Croda International Plc (CRDA) Earnings Call Transcript & Summary

Good morning, everybody. I'm joined in the room this morning by Steve Foots, CEO; and Louisa Burdett, CFO, is also dialing in. We're recording this call this morning. We'll have some short opening remarks from Steve, and then we'll have 40 minutes for plenty of Q&A. Over to you, Steve.

Yes, thanks. Good morning, everybody, and thanks for joining the call at such short notice. Hopefully, you've had a chance to read the trading update that we issued first thing. There are 2 really key points to highlight in terms of what's changed for us since our results at the end of February. Firstly, it's in Consumer Care. Whilst we've been encouraging -- we've been encouraged by the improving performance on quarter 4 last year and continue to see sequential recovery quarter 1 to quarter 2, the recovery has just been -- hasn't been as quick as we'd anticipated back in February. So destocking is ongoing, and we now expect that to continue into the second half of the year. And as a result, volumes were down double digits for the first 5 months versus the same period last year. So the price increases that we introduced last year, together with this favorable FX, have helped to offset that impact. But Consumer Care margins have remained at similar levels to the second half of '22, principally due to this weaker volume. We still expect the recovery in Consumer Care to continue throughout the year. We are encouraged with where we are, and I'm sure we'll take questions on that, but it will just be more gradual than we initially thought. Secondly, in Crop Care, the destocking that we had expected to start later in the year has already begun and has been much more rapid than we anticipated. So we expect that this will now continue until the new planting season at the end of quarter 3, with some improvements starting to come through during quarter 4. Separately, it's worth noting that Life Sciences margin has been impacted by the adverse mix, including it caused lower sales of COVID-19 applications in the Pharma business, which is all baked in for the second half. Our expectations for that lipid business in half 2 remain unchanged and kind of firm now for the second half. So weaker volumes, largely a result of continued destocking in Consumer Care and earlier-than-expected destocking in Crop Care. They're the 2 changes that have impacted our margins, leading to PBT of GBP 143 million for the first 5 months of the year, supported by the minimum net finance cost that is lower than planned. And as a result, we're revising our overall expectations for the year and now expect profit before tax to be between GBP 370 million and GBP 400 million for the full year. So macro impact to one side, I continue to be very encouraged by the exciting progress we're making, expanding our innovation pipelines with Croda. And as well as giving you further details on our performance, we'll talk a lot more about the scale and our innovation in all of our business areas as we report half year results in July. Now Louisa and I are very happy to take questions. So over to you, operator, to start the Q&A.

[Operator Instructions] Our first question for today comes from Charles Eden of UBS.

I'll limit myself to 2 questions. So the first one, Steve, you sort of alluded to it, about how things are progressing currently. If you could give us an update on the very early trends in June for Consumer Care. Are you seeing any recovery at all yet? And then my second question, just on the guidance range that you've put out for the full year. Could you help us sort of understand what you're baking in, in terms of recovery, particularly in Consumer Care? And sort of, obviously, the margin commentary being similar to the -- first half being similar to the second half of last year. What are you expecting for Consumer Care margins for the full year, please?

Yes, correct. Thanks, Charles. I'll let Louisa to take question 2. Just on the Consumer Care progression. So negative volumes, we all saw in quarter 4, second half, but mainly in quarter 4. Volumes have been less negative in quarter 1 and then less negative again in quarter 2. And what we track is the invoice, say, run rate, which is for Consumer Care, and that's improving month-on-month. So from a sales point of view, we're broadly flat, and actually, we turned positive, just modestly positive, in May from a revenue point of view. So we expect that to continue as comparators get weaker. So at the revenue line, it's pretty robust. And the issue really is just this overhead recovery on weaker volumes that you saw in quarter 4. That's just continuing through. So actually, at the product margin level, which I talked a lot about, the product margins in Croda are very robust. They're solid, and they have been for several months now. So the issue really is just that, that weakness in the overhead -- the volume, which is driving that overhead recovery weakness, which is very unusual in Croda. But when volumes are down low double-digit percentages, you don't get that. So that's what we're living through, just until we recover through that. So revenue-wise, pretty robust, actually, from what we can see. And also, behind that, you're just seeing that volume thing. I think the other point, and then I'll pass to Louisa, is if you look around the business on Consumer Care, it's that weakness in America, which is we've got stable with early signs of improvement, and you can see that in the order book. But also, you've seen Europe, which is modestly destocking, particularly in France, from what we can see in there. But on the other side of things, we had a good start in China. So China is positive for Consumer Care for the first 5 months. And it's been a really good start there. So it's patchy around the edges. And Fragrance and Flavors has had a good start, too, for the first few months. So it's a mixed bag. But fundamentally, revenue is holding up well. Margins are -- and margins are already down, too. There's just this negative volume that's driving that weakness. So Louisa, let me pass to you on the other point about the assumptions we're making on the range.

Yes. Charles, the question was around what we're baking in for our guidance range of GBP 370 million to GBP 400 million. I'll provide some overall comments, and we can go to Consumer Care specifics as needed. But in essence, the GBP 370 million is assuming no improvement half-on-half. And it's providing what we believe is either floor based on annualizing our year-to-date position, plus adding the lipids in half 2, which we've consistently said would come in quarter 4. And that guidance has not changed, as Steve said in his intro. So the GBP 370 million is essentially assuming no improvement in Consumer Care. And then the move up to GBP 400 million, Charles, I guess, has several -- or not several, it has a couple of layers in there. There's sort of a layer that is within our control, what I would call sort of implementing sensible self-help cost actions that we continue to do, that don't damage the business in the medium term, whilst we wait for that destocking to come through but keeping our focus on growth projects. And then at the higher end of that range of GBP 400 million, it's an assumption that the Consumer Care growth rate half-on-half increases between 10% and 20%. But essentially, the GBP 370 million assumes that we get no improvement for the rest of the year and that the destocking inflection takes longer to come through in that second half. Does that help?

Yes. No, that's helpful. So I guess you're sort of assuming if there's no recovery in the Consumer Care in the bottom end, the range, effectively -- what you're saying is the margin at the bottom end for Consumer Care would be around the 19% level that it was in the first -- or second half of last year and first half of this year?

Yes. As Steve said, look, we've got double-digit volume declines in the first half of '23. We had double-digit volume declines in the second half of '22. And at the time, just guided that, that's having about a couple of points of a negative impact on the Consumer Care margin. So we're in that sort of territory. But clearly, if we move up through the range from that base of GBP 370 million to GBP 400 million on higher Consumer Care volumes, that will give us some tailwinds behind the margin. But again, emphasizing that our GBP 370 million is sort of a mechanical floor based on no improvement.

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

Steve, you said in your introductory that a double-digit volume decline is highly unusual for a business like Croda. Do you have any market data or feedback from customers that would help us understand how big the disconnect is between your sell-in to the customer base or the channel and, ultimately, what is being sold out? So it's somewhat surprising to see your volumes down by this magnitude and for such a long period now. And that brings me to my second question. So wondering whether there's a Croda-specific issue here with market share loss. Have you been too aggressive in pricing? And especially now that there are some signs of cost inflation in your raw materials, what's your strategy for trying to retain that and improve your margin versus trying to pass it through to maybe regain some volume to fill up the plants?

Yes. Good question, Matthew. Yes. On the second one, yes, I mean, that's always a question. And we spend a lot of time -- we all spend a lot of time with our customers over the last few months, just going up-to-date views and things. And the common theme, generally, is I think it's the multiple stocking -- it's mainly the multiple stocking points. We're not losing market share. It's a little bit around the edges, but it really is around the edges to a small degree. And I think what a lot of our customers are saying, look, demand is holding up pretty well. The sentiment from them all is you see that in our innovation programs. Normally, you would see things being reduced post stocking innovation projects. We're not seeing that. And yes, there's 2 leading indicators. Having demand, that's one. And the second one is around raw materials themselves. They're not coming down. Like it's still -- they're dropping about 3%, 4%. So that's a good proxy for demand. So it looks like demand is solid. So back to your point, we are flexible, particularly in the Beauty Care space, with pricing. And because I know one of the long-standing issues is, are we too price-hungry at the bottom -- at the tail of Beauty Care, too? And are we missing out on volumes? I mean, interestingly, the encouraging growth over the last 5 to 6 months, the run rate improvement is being led by Beauty Care, which is really interesting because Beauty Care is more focused on the mass and masstige markets. Now Beauty Care run rates are increasing quite encouragingly month-on-month. So that supports volume recovery as well, ultimately coming through because that's more at the volume end of Consumer Care. So that's coming through, and there's quite a lot of tactical business. If you remember, one of the issues we had quarter 4 was the unplanned outage of a couple of our sites because we didn't take them off-line in the heat of the demand period for the pandemic. And from a safety reason, we did that. So we got, by itself, back into some of that business, which we're doing, and we are doing that now. So actually, the one area of Consumer Care we look much more closely at these days is the Beauty Care area, and I'm really pleased with that coming back, as I said, sequentially month-on-month. So I'm encouraged with that. I think the first -- your first point, Matthew, was -- just remind me, was around any Croda-specific issues, was it?

Well, I guess, the disconnect maybe, if there is a disconnect, between sell-in and sell-through. I mean, I struggle to believe that the underlying category is down double digits. So how do you think about that converging or normalizing?

Yes. I mean -- so I call it -- I've been around many of the conferences this last 2 or 3 weeks, we see about 8 stocking points for our business. I don't know whether that's different to everybody else. But -- so when you buy a shampoo or a conditioner on the shelf, there's about 8 stocking points between there and Croda shipping. And I think the general view from everybody is you're not losing business. It's all about just this higher stock level that's in the chain somewhere, either in 6 or 7 parts to it or 3 or 4 of them, and the unwind is just taking a bit longer. But we're not far away from positive volumes in Consumer Care when you start to look at the order book. But that's partly because of our weak comparators. But as we always said, the first half is going to be a bit more price-skewed and on negative volumes, and the second half should reverse. And we're seeing that trend play out. It's just that the drag we've got is on those negative volumes, to the extent we see that. The majority of that is just down to this destocking. We don't see anything else. And our intelligence is around literally hundreds of data points from big customers to small customers as well. So I don't know, it remains to be seen whether if anybody else has got the acute volume issues that we have. But we see that is mainly just a reset, a correction, a fundamental correction in volumes which is upon us now. And it's a reset. It's a period of reset to rebase demand, and stock levels should stock themselves out over the next few months. Louisa, do you want to make any other points?

No, only just to reemphasize. I know what we said in the opening statements, but it's been [ threaded ] through what we said, see, we are down double-digit volumes in the first half, but there has been progressive volume growth over -- sorry, H1 '23 versus H2 '22 of high single digits. So to Steve's point about stock resets and rebase and not too far from hopefully a volume inflection point, but we're now starting to see that positive movement on volume.

Our next question comes from Gunther Zechmann of Bernstein.

Steve, I'd just like to understand a little bit better the weakness in Consumer Care happening. So you mentioned it's down double digits, but you said China is up 5 months. You said I think Iberchem, the Flavors and Fragrance business, is doing quite well as well, and you said Beauty Care is ding okay. So what's driving that double-digit weakness then, please? Should we assume that the Actives and the Beauty Effects are down something around 40%? What am I missing here? And then the second question is more on, yes, maybe a different question, and then I've got another question as well, please.

Yes. I mean just for clarity, I mean, if you're looking at -- there's 2 different points here, one is sequential improvement from quarter 4 to quarter 1 to quarter 2, and that's what we're seeing through Consumer Care, led by Beauty Care. So that's one thing. But the other point is there's a year-on-year comparison, obviously, for the first 5 months versus 5 months last year. And when you look at that, the first 5 months of this year versus last year, you're thinking a good growth rate, very good growth rate in F&F. So they're in emerging markets more than anything else, so we would expect that to grow. Beauty Care is still behind last year because they expect that. Because don't forget, it's a massive -- we're comparing apples with pears from last year with a very strong demand half 1 '22, so you're always going to be behind that. But I think the point we're making on Beauty Care is improving month-on-month. I think Actives is mixed, but it's very strong in China, but it's quite weak in France, for example. So it's slightly behind, but not a huge amount. But again, you're talking about a very strong comparator with the first 5 months of last year. So the businesses are all holding up well. So overall and around, our revenue is broadly flat, first 5 months versus last year, but it's driven by F&F outpacing that, of course, and Actives and Beauty Care slightly behind. But the volumes are still quite weak, and that was the point because there's still quite a lot of price in the mix. So that's what's helping us. And the encouraging sign, as I said, is that Beauty Care continued improvement, which is going to be -- is going to be to volume as well -- there as well.

Okay. That's very helpful. And then the second question, sort of impossible to answer, but what is your measure -- inventory levels at your customers? Because you got -- you now guide for destocking for the remainder of the year. It's something we've been discussing since mid last year. So having 1.5 years of destocking, I've never heard of that. So what makes you sure that we're talking about destocking and not consumer weakness at this point?

Yes. I mean if you talk about in Consumer Care, what we have to be careful with, it's an industry issue rather than anything else, is destocking is not homogenous. So it's not the same in every region. And a lot of this is just -- it's the pandemic effect, where some countries are coming out much earlier than other countries. So for example, America came out of the pandemic first, and they saw their way out of it in the normal American way. And it was a boom period for 2, 2.5 years. We saw -- so in North America, we saw the volumes start to come off about this time last year late in quarter 2, and they've continued. I think if you look at North America, you can say that there's overexuberance. There's a lot of stock in the system. But there's probably -- you can argue there's been some -- there's some reset of demand as well through that period as well. I think in America, our -- we're very close to a lot of our customers, and it's mixed. Some people are replenishing fully now into our order book, and some people just got a little bit longer. But it doesn't feel like we're far away. We can see -- we map every customer's order intake with us, clearly, the big customers. And you can start to see that, that inflection is not that far away, but it's just taking a bit longer. So that's North America. And in Europe, you've just got a mixed bag. It's not -- it's more destocking than demand, we think, at the moment. And in consumer, pretty robust in Germany, but a bit weaker in France. And if you look at different countries, and it's quite difficult to draw consistent factual trends, but that's what we're seeing there in Asia. Okay. Asia is pretty resilient and Latin America, too. So I think the area that we're looking for, for when destocking is finished is America first because they went into it -- they came out with it first. So logically, they would come back first. So we can update everybody in the middle of the year. But as I said, we're encouraged with the trends. Staying above all of this, trying to understand all the geography and trends, Consumer Care is moving in the right direction. I think the other point is Crop. We expected Crop -- I think our model for the year was sort of moderation by the middle of the year into the second half and then restarted growth in quarter 4 in a more normalized level that we would expect. We had a very good start in Crop for the first 3 months. But then, literally, within a couple of weeks, we saw the destocking consistently around our 5 or 6 major customers in Europe, North America and Latin America. And that's easy to see because there's a higher concentration of customers there, of course. So when you look at that trend, that was quite clear. And we're innovation leader #1 in Crop, and we have a lot of registered products exclusively. So you can very easily map that destocking pretty well. And the evidence is pretty clear when you talk to your customers. So our -- the message back is, look, they believe they're sitting on 3 to 5 to 6 months of stock, but they would replenish as they lead into the planting season later in the year. So that's what we factored into our -- back to Louisa's point on the range. So it's a mixed bag across lots of different countries in Consumer Care, with lots of different stocking positions for customers. But for Crop, it's much clearer, given the high concentration of customers. If that answers your question, Gunther?

That's great.

Steve, it might be worthwhile just continuing that cost trend whilst you've raised it because we haven't spoken about that specifically. But just to build on what Steve said, we saw a very strong Q1 in Crop, and I think that was touched on in the February communication. But also, as Steve said, we've seen quite a big retraction there in the last couple of months, and we're expecting that weakness to continue through Q2 and Q3. And clearly, that's contributing to our weak half 1 performance as well as the lack of inflection in Consumer Care. But it's also impacting our Life Science margin just because of that timing issue on Q3. But as Steve said, we have best available information with those handful of large customers. It is indicating that we will see some level of recovery in Q4. So in terms of absolute profit for Croda, the overall sort of full year, we believe we'll be in balance for Crop based on strong Q1 helping to cover the timing issues in Q2 and Q3. But it does give us some short-term margin mix issues in Life Sciences.

[Operator Instructions] Our next question comes from Georgina Fraser of Goldman Sachs.

So my first one is -- my first question is around the demarketing. Now this is something that we've seen Croda do kind of at various points in most years, but it historically hasn't had any kind of big impact on margins. And I was just wondering how you're feeling about the demarketing activities you undertook last year in light of the destocking cycle. Has it exacerbated the losses that you've had on the volume side? And is it making it more difficult to regain market share? Is it going to lead to lower prices? So that's the first question. And then the second -- sorry, you go ahead.

No, keep going.

No, no, keep going. Keep going with your second question.

All right. And then second question is, since we have now seen destocking in 2 of the 3 legs of Croda, how are you thinking about the risk of normalizing demand in the health care supply chain?

Yes, correct. I mean on the demarketing, I mean, yes, I mean there's normal demarketing for Croda through a nonlife cycle. But of course, we had the unplanned outages, which we saw a fast demarketing, which we didn't really want to do quarter 4. Clearly, what happens there is we try and go back in, and we have a very focused plan to go back in with price moderation, where needed, to try and recover that business. And -- but that never comes back overnight, but it's mainly in Beauty Care is what we're targeting, and we can start to map that coming through. So evidence of Beauty Care coming back more strongly, first, is probably quite due to 2 things. It's recovery in the mass market, mass markets around the place and masstige markets. But there's also some tactical business start to come back in. So that will drip in over the next few months. But clearly, given the negative volumes, it's not lost on us, but sacrificing for a bit of price to recover some volume is a good decision for us to make sure we get those volumes back up. So there's probably a more focused view of that given the overhead issues that you can get with that in itself, sort of one-in-a-15-year event that we're living through. So we said we have very structured approaches to that from all around the corners of the world, and we're monitoring that. So it is starting to come back, but it's more weighted to the second half because, inevitably, it just takes a little bit longer for some of that to come back. I think on your pharma point, yes, being -- I'm picking that up from a lot of people that quite a number of our peers are talking about destocking that. I mean it's around the edges for us. We haven't really called that out in the release because it is around the edges. And because we're in privileged growth areas, I think most of our pharma activity is in those 3 categories. They're all growing quite a lot. So therein, the growth in the businesses is actually outweighing any sort of fringe destocking around the edges. So we're not -- it's not a material issue in the numbers around that. Louisa, do you want to add?

Steve, just -- I think it is -- I think we've made this clear through various interactions with the markets instead. But just we talked about sort of necessary demarketing from not having enough capacity to support demand in the immediate exit from COVID and then the regressable demarketing because of our plants being out. But just to reemphasize Steve's point that the plants are all back up and running, and that regressable demarketing piece is no longer in the mix, which is brilliant. But nothing else to add, Steve.

Our next question comes from Nicola Tang of BNP Paribas.

The first question was on margins in Life Sciences. I think you were already flagging that you have this worsening mix because of crop versus health care. So I was wondering if you could talk a little bit more about if this is incrementally that much worse. I think you were previously guiding or steering towards low 30s margins in Life Sciences. So does that still hold? And then the second question, Louisa, in one of the answers to the questions, I think you mentioned sort of sensible self-help. I was wondering if you could just, I guess, talk a little bit more about what that is?

Okay. Great. Louisa, do you want to take them both, and then I'll chip in?

Yes. Look, on the -- Nicola, on the margins for Life Sciences, you're correct. We guided to just over 30% return on sales in that portfolio. And we are going to see that slightly lower than at the half year, just because of some of the trends that we've been talking about today with lower COVID-19-related sales from our principal partner and that destocking in crop. We've seen pricing come off in stock in sort of mid-single digits. So we will be seeing something in the probably mid-25s in the half year for Life Sciences. So yes, that's below our previous guidance on that. On sensible self-help, look, there's a balance to be struck here. We have, as Steve said, a lot of really exciting innovation projects. We've got a lot of capital and other projects going on to support growth in the business for the medium and long term, and we won't be compromising those. This will be the normal reaction that you would expect from a company managing some short-term trading weakness, discretionary spend, prioritizing the commercial and front end of the business and just looking at the timing of certain projects and investments to optimize what the teams are working on. Just one on how the flow related to sort of spending and operating expense. We haven't mentioned any cash position in our communication this morning. I would just like to take the opportunity to briefly mention that. Clearly, with the drop in EBIT, our cash -- or absolute cash delivery this year will be affected, but we are going to continue to invest in our capital programs. We've talked very clearly about the investment that needs to go into pharma to support the LNP growth. But we will have some impact on cash just because of the EBITDA drop, but we will hopefully have a little bit of working capital positive unwind as our stocks draw down. But to get back, Nicola, to your question, margins in Life Sciences will be below the guidance that we gave in February for the half year. And our sustainable self-help is really about sensible choices, about where we're pushing our cash flow as we go through this destocking cycle.

All right. And if I may, just follow up or just clarify on Life Science margins. Is mid-25 in H1, assuming sort of the timing of Pfizer, there is still some sequential improvement? Or could it be that there's a risk that there's nothing changes that actually we're looking at that kind of level for the year?

Sorry, Nicola, I didn't make that clear. No, we've obviously got the Pfizer shipments in the second half of the year, which, as we indicated upfront, guidance hasn't changed. And Steve made the reference that those are committed, and we will see a sequential margin improvement in the second half off the back of that.

We currently have no further questions for today. So that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.