Croda International : Full Year Announcement 2019

25 February 2020

Croda International Plc

2019 full year results

Cautionary statement & definitions

Cautionary statement

This review is intended to focus on matters which are relevant to the interests of shareholders in the Company. The purpose of the review is to assist shareholders in assessing the strategies adopted and performance delivered by the Company and the potential for those strategies to succeed. It should not be relied upon by any other party or for any other purpose. Forward looking statements are made in good faith, based on a number of assumptions concerning future events and information available to the Directors at the time of their approval of this report. These forward looking statements should be treated with caution due to the inherent uncertainties underlying such forward looking information. The user of this review should not rely unduly on these forward looking statements, which are not a guarantee of performance and which are subject to a number of uncertainties and other facts, many of which are outside the Company's control and could cause actual events to differ materially from those in these statements. No guarantee can be given of future results, levels of activity, performance or achievements.

Adjusted results

Unless otherwise stated, all performance data refers to adjusted results. These are stated before exceptional items, acquisition costs and amortisation of intangible assets arising on acquisition, and tax thereon. The Board believes that the adjusted presentation (and the columnar format adopted for the Group income statement) assists shareholders by providing a meaningful basis upon which to analyse underlying business performance and make year-on-year comparisons. The same measures are used by management for planning, budgeting and reporting purposes and for the internal assessment of operating performance across the Group. The adjusted presentation is adopted on a consistent basis for each half year and full year results.

Constant currency results

All data is at reported currency rates unless otherwise stated. Reported currency results reflect current year performance translated at reported rates (actual average exchange rates). Constant currency results reflect current year performance for existing business translated at the prior year's average exchange rates and include the impact of acquisitions. For constant currency profit, translation is performed using the entity reporting currency. For constant currency sales, local currency sales are translated into the most relevant functional currency of the destination country of sale (for example, sales in Latin America are primarily made in US dollars, which is therefore used as the functional currency). Sales in functional currency are then translated into Sterling using the prior year's average rates for the corresponding period. Constant currency results are reconciled to reported results in the Finance Review.

Non-statutory terms are defined in the 'Alternative Performance Measures' section of the Finance Review in the Full Year Results Statement.

The Core Business comprises Personal Care, Life Sciences and Performance Technologies.

2

Performance

3

A resilient performance…

• Subdued market conditions
  ➢Trade war
  ➢Daigou
  ➢Automotive
  ➢Destocking
• Sales & operating profit slightly behind
• Robust profit performance in consumer markets
• Weaker in industrial markets
• Continued innovation, robust margin and strong cash generation

4

… from a strong business model

Sales		Margin		Profit		Cash

-0.7%

Unchanged

-0.8%

+30.2%

£1,377.7m

24.7%

£339.7m

£201.7m

Revenue

Return on sales

Operating profit

Free cash flow

5

2019: Sector summary

		Personal		• Slower US cosmetics market - now trading in line
			•	North Asia Daigou and China legislation - lapped
		Care
			•	Improving sales trend & strong profit maintained

Life		•	Speciality excipient opportunity increasing
Sciences		• Well balanced growth in Crop Protection business
	•	Disappointing Seed Enhancement sales

	Performance		• Slower, in line with wider sector
		• Industrial markets weak
	Technologies
		• Progress in new technologies

6

Financial performance

7

2019: Adjusted results

£m	2019	2018	% change	% change
				constant
				currency
Sales	1,377.7	1,386.9	(0.7)	(2.6)
Operating profit	339.7	342.5	(0.8)	(1.8)
Profit before tax	322.1	331.5	(2.8)	(3.7)

Return on sales	24.7%	24.7%	0.0%pts
Basic EPS	185.0	190.2	(2.7)
Ordinary dividend declared	90.0p	87.0p	+3.4%
Free cash flow	201.7	154.9	+30.2%

8

2019: IFRS reported results

£m

2019

2018

Adjusted PBT	322.1	331.5
Exceptional items	(10.7)	(4.9)
Acquisition costs	(0.3)	(2.7)
Amortisation of intangible assets	(8.8)	(6.1)
Reported PBT	302.3	317.8

Basic EPS

172.8p

181.4p

9

Sales slightly lower but strong price/mix benefit

Sales, £m

Constant currency sales -3%

	+3%					-1%
		-6%	+1%	-1%
			+2%
1,386.9						1,377.7
FY18	Price/mix	Volume	M&A	Industrial	Currency	FY19
reported				Chemicals	translation	reported
currency		Core business				currency

Constant currency unless stated

10

2019: Sector sales and profit

Personal	Life	Performance	Group
Care	Sciences	Technologies

			6%
(3)%			(7)%	(3)%
Change in sales %
			+11
+2			(16)	(3)
Change in

operating profit £m

+50bps	+110bps	-260bps	Unchanged
Return on sales
33.4%	30.6%	16.1%	24.7%

Sales in constant currency

11

2019 performance Personal Care

Croda Personal Care sales recovery in Q4…

%	1

(1)(6)(5)

Q1

Q2

Q3

Q4

…while US consumer sales remained soft*

1

%

00

(1)

Q1

Q2

Q3

Q4

Personal Care

• Weak Q1-3: trade headwinds
• Soft consumer demand in US - destocking
• North Asia weak - Daigou & China legislation
• Q4 global sales recovery

Beauty Actives

• Modest sales growth
• R&D and Biotech expansion

Beauty Effects

• Good sales growth - solar protection
• Broadening platform / Indie growth

Beauty Formulation

• Weak sales: MNCs / regional

• ECO Biosurfactants launched

Croda sales in constant currency. *Source: Consumer Personal Care sales from IRI (sourced from Exane)

12

2019 performance Life Sciences

Performance		+11.6%
+5.9%	+110bps
Sales	Return on sales	Profit

Sales growth

10%

%

-10%

Health

Crop

Seed

Life Sciences

• Record year, softer H2
• Richer sales mix

Health Care

• Strong growth in speciality excipients
• New capacity investment
• Biosector integration

Crop Protection

• Ahead of market growth
• LatAm demand offset North America weakness

• Sales delay in Plant Impact

Seed Enhancement

• PaddyRise launched in Asia

• Disappointing demand in NA / China

Constant currency sales & operating profit

13

2019 performance Performance Technologies

Improving operating profit impacted by external market

£m

85

75	69
67
57

15

16

17

18

19

Market conditions soft throughout the year

sales %
Croda	(3)	(9)	(11)	(6)
		Q1		Q2		Q3		Q4

Performance Technologies

• Disappointing after several years of strong profit growth
• Economic uncertainty & weak demand

Smart Materials

• Poor global automotive demand: sales -7%+ Exit sales rate improving
  + Investing in higher tech polymer capacity

Energy Technologies

• 5% lower sales - solid H1 followed by broader weakness + Rewitec renewable energy acquisition

Other

• Weak oil & gas

• Growing sustainability platform in fabrics

Constant currency sales

14

Disciplined cost management supporting reinvestment

Underlying cost base, £m*

2020

Reinvestment		7
Reinvestment
Depreciation
		6
Depreciation
Pensions
		3
Pensions

CostCostsavingssavings(16)

UnderlyingUnderlyingchangechange 0

• Cost base remains lean
• • Efficiencies delivered in 2019 to offset sales weakness
• 2020 target savings will be reinvested to deliver growth
• • Operating reinvestment: China, digital, sales & innovation in Personal Care & Life Sciences
  • Capital reinvestment (additional depreciation): Capacity coming on stream in speciality excipients, advanced polymer technologies, China manufacturing, botanical ingredients
• ECO plant on stream

*Underlying cost base covering production component of cost of sales, together with operating costs. Excludes impact of inflation, ECO plant, incentive costs and overheads in stock. Presented in constant currency

15

2019: Free cash flow improved 30%

£m	71	(4)	(8)
			(1)	(16)

5

202

155

FY18	EBITDA	Working	Capital	Leases	Pensions	Interest &	FY19
		capital	investment			Tax

• Total dividends paid £267m
• Net debt £548m (2018: £426m)
• Leverage ratio 1.4x (2018: 1.1x)
• Debt facilities fully refinanced - 'green' bank revolver

EBITDA includes impact of adopting IFRS16

16

2020: Additional financial information

• Currency translation
• • 2019 average rates: $1.278
  • 2019 average rates: €1.141

•	Average impact: £0.9m per $cent	Represents 65% of typical
•	Average impact: £0.6m per €cent	currency exposure

• • If 2020 FX rates were unchanged from today ($1.30, €1.20), estimated negative impact on sales of 4% and PBT of 3%
• Voluntary exit from Crop products: -2%pt impact on Life Sciences sales
• Impact of Covid-19

17

Strategy with Purpose: Creating New Markets

18

Our ambitious sustainability commitment

By 2030	Climate	Land		People
Climate, Land	positive	positive			positive
& People positive	Enable more	Enable more land	Apply our
	carbon to be saved	to be saved than	innovations to
	than we emit	we use to grow	increase our
		our bio-based	positive impact
		materials	on society

Innovation, technology & customer-driven

Our priority UN SDGs

Creating new markets

• Life Sciences: Expand to grow
• Personal Care: Strengthen to grow
• Performance Technologies: Refine to grow

19

Life Sciences: Expand to grow

Speciality excipients in drug development

Trend

Growth market

7 new speciality excipients in 2019

	9/10 top selling drugs are
Move to biologics	biologics

Technology

Speciality excipients

20

Life Sciences: Expand to grow Vaccine development

Trend

HIV

TuberculosisMalaria

Demand for new vaccines

Technology

Growth market

vaccineslaunched adjuvantwith	100									Adjuvants
1925	1960 1980 2000 2020
	80			10%	CAGR
	60			9%
	40
	20
%	0
Importance of adjuvants increasing

Differentiation

Next generation saponin adjuvants

Gold standard vaccine adjuvant facility

21

Life Sciences: Expand to grow Crop yield improvement

Trend

Growth market

100%

90%

80%

70%

60%

2019

	80% of rice to
	be locally
	produced by
	2023
	Import
2023	Production

Feed growing population with less land

Technology

Supporting farmers to be self-sufficient

Differentiation

+24%

PaddyRise seed treatment

Increased crop yield

22

Personal Care: Strengthen to grow

Bio-based surfactants

Trend	Growth market
	Sustainable Launches in Personal Care
	+56% CAGR

2015

2016

2017

2018

2019

RSPO-1106097	Clean & sustainable

TechnologyDifferentiation

Bio-based surfactants

First mover advantage

Growth market source: Mintel GNPD 2020. The USDA Certified Biobased Product label is a certification mark of the U.S. Department of Agriculture. USDA BioPreferred is a registered trademark of the U.S Department of Agriculture.

23

Personal Care: Strengthen to grow

Bio-actives in premium skin care

Trend	Growth market
			+26% CAGR
	2013	2014	2015	2016	2017	2018	2019
Clean beauty					IRB sales growth

TechnologyDifferentiation

T0	T3 weeks

SaggingTightening

Plant cell culture

Skin lifting with Majestem™

24

Performance Technologies: Refine to grow Sustainable fashion

Trend

Extending the active life of 50% of UK clothing by

9 months would save:

8% 10% 4% Carbon Water Waste

Move away from throwaway fashion

Technology

Bio-polymers

Growth market

Sustainable launches in Fabric Care

+6% CAGR

2014

2015

2016

2017

2018

2019

Increasing environmental claims

Differentiation

2 washes in	2 washes in
Coltide Radiance	regular treatment

Coltide™ Radiance extends life of clothes

Trend: Data from WRAP 2017 report "Valuing Our Clothes: the cost of UK fashion". Growth markets: Number of launches claiming environmentally friendly product/packaging, recycling or carbon neutral for global

Fabric Care (source: Mintel GNPD Feb 2020). Differentiation: Pictures of denim at 1000x magnification

25

Outlook

	Strategy in place		Outlook
•	Strong business model	•	Further progress in consumer
			markets
•	Sustainable Purpose	• Industrial markets weak but stable
• Expand to grow Life Sciences	• Growth second half weighted
• Strengthen to grow Personal Care	•	Healthy innovation pipeline

• Refine to grow Performance

Technologies

• Progress from recent investments

26

Additional material

27

Investing to minimise our negative impact…

Social solar

Roof space donated for community solar

Decarbonising our processes

Infrastructure investment for green

electricity use

Moving away from less sustainable chemistries

Discontinued global sales of APEs

Eliminating deforestation

Founder member of Action for Sustainable Derivatives coalition

Reducing water use at our sites

90% groundwater reduction in Japan

Decoupling environmental impact

from financial performance

Total water	VOC
withdrawal	emissions
down 14%	down 14%
Waste to	TRIR target
landfill	of 0.6 met a
down 27%	year early

Progress on safety & environmental

targets since 2015

28

… and maximise our positive impact

Smart science improving lives in

Togo

Sun care filters and expertise given to

National Association of Albinos

Improving working conditions through supplier partnerships

Banana flower extract from Mayotte

Increasing our innovation in

sustainability-led niches

New technical centre in Shanghai

Focusing on diversity and

inclusion

Targeting balanced shortlists for

recruitment globally

Increasing vaccine efficacy

Adjuvant capacity expansion in

Denmark

Using smart science to assess our

impacts against the UN SDGs

Sustainability Impact Assessment tool

developed

29

Sales growth

H1 2019	H2 2019	FY 2019

Personal Care	(3.6)%	(2.3)%	(3.0)%
Life Sciences	13.0%	(0.9)%	5.9%
Performance Technologies	(6.0)%	(8.6)%	(7.3)%
Core Business	(0.4)%	(4.2)%	(2.3)%
Industrial Chemicals	(7.4)%	(5.7)%	(6.6)%
Group	(1.0)%	(4.3)%	(2.6)%

Constant currency

30

Retirement benefit analysis (IAS19 basis)

£m

31 Dec 2018

31 Dec 2019

Market value of assets	1,272.7	1,390.8
Value of liabilities	(1,291.2)	(1,465.8)
Deficit pre tax	(18.5)	(75.0)
Deferred tax	6.1	14.9
Deficit post tax	(12.4)	(60.1)

31

Capital allocation model

Capital Policy

Reinvest		Regular		Disciplined		Excess
to grow		dividend		acquisition		capital
				approach		returned
~1.5x		40-50%				1-1.5x
depreciation		EPS payout				leverage

Leverage at 31 Dec 2019: 1.4x

Leverage excludes retirement benefit deficit

32