and the group margin has also held up well. As a capital-light business, we've continued to generate strong cash. This has allowed us to continue investment in future growth, agree an exciting technology-rich Health Care acquisition and pay a dividend to shareholders, demonstrating our confidence in the future, the 28th successive year of increased dividend payments. In response to COVID, we have 3 priorities from the outset. And as you'd expect, our major priority has been the health and safety of all of our people. We needed to look them in the eye at the end of the crisis, and we're not there yet, knowing we've done everything possible to safeguard their well-being. And we have a more engaged workforce as a consequence of that more loyal, and it generates a lot more goodwill. We're looking after our people, which is absolutely right. And next, we've focused on keeping the show on the road, maintaining the performance of the business by closely controlling costs and working capital, as you would expect us to. And we've been talking to customers in a lot more frequent basis along the way. And finally, but just as important, we have continued to plan for the future to ensure that Croda is taking full advantage of the emerging opportunities from the pandemic, which I will come on to later. The key principle has been treating all our stakeholders fairly. We didn't furlough anybody. We protected employee salaries. We helped a number of our smaller customers and suppliers with flexible payment terms. We helped communities around the Croda world with our Acts of Kindness initiative, and we pay the final dividend to our shareholders. We've treated everybody fairly, and we're doing the right things. And all of this plays well to our purpose. Turning to the numbers. They are what they are, but you can see the resilience borne out in them. Innovation and commercializing Croda people's knowledge is what our business model is all about. And a modest reduction in sales, a resilient performance in margin and the output of which is strong profit and cash generation. And this is allowing us to further invest in the business. Turning to the sector performance. In Personal Care, we continue to see positive trends from quarter 4 into quarter 1. Quarter 2 was significantly impacted by a downturn in consumer demand, luxury travel, department stores. This was particularly evident in Europe where a lot of our customers either closed or repurposed their facilities into making hand sanitizer gels and in Latin America, where there is a greater reliance on door-to-door selling. During the quarter, we've accelerated our customer interactions massively, much more engagement than we normally would see, and we're excited about what our customers are telling us. There's lots of innovation in the pipeline. And we've also seen a very good recovery in China with Personal Care sales in China up 9% in quarter 2. And we remain confident of a good recovery once lockdown measures have eased further. Turning to Life Sciences. That's less impacted by COVID. Strong underlying Health Care business. Crop will be more second half weighted due to phasing issues and margin progress is in line with our expectations. The Avanti acquisition, I'll come back to later in the pack. In Performance Technologies, industrial end markets are clearly challenging, but this was partly offset by stronger food packaging and Home Care sales for the group. So let me stop there, and I'll hand over to Jez for the financials.

Thanks, Steve, and good morning, everybody. As Steve has said, the first half year saw a resilient performance. Sales were 5.8% down in reported currency at GBP 673 million. This reduction of 7% in constant currency sales terms translated to a 9% reduction in adjusted operating profit in constant currency to GBP 161.6 million. Operating costs reduced with the benefit of cost savings delivered at the end of 2019 and lower discretionary spend during the first half of 2020. These cost savings were partly offset by the startup of the North America biosurfactants plant in the early part of 2020. Net interest was broadly unchanged at GBP 9.1 million, with higher net debt from the 2019 special dividend payment, mostly offset by lower interest rates following our refinancing. Adjusted profit before tax came in at GBP 152.5 million, 10% behind the prior year period. With lower volume and a weaker product mix, return on sales declined by 1.1 percentage points to 24%, a resilient performance, reflecting the strength of Croda's operating model. With the tax rate broadly flat at 25%, adjusted earnings per share were 88.8p, just under 10% lower than 2019. Having paid the increased 2019 final dividend in May, the interim dividend has been held at 39.5p per share. Finally, the free cash flow remained healthy at over GBP 80 million in the half. Adjusting profit items charged in the first half totaled GBP 7.6 million. This covered a further GBP 1.7 million exceptional charge for delivering the cost savings announced at the end of 2019, which are delivering up to GBP 20 million of annual benefits to reinvest in the business. Acquisition costs related to Avanti totaled GBP 1 million and amortization of intangible assets relating to previous acquisitions was GBP 4.9 million. Profit before tax on an IFRS basis was GBP 144.9 million. So now let's look at the key bridging items for the change in sales. Core business sales declined by 6%. This comprised a 2% reduction in volume due to the impact of COVID-19. And a 4% reduction in price mix. Whilst raw material prices were generally stable, this price mix primarily reflected a weaker product mix due to lower sales of higher value-add products in Personal Care and Performance Technologies and relatively better sales of lower value-add products used by consumers during the crisis. There was no impact from acquisitions during the period. Industrial Chemicals contributed to a 1% reduction in group sales and currency translation was favorable by 1%. Now looking at the key movements by core sector. Consumer product markets responded more rapidly to lockdown than industrial end markets, as Steve has described. As a result, Personal Care sales were hardest hit, 9% lower. This, together with a weaker product mix, saw operating profit 17% lower. Margin was resilient, though, staying at 24%, we expect this to recover back to the low 30s once volumes return. Life Sciences sales were 2% lower. As we highlighted at the full year results in February, this reflected a strong comparative period from 2019, particularly in Crop. Continued growth in target markets in Health Care saw operating profit rise by 7%, and return on sales increased to 32.5%. Changes in sales in Performance Technologies were 6% lower due to slower industrial demand. The impact of COVID-19 was seen later here than in Personal Care, with customers initially moving to protect their supply chains. However, profit was harder hit down nearly 20%, and return on sales is just above 15%, still a strong performance compared with its peer group. Let's look at each of the core sectors in more detail. Following a solid first quarter, which saw continued recovery in the North American market, the Personal Care and beauty industry was significantly affected by the COVID lockdowns. China was impacted in the early part of the year, but rebounded quickly. As the bottom chart shows, Croda sales were down 4% in the first quarter before recovering to be up 9% in the second. The second quarter has seen European consumer demand heavily affected. As Steve said, most of the French cosmetics industry had shut down for several weeks, and consumer retail data showed a 14% reduction in sales in the quarter. By contrast, North America consumer demand has been less impacted with lockdown intensity varying state by state. Latin America has been hardest hit, particularly in Brazil, where 50% of consumer sales are typically made on the doorstep. Whilst there are signs of lockdown conditions easing in Europe, Latin America is likely to remain difficult. Overall, this resulted in a 6% reduction in Personal Care volume and a 3% weaker price mix, as the more at-home use staple products of the Beauty Formulation business proved more resilient than the higher value going-out products. Also, Beauty Actives demand is typically resilient in these circumstances, but disruption to the prestige distribution channels of duty-free department and luxury stores had an impact on consumer buying patterns. We've not seen any signs that the long-term drivers to growth in Personal Care have changed. Our strategy to strengthen the growing Personal Care through organic and inorganic investment remains unchanged. Pleasingly, our digital investment has begun to pay off, allowing us to maintain our customer intimacy through virtual contact and support. Life Sciences has seen limited adverse impact on COVID-19. Health Care demand has been modestly affected with fewer prescriptions issued and delays for some elective surgery. There has been no discernible impact on Crop. Volumes grew by 2% overall in the half, while price mix declined due to Crop sales moving from the first half to the second half year. Growth continued in the key high-value niches of Health Care. Our excipient delivery systems business grew by 11% as pharma customers looked to high-quality solutions from well invested, stable and innovative partners like Croda. The Biosector vaccine adjuvant business had a much stronger period, growing sales by 25%. Consumer Health product sales were broadly flat year-on-year. Crop Protection sales were lower against a strong comparative period, coupled with delayed plantings in Latin America due to adverse weather. We also withdrew voluntarily from products with a negative environmental footprint as announced at the last year-end. The outlook for Crop looks strong, with North America recovering from last year's U.S.-China trade dispute and a strong innovation pipeline with our global customers. Seed Enhancement also recovered some loss sales from 2019 during this seasonally quiet first half period. Our expand to grow strategy for Life Sciences is working well. Return on sales for the overall sector has reached 32.5%, an increase of over 4 percentage points since the acquisition of Incotec at the end of 2015. Our specialty excipients and vaccine adjuvants are being trialed in a number of COVID-19-related projects, and we're investing for the future, both organically in plant expansion and inorganically through M&A. After a weak 2019, Performance Technologies experienced a steady recovery in demand during the first quarter. However, with significant closures of automotive and industrial plants, sales weakened progressively through the second quarter. Partially offsetting this, sales have been strong in both the Home Care and Packaging markets due to COVID-related demand and new innovation. This is shown in the top graph. Home and fabric sales grew by 11% in the first half whilst Energy Technologies saw sales decline by 18%, reflecting its focus on automotive and industrial lubricants and on flow control in oil production. Smart Materials was more resilient, down just 2% with polymer additives being used in many COVID-related applications, including PPE, medical devices and packaging. Overall, volume was down 2% in Performance Technologies. Profitability was impacted by a combination of operating leverage and production constraints in our European and Indian plants. The refine to grow strategy will reduce the sector's exposure to more cyclical markets, with growth in high tech, higher growth markets. Innovation will be important, and we are seeing strong interest and growing sales for Coltide Radiance, which we presented to you at the full year results, which doubles the life of fabrics. We are building towards an expected GBP 20 million annual sales pipeline for this product by 2023. We're also investing in Asia with our new Shanghai R&D facility opening in the second half of this year, which will give greater access to many new Chinese customers. With the successful commissioning of our North American biosurfactants plant earlier in the year, we secured our first 2 contracts for ECO products in Performance Technologies, together with our first contract in Personal Care. The ECO pipeline is now worth almost $20 million in annual sales, with sustainably positioned the customer products launching from the end of 2020. While we are excited by the development of new sales opportunities, COVID has provided something of a perfect storm for the plant with food-grade bioethanol, which we use as feedstock in short supply due to hand sanitizer demand, resulting in a high raw material cost at a time when petro-derived ethylene is at record lows. We expect to be able to move the plant to a lower cost feedstock later this year. But in the meantime, anticipate that this will cost us about $10 million in added costs in 2020. Croda continues to generate a healthy cash flow despite lower demand. Free cash flow in the first half year was GBP 80 million, a reduction of GBP 15 million on 2019, driven entirely by the reduced EBITDA. The change in working capital was GBP 14 million better than 2019, and it's pleasing to note that we have seen no material deterioration in the timeliness of customers' receivables during the COVID crisis. Capital investment increased by GBP 9 million to GBP 50 million in the first half year, despite some delays to the projects during lockdown. I would expect investment in the full year to be just over GBP 100 million, allowing us to complete key investments, including the doubling of speciality existing capacity in the U.S., creation of a new customer and R&D facility in Princeton in the U.S.A. and consolidation of our U.K. distribution facility. We're also expanding in Health Care in Japan and Denmark, investing in greater digital and innovation capability in China and expanding some of our European plants. At a time when many companies are slashing investments, we believe that maintaining investment at this time will enable us to grow more rapidly in the coming years. Finally, Croda has a strong balance sheet, having completed its debt refinancing in 2019. As the top graph shows, we have excellent liquidity with almost GBP 450 million in undrawn committed facilities at the 30th of June. Furthermore, there are no material maturities before 2023 as the bottom graph shows with funding out to 2030. And on top of this, we have in July, added a $200 million acquisition funding facility to allow us to complete on Avanti, therefore, preserving our ample liquidity. Net debt at the half year, which is pre-acquisition, was GBP 577 million. This is a leverage ratio of 1.5x EBITDA. Our downside modeling shows significant leverage and liquidity headroom even in more extreme crisis scenarios. I'll now hand you back to Steve, who will update you on our strategic priorities.

Thanks, Jez. Okay. So let me take you through our strategy update. As an executive team, we've prioritized time to think through the impact of a post-COVID world for the group. So if you just look at the slide on strategic priorities, whilst our megatrends and sector strategies remain unchanged, which is very reassuring, by the way, we've refreshed our near-term strategic priorities. And we have 5 key priorities: scaling drug delivery, which I'll come on to shortly; more proactive M&A, the pandemic could open up more opportunities, and we want to be more focused with more bolt-ons. As a reminder to you all, we're interested in more Avanti-type acquisitions, lots of IP, new technologies and clever people. And Asia as a region is the most significant growth opportunity for us and ambition, too. It's there to build. Our aim is to build the Croda brand there, especially in China. And we want to scale biotechnology, is one. We have a lot of talented innovators, but nature does it better. And here, we want to scale up a lot of our technologies, both operationally and from R&D. And this will involve a number of smart partnership arrangements going forward there. And in digital, a real area of progress, which is creating new opportunities to engage with customers in many different ways. For the purpose of today, I wanted to provide more color on scaling drug delivery, including how Avanti fits into our strategy, but first, digital. During COVID-19, quite surprisingly, really, when you think about it, we've become more intimate with our customers. One of the big benefits has been even closer interaction with customers and potential customers. Digital has driven that. And if you look at the table on the left-hand side, we've seen a 200% increase in webinars, a 400% increase in customer attendees. And these webinars often involve our marketing and R&D teams, a powerful way of explaining our latest innovations and trends to our customers and again to our potential customers. It's all about creating business opportunities, and the stats are a great leading indicator for future business. We're also putting firmer foundations in place, building our digital marketing brain. We've got over a dozen people around the world now in places like China, America, Europe, et cetera. And we're building a new personal care website for Indie customers and focused websites in China because of the rapidly developing growth potential there, too. And if you look at the case study on the right, you can see that we found new ways of bringing our innovation to life in China. China -- digital users in China spend an average of 6 hours online per day. So they're used to seeing technologies coming through. But the response has been amazing. 65,000 participants in one of the live stream trade events we participated in there. We're accelerating our conversations with customers. And in the old days, a good salesman would visit 12 to 14 customers per week. Through digital channels, our customer audiences in order of magnitude bigger. We're seeing a surge in customer interactions, particularly in Personal Care, and that bodes well for the future. Turning to drug delivery. As you know, I want Life Sciences to be as profitable as Personal Care as quickly as we can. That's the mandate for the group. Fast-growing drug delivery platforms are an essential part of that. And we want to build drug delivery into a truly global business for Croda. If you look at the trends on the left, some of these we've spoken about for some time, but some of them have emerged more recently. There's a shift from more traditional drugs to biological actives. This is already happening. As you know, 9 out of the top 10 selling drugs around the world use these biological actives now. Biological drugs are challenging to deliver with the majority delivered by injection. Specialty excipients are chosen for their superior performance, enhancing the API's performance in sensitive challenging applications. Developing of next-generation therapeutics is probably a new area to you and to us. And that's things like small molecule and large molecule development of Actives driven by immunology, and wider gene therapy in areas like vaccines and cancer drugs, really good challenging for the future for the group. And of course, COVID vaccines are heavily profiled at the moment in gene therapy, but equally, there's new solutions to address diseases outlined in SDG 3, which are things like malaria, TB and HIV. And all of those we're investing in R&D. From a regulatory point of view, things like safety, transparency and traceability remain the buzzwords of the industry. They have been there for quite some time. And customers are selecting our products increasingly because of the high performance, purity and potency of our products. And all of that is to derisk the supply chains. So a competitive advantage for us and for them as well. In terms of direction, on the right, essentially, we're moving from consumer health, which is like -- you can see that as non prescription drugs to patient health more prescription drugs to capture increased value. And with the price opportunity increasing from a few pounds per kilogram to hundreds of thousands of pounds per kilogram, you can see why we're interested in that. Our job is not to make the active ingredient, though. It's to enhance the performance of the active. So we have a broadening set of platforms for drug delivery and lipid nanoparticles is the exciting emerging technology from Avanti. And it goes without saying, revenue and margin opportunities are increasing as we move from left to right. As we move to drug delivery, we have an increasing breadth of technology in our portfolio, which is creating lots of more opportunities for us. You all know about specialty excipients. We've been banging on about that for quite some time. But many others, you don't know. They're new opportunities for the group. And one of the big ones, gene therapy for vaccine and cancer applications, a good example is Avanti's messenger RNA technology for vaccines. Effectively, it's an encapsulation technology that delivers the active into the cell. But we've also got processing ingredients to fast-track the manufacture of biological actives. Again, we're not making the active, but we've got ingredients that can facilitate the manufacturing of these actives. And also a number of nascent technologies coming through for respiratory disease as well. The photo on the right at the bottom is Croda Denmark, our Biosector acquisition. And as Jez talked to you about, really good growth this year already, and we're expecting good things with that going forward. They have the only aseptic adjuvant manufacturing facility in the world for vaccines. Turning to Avanti then. We bought Avanti because of their deep knowledge in drug delivery, exciting new technologies, rich IP, but above all, clever people. And if you look at the picture at the right, and there's lots of R&D people there and a great age distribution, which you probably can't see. And that was one of the central reasons for buying Avanti. They will become our central R&D brain in drug delivery as we globalize the drug delivery platforms. And most of the employees are scientists serving around 3,000 customers. They launch over 100 products per year, so a very impressive innovation culture, great track record. And the strategic rationale, it's all about buying knowledge and clever people. I think you've heard that a few times from me now. And it doubles our R&D capability in Health Care. We'll learn from them, and they will learn from us, no doubt about that. And this isn't a technology startup. It's a great business in its own right, growing double digit and generating strong profit and cash. So in summary then, we've delivered a resilient performance, which reflects the strength of our business model. And we will continue to take advantage of our healthy cash flow and strong financial platform to invest further in the business. In outlook, it's very difficult to anticipate the future with the timing of recovery unclear but the working assumptions are Life Sciences will benefit from the phasing of Crop Care sales and opportunities in Health Care. Consumer markets were rapidly impacted by lockdown, but are expected to recover more quickly than our industrial markets. The group margin and cash generation are expected to remain robust. So the strategy is unchanged, but refreshed, and that will underpin and even accelerate our future growth. So let me stop there and hand back to the operator to take your questions.

[Operator Instructions] We have a question from Charlie Webb from Morgan Stanley.

A couple from me. Just first off around Personal Care. Thank you for kind of breaking out price mix and volume, that's helpful. And -- but just on volumes, the minus 6% you saw in the first half. Can you -- when you look at the industry and you look at your customers, would you say that is reflective of that environment that you see with them? Or would you say that given the tough environment, perhaps typically, your products are more geared to some of the higher-end customers. There's been a bigger shift there, and therefore, perhaps you have lost some share in this more volatile market. Just trying to understand if it's in line with the market? Or is there some kind of share moving around, given perhaps the overall product mix? That's the first question. And there's a second question on Life Sciences, obviously, a resilient first half. Just trying to get a better sense on what gives you that confidence? I mean, it sounds like you're confident on the second half with phasing in Crop and obviously the Health Care and scale-up of your additional capacity. Just perhaps if you can give us some more context around what you're kind of expecting for Health Care and Crop in the second half, what you're seeing in July? Just so we can understand how that's going to play out for the rest of the year, would be helpful.

Yes. Okay. Thanks, Charlie. Well, let's do Personal Care first and I'll bring Jez in on the volume side, and I'll come back on Life Sciences. I mean, Personal Care, so the trading is modeled or correlated very well with the government lockdowns everywhere around the world, we would say. And we monitor that. You can see that through the Nielsen data and the IRI data which we look at. We're probably at 2 months lag behind that, 2 and 2.5 months lag. So what you see there is very directional to where we're going probably. But I think the -- yes, I mean, you've got the -- what you've got in there is the out-of-home and the in-home differences. So the out-of-home has been more effective. So that's obviously things like high-end skin care, duty free, hair salons and the like. And people clearly haven't been going out. So that's been hit harder than the in-home, which is more of the shampoos, conditioners and things like shower gels. Volumes are broadly where I would expect them to be. I mean, you can look at individual customers out there and see differences. Some have got bigger volume negatives, some have got smaller volume negatives. Very difficult to correlate on that. I tend to look at Croda by geography because of the national lockdowns in Personal Care. And you look at Personal Care in Europe, for example. So the quarter 2 effect has been more significant in Europe and Latin America for different reasons. Europe, primarily, is well, we're all in lockdown. So that's obvious. But the French beauty industry virtually closed for about 6 weeks, because they were repurposing their plants on hand sanitizer gels. So that has an effect, particularly on our skin actives business and our FX businesses more than it does on the formulation business as for example. And also in Latin America, as you all know, it's direct selling there. So nobody's knocking on the door -- or very few people are knocking on the door. So that's been more impacted. But if you look beyond that and you start to see really encouraging signs. China is the barometer that we use. I think I mentioned that before. We're up 9% in sales in quarter 2 in Personal Care, which is a good sign, and that's encouraging us to think that once these national lockdowns moderate further, and your guess is as good as mine as to how quickly they are moderated, then the Personal Care business will start to come back strongly. So there's no market share loss for sure. If anything, we're gaining in some areas. And we've got some good evidence that we're gaining in some areas, particularly right across the board in there because we're -- we're in a good position. We're looking out. We're not cost cutting, and we're not looking internally. We're actually looking a lot more with our customers, and you can see that with the digital stuff. So that does. Is there anything else on volume, Jez, do you want to say comparable with that?

No, I don't think so. I mean, Charlie, yes, the volume is down more in the cosmetics area, and that's consistent. I mean, if we break into that consumer data, that overall 14% drop in Europe, within that, you see cosmetics down 41% in the U.S., although overall, the market is pretty flat. You see cosmetics down by 26%. So it's that going outside of things, which tends to be the higher end -- the higher value part of the portfolio that has clearly been more affected on volume with the simpler products and the everyday products used at home, as Steve says, being less effected.

Yes. And Charlie, on Life Sciences, I mean we're -- we're very confident on Life Sciences. I mean, Life Sciences is effectively immune from the pandemic. I mean, first half, I mean, read into first half, a very good underlying Health Care pharmaceutical performance, which has got very good seed enhancement performance. One of the best-performing first half in the mix of markets that we operate in. And it was Crop that was behind. So Crop was the one that was behind, for no particular reason, it's more a phasing issue, and we sort of knew that. And there was tough comparators. But a lot of that is certainly in the second half, we can see that already. So I mean the 3 things for the second half that are likely to go in the favor of Life Sciences are a rebounding Crop due to phasing. And I said, we can see that. We have got some new committed Health Care orders for the second half of the year as well, which is in train now. And obviously, supporting that is the new capacity coming on stream. We've also got Avanti as well. And we'll have -- we should close Avanti shortly. But we'll have Avanti for a good part of the second half as well, and that's growing very, very well. It's got double-digit growth in there. So we're really pleased with that. So Life Sciences is good. And you can see the margin projections are good. They're going towards what you would expect Personal Care margins to be in the normal environment. And they can easily get there soon. And we would expect that. So yes, very confident on Life Sciences but very difficult to predict on Personal Care and Performance Technologies in the second half. But consumer markets will probably move ahead of -- will rebound quicker than the industrial one.

Our next question comes from Matthew Yates from Bank of America.

Just a couple of questions, please. The first one on the biosurfactant plant, which I guess continues to disappoint. And I appreciate, I don't think any of us could have seen a collapse in ethanol availability. But of the GBP 10 million additional feedstock costs you're highlighting, do you think you can recover any of that through passing through price increases to customers? That's the first question. The second question is around what you talked about in the presentation in using these digital tools to interact with customers. Just how good a substitute are you finding that virtual offering to that physical working with customers on new product development? And do you think that's going to have any impact on your NPP product development over the coming quarters?

Yes. Okay. Well, bioethanol. I mean, yes, we've -- if you look at bioethanol, the plant itself, it's not disappointing. I mean it disappointed to get us -- to get on track. It's taken longer than we'd like. But actually, for the last 6 months, it's had a really clear run. And operationally, it's in really good -- a good position. So once you get these sites up and running, then they're a bit like an airline. Once you get in the sky, they stay in the sky for several years before you bring them offline. And this one is no different to that. So that's working well. The customer engagement is brilliant. We've got now, I think you can see in the pack, $20 million of pipeline there already and lots more engagement. I think what you're going to see post this pandemic is a greater -- the pandemic is the big challenge of today, but the bigger challenge for the next 10 years is sustainability, I call it. And we're already seeing a much heightened interest from our customers on our specific composition of products, safety of our product ingredients, renewability. And we think that's going to drive an increasing interest and future sales for that plant because that's renewable -- based on renewable ingredients. So all of that looks really good. The disappointment, and we couldn't plan for that has been a sort of bioethanol issue. We didn't model that. And it's the perfect storm in terms of raw material positioning. But the GBP 10 million is sort of, Jez will help me -- but it's probably GBP 4 million hit already in the numbers in the first half. So we've taken that hit and potentially up to GBP 6 million in the second half of the year. But it's a sort of 2020 issue rather than anything else. What we can do to mitigate that, is using nonfood-grade bioethanol, which we are trialing, and we expect to come soon through the second half of the year. So that will -- and also, that will help. But also the demand will probably moderate as we get towards the end of the year for hand sanitizer gels as well. So in the round, actually, it's disappointing. It's largely out of our control, but the things that are in our control about customer interaction pipelines and getting the plant reliable, they're all in great shape. So we see a really good opportunity for 2021, '22 of a really good growth being captured there. So that's the point on that. On digital, yes. I mean, It's amazing. I mean, as a sales guy growing up and trying to do 14 customer visits a week was a challenge, and that wasn't just for me, by the way. That was for everybody. Some might say it wasn't. And what you're seeing now is just amazing. The interaction is a magnitude different. The customer audience is just a different audience. Now over the last 3 months, we've obviously been tuned into that, with our marketing teams and R&D teams. And it's definitely the future, but it won't replace direct face-to-face. I think for me, we'll never do that, but it will be a very important part of our selling programs and marketing programs going forward. So you need them both. It can, it will. It can't, but it will accelerate NPP. It just feels like it will. I mean some of the -- we've been working hard whilst we haven't been able to spend time at the bench with our R&D facilities because a lot of them have been off-line for quarter 2. We've been spending a lot of time promoting our products in front of customers. And you can see from those stats, some of these numbers are very significant. And it's a great opportunity to engage with the customers. As I said, we've become more intimate with them as a consequence of this. So we'll certainly be continuing that in different forms, too.

Our next question comes from Andrew Stott from UBS.

I have a couple, mainly on Avanti. I wonder if you could explain to a layman, especially around what seems to be more complex chemistries than I can manage. What's particularly exciting about that acquisition for you? I appreciate the slides gave us a lot of detail, but if you can try and tell us, what did it really bring to Croda that you just didn't have? And then on the technicals of that acquisition, how does the earn-out work? Is it a 3-year target? How does that full payout potential, how is that reached? And then for this year, how many months do you expect to have it in? So a few questions there on Avanti. And then [indiscernible] question on...

All right. For all the questions, Andrew, when you say a layman, I think we're both the same, but I'll try and answer that. But yes, I mean, the last question first. I mean, we expect to close in quarter 3. So let's assume if we audit for 4 months, there should be 3% to 4% growth to Life Sciences this year. So we start with that. I think secondly, to your point, I mean, what we're excited about is, I'm excited about drug delivery, and you know that. But I'm more excited about the depth of knowledge that we can create in drug delivery. Personal Care is brilliant for Croda because it has great, great knowledge. And we're developing that in performance technologies too. Here, we've got great -- we're buying great knowledge. You got 150 people, 100-plus scientists. A lot of them are PhDs as well. The previous Chief Exec would have a field day talking about propeller heads. But brilliant R&D, and they have the deep pharmaceutical expertise, particularly in drug delivery. And they've got 3,000 customers, but they've got a lot of academic partnerships, which we can leverage that. But their competence is R&D, not operations. And what they do is they got to the first base scale of pharma projects. But then what tends to happen is that that's farmed out to bigger contract manufacturers. And then they lose quite a lot of value with that. Well, Croda can do quite a lot of those, because a lot of them scale up in our sites. And we've got multiple sites that could scale this up -- their projects. So the technology -- I mean, the lipid nanoparticle technology is what it is. It's liposomes. And more and more of the next-generation drugs, whether it's cancer drugs, oncology drugs or vaccines, are using this type of technology. And what it does is, its primary use is encapsulation. It encapsulates the active and it delivers it into a cell. So it opens the door of a cell effectively. And that's what it does. And it does it very differently to specialty excipients. So the example I used in the presentation was a messenger RNA. That's a good example where it delivers -- it encapsulates around the RNA. The RNA can't go into a cell directly. But what it can do through an encapsulation route through the nanoparticals, it can deliver that into the cell. It opens the door of the cell. So that's really important. We would say that. So that's a type of technology for cancer. The next-generation cancer drugs and oncology drugs are moving that way. And it's all about boosting the immune system as well. So the immunology, it's golden, and a lot of new development in pharmaceuticals is about boosting immune systems. And they have very sophisticated technologies to do that. So that's that. On the earn-out, I mean, the way we look at the earn-out, we appreciate that's unusual for keeping it. You certainly don't see that in the chemical industry. And it's a significant earn-out. But I mean, how we look at it is we paid $185 million for the business, the base business. We wanted to detach the opportunities from the base business. And the base business was growing -- effectively, it's growing at double digits. So we didn't want to pay for potential future projects that didn't pay out just in the base value. So we did that. And then what we've looked at with them is like in any pharmaceutical company, they have bigger projects that they're working on. We always have them as well. But a lot of them never get commercialized. Some of them potentially do. And what you're trying to do then is agree to sort of an earn-out that effectively that captures the benefit for both parties, if it's material. If things take off. So we wanted to detach that away from the base business. So we're not paying for them. I don't think any of our shareholders want us to pay for potential business rather than the real business and the base business. But Jez, anything else on earn-out?

I mean, clearly, on the earn-out, if the earn-outs are paid in full or in part. And if you could do either of those, then clearly, the value of that earn-out to Croda is much more than the amount we're paying away. So I think it's a win-win from that point of view. Yes. But as Steve said, the $185 million is based on the existing performance.

Can I just check? Is it a revenue earn-out or an EBITDA earn-out?

Yes, it's revenue. It's a revenue earn-out, but it's -- yes, it's -- we don't want to take you through the details, but it's the -- and you don't really need to know the proportions, but it's revenue-based. But it's -- I mean these are very high margins. So the revenue base is significant -- a large part of the revenue is likely the profit. So -- it's -- but it affects -- technically, it's a revenue based...

The key thing, obviously, we control -- from completion of the acquisition, we control the projects that are going on, the projects that are being delivered. So you're not going to end up in a position where you're paying the revenue earn-out on something which is unprofitable because we're responsible for the company. So -- let's put it this way, we would be delighted to pay the full earn-out. Yes. I mean, on behalf of the company because the company would generate a lot more profit generation than that earn-out. So -- and that's obviously it goes without saying that. But yes, so it's great. Some of the projects that we're sitting on are potentially very significant. But we know a lot of them never get to market. That's the issue with these things. So they're quite binary, I've got to call them. So the earn-out is there just to cover that. So they've worked hard with these projects for quite a few years. And there's a contribution of the profit that effectively goes to them if they do come good.

I'm sorry, just a follow-up. The group CapEx for 2020, do we just take GBP 50 million and double it? And then also any thoughts on '21?

So we've got quite a lot of growth projects sort of going on at the moment. We've got the -- we'll be completing this year the doubling of capacity on the specialty excipient plant in the U.S. and we've started work on the U.K. and the Japan plant. We've got new customer centers built for the U.S. and for R&D in China. So there's quite a lot going on at the moment. I think the GBP 50 million in the first half year was slightly constrained by COVID. Clearly early on some sites, we took off the people who didn't have to be there, which would include construction workers. So we could just focus on the operations side of the business. So I suspect second half will be a little bit higher than GBP 50 million just because of the number of opportunities we have. So something just over GBP 100 million for the full year should be a good guide. We still think going forward that the overall level of spend should be around about sort of GBP 80 million, GBP 90 million. It's just the way in which the projects are falling this year. And as Steve said, the opportunity to invest at a time when a lot of people are slashing their investments, but we think that there's a lot of opportunities there, particularly around the Life Sciences business. So we'll continue to do the appropriate investment. But we'll remain relatively capital light. There's no major projects in there. The biggest one would be about GBP 20 million. So I think -- so this is a big projects on the ECO scale, but there's a number that they are going to add meaningful capacity and capability over the next 6 to 12 months.

Our next question comes from Chetan Udeshi from JPMorgan.

A couple of questions. Maybe one for Jez. Just looking at the depreciation in first half, there wasn't a major or material swing. I think at the full year results, you were talking about maybe including biosurfactant plant, an increase of maybe GBP 12 million, GBP 13 million. So can you help us understand if that is going to come primarily in the second half? Or has something changed in terms of numbers for full year? And maybe one for Steve. I appreciate a lack of visibility on how -- what is the pace of recovery in Personal Care. But are you seeing any of that yet in the numbers? Or is it still pretty patchy to call out in terms of any noticeable signs of recovery?

Okay. Okay. Chetan, yes. So on depreciation, yes, as you said, the key driver to depreciation was commissioning of the biosurfactant ECO plant in North America. Because that came on during the first quarter, we only have 1 quarter of depreciation in the second quarter. The overall impact of that is about -- around about GBP 8 million in a full year. So there's a couple of million in the first half, and there'll be a couple of million more in the second half because of having 2 quarters of depreciation. Okay?

Yes. I mean, the Personal Care recovery, it's hard to say, and it's very difficult for us to forecast. And if you wanted us to put a focus to it and you wouldn't believe it and we wouldn't believe you with your forecast as well, which is very difficult out there. But it's going to be evidence-based. And we look at China, we're very pleased with China, how that's recovered. We're looking closely at the Nielsen data and the IRI data, IRI data from the U.S.. And they're good indicators for us that people are starting to purchase Personal Care products again. That's probably the best. And we're starting to see that the Nielsen data is improving. It's less negative as is the IRI data as well. So that bodes well for a recovery. And we relate it SARS -- when SARS was upon us, we recovered pretty strongly. But I think before we get there, we just have to see the -- how these national lockdowns moderate further because Personal Care is exposed to people getting at -- the more people are out then obviously the more people that will use cosmetics. There's no doubt about it. So it's getting back an improvement, and I think that will gradually improve, but certainly over the next few weeks and months. So yes, so we -- and it's a great business. It's a very solid business for Croda, there's lots of technologies in there, and we're in lots of countries around the world. So we would expect that to come back. So we'd like Europe to -- I think the big thing for us is Asia -- certainly China is doing well, but the rest of Asia coming back and North America too, which is encouraging signs in North America. And we want to see Europe starting to come back. We would expect that probably the next few months as well. Latin America will take a bit longer because of where they are in the pandemic at the moment. So that's sort of where we are with it.

Our next question comes from Kevin Fogarty from Numis.