Croda International PLC

LSE:CRDA

Earnings Call Analysis

Early Signs of Recovery Amid Challenges

Croda International reported an 8% sequential increase in Q1 sales, driven by strong performance in Consumer Care with double-digit growth in Beauty Actives. Despite challenges in Life Sciences, particularly a small decline in pharma excluding COVID lipids and consistent high orders in Crop Protection, the company remains optimistic. Utilization rates improved from 55% to 65%. Economic headwinds impacted profits by GBP 4 million. The company continues to innovate, focusing on new drug delivery technologies, and expects non-COVID lipid revenue growth to be mid- to high-single digits for 2024. Overall, they remain on track to meet full-year guidance.

Introduction and Key Highlights

In the first quarter of 2024, Croda International Plc made significant strides across various business segments. The company saw an 8% increase in group sales compared to the previous quarter, excluding COVID-19 lipid contributions. This growth was driven primarily by the Consumer Care segment, which experienced a robust double-digit percentage rise in sales volumes. Despite facing some headwinds, Croda's overall performance aligns with their expectations for the year.

Consumer Care Sees Impressive Growth

Consumer Care has had a promising start, particularly in Beauty Actives and Beauty Care segments. Sales volumes increased by double digits compared to Q4 of the previous year. Geographically, North America and Europe led the way, with notable growth in the Americas region. This segment's growth was not isolated, as Fragrance & Flavors (F&F) and Home Care also showed continuous momentum. However, the management remains cautiously optimistic, attributing part of this growth to new year restocking.

Challenges Persist in Life Sciences

The Life Sciences sector faced more challenges. Sales in Crop Protection remained flat, while seed enhancement sales were lower. The pharma sector also saw a small decline when excluding COVID-19 lipids. These decreases were primarily due to destocking, the normalization of COVID-19-related sales, and some phasing issues. Nonetheless, sales of delivery systems for nucleic acid and protein-based drugs continued to grow, indicating long-term positive trends.

Industrial Specialties on a Positive Trajectory

Industrial Specialties experienced higher volumes and a positive product mix compared to the previous quarter. This segment plays a crucial role in the overall efficiency of Croda's manufacturing model, and the recent progress is a positive indicator for future performance.

Currency Impact and Financials

Currency movements adversely impacted Q1 sales by nearly GBP 20 million and reduced profit by approximately GBP 4 million. Despite this, the overall group results were in line with expectations. The company remains on track to meet its full-year guidance, underscoring the resilience of its diversified business model.

Future Outlook and Strategic Priorities

Looking ahead to the rest of 2024, Croda is focused on several strategic priorities. These include capitalizing on the improving demand in Beauty Care, accelerating the conversion of their pharma pipeline, and continuing to enhance and improve operational efficiency while monitoring costs closely. Investments in innovation will remain a key driver of performance. The management is optimistic about meeting the stated guidance, given the early signs of recovery in various segments.

Guidance and Investment in Innovation

The company's focus on sustaining growth in non-COVID pharma business is evident, with expectations of mid- to high-single-digit growth in this area. New delivery technologies are anticipated to contribute more as the year progresses. The sustainability focus, particularly in partnerships with major clients like Unilever, reaffirms the strategic move towards sustainable ingredients.

Financial Health and Cash Flow

Croda's cash flow for the first quarter has been positive, aided by COVID-19 debtors in January. The financial health remains strong with good stock management, and the working capital guidance for the end of the year remains unchanged. An improvement in utilization rates, up to 65% from 55% last year, also indicates better operational efficiency and cost management.

Customer and Market Dynamics

The demand environment has shown signs of recovery, particularly in Consumer Care, which has normalized its order visibility. Despite the challenges from destocking and pandemic effects, the management remains optimistic about long-term trends. The market dynamics in regions like North America are showing positive signs, which are expected to continue into the second half of the year.

Conclusion and Investor Takeaways

In conclusion, Croda International Plc has started 2024 on a positive note with significant growth in the Consumer Care segment and steady progress in Industrial Specialties. While challenges persist in the Life Sciences sector, the company's strategic focus on innovation and operational efficiency positions it well for sustained success. Investors should keep an eye on key growth areas, including Beauty Care and new pharma delivery technologies, as these will be critical drivers of performance in the coming quarters.

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to the Croda International Plc Q1 Results Call. My name is Jess, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over to your host, David Bishop, Investor Relations Director, to begin today's call. Thank you.

[David Bishop, executive]

Good morning, and thank you for joining this Q1 update call covering our sales performance in the 3 months to the 31st of March 2024. I'm joined this morning by Steve Foots, CEO; and Louisa Burdett, CFO. Hopefully, you've already seen the statement, so we will have a short introduction from Steve before taking questions. Can we ask the analysts to limit their questions to one per participant, easy to say, please, plus one supplementary, only if necessary, for clarification.

[Steve Foots, executive]

Thanks, David, and David hasn't been drinking [ last night ] as well. Morning to you, everybody. Look, let me take you through the handful of key points that summarize what we've seen during quarter 1. I'll use the final quarter of '23 as the comparator, as quarter 1 '23 was a very strong quarter, as you know, in all of our businesses actually before destocking commenced in crop protection and industrial demand started to fall. But you have both the comparisons in the RNS anyway.

So anyway, we're starting to see early signs of recovery in some of our end markets is the punch line. Firstly, Consumer Care has made an encouraging start driven by a double-digit percentage increase in sales volumes in comparison to quarter 4. Beauty Actives led the way with the strongest growth, particularly in North America and Europe, and Beauty Care also delivered a double-digit increase in sales with growth across all regions, led by the Americas, and momentum has continued in F&F and Home Care too. So in common with our peers, we think quarter 1 benefited from some new year day restocking but we remain cautiously optimistic about the recovery in Actives and Beauty Care plus continued momentum in F&F and Home Care.

Secondly, the market continues to be more challenging for Life Sciences in comparison to quarter 4, sales were flat in Crop Protection, and they were lower in seed enhancement, although sales are seasonally second half weighted here. And we also saw a small decline in pharma, excluding COVID lipids. So just on pharma, as we indicated in February, we've seen the continued impact of destocking primarily in consumer health, bit of COVID-19 final normalization and some phasing. These challenges are temporary rather than structural and will fall away at some point.

What's key is sales of delivery systems for nucleic acid and protein-based drugs continue to grow, and we're also bringing new delivery technologies to market that will contribute more as the year progresses. And finally, Industrial Specialties saw higher volumes and a positive mix versus quarter 4. So remember, it plays an important role in the overall efficiency of our manufacturing model. So we're pleased with the progress there. So in summary then, group sales were up 8% sequentially, excluding the COVID lipids we delivered in the previous quarter. And overall, group results for the first quarter were in line with our expectations.

Currency translation had an adverse impact of just under GBP 20 million on quarter 1 sales and approximately GBP 4 million on quarter 1 profit. So looking ahead, we're on track to meet our previously stated guidance for group performance in the full year '24. And as a team, we remain focused on executing our strategy, and we have a clear set of priorities, which are to capitalize on the steadily improving demand environment in Beauty Care, accelerate the conversion of our exciting pharma pipeline and continue to enhance and improve the way we operate while carefully monitoring costs. Alongside continued investment and innovation, these will drive our performance in the near term. So look, let me stop there, and Louisa and I are now happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Matthew Yates from Bank of America.

[Matthew Yates, analyst]

I noticed a consistent theme across the press release, seem to be better product mix in consumer health and Industrial. Does that mix help the margins? Or is it still much more important that we just get volume across the sites to see that margin recovery?

[Steve Foots, executive]

Yes. I mean what we're seeing is that I think the main thing for margin is the big volume recovery. I mean we've talked about the 2 areas. The 2 big theme areas last year were unusually a big volume decline on our assets. And then quite an unusual mix effect in both businesses, both skewing to the negative. So the way back is about -- is really about volume recovery. I think in CC what you're seeing is whether you look sequentially the quarter 4 exit rate, so you look at relative to quarter 1 last year, Consumer Care is double digit volume growth and low to mid-single-digit price decline.

But actually underneath all of that is you're obviously starting to see with industrial coming through, utilization rates now at the factory coming up from, what, 55% to 65%. And so we're starting to see some recovery coming through in the utilization rates as well, combination of consumer and IS there.

[Louisa Burdett, executive]

Yes. Matthew, this is Louisa. The only -- I mean I would reiterate that volume being one of our most positive indicators for the quarter. And the other thing that is helping a more positive trend on margin compared to what we were expecting is the fact that our internal destocking, satisfying customer orders from stock is coming to an end. So we're getting that benefit as well.

[Operator]

Your next question comes from the line of Charles Eden from UBS.

[Charles Eden, analyst]

Just -- first, just to follow up on the sort of answer there to Matt's question. You talked about low- to mid-single-digit price sequentially declining, sequentially versus Q4. Can you just sort of help us, I know this is a sales update, but just in terms of the direction of your raw materials, I just sort of think about things like wool grease into lanolin, seems to be down sequentially and year-over-year quite a bit. So just sort of the context of how that pricing sits versus your raw materials.

And then the second, a clarification. On the pharma business, obviously, sequentially, sort of slight decline versus Q4. But in terms of the health care ambitions for the year, I assume you're still expecting sort of a strong, healthy growth for that platform in 2024.

[David Bishop, executive]

Charles, it's David here. Just quickly on the raw materials. They're broadly tracked the way that we said they were when we updated you in February. So down 2% to 3% in the first quarter, which as you know, continues the trend that we saw in 2023 when raw materials were down by 12% through the year. We're pretty good when we look ahead into the next quarter, and then it becomes more difficult to forecast what raw materials are looking like for the remainder of the year. And again, as we said in February, we think that we're probably reaching the bottom in Q2. So we may even see a little bit of inflation as we get towards the end of the second quarter in line with what we said in February with the first quarter seeing continued deflation.

[Steve Foots, executive]

Yes. And then your second question -- was that all right, Charles? We'll come on to your second question.

[Louisa Burdett, executive]

Just a reminder, that we do have some more bits of tactical pricing regain business, which we've talked about consistently, which is -- there's a discipline of time-bounding, but that will be a minor contributor to our -- the price dynamic in the sequential single-digit declines that we talked about.

[Steve Foots, executive]

And in the whole pharma area, what you're seeing is just more of a slower start in consumer health driven by some stock corrections more than anything else. But actually, the platforms of -- the big platforms that we're obviously targeting, nucleic acid and protein delivery and the like continue to strengthen. They should continue to strengthen through the year as new business starts to come on, we've coded in 1 or 2 interesting projects with revenue coming through the year. So there's some phasing for the rest of the year on that. So I think a lot will depend on how we see consumer health, which is a relatively small part of that and how do we see that coming back. But the rest of pharma looks fine.

[Operator]

Your next question comes from the line of Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

With first quarter now under your belt, can you just help us understand how do you think about the phasing of the PBT, let's say, 280 between first half and second half? I mean, do you have a more updated view on how should we think in terms of phasing?

[Steve Foots, executive]

Yes. I mean it normally -- it should be normal, shouldn't it? But we're coming out of this sort of second order effect of the pandemic. But I would say -- I mean, it's difficult to call because, I mean, a lot of this is around the volume loading of the plants, reconciling that with the margin recovery. And also a lot depends on how we see the Life Science business, particularly crop whether it comes back or not in any material volume. So I think it's still too early. I think the encouraging signs as we exit quarter 1, obviously, on the consumer side more than anything else. And you've got Consumer Care slightly ahead of where we expected. Life Sciences slightly behind. And the Consumer Care slightly ahead is on more of the volume start to come back.

So we are seeing some moderation in order intake, but still at a good level. So we remain cautiously optimistic about consumer. So a lot of the sort of first half versus second half will depend on 2 or 3 different things, the volume loading in Consumer Care going forward and this rebound in parts of Life Science, whether it comes or not will determine what's the sort of split, I think. And that's the whole point this year of trying to update you quarterly, just to give you -- try and take you through the trends of each of the sub businesses to better guide you really.

[Chetan Udeshi, analyst]

And can I just quickly follow up on your comment on slight moderation in order intake in consumer. Do you think this is just a reflection of maybe some restocking in Q1, which is now maybe edging lower? Or is this also something like a seasonality that you have seen in the past? I'm just trying to...

[Steve Foots, executive]

No. I mean I think you probably heard this from others as well. There's been some rebound. The order intake in January -- late December, January was very strong but actually the order intake of Croda consistently through the quarter, it's been -- it's come up a little bit, but still at a very high level. Our order intake volumes and, therefore, value are still giving us the optimism for -- albeit we will be cautious, given we're coming out of the pandemic, with cautious optimism that we're in a good place. So exit rates in quarter 1 aside, I think some people -- Easter phasing is an excuse in our organization.

There is an Easter phasing issue this year, which is sort of 3 days less in March than last year. But actually, we see through that. And we see the continued momentum. I think what we're all trying to work out, I think, whether you're in fragrance and flavors, whether you're in Croda or whether you're in other parts of consumer is, where does the demand sit after that bit of restocking, but it still seems pretty okay to us.

[Operator]

Your next question comes from the line of Sebastian Bray from Berenberg.

[Sebastian Bray, analyst]

Can I just ask a technical one on the Consumer Care segment, please. Does the 5% constant currency growth includes the contribution from Solus Biotech, i.e., is this actually an underlying organic growth number on a scope-adjusted basis. And sorry, just to follow up on the earlier question. Did I hear right to get to the midpoint of PBT guidance, we need a second half-weighted recovery in Life Sciences?

[Steve Foots, executive]

I'll let Louisa do the first one.

[Louisa Burdett, executive]

Sebastian, the answer to the first is yes. It includes a contribution from Solus Biotech, but it's fairly minimal. As you know, the business plan for that sort of quite accelerated in the latter years, but it does include that.

[Steve Foots, executive]

Yes. And on balance, just to be clear, we didn't say that. But on balance, where we are at the end of quarter 1, if you decode the statement, we're slightly ahead of where we expected in consumer, slightly behind in Life Science. I'll repeat that. If that trend continues, then we'll be, obviously, in the end comfortably in guidance. So a lot depends on where Consumer Care goes from here and where that Life Science goes from here. So one balances the other is the point we try to make.

[Operator]

Next question comes from the line of Lisa De Neve from Morgan Stanley.

[Lisa Hortense De Neve, analyst]

Two quick ones from my side. Can you provide us with a quick update on the CFO change? And if anyone has been found or where the process is at the moment? And then two, can you sort of share a bit around your utilization rates and how they have progressed from the full year '23? And what do you expect for the year, at least some qualitative comments around that?

[Steve Foots, executive]

Yes. I mean we're in the final -- I think we mentioned that on the call. We're in the final stages of the CFO search, very pleased with that. So an announcement will come when it comes, so we don't want to push that. It's more about diary management and finalizing with the Board, the Plc Board. So that -- we won't give a date on that, but it's not far away. So as I said, it's a good comprehensive process there.

I think utilization rate, I mentioned earlier on the call, if you just joined, is utilization rates are improving. We're starting to feel now in multipurpose sites, they're all in slightly different places. But when we look at our utilization loadings, they've gone up from typically, last year, they were 55%. I'm looking at David to make sure that number is right. We're exiting quarter 1 at about 65%. So clearly, that's a benefit. And that's going to help us because the margins are pretty stable. The gross margins in our world. And the volume loading is the most important thing for us to make sure we can keep that going. So we're -- as I said before, we're in the early stages of recovery in some of our markets, particularly Consumer Care and IS. So we're in a high loading position now than we were at the start of the quarter.

[Operator]

Your next question comes from the line of Amy Lian from Barclays.

[Amy Lian, analyst]

Just one question from me. I wonder if you could talk a bit about normal seasonality versus, I guess, the current sequential momentum you're seeing on sales? Because obviously, I guess if you take Q1 at the moment that implies you can step up in sales through the year, but I imagine there's some seasonality anyway. So can you give us some guidance on your volume momentum versus seasonality between quarters, that would be really helpful.

[David Bishop, executive]

This is David again. So the seasonality is most distinct in Life Sciences where actually there's a strong Q4 weighting, particularly in seed enhancement, but also a little bit of a second half weighting in Crop Protection. As Steve alluded to, we would normally expect the first quarter to be quite good in Consumer Care because of the new year restocking effect that I think has certainly been apparent this year for understandable reasons. But overall, we're seeing encouraging signs in Consumer Care that give us confidence for the remainder of the year.

Notably, the fact that the growth is coming from all of our business units. The order book is 15% to 20% higher than it was this time last year. And North America is leading the way, which is obviously the area that's been weakest for us over the last 12 to 18 months. So net-net, I think, the seasonality works in a slightly different way than the different business units. But we're confident, given the encouraging start in Consumer Care that we can build from here.

[Operator]

Your next question comes from the line of Artem Chubarov from Redburn Atlantic.

[Artem Chubarov, analyst]

I have one on Crop Protection, please. Would you be able to provide any color on volume price dynamics in the quarter? Maybe some regional trends and your overall assessment of where we are in the destocking cycle for the division.

[Steve Foots, executive]

Yes. I mean I'll provide some general color. I mean, let the team to give you some more data. I mean, don't forget last year, quarter 1 was very strong for all of our businesses. So the comparators are the most difficult for quarter 1. Then obviously fell off the end of the cliff because we went into quarter 2, crop and industrial that is. I think generally, what our customers are saying is there's still -- it's not getting any worse. You can see sequentially, it's broadly flat from quarter 4.

So it's stable at a weak level. And the likelihood is it's going to -- it's -- clearly volumes are going to come back to some degree, and we would hope and -- but we can't be sure, through the second half and beyond. But the rate at which that volume comes back is still the big question. And a lot of our crop customers are still unsure as to how that comes back and it's different for each one. But by and large, broadly, it now feels like it's going to be North America coming back first, then Europe, then Latin America.

I think Latin America has a bit more of a weather issue with drought, and things like that. But we're in a good place there. We are -- we're the #1 delivery system supplier in the industry, we put it into thousands of formulations. So when it comes back, it will come back. But -- so I don't think there's anything structural. We just have to wait for it to come back. I'll pass to Louisa on the specifics of your first part of the question.

[Louisa Burdett, executive]

Yes. The only data point that I would give to support Steve's statement is we look sequentially. We've already indicated that at a total SBU level, we are flat quarter-on-quarter. But North America is definitely in pole position with single-digit growth with EMEA and LatAm behind. Asia is looking good, but it's obviously a smaller business there.

[Operator]

Your next question comes from the line of Ranulf Orr from Citi.

[Ranulf Orr, analyst]

Just two, please. Firstly, just in Consumer Care, given the very strong January, would you mind giving the monthly year-on-year growth? Or if not that, at least the delta in growth between January and March, so we can understand the exit rate a little better. And secondly, just on these new delivery systems you're bringing to the market. Can you kind of give an idea of what the contributions from those might be sales-wise end of the year?

[Steve Foots, executive]

Yes. Just say the first question again.

[Ranulf Orr, analyst]

Could you give the monthly growth in Consumer Care please, for Q1, given the very strong January just to understand the sort of the phasing...

[Steve Foots, executive]

It's a good question. It's a good try. [ Have to ] say. But we are trying to give you quarterly and now you're asking for monthly. So look, it's a fact we're not seeing a massive change month-to-month. I think I would say that. It's not falling off the end of the cliff, far from it. So that's why we're still saying we remain cautiously optimistic. So we look at the order intake. I think the other point -- the broad point I'm making, consumer is, we're getting back to a normalized order visibility, which is important. And so we've got a better tracking. And I think our customers now are largely through this all destocking period. So for us, getting better visibility in the near term is we're getting more accurate assessments of that.

But we're still coming through the final stages of a pandemic effect. And I think quite rightly, our customers are quite cautious as well, and everybody is a bit cautious until we see the really firm trends coming through. But overall, we're pleased and encouraged with the progress.

[David Bishop, executive]

On the pharma pipeline, we gave a number of examples in the full year pack where each of those new delivery system technologies that we're bringing to market have peak annual sales values of round about GBP 20 million. Now those peak annual sales values are not in 2024, but a number of them will start to generate some revenue as 2024 progresses. So individually, they're not material, but we hope there will be a decent contribution from those new delivery technologies in 2024.

[Operator]

Your next question comes from the line of Isha Sharma from Stifel.

[Isha Sharma, analyst]

Could you please quantify the growth in your drug delivery systems within health care? And just a small follow-up on that would be what -- how do you account for FX pricing from the Argentinian peso? And if you could help us with the extent of that within the organic growth, please?

[David Bishop, executive]

Isha, it's David here. On the drug delivery platforms, the areas where we're seeing continued growth are in nucleic acid delivery and protein delivery. So in line with what Steve said at the beginning that the areas of strategic focus for us are continuing to grow. And the area that where we've seen some sequential decline is in adjuvant systems because of the COVID normalization and then in small molecules because of the destocking in Consumer Health. And I'll hand over to Louisa to talk a little about FX.

[Louisa Burdett, executive]

Just broadly on FX. We've got 2 drivers. Just in our general business, obviously, we give you the framework around FX and what a movement in the dollar does. We've had a little bit of adverse in the first quarter. Steve talked about GBP 4 million adverse impact at PBT level. The rates are coming back in our favor. So we're still fairly neutral on that. On the Argentinian piece, clearly, a little bit more difficult to predict. We're still obviously managing some probably single-digit million risk there for the year, but the local team are moving to the degree that we haven't done it yet to dollar-based pricing. So we should come back into line with a more easy to predict sort of framework and [ heuristic ]. So yes, dollar-based pricing where we can.

[Operator]

Your next question comes from the line of Gunther Zechmann from Bernstein.

[Gunther Zechmann, analyst]

The first one, could you just remind us what you expect for non-COVID LNP revenues for this year, please? The second one, companies like Unilever recently stepping away or delaying their midterm ESG targets. Could you just give some flavor how that impacts Croda and your conversations with those customers, please? And then lastly, I know you don't guide for cash flow, but given the growth is improving, and Steve, what you mentioned earlier about improving utilization rates in the plant what should we expect for inventory build for this year, please?

[Louisa Burdett, executive]

So I'll start with the inventory question in cash. The cash flow in the quarter has been positive. Obviously, we had that tailwind from the COVID-19 debtors in January, but our stock management continues to be good. We will be building stock as we go through the year, particularly as we try to balance the crop recovery but our working capital guidance from the end of the year remains unchanged.

[Steve Foots, executive]

Yes. The non-COVID lipid revenue growth rate at high single -- mid-digit -- mid- to high single digit.

[David Bishop, executive]

We think we'll be a bit below our sort of longer-term run rate because of the headwinds that we've described. But mid- to high single digit is what we expect in the non-COVID pharma business.

[Steve Foots, executive]

Just to your point on Unilever. I mean, look, we had our big cosmetics exhibition last week, to give us the opportunity, the exec committee to sort of meet all of our senior customers. And the themes are slightly different for each of them, as you'd expect, because their brands are positioned slightly differently as well. But common theme, the big common theme is around sustainability. Everybody is moving to lower carbon in their products and trying to develop brands in that way, and that's given us a lot of reassurance that our strategy of moving to sustainable ingredients is the right one. So we're on our way, if you like, with them. And I think each one has their own opportunities and their own challenges. So it's difficult to try and draw too many specific things, Gunther, around individual companies, if that's okay.

[Operator]

There are no further questions in the queue. So I will now hand the call back over to your hosts for any closing remarks.

[Steve Foots, executive]

Yes. No, I think it's -- thanks for the questions, everybody. And yes, I mean, with quarter 1 being gone we will guide you through each of the subsequent quarters. But encouraging start in some of our businesses, particularly Consumer Care and IS, but we've still got challenges with Life Sciences with some of the -- with Crop and in Consumer Health primarily. So we'll monitor all of that with you, and we'll update you again in the middle of the year, more fully. So thanks, everybody, and we'll see you then.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.