Croda International Plc (CRDA) Earnings Call Transcript & Summary

Welcome to the Croda call. Shortly, I will hand over to your host, Steve Foots, Croda's Chief Executive. At the end of the presentation, there will be a Q&A session. Steve, over to you.

Thank you, and morning, everybody. Yes. Here I am with Jez and Dave Bishop and we'll spend about 20 minutes going through the presentation and the rationale about Iberchem and why F&F and what we really want to do in this space and also plenty of time to ask questions along the way. So I'm going to try and rattle through the slide pack with Jez and then please build your questions up and then we'll -- as I said, we'll take that. So putting this context on Slide 6. This is the grand plan. Part of the grand plan is to move Croda to more of a pure-play consumer ingredients business, and central to that is expanding our Life Science business. And you've seen with our Avanti acquisition and the connections with Pfizer that we're well on track there. We don't need a huge amount of capital in that business to get to an exciting place. We think there's a lot of excellent growth potential in the business. So our minds have been turning to how do we strengthen the Personal Care arena. And this is being 4 years in the making, getting into F&F, and I'll come back to that as we go through the presentation. So we -- so if you look at Slide 6, everybody knows, we've been in Personal Care for many years. We've been looking to strengthen around Personal Care, and we've decided to enter the F&F market. We've had this as a strategic target for about 4 years now. And everybody knows, fragrances are critically important ingredients for our customers. But we think there's an opportunity in the midsize level to leverage our positions, both in Personal Care and Home Care with the fragrance positions in Iberchem. The global F&F market is, what, $59 billion by 2024, and it's growing about 5% to 6%. This business is growing at twice that. It's because of its position and its unique business model, which I'll come on to. But they're very well exposed to emerging markets, Latin America, Asia Pacific, Middle East, Africa, and they're all core markets for Iberchem. So it's a high growth segment. We want to -- we don't want to be big in fragrance and flavors for the sake of it. We want to be big enough for what we want to do with the business to get the synergies in the small and medium-sized customer space. Slide 7 just takes you through a bit more of the strategic and financial rationale. I mean, we've known Iberchem and its management team for a number of years, 4 years. We tried to buy them 4 years ago, and we just weren't ready from our side. And then we've looked since then in the F&F space, and we got close to acquiring something else slightly smaller than that about 2 years ago. And again, we didn't feel it was appropriate. So we walked away. So we're being patient to look for the right thing. And we think this is the perfect model for Croda. If we could imagine ourselves as an F&F player that's been in the business for 10, 15, 20 years, this is the company that is Croda. So we think this as a Croda of F&F, it's fast, it's agile, it's responsive, it's entrepreneurial, third of the people in sales, marketing and research, thousands of products, thousands of customers. They manage complexity very well. And it's a very capital-light model, much less capital-light than ours. And their top 10 customers represent about 20% -- that's probably about 20% of sales. So similar to ours, which is about 16% of sales. In terms of R&D, which is a central part of their business model, they've got 25% of their people in R&D. And they've got this huge hamster wheel of innovation churning out 4,000 references per annum and a very distinctive model, which I'll come back to. It's EPS accretive in year 1 and strongly accretive thereafter. And let me pass to Jez, who can take you through the transaction details. So Jez, over to you.

Okay. Thanks, Steve, and good morning, everybody. So looking at Slide 8. We've agreed to pay a total consideration of EUR 820 million, around GBP 736 million. We're acquiring the business on a debt and cash-free basis. This represents an EBITDA multiple of about 20.5x. We'll fund the acquisition by drawing about EUR 136 million of debt from our existing facilities and by the equity placing of new ordinary shares, which is expected to raise net proceeds of EUR 600 million, about 8% of Croda's issued share capital, which is underway today via an accelerated bookbuild. On completion, our leverage is expected to tick up modestly to about 2x EBITDA. So the equity placing will help to preserve the group's robust financial position and balance sheet strength, which has been important for us historically and also through the current COVID year. Croda generates strong cash flow, and we would expect to delever quickly back to about 1.6x by the end of 2021. Commenting briefly on our current trading, this is Croda's trading. Our performance has continued in line with expectations that we set out at the half year results in July, and the group's trading outlook for the full year is unchanged. Personal Care and Performance Technologies sectors have both seen constant currency sales about 5% lower year-on-year in the first 4 months of the second half of the financial year. So that's July to October. This is significantly better than the Q2 performance, where we were down nearly 20% in each of the sectors. And with every month, we've seen an improvement in trend. And we expect to be around flat year-on-year as we progress through the fourth quarter. Life Science is pretty independent of both the macro and the COVID issues. In fact, as we announced last week, it's starting to see some benefit from COVID-related contracts. Constant currency sales in Life Sciences are at double-digit percentage, and that excludes the impact of the recent Avanti acquisition. So great performance from Life Science. Turning back to Iberchem. We're buying the business from Eurazeo, the French private equity house, which has owned the business since 2017 and from its management. We hope to complete the transaction before the end of this year. Going forward, we'll operate Iberchem as a independent entity, led by its own management team, its existing management team, and it will sit within a newly formed Consumer Care sector alongside our existing Personal Care business and the Home Care business, which is currently reported in Performance Technologies. We'll be providing extensive support, particularly in the areas of opportunity in sales and in R&D. This is very much in line with the model that we successfully used with the Sederma acquisition way back in 1997 and how we're managing the Avanti acquisition this year. Steve, back to you.

Thanks, Jez. So just clicking over to Slide 10 then. Just picking up some of the numbers. They've been in existence for 35 years. Management were there at the start and still there now, and they will stay on with us as well, which is really good. As I said, 850 employees, 14 manufacturing facilities in the right countries, in the fast growth countries, and 10 R&D centers and very much being centralized again in these fast-growing areas. They have a commercial presence in 120 countries. So very much a mini Croda with good reach around the world. 83% of the sales are in emerging markets, territories where we want to be stronger with 25% of sales in China. They're actually bigger than we are in China in consumer markets. And we're very happy with our growth. So we think is a great growth platform there, just thinking about that country alone. They've got manufacturing and R&D on the ground. So Iberchem has 3,600 customers, and we have 5,900 customers. If I just look at Croda's customers in this space, virtually all of them will be buying fragrances. I don't know if any of them are buying Iberchem's fragrances. So we see a great opportunity there. And vice versa too, actually. With Iberchem, there's a lot of opportunities to sell Croda's consumer ingredients into them as well. And just to try and bring to life the business model, which is not on the slide. But we say this is the Croda of F&F. We haven't seen anything better. We also see it as the ZARA of F&F. So haute couture in retail. You got on to Paris Catwalk and you buy expensive clothes, the ZARA model, as you replicate that at great value and you personalize that for individuals, and you feel like you're getting something unique. That's their model in fragrance and flavors. It's a very clever model, and it's a contrarian model to everybody else's. And that's what we like about it. So it's a model that's built on, if you wanted a CHANEL N°5 fragrance with a twist, they'll give you it, and they'll give you an exclusivity, and they can move very quickly. And so it's a very personalized, very intimate model. And if you look at that, yes, 80% of their sales are in fragrances and 20% are in flavors. So we like that. It's got a very deep product range, and they're very broad product range as well. Slide 11, if you just turn over. It's got about 4,000 -- brings out about 4,000 new fragrances and flavors every year. So it's a very fast innovation wheel, as we call it. And it's targeting formulation churn in the industry at the small and medium sized customers. And as a reminder to you all, as you do know, 75% of Croda's business is in the small and regional and local customers. And our view of the world post COVID is barriers to entry in Personal Care, particularly for small customers to get on the market, is going to increase -- sorry, it's going to reduce. You're going to get more customers coming on the market, small, medium-sized Indie type customers. Theirs is the perfect model to capture in there. We're unlikely, and we won't take them to the big multinationals. That model is a different model. And the big players do that very well. This is to target small and medium-sized players. So a very good fit for us in that respect. I think the other thing is we've had a good look as a Board and as an executive committee on sustainability. We've got a big sustainability leadership position. And safe to say they're behind us, but we see a very good, clear road map to get them to somewhere near where we are. They're not integrated into -- back integrated into the supply chain to aroma chemicals. So they can buy whatever aroma chemicals they need. It's not part of their model. They will just buy from whoever they need to. There's 2 raw materials in there that they are buying now that we think we can convert them to bio-based materials, and that will transform their business up to about over 50% bio-based nature, which is not far from Croda's model. So the biggest hue in their business is Scope 3 rather than Scope 1 and 2. Scope 1 and 2, it's a timing footprint. So in absolute carbon terms, it's much less exposure than our business. But of course, Scope 3 at the moment because it's linked down into petrochemicals, it has -- that's the iceberg. So underneath the water is the big Scope 3 emissions. They've got work to do there. But the big -- the neat change there is to move 2 or 3 of their raw material ingredients. And we think can do that pretty well. Slide 12, if you just look at Slide 12, it's more about alignment to the Croda way. I mean, they're very much like us, if I rattled off a few things about the Croda of F&F. They mirror us very well. It's just a smaller version of Croda, but they have a deep root in clever science, R&D. And this agility and entrepreneurial spirit is very visible. And they've invested heavily in the right parts of their business in the research labs, in sales and marketing. And it's a Ferrari speed. If you're at the traffic lights, they're in the fast car versus their rivals in Tier 2 in their slower car. They really get to market extremely quickly. And they're probably quicker than Croda. And we've probably got some learning to do from them. And if you throw all of that in output terms, if you look at Slide 13, you will see that their financial performance has been outstanding over the last 10 years. It's a very resilient model. Compound growth in revenues up 15% and profits, which is more of what we look for in Croda, up 20%. Whilst they're growing very quickly and they're doubling the number of people they've got, they're still driving very good profit growth, which is what we like, and it's a sign of a good management team as well. Because normally, you can reduce your profitability for 2 or 3 years as you grow your business. And it's a very young team. The average age in the business is about 35 to 37, which is a reflection of the growth in the business, is a very much a growth business, and you've got a lot of dynamism and energy in there. And this year, they'll probably do about EUR 40 million of EBITDA against EUR 34 million of EBITDA last year. So in the harshest of trading environments, they're growing their business well in profits as well as turnover. So from Croda's point of view, we look at that and say, fair play to them. That's a sign of a very good business. EBITDA margins are around 20%, and very strong cash generation. We would expect as we get into it with the combination of the Croda model that those margins can start to climb more than that. And then we'll come back and update you on how we're thinking about that next year as we get into it. But overall, a great exposure to emerging markets and a great business model, which is very different to what you think and very different to the market. Slide -- so that's 1 of the major reasons that attracted us to that. Slide 14 really shows you the second driver of why we're interested, and that's their global reach. As I said, 1/3 -- over 1/3 of their sales are in Asia, mainly in China, which is what we like. I mean, Asia will be the fastest-growing area for Croda going forward. And I'm sure it will be for Iberchem, too. Followed by Africa and Middle East, and together with Latin America, as I said, 83% of sales in these markets. So over the years, they've got these 14 -- developed 14 manufacturing facilities close to home. And so they've got big operations in China, Indonesia and Thailand as well as South Africa and Tunisia. And in Latin America, it's Mexico and Colombia. And where they're not is quite interesting as well. They're not in America. They're not in France. They're not in Germany, Poland. They're not in India or Brazil. And we think there's an opportunity with the Croda brand there. I mean, we have manufacturing facilities on the ground there and great opportunity for us to point them through our supply chains and go-to-market approach with our country selling teams to get them into some of those markets. So for an example, if we wanted to get into Brazil with them, it will probably cost us GBP 3 million to put a fragrance unit in our Campinas site there, and we can probably get on the market in 6 months. So it's a different speed to their operations than what we used to. So we quite like that as well. So our job really is to point them into some of the countries that they haven't been pointing into as well. Slide 15 is the third driver. It's their customer centricity. We really like the model and we get the model really covered, as I said. I think the major points on that slide are top 10 customers represent 20% of sales. And I think the other thing, which we think is impressive, is that they're expanding their customer base. So they've got 1,000 new customers in the business in the last 3 years. So there's 3,600 now. So they're not only growing with existing customers. They're growing with new customers as well. And we think with Croda's digital capabilities in omni channels that we've been developing over the last 2 or 3 years, we can definitely take them to a bigger audience in a much short space of time. So we're well ahead of them in digital. So obvious opportunities there for us and the group. Turning to Slide 16. And finally, the fourth area that's interested us is this R&D wheel. Whether we're buying Sederma, Avanti or this, the same principles are in play. We want something that's got a great business model, unusual, great technologies, but an innovation philosophy that's the best in the industry, and they've got a powerful innovation model. So they're launching 280 new fragrances each month and 70 flavors each month. So this is a busy business. And there's a lot of moving parts to it, but it's very defensive in that respect as well. So all of that chimes to -- back to this is the Croda of F&F as far as we're concerned. So let me stop there, and Jez is going to take you through the combination benefits. So Jez, back to you.

Okay. Thank you, Steve. Slide 18. So we've gone through the financial performance, which is outlined at the top of this slide. 2019, a very strong year. 2020, as Steve said, you can see the resilience of the model still growing despite impacts of COVID on the performance. So at the bottom of the slide, really building on the organic growth story that Steve has outlined, we believe the acquisition can deliver significant revenue synergies on top which we expect to be at least EUR 25 million of revenue by year 3, growing to nearly EUR 50 million of annual revenue by year 5. And if I work across these, I'll actually work from right to left, beginning with box #3. You can see the 3 key areas of revenue synergies. In #3, we have the cross-selling of Croda's expertise to Iberchem's 3,000 fragrance customers with a particular focus on their exposure to high-growth emerging markets. In the center, #2, you have the cross-selling of the Iberchem fragrances into Croda's near 6,000 customers in Personal Care and Home care, particularly in the more mature markets in parts of Europe and particularly in North America, where Iberchem currently doesn't have a presence. And finally, on the left-hand side, #1 is the creation of a one-stop shop to provide Personal Care and Home Care customers with a full-service formulation offer. This is very interesting for us because we have seen a number of midsized and smaller and particularly Indie customers come to us, not just for magic ingredients, but also to help to formulate because they don't necessarily have the in-house formulation expertise of the larger customers to help them formulate their products, their shampoos, their body products, et cetera. And 1 of the parts that we've been missing in that story has been the ability to bring in an on-trend fragrance, which is stable in the formulation. Slide 19 gives you a bit of a feel for that. This is an example based on a shampoo formulation, where you can see Croda delivering 5 or 6 ingredients in green, which are delivering performance and formulation benefits. We're not interested in operating in the ones in the black type because they're the more commoditized part of the chassis formulation. But the part we are interested in doing is then being able to have fragrance, which Iberchem will bring, which will be the right fragrance for the product and also stable in the formulation. So we think that that's a big opportunity. Also in the bottom right-hand corner, Steve's point around, we also help believe that we can help Iberchem move further into sustainables, into natural raw materials, replacing more petrochems within the supply chain. So that's a very exciting area for us to look at. But the big revenue synergies that we've modeled here are really built on Slide 20. And they are the cross-selling opportunities. And it really is a perfect fit geographically between Croda and Iberchem. So Iberchem is strong in the areas that Croda has historically been less well represented, certain countries within Asia and also the Middle East and Africa, so the blue areas on this map. Equally well, the green areas are the areas that Croda has traditionally been strong. Europe and North America in particular, where Iberchem did not have much of a footprint. So again, a very strong fit there. And finally, in the purple area, the areas where both companies have presence, but where we have probably a larger exposure to multinationals. We can open up a lot more of the smaller and middle-sized customers in the years to come. So that's the revenue synergies. Finishing for me, before I hand back to Steve, on Slide 21, just to show you how we're going to report this going forward. So the new Consumer Care sector from the beginning of 2021 reporting will comprise the 3 existing Personal Care businesses: Beauty Actives, Beauty Effects and Beauty Formulation. It will include our fast-growing Home Care business, which currently sits within Performance Technologies. And we'll have the fragrances arm as well, the Iberchem arm, to that reporting of Consumer Care. That will mean Consumer Care will sit alongside the other 2 core business sectors, Life Sciences, where we've clearly been deploying more capital recently, and Performance Technologies. So we'll give you more details, including comparators on how that will look. So 2020 we'll report under the old structure, and then we'll give you comparators for the new structure when we have our results in February. Steve, back to you.

Thanks, Jez. So in summary on Slide 22, we think there's an obvious strategic and financial logic for it, very compelling indeed for us. F&F is something we've watched with interest over the last 4 years, and we think we found -- we definitely found the right business model and the right company. So the business, in many ways, is smaller mirror image of Croda, lots of innovation, tons of customer intimacy and a great innovation wheel that drives that business. So the combination will make us stronger in the Consumer Care arena. So let me stop there, and let's take your questions.

[Operator Instructions] And our first question comes from the line of Gunther Zechmann of Bernstein.

Can I kick off with 2 questions, please? One is just a short one. You mentioned the deal will reach Croda's cost of capital by year 5. Could you share with us what Croda's cost of capital is at the moment? What do you use in your calculation? So that's the first one. And the second 1 is, when I think about what you say on the one-stop shop strategy, there's still a number of ingredients that fit the bill for high tech, thinking of enzymes, for example, but there could be others as well, which you currently don't serve. So should we expect more M&A to come to complete some gaps in the portfolio that Croda still has in the Personal Care and in the Home Care space?

Yes. Thanks, Gunther. Jez, do you want to do the cost of capital? And I'll answer the other one.

Yes, Gunther. The -- yes, I mean, we'd use about 6% post-tax as our current cost of capital. I'd be hopeful that we'll do -- we'll exceed that in less than 5 years. But what we're very focused on is that in year 1, we want to add whatever additional resource, and it's more resource than capital, to enable us to really deliver the revenue synergies then rolling out over years 2, 3, 4. So we're making a bit more of a resource investment upfront. And as Steve said, there might be some very modest CapEx into certain countries. So overall, yes, certainly by year 5, and I would expect before that. But of course, we are earnings enhancing in the first full year, significantly cash-generative as well. And then, yes, we'll be delivering the improving capital returns over time.

Thanks, Jez. And to your other point, Gunther, no, we don't believe things about enzymes and things would be part of our thinking, I mean. We're looking at the formulation in Personal Care. In the typical formulation, Croda will be supplying 4 ingredients, maybe 5 ingredients, back to 1 of Jez's slides. And fragrance in there could be 1 fragrance, it could be 2 fragrances in there. So that was always a gap. So we potentially -- the rest of the Personal Care formulation is largely quite volume-driven, more undifferentiated materials, basic surfactants in the line. So we have our mind on that. So we think this completes the gap. Anything else we'd be looking at in this Consumer Care area would be around the Sederma area, the skin actives and to look at to consolidate there, but no plans for that at the moment. So our priority now is obviously growing Life Sciences in a fast way, which we expect and also making sure that we fast grow this new consumer sector with Iberchem essentially evolved in it.

Our next question comes from the line of Thomas Wrigglesworth of Citi.

2 from me. Steve, you made mention that you looked at this 4 years ago and you didn't pull the trigger then. Can you help elaborate as to what's changed on the Croda side? I mean, the contiguous nature of this business with your Personal Care business has been evident, I would have said, for decades. So that's my first question. And then second, it's really about the -- your competition for capital in the business. If we look forward 5 years from now, after you've done the kind of the internal synergies, will you add through M&A to display some fragrance business? Will it be a stand-alone -- do you see it being a stand-alone division within the Croda portfolio? Can you explain a little bit more about the inorganic ambitions that you might have around growing this business going forwards?

Yes. A few questions. I mean, yes, so we've known it for 4 years. I mean, we do have strategic reviews every year, and we're always looking at markets and potential adjacencies. And this was 1 that came out about 5, 6 years ago. So we've had our mind on it for a while. This came up -- but we weren't ready for it from our side. And we were just really learning about F&F in our own way. And we look at that in different ways to probably what other people look at as well. We're looking at a slightly different business model and the innovation approach. And as I said, so it was passed from our side rather than from their side. But I think the good thing and the reassuring thing is we've always kept in close touch with them for 4 years. And actually, through that period, we've collaborated on a number of projects with them as well. So we can see them in practice. We can see how they operate. And also through that period as well, we've collaborated with a lot of the Tier 1 players as well on bipartite, tripartite customer projects as well. And we can see the differences as well in all of those and also with other Tier 2. So we got -- over the last few years, we've got ourselves comfortable and familiar with the different types of business models there. And when this came available, again, we've moved pretty quickly. In terms of the integration, it's -- Jez describes it similar to Sederma and Avanti, which is right. But what we mustn't do is slowdown the speed of their innovation. I mean they're faster than probably we are. So we want to keep their Spanish team intact, because that's where the brains are behind the model and the innovation wheel and similar in China, too. But what we will be doing is heavily focused on country integration in all of the big overlapping countries where the Croda model will be applied with support from their model to get into markets. So all the -- virtually all the synergies are with customers -- in front of customers. So we'll be using our digital platforms. We'll be using our R&D and their R&D together. We'll be joining them up in our sales network in 1 sales office rather than 2. And we're sharing warehouses and getting their product to the point of as close to customers as we can. So all of that will be part of it. And that's part that we're thinking. And just remind me of the other question because there was another question, I think, you had?

Yes, just the longer-term ambition. Do you think you would -- we would see consumers in 5, 10 years, Consumer Care would split out and we would have stand-alone kind of fragrance division? I mean, I know it would obviously be pitched in. It would be integrated with Personal Care.

Yes. Well, we'll see. I mean that's not part of our plan now. I mean this is sort of part of a three-pronged plan to expand Life Sciences, strengthen Consumer Care and then refine Performance Technologies. Of course, we're not talking to you about that today. But so it's moving Croda more and more to Life Sciences and consumer ingredients and reducing our industrial exposure, although there's still quite a lot of good industrial businesses that we're involved in. So I think at the moment, no. But I think you should be looking at the Consumer Care business with a slightly different growth trajectory when you combine it all together. And we think the combination of those 3 businesses, effectively, the 3 Personal Care businesses, we've got a very good small business, but we've got a very good Home Care business, which will grow. There's a lot of good innovation in there and then the F&F business, which serve them both, for the next 3 to 5 years will be in the same business sector. So no plans to expand further into F&F. We don't feel we need to. We certainly -- we're very impressed with the Tier 1 players, but we don't want to be a Tier 1 player. We're not -- we don't want to be back integrated to aroma chemicals, and we don't need to be that big. We're just -- we're here to serve our small and medium sized customers. And we think that combination will be very powerful for us. So don't read any more into it than that. We think now it's all about integration and fast growth there.

Our next question comes from the line of Andrew Stott at UBS.

A few questions, if I can. So the first 1 was on the organic growth track record. It's 15% on the slide for 10 years. But is that organic? Because I see in the notes, there's a couple of acquisitions mentioned. So I just wondered if you have the underlying number there, please. Second question was about profitability. Steve, I mean you've been on record in the past in saying that the F&F industry has an issue with profitability as in as a cap. There's a limit to what they can do. And I guess, broadly, that's low 20s versus low 30s for a lot of Croda assets. So do you still stand by that with regards to this particular transaction? Should we think about this as predominantly a revenue story and not a profitability story? That's sort of key to me to understand. I'm sorry. I've got a third, if I can. The financing -- I've had feedback already this morning that there's a surprise at the amount of equity involved. I sort of share that view. I think 2.7x pro forma would be very comfortable for a business model like Croda. So the only interpretation I could put on that is there's more acquisitions to come across the group. And so you want to keep your powder dry. Is that the right conclusion?

Yes. We'll take them in turn. I mean -- so it's a track record of 15% growth. There are some small acquisitions in there. I mean if you split those out, the true run rate in the growth is about 10% to 12% organic, across the cycle, quite consistent year-on-year there. So that's that. And I think the way -- the fragrance model is a very good model. It's different to ours and the big players, and we understand that. And they leverage that for what they need. So sales growth tends to equal cost growth equals profit growth. I think in here, it's slightly different, but it's more skewed to that. So there's still a bigger revenue growth story, but we would expect the EBITDA margins decline from 20%, given that we're fronting up to small and medium sized customers, and a lot of those customers we are the R&D partner rather than just the ingredients supplier. So we sort of get a management fee out of that work. We don't charge them for that. We just -- we bought it into the pricing of the product. So there's a bit of a margin improvement story there. And we'd like to -- we've got our thinking -- we've got our thoughts on what that would be. But we'll probably share that with you early next year. So there's definitely a fast revenue growth story there, but certainly, margin improvements. Can we get into 30%? Who knows, but certainly 25% is something in the short-term that we think we could do. In terms of the finance, I'll let Jez talk about the -- Jez, why don't you talk about that now?

Yes, sure, Andrew. The -- yes, in terms of equity, look, I think having a strong balance sheet is important to Croda. Clearly, as you indicate, it does give some capability to continue to look at M&A opportunities, given that we don't need to invest too much organically in either our existing business or the newly acquired business. But I think coming into the COVID period, the fact that we had a strong balance sheet and that we have plenty of headroom from refinancing of facilities last year was important in both taking the market's mind off of worries about Croda or -- and indeed management's mind off of it, so that we could focus on the expansion, particularly with the Avanti acquisition and then this acquisition. So we've been able to get on and focus things. So I think for the Board, keeping a strong balance sheet is very important. You can always argue about where the right level to be is. It's maybe 2.5x in market -- more stable market conditions and maybe it's nearer 2 in the current market. But I think that's why we want to do it. Now we did the Avanti acquisition from debt. So we increased the leverage there up to about 1.8x, and this will take us up to around about 2x at the year-end. And I think going forward, we would like to deploy capital in both Consumer Care and in Life Sciences. I think acquisitions will come through as we've seen this year. Generally, our target area is more typically EUR 100 million to EUR 200 million as we spent on Incotec and on Avanti. And I think that you're not going to come back and raise equity frequently from the market. It's a very long time since Croda did it and, therefore, taking the opportunity to have the right balance sheet and still creating the freedom, both for uncertain conditions and for future expansion opportunities is the right place for us to be. So we think this is the right thing to do.

Perfect. And sorry, last one. Will you keep the flavors businesses? 20% of it is flavors. Doesn't really fit into what you just said. Will you keep that?

Yes. I think that's something that we'll look at. I mean, it's an obvious area for us to have a good think about. But it's something that we will keep for the moment because it's growing very quickly, and then we'll review that once we get into the business. But we won't make any decisions on that just yet. But yes, I mean, the priority is integrating fragrances into the Croda model, of course. The other thing, I would say, Andrew, is we lived through 5 recessions. And each time we've come out of that, there seems to be a few more opportunities on the M&A side, the surface that we've either been surprised with or not expected because of the changing -- just changing major families try to sell because they have to and similarly, businesses -- other businesses, smaller businesses coming to the market. So they're all in the small end, much smaller end, typical end for Croda. And as Jez said, it's just created a bit of headroom just in case they come along, they may not. But that's why the nature of the equity, debt split is what it is.

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

The first question is, do you have any insights or are able to share why the PE fund is selling? I mean it looks like they've doubled their money since buying it in 2017, but just interested why they wanted to exit now. The second question is to go back to something that you've said a few times on this call about not competing head on with the big fragrance companies. And I'm conscious Givaudan probably has 20x the size of revenue that you will. Can you just elaborate a little bit more on that? Why this product offering and why this route to market is so different than what the big fragrance houses are doing and why ultimately you wouldn't be competing with them?

Yes. I mean, fine. I mean, PE fund is straightforward. I mean, they're the third owners in the last 12 years. They're all in for about 4, 5 years. Some of them get out in the fourth year, some of them get out in fifth year. And by the way, they've all made a lot of money from the fund because the business continues to grow at pace. So there's no -- the reason really is that they are starting a new fund, and this is 1 of the best performers. So it's a good chance to crystallize that now and then rotate out and then rotate into, use the money to rotate into other businesses. So as simple as that. I mean, the management are very influential. They own 30% of it. So they had a big say in why it came to Croda. Yes, we certainly were the underbidder by some way as well, because we don't have big cost synergies like the big players. And that's great because from a management point of view, their business model would be -- remain intact with us, but it wouldn't if 1 of the big F&F players were buying it. On the competition front, it's straightforward. I mean, we're not here just to buy a Tier 2, just for the sake of it. We buy -- we want to buy uniqueness and something different. And their business model, trying to describe it, like a Croda of F&F, but more like a ZARA of the retail industry. I mean it absolutely is -- it's a clever model. And they're not really competing. They don't compete really with the big players. They're competing with other regional Tier 2 players. And they get their business because of their fleet of foot and their speed amongst other things behind the business model. It's very much a speed to market. And we've always said this now with Croda's business in Personal Care. We've got to be quicker and more responsive to market. So this will speed us up as well. So don't expect that growth to be jeopardized in the future because of that. If anything, our job is to try and accelerate that growth as we tried to outline to you.

And if I can ask 1 more on the cross-selling opportunity here, the EUR 25 million or the EUR 50 million number you've come out with. Can you say how much of that would be Croda selling more into emerging markets versus Iberchem selling more into your developed markets? How does that sort of split and breakdown look?

Jez, do you want to take that?

Yes. So Matthew, the majority of the revenue synergies are related to the cross-selling, partly because the formulation model obviously needs to still be developed further and improve them, but we know there's a lot of interest in it. So I think the cross-selling will be sort of both ways. But we particularly -- we've particularly seen in countries like China, that we're really just scratching the surface in terms of our exposure to Chinese consumers. So I think the opportunity to take Croda's ingredients into Iberchem's strong Chinese position will just open up a number of new customers. So I think, yes, you've got cross-selling both ways, probably relatively equal. But certainly, the opportunity to take Croda ingredients to Iberchem's customers in these markets is very exciting indeed.

Our next question comes from the line of Laurence Alexander of Jefferies.