Croda International PLC

LSE:CRDA

Earnings Call Transcript 2022-Q2

[Steve Foots, executive]

Good morning, everyone, and many thanks for joining our Half Year results call. As usual, I am here with Jez and David, and we will of course be very happy to answer your questions once we have been through today's presentation. The agenda will be one you recognize, first some highlights from me, then over to Jez for detail on the numbers. I will then come back to talk about our future growth platform, explain why we are so excited by it and how it underpins our outlook for the second half of the year and beyond.

It's been an excellent first half, driven by very encouraging progress across all areas of the business. Once again, we've seen the unique strengths of Croda's business model, especially in our ability to manage unprecedented inflation by successfully passing on higher costs to customers.

We are also delivering our strategy. At the end of June, we completed the sale of the majority of our industrial businesses, fulfilling our ambition to become a pure-play consumer care and life sciences business. Croda is now more focused, both in terms of where we deploy our intellectual property and our capital. And that's translating into more and more growth opportunities, and that growth is more resilient than ever before.

Some of the key financial highlights across this slide, our growth is broad based, with sales and profits up across almost all areas. And record sales, margin and profit. This is classic Croda. Profit growth ahead of sales growth and EPS growth ahead of profits, the hallmarks of a great business, fueling our ability to deliver strong returns to shareholders. Our strategy has transitioned Croda into being a better margin and higher return business. And we are in an even stronger position to commercialize the knowledge and expertise of our people.

We are IP led, nearly 40% of the Group's sales are protected and we have over 1,500 patents across 250 patent families. We're capital light with CapEx typically accounting for only 6% of sales or GBP 100 million annually. And the divestment of large sites such as Hull and Gouda have made us less carbon intensive. And we are even more focused on value.

You've heard me say that we sell in test tube quantities rather than tanker loads, now we are increasingly selling in vial quantities, pounds per gram rather than pounds per kilo. It is all about maximizing value from the commercialization of peoples' knowledge, not the commercialization of metal capacity. We make much bigger margins that way. And we are doing that better and better. So a great first half but let me stop there and hand over to Jez to go through the results in more detail.

[Jeremy Maiden, executive]

Thank you, Steve, and good morning everyone. As Steve highlighted, the Group delivered an excellent financial performance in the first half of the year, building on the record performance seen in 2021. Sales increased to over GBP 1.1 billion and were up by 21% against the prior year, 18% in constant currency terms. Adjusted operating profit increased by 24% to GBP 300 million and EBIT return on sales improved by 70 basis points and is now approaching 27%.

Adjusted profit before tax rose by 26% to GBP 289 million and, with the tax rate broadly flat against the prior year at 24%, adjusted earnings per share increased by 25% to 155 pence. We have declared an interim dividend of 47 pence, an increase of 8%, continuing a 30-year track record of unbroken dividend growth. Free cash flow reduced to GBP 21 million in the period, with significant investment in working capital reflecting strong sales growth.

Turning now to the IFRS reconciliation, exceptional items and intangible amortization totaled GBP 13 million. We delivered a profit on divestment of the PTIC business of GBP 361 million. As a result, on an IFRS basis, profit before tax more than tripled to GBP 637 million. The PTIC divestment completed on 30 June, so the first half year includes a full period of PTIC, reported in the usual way as continuing operations.

Turning now to the sales bridge for the first half. The chemicals sector has seen significant inflation for some 18 months, which continued through the first half of 2022. We have continued to fully recover cost increases, demonstrating the strength of Croda's business model. Price/mix added 22% year-on-year, of which this successful recovery of cost inflation through higher selling prices is estimated to have contributed 20 percentage points. This was supported by a 2% improvement in mix.

Volume declined by 5% year-on-year. The first half of last year had been characterized by strong consumer demand, coupled with significant customer restocking. This restocking was a function of customers not wanting to be short of product as the post-COVID recovery took off, combined with the uncertainties around global supply chains and rising supply prices. And as a result, we were serving the high demand last year from both production and existing stocks.

The first half of 2022 has seen supply chains and service levels improve, with the result that customer ordering has been normalized. Nevertheless, consumer demand has remained strong and our capacity does remain tight in some chemistries. As a result, we have de-marketed some lower margin product. This was reflected in a slightly lower volume but higher margins. In addition, overall acquisitions added 1% and currency translation a further 3%, giving reported sales growth in the first half of 21%.

I have also shown what the impact of the PTIC divestment would have been, had it occurred on 1st January. Taking account of sales retained by Croda and the impact of the new supply agreement to Cargill post-divestment, revenue would have been GBP 191 million lower.

This next slide unwraps the cost inflation further. The left hand side shows the breakdown of sales. Raw materials make up 35% of our sales value, labor 19%, and energy and freight 3% each. 9% is other costs and 31% is our EBITDA margin. Raw materials saw a 25% increase on average over the first half year compared with the final quarter of 2021. With a broad basket of raw materials, mostly grown commodities, it was unprecedented to see so many different materials increasing together. The conflict in Ukraine added further to the existing inflation. Now we do not hedge raw material prices but buy on a quarterly basis, and our operating model ensures that we get successful recovery of this cost inflation as it occurs.

Freight costs continued to inflate after a challenging 2021 for global distribution systems and were up 14% in the first half. Energy costs were up by 47%, though this benefitted from a degree of forward cover which we take on a rolling basis. Energy costs constitute a relatively small proportion of our cost base but have been recovered through selling prices. Given our manufacturing footprint, we don't anticipate any material exposure to potential gas shortages in Europe from the current forward uncertainty, although some of our petrochem raw material suppliers may see some of it.

As we look forward, we see signs of smaller price increases in many materials but we will continue to recover inflation as and when it occurs, protecting profit, in line with our operating model. Growth was strong across all regions with double-digit percentage growth on both reported and underlying basis, that is excluding the impact of currency translation and M&A. Reported sales growth was particularly strong in Asia, at 31%, including in China, where sales grew even in April, the worst of the COVID lockdown months.

Sales in North America continued to grow strongly and in Latin America reported sales growth of 35% was driven by excellent demand in Crop Care. In Europe, reported sales grew by 13%, despite a small adverse impact from the conflict in Ukraine; sales impacted by the conflict are just 1% of the Group's total revenue.

Turning now to look at how the sectors performed. Consumer Care grew sales by 24%, whilst adjusted operating profit was 34% higher. And as a result, return on sales increased 200 basis points to 26.6%. Life Sciences continues to grow. Sales were up 14% with adjusted operating profit 4% higher, against a record prior year performance that included peak COVID-19 demand. Life Sciences delivered a best in class return on sales of 36%.

The combined performance of Performance Technologies and Industrial Chemicals saw sales grow by 24% and profit by 61%. Industrial markets reached top of the cycle during the period, with prices for commodity by-products particularly strong, delivering return an overall return on sales of over 17%. Sales began to slow somewhat in the second quarter. There was a broadly similar performance between the business we divested and the part we've retained.

As already noted, at the Group sales level, sales were up 21% and adjusted operating profit 24%, with return on sales of 26.6%. As in previous years, return on sales is impacted by the level of our variable remuneration charge, particularly reflecting the impact of the share price on the mark-to-market value of our global employee share plans. The lower share price across the first half year saw a benefit of 1.5 percentage points to both sector and Group return on sales.

So now let's look at each of the sectors in turn. Consumer Care was the standout performer in the first half year. Underlying sales increased by 18%. Price/mix was up 22%, driven by successful cost inflation recovery. And volume was marginally lower, reflecting the strong prior year comparator which benefited from the post-COVID resurgence in demand and the associated customer restocking that I mentioned. This combined with some selective de-marketing of lower margin business to manage capacity limitations, with underlying consumer demand volume remaining robust. The prior year acquisitions of Alban Muller in Beauty Actives and Parfex in F&F added 3% to sales growth. Currency translation also added 3%, resulting in overall reported growth of 24%.

We saw sales growth across all 4 business units. Beauty Care was the strongest, a noteworthy performance, given this was a business where growth had been inconsistent back in 2018 and 2019. Consumer demand for sustainable ingredients such as ECO surfactants and our enhanced formulation capability for customers are driving growth and creating greater resilience. Alongside Beauty Care, the Beauty Actives business continued to strengthen, with the integration of Alban Muller in complementary natural actives.

Home Care continues to accelerate its customer roll outs in high value proteins for fabric care. And the F&F business saw some improved growth in emerging markets, alongside good progress in synergy capture. Consumer Care return on sales increased by 200 basis points to 26.6%. Following an outstanding year for Life Sciences in 2021, with rapid expansion of Health Care following the Avanti acquisition and COVID vaccine sales, the first half of 2022 saw further progress, consolidating on this exceptional performance.

Underlying sales growth was 12%, with price/mix up 1% and volume growth of 11%. Currency translation added 2%, resulting in reported sales growth of 14%. Volume growth was driven by a standout performance in favorable market conditions for Crop Protection. The lower average pricing in Crop also reflected in a lower price/mix for Life Sciences and in its slightly low return on sales of 36%. This Crop growth built on a strong second half of 2021, so the headline growth will slow in the second half this year but the outlook remains strongly positive, with high commodity prices driving great demand.

Health Care consolidated on a stellar 2021, with growth across all its platforms, other than lipid systems. Recent investment in capacity expansion in patient health drove continued growth in specialty excipients and in vaccine adjuvants. We are starting to see lower demand for lipid systems, as COVID vaccine use declines from its peak. 2021 saw total lipid system sales of about $230 million, of which $190 million was COVID related vaccines and the balance the Avanti R&D lipids business. The first half of 2022 saw $90 million of total lipid system sales. Looking forward, we expect a further second half decline to give full year sales this year around $150 million, with $120 million in each of 2023 and 2024, as COVID demand stabilizes at this lower level.

After this, total lipid sales should return to growth from 2025, as clinical opportunities in mRNA and nucleic acids develop and convert into commercial scale projects, leveraging Croda's wider scale-up capability and Avanti's great pharma R&D access. It is important to remember that this was our rationale for acquiring Avanti, to develop this new patient health care delivery platform in exciting new technologies. But it is also good to be approaching the bottom of the curve from the initial COVID sales and important, I think, to see the profit growth we will still be delivering in 2022, despite an $80 million decline in total lipid sales. We are building a strong foundation for Croda in drug delivery which will deliver exciting growth in the future, and Steve will share some of the exciting pipeline programs later.

In PTIC, first half performance was strong, with underlying sales growth of 22%. Price/mix increased by 32% reflecting the most significant cost inflation seen across the Group, but volume declined by 10% against a strong comparator and as industrial markets peaked in the second quarter. On 30 June, we completed the principal PTIC divestment, with gross proceeds of EUR775 million, with the potential subsequent sale of Sipo in China, subject to reaching an agreement with our local partner. The retained business will now form the new Industrial Specialties sector and play a critical role supporting the efficiency of the Consumer Care and Life Sciences sectors on common manufacturing sites.

In the first half, the combined PTIC business delivered GBP 343 million of sales and GBP 61 million of operating profit. Had we made the divestment on 1st January, the impact on the Group overall would have been to reduce sales by GBP 191 million and adjusted operating profit by GBP 39 million, as shown in the table. This includes sales from a new supply agreement with Cargill and the impact of stranded costs across all 3 sectors, which we expect to mitigate over time through future growth. Going forward, we expect the Industrial Specialties business to operate with a return on sales at or just above 10%.

Now turning to cash flow, EBITDA grew strongly. Working capital increased by GBP 184 million, primarily reflecting the impact of inflation on inventory value and receivables. The bar chart shows about 2-thirds of the working capital increase reflected the simple pro-rata impact of inflation, at constant days cover. One third reflected investment for growth, primarily into higher receivables. We expect working capital to reduce in the second half of the year, particularly if raw material inflation starts to recede, as expected. Net proceeds from the divestment were GBP 613 million, reducing half year net debt to GBP 331 million, a leverage ratio of 0.6x EBITDA.

This slide shows where we intend to use those proceeds. Our capital allocation policy remains unchanged and the divestment will allow us to deploy more capital in line with this policy to support expansion in higher growth, higher returning Consumer Care and Life Science markets. We have a rich seam of growth opportunities and will prioritize organic capital expenditure to drive value creation through new capacity, product innovation and expansion in attractive geographic markets.

This will be complemented with targeted acquisitions in technology adjacencies, in line with our preferred approach to 'buy and build'. This is demonstrated by our recent investments in Patient Health where we have secured new technology platforms like vaccine adjuvants in Denmark and lipid systems in the US through modest acquisition spends, and then built global scale through organic investment. Our typical capital investment spend is around 6% of annual sales or just over GBP 100 million currently, and we believe this is sufficient to maintain our asset base and deliver target organic growth rates. In addition, we are investing GBP 160 million over 4 years to access fast growth pharma opportunities, which Steve will cover shortly.

We are also committed to pay a regular dividend to shareholders, with an 8% increase that I mentioned earlier, and in addition we monitor leverage against our target policy of 1-2 times EBITDA, returning surplus capital to shareholders, when identified. I will now hand you back to Steve to look at our strategic opportunities.

[Steve Foots, executive]

Many thanks, Jez. And for the first time in our history, Croda is now solely comprised of 8 growth businesses, supported by Industrial Specialties. We expect each of them to deliver sales growth of at least 1.5 times GDP with return on sales above 20% and ROIC over 2x the cost of capital. 10 years ago you would be investing in one business and it was called Actives.

Now you can take your pick. You might choose to invest in us because of our Personal Care, our F&F business or even our Crop franchise. Or maybe you invest in Croda because of our emerging Health Care platforms that we've got. There is a much broader breadth and depth to our growth than in the past. We also no longer have exposure to industrial markets to worry about and the portfolio has rich innovation in each area. So this increased focus makes our future growth much more resilient, even in a more uncertain environment.

So in Consumer Care, Beauty Actives is still the leading innovator in the skin care market with a strong position with prestige and masstige brands. Beauty Care is a stronger, broader business with multiple revenue streams, and growth is being driven by a structural shift in behavior by customers and consumers towards sustainable ingredients. F&F has significant exposure to fast growth markets, underpinned by a highly flexible and responsive business model. And whilst Home Care is concentrated on fast growing niches, that should be broadly unaffected by the macro. So Consumer Care has a much broader portfolio today than we had 2 years ago.

Turning to Life Sciences, we expect all the businesses to be pretty immune to any deterioration in the macro environment. People don't compromise on health, and farmers continue to look for ways to protect their crops and get more output from their land. As consumers think more and more about their impact on the wider environment, our customers want us to deliver novel sustainable ingredients, and this has become a real differentiator for us. We are leading in 4 areas.

Firstly, our target is for the raw materials that we use to be 75% bio-based by 2030. And by continuing to move away from petrochemicals, we are helping our customers to meet their own commitments to fossil-free formulations. Secondly, by ensuring that our raw material sourcing has a positive impact on communities in our supply chain, giving our customers an even stronger platform from which to market purpose-driven brands. And thirdly, by decarbonizing our operations and supply chain to meet our 1.5 degrees Science Based Target. We expect to reduce our product carbon footprint by 35% and we are developing a Scope 3 Index so our customers can see how our actions are benefitting them. And fourthly, with R&D projects that help to transition our portfolio and enable our customers to meet their own sustainability goals.

We are combining leadership on sustainability with market-leading innovation to deliver sustainable growth. Our focus is on niche areas, developing next generation products. R&D is driving growth in our Beauty Actives business. Recent launches have included an innovative retinol anti-aging active. By encapsulating the active, we have improved skin penetration by more than 9 times, creating the most sustainable retinol-containing complex on the market.

Beauty Care is delivering more consistent top line growth, particularly in the higher value sun and hair care markets. Sales of ECO bio-based surfactants continue to accelerate, and both in Beauty Care and Home Care where they have doubled in the past first half year. And in F&F, we have launched encapsulated fragrances, one of the first on the market, and expanded our presence in Indonesia and South Africa, as well as launching in Brazil.

Innovation as you all know is Croda's lifeblood and the bedrock of our future growth. We continue to make significant investment in R&D and are taking bigger bets with more ambitious projects. Our pipeline is being strengthened by our biotech investments such as Nautilus' expertise in blue, or marine, biotech. We are using micro-organisms found on the ocean floor to find new ways of treating dandruff, skin aging and inflammation.

Our new biotech-derived surfactants have expanded the options available to customers. They are helping to increase our bio-based portfolio and meet our ambition to eliminate petrochemical derived surfactants globally by 2030. And biotechnology is opening up new approaches to making fragrance ingredients, one of the ways in which we are making our F&F portfolio more sustainable.

Investments in organic expansion form part of the redeployment of capital from the PTIC divestment into innovative, fast growth markets. We are growing our IP with more specialist scientists coming into the business. Our expanding sustainable technologies building on growth in areas like sulfate-free surfactants and ingredients that double the life of fabrics. And we are also increasing geographic coverage, particularly in China. So these investments are delivering results and strengthening our platform for growth for the future.

The vast breadth of the Consumer Care portfolio is at an all-time high. Tens of thousands of products focused on fast-growth, high value markets. And our pipeline is getting stronger, responding to both current and future trends, creating next generation technology, replacing petrochemical formulations along the way. We are winning by focusing on premium, share, agility and fast growing and sustainability driven niches. So Consumer Care has developed very significantly to become an even more resilient growth platform, underpinned by a strong pipeline and focused investment.

Turning to Life Sciences then, growth is being driven by demand for high-value delivery systems to enable the latest biological drugs. Biologics is a huge market, accounting for 70% of top 20 selling drugs, enabling doctors to treat diseases when they could previously only treat the symptoms. So going across the 3 areas that you will be familiar with, growth in excipients is being driven by expansion in injectable drugs using biological APIs, such as monoclonal antibodies with 5,000 clinical trials currently underway.

Adjuvant demand is being driven by new vaccines, greater adjuvant use to enhance the body's reaction to vaccine protection and WHO programs to expand vaccine take up in developing countries. So vaccines are also increasingly being used to trigger an immune response to an already contracted disease, to treat HIV, for example. There are 1,500 clinical trials for these therapeutic vaccines underway globally.

And whilst lipid systems have played a critical role in COVID vaccines, they offer significant potential beyond COVID-19 as the preferred delivery system for nucleic acid therapeutics. The mRNA market is expected to reach $35 billion over the next 15 years, and 180 clinical trials are already underway for applications across preventative and therapeutic vaccines, and therapeutic drugs. So biologics also has the potential to revolutionize crop science. With our innovative delivery systems, Croda is well positioned to benefit from the move into biopesticides which are growing at twice the rate of traditional crop care.

Our biopharma pipeline is very exciting indeed. We are partnering with major pharma brands to provide specialty excipients for monoclonal antibodies. Applications range from oncology to combating macular degeneration, a condition that affects peoples vision. And with the only aseptic manufacturing site for vaccine adjuvants globally, we are the gold standard for aluminum adjuvants used in a third of preventative vaccines. So we have a strong sales pipeline across a variety of vaccines including flu, pneumonia, shingles and HIV.

And therapeutic vaccines promise even faster growth rates, enabling the treatment of diseases such as HIV with a new vaccine that is in Phase 3 trials in Africa. And our lipid systems are being used in preventive vaccines for flu and RSV, a common virus seen in schools during the winter, and in therapeutic vaccines for cancer. All of this highlights how we are involved in helping to treat some of the biggest diseases in the world creating more and more opportunities for Croda.

And similar to Consumer Care, our innovation pipeline in Life Sciences is extremely strong. Here are some examples of applications that use our current generation delivery systems but illustrate more importantly the focus of our future innovation. The first one uses one of our specialist high purity excipients which has been developed for APIs that require superior solubility performance. They will help enable diabetics, for example, to take insulin orally rather than by injection. And this project is currently in Phase 3 clinical trials in the US.

Our vaccine adjuvants are being used in a novel personalized immunotherapy for the treatment of patients with melanoma, lung cancer and bladder cancer as well. So Phase 2 clinical trials are underway in Denmark at the moment. And most exciting of all, our lipid systems are being used by a customer which recently completed the world's first dosing of a patient with a gene editing therapy, and as part of a clinical trial for the treatment of heart disease. We are truly applying our purpose of smart science to improve lives in all of these opportunities. And again, we are driving growth through focused investment.

As Jez said, our preferred approach here is to adopt a 'buy and build' model, securing new technology platforms and know-how through modest acquisition spends then building site expansion from within. We have already doubled capacity at our specialty excipients plant in Pennsylvania and are rapidly expanding our adjuvant systems factory in Denmark. Our priority is continuing to build our knowledge base in lipid systems. So we are investing in our R&D and pre-clinical capabilities at Avanti and in a second scale up site in Pennsylvania to augment current commercial scale capacity at Leek in the UK.

Between 2021 and 2024 we will invest up to GBP 160 million for new capacity to deliver on the exciting pharmaceutical platform we are building. Complementing our own investment, the US and UK governments are co-investing up to GBP 75 million too, recognizing the importance of new generation delivery systems to drug discovery. These are already some of the highest returning investments in our portfolio and the expansion will drive accelerated growth.

We are going to go into a lot more detail at our Investor Day in October, but our pipeline in biopharma will be a significant growth engine for Croda and it is getting bigger. In the first half year, we secured 30 new customers and 80 new clinical and pre-clinical programs, bringing the total to 330. More than 3-quarters of these programs are for non-COVID-19 applications, up from 2-thirds just 6 months ago. And the pie chart in the middle shows the proportion by each product class. So monoclonal antibody and oncology programs make up the majority of our specialty excipient pipeline as well as immunosuppressants.

In vaccine adjuvants, in addition to our continued focus on fighting against WHO-listed diseases, immunotherapy applications such as the personalized cancer treatment I mentioned earlier, are becoming increasingly important. And in lipid systems, all of the new programs in the first half were for non-COVID applications. In this business we are now involved in more oncology and gene editing trials than we are for COVID, and new mRNA vaccines beyond COVID are a particular area of focus.

So finally coming to outlook. With stronger profits than anticipated in the first half, full year profit before tax will be modestly ahead of our previous expectations. And that is despite growth moderating in consumer markets in the second half and full year lipid sales reducing to $150 million versus $230 million last year. Our improved overall outlook reflects the things I have talked about today, a more resilient growth platform in Consumer Care, ongoing demand in Crop and continued overall growth in Health Care.

So in summary, Croda's powerful operating model, its increased focus, greater innovation and exciting pipeline underpin our resilience, ensuring we are even better equipped for future growth. Now, Jez and I are very happy to take your questions. So, over to you.

[Steve Foots, executive]

We'll now move on to the Q&A section of the event. [Operator Instructions] The first question over the webcast comes from Gareth Hayward who asks what businesses are now in Industrial Specialties and what's going say right at Crop Care?

Gareth, good morning to you as well. We're just talking about [indiscernible] David's team, who has got promoted. But anyway, back to business. Yes, I mean, Industrial Specialties is still a significant business for Croda. We've reduced our industrial portfolio in that the small businesses, which are in the core sites that we couldn't -- either product streams rather than the businesses that we couldn't really sell as part of the Cargill deal. So things like water treatment, fabric and fiber protection, and there's a bit of electronics in there. There's a bit of emulsion dispersions in there. And then, of course, on top of that is there's a supply agreement with Cargill, which is a big customer. So we've got transitional service agreements with them, but we will be supplying them on a long-term basis.

So all of that in the round is in there. In terms of crop, I mean, crops had an outstanding year. There's 3 things in the crop results. You've got this big macro positive, which I think you all know about, the big crop prices are higher for longer. And the Ukraine events, unfortunately, prolonged those, when you think about it from the disaster point of view. But from a crop point of view, prices are going to stay longer for a while. So you clearly got a helping hand in the macro. You've also got 2 other things. There's a big move into sustainability. It's not just in home care and beauty care. It's in crop. And we're partnering or probably more so now than we've ever done with the big crop players. So that's gaining more traction, more business.

And I think the other thing is the innovation. We've got world-class platforms in there. You tend to think about us in terms of beauty care and actives and pharma, but the crop innovation platform is great. So you got those 3 things together that's driving a really strong performance in crop. I think our view on crop generally is that, that will continue well into next year as well. So clearly, there's some tougher comparators in the second half, but we're expecting the dynamics of crop to remain positive like that for quite some time to come.

[David Bishop, executive]

Thanks, Steve. We'll now move on to analysts starting I think with Matthew Yates. We'll have to come back to you. Can we go to the next analyst, please?

[Gunther Zechmann, analyst]

Yes, if you can hear me. Now I can.

[David Bishop, executive]

Yes, we could get. Gunther, please [indiscernible] and go ahead and ask the question.

[Gunther Zechmann, analyst]

So I'll start with 2 then. Firstly, Steve, Jez, on the LNP business, sorry to start on that point, but it seems that the visibility of the business you have there has improved significantly with the forecast you are giving out or the projections you are giving out to 2025. So my question is what has structurally or contractually changed in that business? I think Pfizer was more a quarterly rolling visibility. So that seems to be quite a step function to the better. That's the first one.

The second one is, like all of us, I'm elated that we only have to deal with earnings twice a year now and not with Q1 and Q3. I'm sure a lot of my sales side colleagues share that feeling. But can you give us an indication of the volume decline in the second quarter versus Q1 and the exit run rate out of the second quarter? And if there's any differences by business, then that would be helpful as well.

[Steve Foots, executive]

Yes. Just on the LNP, the way we look at that is we've done a lot of work since we last spoke with you on the pipeline. I think that's the important point. So you'll hear a lot more about that, the innovation pipeline. We've got a sales pipeline and an innovation one. So we're mapping every project to our risk-weighted approach and average in terms of the size of that pipeline, and we can monitor that more closely. So again, you're going to hear a lot more about that in early October. I think there's 2 or 3 things in this. Clearly, there's the moderation that we would expect and you would all expect from the vaccine rollout to be more gaining to what I'd call a natural rhythm. And we feel like with our partner there and others that we can call that more sensibly now than we've had in the past.

And if we're now in a natural relationship with them where the first year we were chasing hotel as were they just to get product to market. Now they're in a good position where they've got stock on the ground, and we have as well. So we're in a normal rhythm to that relationship. So I think it's easier to call the future than it was 6, 12 months ago, although there's still a bit of risk involved in that upside as well as potentially downside. But it's much more certain now than it was probably about 6, 12 months ago. So I think it gives us more confidence. The other thing to point out, though, is this 120 million in 2023, more than half of that revenue will be in non-COVID projects. And in 2024, more than 2-thirds of those projects in sales value will be non-COVID.

So I think the point we're trying to make is it's the innovation pipeline that we're mapping that's driving that assurance and confidence in those numbers in the next 2 or 3 years. But Curt, as we've always said, by 2024, '25, the large portion of this is going to be non-COVID related. And we're in -- we're supporting a huge stream, as you can see with some of the examples of treatments from lung cancer to bladder cancer, from heart health to diabetes, from RSV to HIV, lots of different treatments. So there's not one project in here, there's several projects, and that's really the importance and the pipe we're trying to make is the assurance is not coming -- it's coming more from the innovation pipeline. I mean in terms of volumes, I'll kick off, and then I'll let Jez to comment on that.

You can see in the -- we've had a bigger deviation in Industrial than we've had in Life Sciences. I think that's fair to say. And then somewhere in the middle is Consumer Care. We -- if you look at Consumer Care sort of this minus 5% in the first half. When you look at that, there's 3 moving parts in that -- Life Sciences is positive, and that's largely crop driving that. But we're talking about micro volumes, particularly in pharma. So the volume end is more the crop end plus the consumer care. So the minus 5% in Consumer Care, effectively is 3 different things. If you remember last year, particularly in the first half quarter 2, there was a big surge in demand plus real demand plus restocking. So the compare to last year, it was tough because of that restocking of the pipeline. That was one thing.

And the second thing is we haven't supplied everything we wanted. We've still got some supply constraints. So outstanding orders are still in a higher position now than they normally would. And we got one or 2 raw material constraints in Home Care and just supply issues generally in Beauty Care, particularly that's not allowing us to satisfy all the demand, that's second. And then the third thing is this demarketing point. Croda is very good at demarketing. And when capacity is tight, we tend to demarket at the lower end, which tends to be the more volume. And so actually, when you look at that in the round, we think the true volume decline in Consumer Care is about 1%, minus 1%, minus 2% in the round on an ongoing basis.

And when you see the inflation in the business and the 20% in price, in the mix, negative 1%, 2% on volume, we think is perfectly acceptable given where we are. And as you can see, profit growth ahead of value growth. So we're in a good shape there. So that was -- that's the response to that.

[David Bishop, executive]

Matthew, go ahead and ask your question. Sorry, still no audio. Apologies, Matt. We're going to have…

[Steve Foots, executive]

Matt, if you can send an e-mail to David, just with your details, so the question, we'll read it out and we'll try and answer it for you.

[David Bishop, executive]

Let's move to the next analyst, please.

[Charles Webb, analyst]

Hello, can you hear me now? It's Charlie with Morgan Stanley. Well, I'm going to maybe follow up, firstly on Gunther's question just around demand, so just thinking Personal Care, the underlying small negative that you saw in the first half. How do you think about the second half? Obviously, raw material inflation presumably is slowing, so the price component will be a little bit less in the second half. Presumably, de-marketing doesn't carry on forever. So -- and the concepts set are easier, right? So just how do you see the organic profile of Consumer Care in the second half? That would be the first question.

And then just second question around the leverage position. Obviously, ending the year -- ending the half in 6x net debt to EBITDA as you talked about wanting to reinvest in growth. You see lots of exciting opportunities organically, but how does the inorganic opportunities look at this stage, where is that focused, or are there opportunities out there that you think are exciting, and maybe just any additional color around that would be very helpful.

[Steve Foots, executive]

Yes. Great. I think in Consumer Care, I mean the way we look at that is we are still very upbeat about Consumer Care. I mean, L'Oreal being out today or last night and today as well, and our view has always been quite similar to them. We've had 2 years of the pandemic, and let's not forget, there are large parts of the world that are just coming out of the pandemic now and we start to see this resurgence in Asia second quarter versus first quarter because of the unlocking of restrictions. Still not fully there as the rate across the China there.

So this is pent-up demand to socialize and through travel, through just going out with friends. So that all helps to drive personal care. There was an indulgence in personal care that we haven't seen for 2 years, and we expect that to continue. So the appetite to purchase personal care products in the industry has never been stronger and I don't think in a recessionary environment is going to significantly slow that down. Clearly, there's going to be areas around the edges that will moderate. I think they always do, but we don't -- we're not expecting in our forecast for a real cliff edge volume reduction in personal care. We expect it to start to cool off a little bit. We're going to get to some of stock levels that you'd expect and demand may moderate a little bit, but we're not forecasting it as a sort of a cliff edge volume decline on the back of that and we'll manage that in the normal way.

And as you saw and I think people saw Croda's figures in the pandemic, the harshest probably trading environment we ever laid to see, I think. The Personal Care business stood up very strongly to that. So I think we are optimistic. Innovation pipelines are strong. The more important thing for the group is making sure that those innovation projects move with pace. So our customers don't reduce their investments in the end of projects through any uncertain environment or recessionary environment and there's still a lot of pent-up demand there as well.

So, yes, I mean we're cautious with the second half in our numbers. We expect there is some moderation but not massive in terms of that. And so in terms of your leverage point. Clearly, we'd like to put that to use, the proceeds. Were in a brilliant position. We've got strong -- we've strong trading. We've got a strong balance sheet. We've got plenty of optionality there and we'll take our time. We're in no rush but we've appointed chief scouts in both of our big businesses. They are some of our best business developers in the company. We're not after particularly -- we're after target technologies rather than target customers, but the target technology leads us to that customer.

So we know what we're looking for and our list is probably very different to everybody out there. So we have to be patient with them. They are not long list, but they are interesting list. And I think I've always said, when you come into a -- you go out of a recession, there's always great opportunities and Croda, I've lived through 5 recessions in 20 years in Croda and the opportunities when you come out -- when you come out of the harsh trading environment like what we have done is -- there is normally more opportunities than you think. So let's just be there. So we're flexible, we're open, but we're very sensible with our money. So we're not deploy -- we don't feel like we've -- there is a burning need to deploy it with speed. We'll do it in the right way.

[Charles Webb, analyst]

That's really helpful. And just maybe following up on that point around raw material inflation for the second half versus the first half, obviously, saw a lot of inflation in the first half. How do you see that in the second half and what kind of reciprocal pricing we do would you expect to see to offset any residual inflation?

[Steve Foots, executive]

Yes, I mean I think our view is it's probably about 2% in Q3 versus Q2. There is a mix -- it's a mixed bag still out there, but an extra 2% increase we are forecasting in Q3. So we think it's peaking. We expect it's a peak in the second half of the year, raw material pricing and that's a significant part of everybody's inflation environment, so we would expect that to moderate, and therefore, the need for further increases is very much more targeted now in individual products rather than sort of across the board. So we're not expecting to full scale across-the-board increases through because we, as I said, we're expecting. Raw materials saw a plateauing now.

Jez, any additional point?

[Jeremy Maiden, executive]

I think that's fair. I think, yes, so raw material is probably somewhere in that 2% to 5% region, maybe sales price near the 2%, but we did call it out in March and we sort of got it wrong then because of Ukraine, but it certainly feels after 6 quarters, 7 quarters now some increases that we're getting to the end of that period, and we should start to see commodities generally coming off, obviously, particularly given that we see a little bit of softening on the more industrial side of markets. So that should be helpful.

[David Bishop, executive]

Just 2 questions here from Matthew Yates, one of which is a follow-on to Charlie's question.

Jez mentioned that there might be some working capital released in H2 if raw materials fall, from a profitability perspective, when you have that sort of cost deflation, would you be passing it all on to customers or would you plan to keep some of the savings and drive up your own profitability particularly in consumer care?

And then Matthew's second question is in relation to healthcare. Steve, you kindly gave the number of 330 projects in the healthcare pipeline, but I have no idea what to do with that in terms of translating it into financials. I'm sure there must be a huge variation in project value and likelihood of making it through to clinical trials. So at the risk of front running your planned seminar after the summer, is it reasonable to think this business is running a bit ahead or substantially ahead of the targets you first outlined in 2019 and that's reflected in a sustained high level of CapEx to support that growth? So perhaps turning to raw materials, first of all.

[Steve Foots, executive]

Yes. Well, let me, we'll both answer that. I mean, the first commercially and I'll let Jez talk about working capital unwind and things like that. I mean, we're not forecasting in the model a massive deterioration in raw materials very quickly. So the issue with raw materials, I think, will plateau. And if they did come crashing down, which we're not expecting, then we will of course pass that -- pass some of those reductions back. But what you tend to find in our model is in rapid raw material inflation or deflation, we tend to hold onto a bit more margin at the edges because we're up quickly to push prices through as we've demonstrated in the first half. There is no like there for most and when we come down, we'll just be a bit slower to pass the increases on, but we will pass -- we will pass a significant amount of those on. So, net-net, it's sort of a slight margin improvement story for the group.

Well, Jez, the working capital is slightly different.

[Jeremy Maiden, executive]

Yes, I mean from working capital point of view, I mean, clearly, we've seen very sustained increases in working capital over the last 18 months. Almost exclusively reflecting the higher values of inventory and the receivables in there and so certainly, given our sort of view that we should be seeing a more stable period at least on raw material inflation that we'd expect to see, yes, a stabilization of working capital and then obviously, if we see prices coming down later in the year then that will be reflected in working capital but I think with probably through that peak in working capital in the same way that would probably through the peak in raw materials at the moment, but we keep the number of days constant and just manage our business.

We've probably added a couple of weeks of inventory over the last 18 months because of supply chain disruption particularly caused by global distribution. So we'll keep that in as a buffer to protect service but the great thing has been seen that service has been improving steadily through the first half year, so we don't really need to do any more of that at this point.

[Steve Foots, executive]

Yes, just on your healthcare point, I mean, yes, I mean you make a good point. And $64 million question, what does it all mean? We didn't want to give you too much information today because we've got Capital Markets Day in early October and you said the feature of that will be, it will be exclusively the pharma, the pharma business of Croda, new team and fresh information, but a lot of that will be around the bring it to life, the innovation pipeline as we know it. And we are very reluctant to go out too early with numbers that might overexcite people.

We've got to make sure ourselves, as you say. They're all in different stages of clinical programs. Some are much bigger than others, but in the round. The fact, it's the sheer breadth of the treatments that we're following and the sheer breadth of the products that we have in there, which is the really big important thing.

Since we last spoke with you, we picked up another 80 programs in the first half of the year so we're now at 30 customers across these 3 new customers -- across these 3 platforms. So in the round, it's all shaping up nicely, but what we need to do is try and guide you and educate you and bring to life that not just an example in the framework. So I think what we're going to see in October is certainly the innovation framework and how that's linked to the wider strategy and breaking that down in the 3 component technology platform. So there's more about that in the future.

[Jeremy Maiden, executive]

I think Matthew makes a good point as well about the CapEx. I think that pipeline development does give us the confidence in the CapEx. If we were critical of ourselves in the past, it would be that we're sometimes a bit slow to put the CapEx in. So in the case of the specialty excipients platform, we're probably surprised by the rate of growth that we saw that we covered in the 2019 Capital Markets Day and then how to put capacity in and we're probably constraining demand somewhat while we were building that capacity.

We inherited the same situation with the vaccine adjuvant business in 2018 and we've been willing to put capital in to expand that because we've seen here that business sort of double since we acquired it at the end of '18. And so on the lipid systems platform, we want to make sure that we're fully prepared for what we see as really that market taking off commercially from 2025, notwithstanding obviously the COVID demand that has been up to now. And that's what gives us the confidence about spending the GBP 160 million of additional CapEx over the 4 years from '21 to '24 because we can see that pipeline coming through and we want to be able to serve those markets as the growth comes.

[David Bishop, executive]

There is a follow-up question from [ Tanika ] on the webcast. He says, is there a risk that there will be excess capacity in 3 years' time?

[Steve Foots, executive]

Yes, I don't know whether that's in relation to lipids or is that in relation to just generally for the group.

[David Bishop, executive]

I think principally in relation to the healthcare and pharmaceutical capacity.

[Steve Foots, executive]

Yes. Unlikely we would say, but I mean, there may be, but let's be honest. We want to run -- we don't need to run our assets at under 100% utilization. We're not a continuous process-built company. We working batches and it's purity and quality in pharma, which is the most important thing. So what we have to make sure of is that eventuality when some of these products hit the market and the more significant than we expected of there earlier than we expected that we've got a multipurpose set of chemistry and biochemistry set on our sites that allow us to cater for that demand.

And as I said, the interesting thing is multiple products now in the pipeline. There are 3 hanging around 3 big technology platforms. So we have to be able to have that breadth and that capacity to cater the demand for that. So effectively, as Jez said, without thinking about a 5-year planning program that we're moving into now. We are moving 3 to 5 year planning parts. That is to really imagine where this growth is going to be in 3 and 5 years' time and invest now. So I think we're doing all the right thing for you and for us. So, in terms of the overall spend for the Group, it's trivial, it's modest compared to the potential performance benefit we get with the results.

[Jeremy Maiden, executive]

The return on capital we achieved from our organic program is the best that we can achieve. We don't have to pay away goodwill intangibles. We can get a very strong return on capital. It's still the best place for us to deploy capital and we're still seeing 10% to 30% growth in the existing to the prior to healthcare platforms and everybody knows that an RNA demand is going to really drive lipids so that market is going to grow very rapidly.

[Steve Foots, executive]

And I think the other thing as well I was thinking about is the bigger disappointment if we were here talking to you all about the frustration because we've got big demand and we don't have the supply, that would be remiss of us as well. So we're just trying to bake in some contingency and insurance and we might have got it wrong. But if we've got it wrong, we'll still have a great return because what probably got it wrong on the downside, we need to invest a little bit more. So we're in a good shape. And as you say, so I'm using that wisely is probably the best use of our capital right now.

[David Bishop, executive]

Okay. We are ready to take the next analyst's question on Zoom, please.

[Charles Bentley, analyst]

Just 2 from me. Firstly on Life Sciences. Given the comments on momentum in the other components division to outside of lipids, it feels like sell in the division might be able to be almost flat or even grow modestly in '23. Is that a fair conclusion? I guess sort of net of that GBP 30 million drop in lipid sales you're guiding to.

And then my second question is a follow-up on the leverage commentary and the inorganic opportunities. Jez, maybe talk to you. Is there a net tax level, which we will see you say, okay, it's time to return some of this to shareholders either through buybacks or special dividends as you've done in the past? Was that not really in the thought process at all at this moment?

[Steve Foots, executive]

Yes, Life Sciences. I mean, yes, the way -- I'll let Jez do the leverage. The way we should look at that is you've got the numbers now that you can program in for the lipid systems. I mean the rest of the business we had expect to continue to trade 7% to 10%. It's demonstrating that. Even in our harsher trading environment, we think the opportunities are still less. So when you model that in your system, I think you'll get that to a Life Science profitability around last year, maybe a little bit more.

[Jeremy Maiden, executive]

Yes, Charles, I think you're right. I mean, we're only expecting a $30 million reduction from this year to the next year on the lipid platform. I think the important thing, as Steve said in the commentary was that we've come at $80 million year-on-year and yet we are still growing the profit and so in Life Science and of course for the group overall in significant terms.

So yes, absolutely, I think our point today is there is only another $30 million to come out of that platform and our view before we normalize and therefore, yes, definitely the Life science growth in crop and the other healthcare platforms will more than offset that. So yes, I think we'll see positive growth just be constrained slightly by the lipid reduction that we see.

In terms of return in capital. We're very disciplined in terms of the approach that we take to deploying capital. We don't want to deploy capital into marginal products -- projects. We want to deploy capital in projects that are at least 2x to 3x cost of capital because that's the Croda way. It's about keeping special and valuable, not just becoming big. We do see the additional opportunities at the moment to deploy capital organically. We're spending about GBP 100 million annually on capital and then we have this GBP 160 million program on top over full year. So this year, probably about GBP 150 million that was quite light in the first half, but we've got the part of government-funded project starting in the second half. I think we'll spend about GBP 150 million organically and that will continue through '23, '24 as we go through these healthcare programs.

And as Steve said, we're looking for what are unlikely to be bolt-on adjacent acquisitions across Consumer Care and Life Sciences. That said, we're probably still going to generate to much more capital than we need. And so, we'll keep that capital allocation under review. So we are very clear when we did the announcement of the disposal last December. We start with where we can deploy capital and I think investors would like us to deploy capital in high return opportunities rather than give it back. So the discipline is there, but we're not looking -- we're not looking at that short term, but it's very much part of our capital allocation discipline.

[David Bishop, executive]

Next question. Mubasher?

[Mubasher Chaudhry, analyst]

Yes. Couple of quick ones, please. Could you provide an update on the Iberchem side of things. How did that perform in the 1H and did the -- I know it's still relatively early days on the synergy side of things, but just a couple of comments around that would be helpful.

And then on the Avanti sales. So you've given the top line outlook. Is that coming in at the same profitability as it was for the last year and kind of first half or is it dropping in profitability as well? Just some comments on that would be helpful. And then finally, are you seeing a slowdown in July, which is driving your cautious outlook or are you just being conservative given where the macro is and kind of taking a bit more of a cautious approach?

[Steve Foots, executive]

Yes. Few questions in there. I'd do Iberchem and then Jez can do the second one if we can remember it and I'll do the third one. Yes, Iberchem trading well and improving. It's in Q2, about in the Q1 and its reported revenues are in the teens, but the organic underlying is probably like for like high-single digits. So we're really pleased with that. Good shape to the growth and they have been trading in a difficult environment, as well as you know with raw material prices. It's sort of a 10-year high. So we've been pleased there. I mean, we will continue to invest.

We've started this energy capture, as everybody knows and we're investing in Brazil, South Africa, Indonesia, and as each 3 months, 6 months goes by, it's getting into a more integrated part of Croda I'm thinking. So very pleased with where they are. 83% of their sales, as a reminder, is in emerging countries. So once the emerging country starts to fully unwind with no lockdown restrictions, then we're pleased the headwinds -- one or 2 of the headwinds that they've had. So it will go away. So we're pleased with that. And in terms of -- what was your third? I'll take the third question.

[Mubasher Chaudhry, analyst]

July outlook?

[Steve Foots, executive]

Yes, July outlook and I'll go back to Jez. So, yes, I mean we're cautious naturally like everybody is. I think you'd be surprised if we weren't given the noise around, but we're not really seeing the exit rates. It's best to look at it regionally rather than by sector. The exit rates in Q2 is strong everywhere with the exception of some moderation in America. We've seen a couple of months of trading, which is a bit softer, but still positive but softer than it was in the first 3 or 4 months, and so we were expecting.

We're trying to forecast into the second half that continued moderation, maybe a little bit of moderation elsewhere, but you know, people forget. People just coming out of lockdown as well as the disposable income squeezed as well. So you've got a number of different trade-offs out there and it's very difficult to call. But our general view is one of caution for the right reasons. We don't get ahead of ourselves and neither do you and you wouldn't believe us anyway. So I think that's right.

Jez, on the other one.

[Jeremy Maiden, executive]

Yes, Mubasher. So I guess, we tend to use a sort of Avanti and lipid systems language a little interchangeably. So if I could just sort of start there. So the lipid systems platform obviously has its half the Avanti business that we acquired 2 years ago now and then we have the second site in the U.K., which is the scale upside which Croda already owned, and then we recently announced that we're going to create another scale-up site in this case this time in the U.S. partly supported by the U.S. government.

So I guess Avanti is the core of that, but it's the lipid systems platform really that we're focusing on and within that lipid systems platform, you've probably got 3 components. Firstly, you've got the business that has been built up over 50 years, which is the Avanti R&D business and that's serving 3,000 customers in preclinical and clinical stages and that's one of the excitements about originally about acquiring Avanti was it gave us to have access to R&D and pharma that we haven't had before through our existing fiber platforms, which tend to be late stage and commercial.

So that Avanti business continues to trade really well, a $40 million business, roughly when we acquired it. Good profitability and that's expanding as it expands its R&D presence. Second part of the platform is clearly the COVID piece around principally around the principal customer contract. That profitability has come down a little bit. We indicated that the year one profitability for that contract was higher than the year 2 and year 3 profitability. But that just really reflects the fact that you get better at what you're doing, you get more efficient. So overall profitability in that contract. Similar level to where we were before.

And then the third component of course is the pipeline of opportunities developing from the Avanti R&D engine and we'd expect the profitability levels in that to be at least as good as the, as what we've seen in the COVID experience. So long answer to basically saying, no, the overall profitability of the lipid platform is consistent and the profitability of that platform in the rest of healthcare is also quite consistent as well.

So yes, we're not seeing sort of significant erosion or anything like that. It's in a good place and all of these important projects coming through from our mRNA are going to keep the profitability very good in that platform.

[David Bishop, executive]

Thanks. Next analyst, please.

[Unknown Analyst]

Just on lipids. Understand that there is a greater proportion of non-COVID sales, but what gives you the confidence over the longer term sales forecast given that you've effectively just cut the H2 contribution by best part 50% and a related question, just on stocking and how much visibility do you have over inventory levels at Pfizer and are we likely to see a situation where as demand comes off, you get a destocking situation from them as well.

[Steve Foots, executive]

Yes, I mean, we've sort of try to answer that with the other questions. I mean it's all around the pipeline, the innovation pipeline. As a reminder, next year, more than half of this revenue will be in pipeline projects non-COVID and all of those are from our point of view, we can forecast with more -- with quite a lot of accuracy. Clearly, they can move in. In 2023, 2/3 of these projects. So the innovation pipeline is, it's got a lot of discipline to it and it's not by individual projects. So that gives us the sort of the comfort and confidence of where we're going.

So I think the point we're trying to make to your Pfizer thing is, Pfizer becomes less. Not less important, but it's less of the waiting of the lipid systems in 2023 and 2024. It becomes, well, less than half and well less round a 1/3, potentially less than that in 2023. A lot of that is because -- '24, and a lot of that is because of that reaching a natural rhythm. I think we're not far from reaching a natural rhythm. That's why we're calling out with Pfizer to '23 and '24 numbers now, because the difficulty in 2021 was because you're chasing your tail and it's going out as quickly as you're making it and so for them, it's very difficult to sort really guesstimate and get an accurate forecast on that and that was Pfizer's comment.

But now with this natural rhythm around the world where they've got reasonable amount of government contracts that have visibility on making work back through that and they've got a stable stock position, then, it's more forecastable in our way and in their way. So that's why we saw it coming out with those numbers. So it's a combination of the business settling down to a natural rhythm with Pfizer and the innovation pipeline projects becoming more targeted from Croda and better understanding the nature of those. And as I said, repeating what I've said in the past, you'll hear a lot more about that in early October at the Capital Markets Day.

[David Bishop, executive]

Next question, please.

[Isha Sharma, analyst]

I just have one, please. You've mentioned in the past that you would slowly phase out the PT business by growing in other areas, especially in Life Sciences. How should we think of the phasing of the remaining GBP 200 million in the next 5 years. And also are you happy with Croda's size in the consolidating industry?

[Steve Foots, executive]

Yes, I mean, I think we haven't said it's going to reduce to nothing. It won't reduce to nothing. The IS business that's still with Croda is with us because there's lots of moving parts in there. They're in core assets. Now in terms of phasing industrial -- the industry question. So in terms of footprint in 3 to 5 years' time, it might be a little bit smaller but it won't be -- it won't be nothing. It's still an important part, we'll it treat it as very much an important part of Croda and it's got good margins. You know a lot of quite a number of products in their margins that are not -- that wouldn't disgrace the Consumer Care portfolio, some good margins in there. So our job there is to run it and run it in the right way.

The point we're trying to make is with the strategic divestment is to allow us to use those funds to invest 100% into Life Sciences and Consumer Care to turbocharge the growth there. So we've got these 8 growth businesses and all of them. Jez and myself will look at. The ball got growth in them and our job is to invest in them in the right way, whether that's people or CapEx or inorganic growth and we've got the choice. We won't invest the same in each of the 8, but we'll be investing in them because they're in growth markets with trends supporting our innovation and our job then is just to allow them the environment to grow by continued investment. So industrial not shrink into nothing. It's going to moderate, but not a huge amount.

[Jeremy Maiden, executive]

Yes, it's right. I would probably add just that just the also in the Industrial Specialties business, the supply agreement. So clearly the business we've sold to Cargill is bigger than the 4 manufacturing sites that we've sold. So we have also agreed a 5-year agreement to supply some other products from other retain crowded sites. So again, that business, we would expect to be reasonably consistent over 5 years. But clearly, it might drop off completely at the end of that 5-year period. It might slow down during that 5-year period as Cargill transfers some of that product technology into their own business as well.

So you will have the supply agreement within Industrial Specialties, but yes, initially, it's going to be a business of getting on for GBP 300 million of revenue and we expect the profitability to be low double digit, just around 10% probably.

[David Bishop, executive]

Thanks, Isha. Next question.

[Georgina Iwamoto, analyst]

It's Georgina from Goldman. I've 2 questions left. The first is, you've got the ECO surfactant growth CAGAR to 25% of 75% if you can give an idea of the path, is that linear over the coming years?

And then my second question, it was a really interesting comment that you made, Steve, about lipid systems not being continuous process, so therefore pricing in lipid systems is not going to be driven by asset utilization rate. So if I think about more batch process chemicals, I've got paints coming to mind, and pricing is usually driven by raw materials. I'm assuming that's not the case in lipid systems. So just wondering if you could talk about, therefore, what are the key price drivers in lipid systems?

[Steve Foots, executive]

Yes. We'll do the lipid system one first and then I'll bring Jez in the ECO one. I mean, the Croda model is about maximizing value in from the customers through knowledge not commercializing the capacity. So it doesn't matter whether it's a continuous process or a batch process as far as I'm concerned. It's how much knowledge that we got that we can commercialize. And what you never want to do is be disconnected with your customer. We want to be in with lipids wherein really critical ingredients. A step ahead of where the Actives business is in Personal Care and the job there is to add great value.

So our customers want the product. They need the product. They're going to make a lot of money out of the products. So our job is to make sure we get a fair value with that as well. And we're not -- we're balanced with that. So the interesting thing in lipids is as we've seen with more and more of these treatments, they're going to be more niche treatments. They look like, particularly in mRNA, they need a lot more mRNA in them relative to the current vaccines, but they need bespoke ingredients and delivery systems, and I don't think this is a panacea for a standard number of products here that are going to be commoditized. We don't expect that and that's why we're investing in it.

So it all chimes to maximizing value and when you start thinking about pounds per gram rather than pounds per kilo, you get to a different figure and the chief exec loves pounds per gram. If we can have more and more of our business on pounds per gram. Yes, we're not a chemical company in this. We don't think like a chemical company. We think like an IP company and we want more and more of our knowledge commercialized and you just get to better margin, so I won't worry about how we manufacture it. I'm more bothered about the use of the product in application and how much value we can get from that. And we'll get some interesting numbers.

I think the other thing, though, is with this capacity that we're putting in, it doesn't change profitability if we're running it at 50% or 40% or 70% in real terms. I mean, obviously, the higher, the more profit we get. But the overhead issues in there, it's not non-existent for us because it's small scale. We're not building petrochemical refineries. We're building refinement purification units rather than that.

So in the end, it's about adding value through pricing power and value in your intellectual property correctly. And I think the other thing in farmer as well is it's not just the product margin. On top of that, there is royalty potential payments, licensing agreements, profit shares, and that's something that we're alert to. It's still early days, but we think some of these pipeline projects, there is no reason why we can't get 2 margins. rather than just one.

[Jeremy Maiden, executive]

So -- and of course, the lipid systems, when we say it's a batch process, I mean that's like all of Croda's processes. So your other question is about our only continuous plans, which is the bio production and so yes, where we are is we've obviously transferred all of the existing products onto on to bio, but the ECO piece is really about which of those products are sold under the bio label as opposed to just happening to have bio content that the customer may or may not be currently concerned about.

And that's where that growth should get faster and faster, as we go. Because of course it's really about customers launching new products with using the bio credentials, all we launched in their existing products and substituting their existing petrochemical supply with the bio feedstock and then wanting to take the label claim and therefore requiring the certification from us and so on.

So that clearly is quite slow. At first, you have a couple of launch customers, particularly in Home Care, into products areas like Ecover and so forth, and then it's into more rapid acceleration as you get more and more customers to convert. And as Steve said, the exciting thing over the last 18 months has been the performance of the Beauty Care business within Consumer Care, which is really where a lot of these products fit together with Home Care and that's undoubtedly being driven by both the consumers move to sustainability and one thing sustainable products and the customer making their sustainable commitments about moving to biobased material as we see with customers like L'Oreal and Unilever.

So I think that growth should just accelerate. We are EBITDA positive now. We should be moving to EBIT positive in due course and then really driving the returns through the more volume that we can drive through that plant because it is our one continuous plant in the whole group.

[David Bishop, executive]

Thanks, Georgina. We've got 2 analysts in the queue. So Chetan and then Martin and as we're overtime, we'll then wrap it up. Chetan?

[Chetan Udeshi, analyst]

I just had one question maybe for Jez. If I look at the outlook, it suggests maybe the second half EBIT on a continuing operations basis should be closer to GBP 200 million, which seems a decent step down from the underlying number ex-PTIC somewhere around GBP 250 million also, so I was just wondering if you could give us some sort of bridging items from first half into second half.

And also, just want more to squeeze in. The CapEx was a little lighter in the first half at least versus the run rate. Do you think you can catch up all of the -- to get to GBP 160 billion for full year? Is that likely now for this year or do we see some of that being pushed out into next year?

[Jeremy Maiden, executive]

Yes, okay. Chetan, it's in terms of the bridging items from first to second half year, I guess you've already called out the impact of the divestment, which we estimate had we done the divestment on 1st January would have been GBP 39 million, so that's to your GBP 250 million as you refer. I think the other 2 adjusting items would be the variable remuneration charge benefit that we had in the first half year.

So that's essentially a function of, we have a lot of share-based schemes across the Group. Most of our employees are our share owners and participate in share schemes. So as you own performance share plans, et cetera, with share plans as well and every half-year we have to mark those to market. So there's a number of shares outstanding. We have to market into market and obviously, at the year end, we were marking at GBP 100 and at the half year, we will now be GBP 65. So that gave us credit of around about GBP 17 million, GBP 18 million sterling, which I wouldn't obviously anticipate for the second half year. So you've got a one-off benefit in the first half year of GBP 17 million, GBP 18 million in the first-half of P&L.

And then the final component is the lipid step down. So where we did $90 million of lipids in the first half year, we're expecting $60 million in the second to take us to about $150 million and that $30 million of lipids you can convert sterling and then take a typical healthcare margin and that will give you a number, probably not too far away from GBP 10 million as an adjustment.

So those are really the 3 bridging items between first half and second half performance and then you've got our normal seasonality and we typically do around, I think if you look over the last 3, 4 years, typically we've been around 53% first half 47-second and that's really a function of holiday timings, particularly in the European business, which means that second half is always a quieter one for us because there are fewer working days I guess in there. I think if you do the math, then that gives you -- clearly, we are not setting a specific expectation. But I think that gives you the modest growth that we expect for the full year.

On CapEx, yes, it was a bit lighter, but we do have the government-funded projects starting up in the lipid expansion, the U.K. expansion part funded by the U.K. government and the U.S. expansion part funded by the U.S. government. They will be kicking off as well. So it's just really phasing of projects. I'd expect this to be at about GBP 150 million for the full year, so about GBP 90 million to spend in the second half and that's consistent with our view of GBP 100 million as a base to grow the business at organic rates and to replace existing assets and then there'll be about GBP 50 million from the healthcare program of GBP 160 million over 4 years. So yes, about GBP 150 million for this year and about the same probably going forward for '23, '24.

[David Bishop, executive]

Thank you, Chetan. And the final question I think is from Martin Evans at HSBC. He always gets the final one.

[Martin Evans, analyst]

I always do. Just a quick one, I don't want to preempt sell October the 5th with information on Life Science, but just one of the numbers on the Slide 28. I think you've mentioned it before as the new opportunities. This $300 billion biologic drug market, and Steve, you've referred several times to monoclonal antibodies as an area you're working on. I mean, in simple terms, this is obviously a huge market if would get a share of it. But from a Croda perspective, is it essentially the same chemistry, is it the specialty excipient delivery systems that sort of fast tracks absorption of the protein? Is this what you're doing with these customers you're working on these projects with?

[Steve Foots, executive]

Yes, I mean, primarily that fits into it. So, yes, it's the continuation of these. We call them specialty excipients with you. So there's a lot of specialty excipients that are gaining traction. So it's -- a lot of that is s established chemistry. There's one or 2 new chemistries from Avanti that are coming through as well that you'll hear about but in principle, it's a continuation of development from where we are. I mean, what you're going to hear in -- you are going to hear a lot more about that. It's not monoclonal antibodies that the Chief Exec sometimes says. I don't get these words right. And also these things like nucleic acids and things like that.

So I think you're going to hear a bit more of a new narrative from Croda as we develop the story in farmer in October, and also the central theme there is going to be about how do we sort of figure all of this out from the individual projects that we've got in terms of sort of future revenue streams to try and give some guide to that through the 3 platforms. So, yes, so it's nothing completely different, but this is more a continuation of where we are.

[David Bishop, executive]

And thanks for the advertisement. We are hosting an investor seminar on the afternoon of 5th of October at the London Stock Exchange and virtually on our healthcare business. Over to you, Steve, just to wrap up.

[Steve Foots, executive]

Yes, great, thanks, everybody. Lots of questions. It's been an excellent first half where we've demonstrated growth across all aspects of the business. So we're really pleased with where we are. And actually the business now is in rude health and certainly, for any uncertainties in the future, we're much better equipped to deal with that through the sustainability leadership and innovation leadership we've got and all these 8 growth businesses moving in the right direction.

So we'll stop there. Hopefully, by October 5th, someone will be top of the championship as well. So, he's still hoping that as well. But what's for certain is we'll be there in October 5th as well. Maybe something might not be, but we'll see you then. Thank you.