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Croda International PLC
Earnings Call Analysis
Q2-2023 Analysis
Croda International PLC
Croda, a company known for developing specialty chemicals, exhibited a resilient performance in the face of unprecedented market headwinds in the first half of the year. Despite considerable customer destocking leading to a significant volume decline, the company's adaptability and swift cost management measures allowed it to maintain an interim dividend at 47p per share. Notably, Consumer Care managed to keep sales flat while Life Sciences achieved an 8% growth, discounting the prior year's exceptional COVID-19 lipid sales. The free cash flow also saw a marked improvement, driven by a reduction in working capital outflow, compensating for the lower profit and heightened capital expenditures. This perseverance through tough times portrays Croda's solid foundation and strategic agility in navigating market volatility.
Croda's strategic endeavors include bolstering R&D capabilities in Asia and expanding manufacturing capacities, demonstrating its commitment to growth even in tough times. The acquisition of Solus Biotech is indicative of the company's investment in bio-based technologies and its transition towards higher-margin, life-science sectors. Despite the challenging industrial backdrop, marked by substantial destocking across various sectors, Croda's Consumer Care and Life Sciences divisions reveal underlying strengths, particularly in areas such as Beauty Actives, with its price/mix and Fragrance & Flavors (F&F) unit which experienced a robust 20% growth. However, the Industrial Specialties sector struggled, reflecting both the cyclical nature of the business and increased competition, particularly in China.
A closer examination of the first-half numbers necessitates a pro forma analysis due to the previous divestiture of the PTIC business. On a like-for-like basis, sales decreased by 6% and adjusted operating profit by 33%, marking a challenging period for Croda. Nonetheless, an improved tax strategy and the interim dividend reflect the company's confidence in its long-term outlook. Looking forward, Croda foresees an adjusted profit before tax in the range of GBP 370 million to GBP 400 million for the full year '23, assuming stable Consumer Care performance and the inclusion of COVID-19 lipid sales scheduled for Q4. These figures demonstrate Croda's cautious optimism and careful financial planning in the face of global economic challenges.
The resilience of Croda's Consumer Care sector is evident, with sales remaining flat amid challenging conditions and price/mix improving margins. Volumes observed a dip but show signs of recovery, and the sector pins its hopes on a volume rebound to stabilize margins. Life Sciences faced a margin decline mainly due to destocking in Crop Protection and the absence of COVID-19 lipid sales, highlighting the significance of timing in Croda's unique product cycles. However, underlying fundamentals remain strong with an 8% growth in sales, disregarding the exceptional COVID-19 lipid boost from the previous year. These insights suggest that while Croda experiences a temporary sting from market conditions, its core business segments have the potential for vigorous recovery.
Croda's financial stability is underlined by a more robust cash flow generation of GBP 76 million and a prudent management that has seen a slash in working capital outflow. The leverage ratio of 0.7 times EBITDA post-acquisition of Solus Biotech conveys a strong financial standing and strategic prudence. The company's agile management of funds, subsequent to the PTIC divestments, has yielded lower interest charges, contributing to the financial resilience. This financial prowess positions Croda to comfortably pursue organic and inorganic growth initiatives without stretching its balance sheet.
Looking ahead, Croda's strategy is decisively geared towards aligning with megatrends such as sustainable solutions and advancements in biologics—a field ripe with possibilities from gene therapies to mRNA drugs. This positions Croda at the forefront of innovation, with a portfolio reshaped by strategic acquisitions and disinvestments to capture burgeoning opportunities in high-growth niches. The company's robust structure, delineated into seven dynamic businesses, is fueled by dedicated leadership to propel sustainable growth and reinforce Croda's vision of leveraging smart science to enrich lives. Their expansive geographic reach and diversified portfolio is a testament to the company's potential for sustained and scalable growth in an ever-changing global landscape.
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Good morning. Welcome, everyone, and many thanks for joining our half year results presentation. I'm here with Louisa, as well as David, and we'll run through our respective sections of the pack and as usual, there will then be plenty of time for your questions at the end.
So a straightforward agenda this morning. A quick overview from me, before I hand over to Louisa for a detailed run-through of our financials and outlook. I'll then provide an update on some key aspects of our strategy before the Q&A.
Okay then. Starting with performance. The results for the first half are very much in line with the changes that we announced to our full year guidance on the 9th of June. The significant volume decline that we've seen because of customer destocking inevitably impacted our profits and margins. And despite the challenging conditions, it is testament to the strength of our business that we continue to make good progress. Consumer Care delivered a sequential improvement in volumes, with sales flat for the half. Sales increased 8% in Life Sciences, when stripping out the exceptional impact of COVID-19 lipid sales in the first half of last year.
We saw improved free cash flow with lower working capital outflow more than offsetting lower profit and higher CapEx. And the interim dividend has been maintained at 47p per share. As you've seen from us before in tough conditions, we've taken some immediate actions to address costs and protect profitability. Should current market conditions persist for longer, we will look to do more in this area. We've also continued to increase investment to strengthen our platform for future growth. We're growing our R&D capability in Asia, especially, expanding our manufacturing footprint to increase capacity and whilst continuing to execute on technology acquisitions, too, the most recent of which was Solus Biotech, a very exciting opportunity for Croda.
Turning to the sectors then. As we indicated in June, the speed and scale of customer destocking that we've seen impact consumer, crop, industrial markets is quite unlike anything that I've experienced before during my time in the industry. The brutal volume declines are indiscriminate to the segments we serve and are widespread across all parts of our industry. The IS decline is more significant in volume reduction than crop. But it's in challenging conditions such as these that the depth of and diversity of Croda's businesses really comes to the fore.
In Consumer Care, whilst volumes were down 14% year-on-year, they were up 8% on the second half of last year. And we have continued to see good demand for innovation with sector NPP remaining strong at 40% of total sales. Price/mix was up 10%, reflecting price increases implemented towards the end of last year.
Encouragingly, sales were up slightly in actives with positive mix, whilst volume recovery was strongest in Beauty Care, driven by customer demand for sustainability. And our F&F business is doing exactly what we thought it would when we acquired Iberchem, growing sales by 20%, reflecting its high exposure to emerging markets and the progress we're seeing with Croda-enabled growth. In Life Sciences, Pharma sales were up 8%, excluding the impact of $60 million of lipid sales to our principal vaccine customers last year. We also saw growth in seed and crop protection although crop was hit by earlier-than-expected destocking in the second quarter.
Our nucleic acid delivery pipeline continues to develop well, with Croda supporting now more than half of the nucleic acid drugs in clinical trials that specify a lipid delivery system. This points to a strong medium-term growth trajectory for the business. And finally, as you'd expect, our Industrial Specialties business saw a significant deterioration in sales, highlighting the cyclical nature of this business and our rationale to exit this space last year.
So just to unpick the destocking point in a little more detail. It's interesting to see from the publicly available data that inventory levels are significantly higher right across our consumer customer base. The chart on the left shows the discrepancy between inventory levels pre-COVID, the dark green line, and where they were at the end of '22. This correlates with the deterioration that we've seen in volumes in Consumer Care from quarter two last year.
As you can see from this chart on the right, the evidence suggests that this is beginning to work its way through with volumes steadily improving month-on-month from earlier this year. It is also encouraging to see NPP holding up well at 40%, reflecting the destocking cycle impacting both our NPP and non-NPP at the same rate. And as I've said before, our visibility is still restricted to two weeks. So we don't know when conditions are going to return to normal, but they absolutely will at some point, of that, we are certain.
And then in terms of our priorities, the current environment hasn't changed our strategy. There is no knee-jerk reactions at Croda and continuing to invest in the business remains a fundamental priority to support our growth trajectory in both the short and medium term. So top left, we've continued to do bolt-on M&A. Our acquisition of Solus is immediately transformational because it brings both ceramides to our Consumer Care business and phospholipids to our Pharma portfolio. It will help to significantly strengthen our capability at the premium end of the market and also in Asia.
And moving down the slide, Asia is a big opportunity for Croda, probably the biggest, which is why we're continuing to invest in the region to drive fast growth. During the half, we have opened new R&D facilities in Shanghai, China, and Hyderabad in India. We've also continued to scale biotechnology. The fastest growth will come from sustainable ingredients such as biotech derived actives. So we're increasing our capacity accordingly.
And finally, top right, we're also investing in our customer proposition. Our doing the basics brilliantly program is introducing new ways of interacting with customers, leveraging digital to make engagement faster and easier. We're also finding ways to enhance productivity across our business. These initiatives will make us more efficient.
Now let me stop there and hand over to Louisa to run you through the financial performance in more detail.
Thank you, Steve. And good morning, everyone. I'd like to start with two orientation points. Firstly, it's only been six weeks since we updated the market and trading in June and therefore for the first half has been as expected. Secondly, the numbers need slightly more unpicking than usual due to the inclusion of PTIC in the prior period before its divestment on the 30th of June last year. The first three numerical columns on this page show our reported numbers which include PTIC in the 2022 comparator.
To estimate our like-for-like performance excluding PTIC, we've provided pro forma numbers in the two columns on the right-hand side. As disclosed at the full year results, the divested business contributed sales and operating profit of GBP191 million and GBP39 million, respectively, in the first half of 2022, which we have adjusted for. On a reported basis, group sales of GBP881 million were down 22% on the prior period. But after adjusting for PTIC, pro forma sales were down 6%, largely due to destocking. Adjusted operating profit of GBP176 million is down 42% on a reported basis but down 33% pro forma.
Operating margin was negatively impacted by both lower volumes and the timing of COVID-19 lipid sales, which I will discuss in more detail later. The effective tax rate on adjusted profit rose slightly versus 2022 to 25.4%, driven by the geographic mix of profit and the increase in the UK tax rate. Adjusted EPS was 92.9p, and we've proposed a flat interim dividend of 47p per share, reflecting our confidence in the longer-term outlook and the strength of our balance sheet.
Pleasingly, free cash flow has improved to GBP76 million versus GBP21 million in the same period last year. And finally, turning to the IFRS reconciliation. In the bottom chart, intangible amortization was unchanged at GBP17 million and exceptional items were GBP29 million, primarily an impairment of the goodwill in our Chinese joint venture, Sipo. The joint venture is trading below budget as a result of the same destocking trends that we're seeing in the broader industrial market, as well as increased local competition. Therefore, on an IFRS basis, profit before tax was GBP129 million, down from GBP637 million last year, with the 2022 profit on divestment of the PTIC business accounting for the majority of the difference alongside weaker trading.
Turning to the group sales bridge on the next page and moving from left to right on the chart. As covered, the estimate of not owning the PTIC business in the first half of last year results in a 17% adjustment to sales. And against this pro forma baseline, price/mix added 9% in the period after a very strong increase for the full year 2022. The price of our raw material basket peaked in Q3 last year and has since seen modest declines. However, the annualization of price increases in 2022 continues to support price/mix. Pro forma volume declined by 18%, largely as a result of extended customer destocking and the weakness of sterling in the first half, particularly against the US dollar, helped to offset some of this impact, increasing sales by 3%.
The next slide looks at the same bridge for adjusted operating profit. The estimate of not owning the PTIC business in the first half of 2022 results in a 13% adjustment. And against this pro forma baseline, the impact of lower volumes with reduced overhead coverage and the absence of COVID-19 lipid sales were the main contributors to the profit fall of 33%.
Turning now to sector performance. This slide shows the percentage change in sales and operating profit with Industrial Specialties and group shown on a pro forma basis. Sales in Consumer Care were flat. Operating profit was 21% lower, with an operating profit margin of 20.9%, diluted by lower volumes, although the performance was an improvement over the second half of last year.
In Life Sciences, there were no sales of COVID-19 lipids in the first half of 2023 with shipments due in the fourth quarter. This timing difference was the main contributor to the reported decline in sales of 8%. Excluding the impact of $62 million of COVID-19 lipid sales in the prior period, we were pleased that the rest of the Life Science business grew 8%. Operating profit in Life Sciences declined 39%, reflecting both the weak crop volume in quarter two and the phasing of COVID lipid sales or a decline by 23% excluding COVID lipids.
Sales in Industrial Specialties declined 20% on a pro forma basis with the sector experiencing more significant destocking than in Consumer Care and Crop Protection as well as increased competition in China. IS margin was just under 7%, with volume declines affecting performance.
Turning to the next slide. Consumer Care sales were flat in the period, a resilient performance in light of market conditions. The sector saw a price/mix 10% higher, of which price accounted for approximately 6% with positive mix, particularly in Beauty Actives accounting for around 4%. Volumes were down 14% versus the first half of '22, reflecting continued destocking, and currency translation added 4%. Although volumes remain down double-digit year-on-year, we remain encouraged that volumes were sequentially up by 8% versus half two '22. We estimate that approximately 10 percentage points of the 14% volume decline is market driven, mainly destocking, but the remainder is driven by Croda-specific supply issues and demarketing that we discussed at February's results.
At the bottom right of this page, we’ve provided detail on the price/mix and volume dynamics of the four business units within Consumer Care. With the exception of Fragrances and Flavors, the consistent theme across each of these business units is positive price/mix and positive currency offset by lower volumes. These similar volume declines in Beauty Actives, Beauty Care and Home Care underpin our view that we are seeing a broad market adjustment.
Beauty Actives has continued to counter volume declines with the highest positive price/mix driven by strong sales of Sederma actives, particularly to China. And as mentioned, F&F is the exception to these volume declines with sales growing 20% in the period, driven by its agile cost-competitive model.
Turning to Life Sciences. We've already covered the drop in reported sales of 8%, driven by the timing of COVID-19 lipid sales with underlying growth of 8% when lipids are taken out. The Pharma business itself also grew by 8% on that basis. Crop Protection had an exceptional 2022 and entered the year with good momentum, growing volumes with flat prices in the first quarter. But as we've said previously, the business began to see rapid destocking in the second quarter, something we'd actually expected to materialize more slowly in the year, with volumes down more than 30% in the second quarter compared with quarter one.
Overall, Crop Protection grew sales 5% with positive price/mix and FX more than offsetting 12% lower volumes. Seed Enhancement only has a limited exposure to stocking cycles as a significant proportion of its sales are derived from services. It grew sales 18%, driven by strong structural growth trends.
The next slide shows the drivers behind the operating margin improvement in Consumer Care and Life Sciences. The Consumer Care margin declined from 26.6% to 20.9%, with weaker volumes accounting for approximately 9 percentage points of the decline with reduced coverage of overheads. While volumes in Consumer Care have improved sequentially from the second half of 2022, they remain lower than historical averages and a step-up in volume is required to deliver an improved margin. But encouragingly, price/mix benefited margin by around 3 percentage points with Beauty Actives particularly strong and partially offsetting the impact from lower volume.
Life Sciences margin declined from 36% to 23.8%. Volume accounted for approximately 4 percentage points, principally driven by the destocking in Crop Protection in the second quarter and price/mix was a significant driver, accounting for 8 percentage points of the decline, with no COVID lipid sales in the first half year.
The penultimate slide in my section focuses on cash flow. Halfway down the table, you can see free cash flow generation of GBP76 million was higher than GBP21 million last year. There are two significant contributors to this improvement. Firstly, a reduced working capital outflow of GBP10 million versus GBP184 million in the first half of 2022.
During 2022, we experienced a significant increase in stock value, principally due to raw material inflation. As raw material prices moderate, this value is unwinding from the balance sheet, but the reduced outflow is also due to active stock management in our regions. Secondly, we saw lower interest charges as we benefited from holding cash from the PTIC divestments. These positive movements helped to mitigate the fall in EBITDA at the top of the table and the uptick in capital expenditure to GBP76 million from GBP62 million.
Net debt increased to GBP349 million from the year-end balance of GBP295 million, a leverage ratio of 0.7 times EBITDA. And as Steve highlighted, we completed the acquisition of Solus Biotech post period-end and following payment of the consideration, leverage was 1.1 times EBITDA, towards the bottom end of our target range of 1 to 2 times.
And then to finish up my section, I'm going to run through the full year '23 outlook with you. So starting at the top, our guidance remains unchanged for adjusted profit before tax with a full year forecast in the range of GBP370 million to GBP400 million. As a reminder, delivery at the bottom end of the range assumes no change in the second half for Consumer Care versus the run rate in the half year. We also have COVID-19 lipid sales in quarter four and an uptick of crop in quarter four, with the tax rate expected to remain in the region of 25%.
Moving on to currency. Our guidance on the 9th of June was given when the FX sterling to dollar rate was 1.23. With recent US dollar weakness, we're carrying greater currency headwinds into the second half of 2023 than we foresaw in June with a total impact of around GBP5 million to GBP6 million at rates prevailing at the end of last week, given both translational and transactional exposure.
On cost, as Steve has already highlighted, we are maintaining tight cost control during this difficult time, but taking care not to short-term the business. And we will continue our doing the basics brilliantly program which is focused on continuous improvement and good practice to optimize our business processes. And thirdly, should current market conditions persist for longer, as Steve said, we will look to do more in this area.
And finally, capital expenditure is expected to be between GBP170 million and GBP180 million for the full year. This includes the specific investment program of GBP175 million in Pharma capacity that's phased over 2021 to 2024 to meet the growth in proteins, vaccine adjuvants and particularly nucleic acid delivery, but it also reflects the rich seam of organic opportunities for growth that are available to us and that Steve will cover in the final section of his presentation.
And on that note, I will hand you back to Steve.
Many thanks, Louisa. As you know, a big part of our strategy over the last three years has been to align our portfolio with the exciting megatrends that we see, set out here on the left-hand side of the page. Beneath those, there are two massive technology trends. The first is the escalating demand for sustainable alternatives. Companies, both big and small, want to find ways of moving to safe, low carbon and more biodegradable ingredients. And even in the current environment, customers show no signs of reneging on their commitments to sustainability.
And the second trend is the move to biologics, actives that come from a variety of living sources. We see big opportunities in gene editing, gene therapy, mRNA drugs more broadly, and of course, in crop, and we expect a significant shift to biopesticides and RNA technology. We identified these key trends a long time ago and have been reshaping our portfolio accordingly, both through organic and inorganic investment and by divesting most of our exposure to industrial end markets.
We report as two core business sectors, but in reality, Croda is powered by these seven dynamic businesses on the left hand of this slide. They are each run by MDs with dedicated P&Ls as well as R&D and innovation responsibilities to drive performance. They're all focused on niche high-growth areas. Our job is to live our purpose and apply our smart science to improve lives in the form of taking an innovation and sustainable leadership position in all core markets. The opportunities in these emerging niches are much bigger than we've seen in the past. And as you can see from the chart on the right, there is a real depth and breadth in the business, both in terms of the portfolio and geography, which sets us up well for really exciting growth going forward.
We have a clear growth strategy for each of these businesses set out on this page. I want to spend a bit more time talking to you about the progress we're making in Consumer Care looking more closely at Beauty Actives, Beauty Care and F&F and also Life Sciences focusing on our Pharma business. We plan to do a deep dive on crop at our next Investor Day.
So starting with Beauty Actives then. This part of our business has the largest actives portfolio in the industry and is really moving at pace. Two key points to note from the slide. Firstly, we're shifting the portfolio to faster growth opportunities in biotechnology, both plant stem cell and fermentation-based ingredients, filing 10 patents every year for new biotech-derived actives.
Secondly, we're expanding the transformational claims we can make in the application of our actives in the brands we supply. Our strategy is to scale our leadership position by continuing to add innovative technologies. Sederma used to be a peptide business supplying antiwrinkle actives, largely exclusively. Now we're also about making skin claims for rapid moisturization, reducing inflammation, anticellulite and wider skin disorders. And for the hair, don't forget, we have actives to reduce grayness too, something the CEO is very keen on.
And we're stepping up new product launches too. Here are six examples of launches this year. Along the top row, exciting developments in peptides and plant stem cells. Our Actives business has supplied peptides for the new Boots No7 Future Renew range, the biggest skincare launch in their history and we've also developed peptides for a new Deciem product that repairs scars caused by acne. So Croda is supporting some of the biggest brands globally with their product launches.
The second row are examples of the rapid scale-up of biotechnology in the form of fermentation that is opening up more opportunities for us. New launches here include antiaging and antidandruff actives derived from marine biotechnology. And along the bottom, we're also benefiting from investments that we have made in novel delivery systems such as Avanti and Solus, allowing even better performance claims to be created.
Turning to Beauty Care then. Our strategy is to leverage our portfolio of market-leading sustainable ingredients, positioning ourselves as the go-to-market partner for both small and large customers. The continued fragmentation of Beauty Care markets is playing to our strengths as we partner with customers, enabling them to launch their products quickly.
Similar to the Actives portfolio, we're adding further high-performance replacements for fossil-based products such as biotech-derived surfactants to reinforce a number one position in sustainable surfactants. In haircare, our focus is on biodegradable ingredients and non-animal alternatives for hair conditioning. We've recently launched a new plant-based low aqua-toxicity conditioner as well as a vegan-friendly conditioning agent. This is very much the future direction of travel for the industry.
In sun protection, we specialize in mineral sunscreens that deliver superior SPF protection and are reef-safe and appear clear on the skin. We're taking further steps to enhance our sustainability credentials by developing a naturals index too for all of our products, and we expect to launch this later this year.
We're really pleased with the progress that we've made to accelerate growth in our F&F business, with sales up 20% in the half, a new record. Their performance is getting stronger under our ownership. The Croda brand has brought added credibility to the businesses we acquired, resulting in increased projects and, therefore, a stronger pipeline. We're also picking up new business with large multinational brands and regional customers, too.
And as you would expect, we continue to invest in both innovation and sustainability in this business. We now have approved R&D and manufacturing investment programs in China, Indonesia, France and Spain as well as shifting the portfolio to a lower carbon and more natural footprint. It's all about building knowledge in their fastest growth markets, and that is exactly what we're doing. And a key part of the group strategy is to drive even faster growth in Asia. It represents a big opportunity for both sectors and not least in Consumer Care, where sales grew high single digits during the half.
We also saw really strong demand for Sederma's premium actives, with their sales growing by over 30% in China during the period. So to support this strong momentum, we are selectively expanding our manufacturing capability across the region. We are starting construction of a new greenfield site in Dahej in India, and we're also doing early-stage investment in a combined Beauty Actives and F&F manufacturing facility in Guangzhou to grow domestic sales in China. We've also invested in new Consumer Care laboratory capabilities in Shanghai, too.
And of course, there's also Solus Biotech, which has given us another state-of-the-art plant in the region and significantly strengthened our presence across Asia. So there's a lot going on in Consumer Care, new product launches, new claims, moving ever more to sustainable ingredients and building a deeper knowledge brain in our fastest growth market of Asia.
Turning now to Pharma then. This is a variation of the slide that you've seen before, and it highlights how we're investing across our pharma platform for both near and long-term growth. The big bubbles illustrate the market opportunity and laid on top, you can see where the Croda technology platform bubbles are allowing us to capture growth in most of these areas.
Our legacy healthcare business is in small molecule injectables, where we started our exciting journey. And our leadership in small molecules and protein delivery has been enhanced by the Solus acquisition, which adds phospholipids into our portfolio, helping to stimulate additional growth in the near term.
We started to expand in higher growth areas with our acquisition of Biosector, a specialist in the development and supply of vaccine adjuvants, giving us access to a market growing double digit and with a significant need for innovation. And of course, our acquisition of Avanti provides significant growth potential in next-generation mRNA vaccines and complex therapeutic drugs and even higher growth trajectory.
So whilst we're investing significantly in the medium term, which in itself is looking very exciting, we're also investing to develop a number of near-term opportunities, too. Talking of which, we've recently expanded into bioprocessing aids, a target adjacency, launching Virodex as an aid for biopharma manufacturing and a superior alternative to a product that is now banned in Europe due to legislative changes in the industry. So through the Solus Biotech acquisition, we have added phospholipids to the Pharma portfolio. These are naturally derived and can be used as delivery systems for protein and small molecule actives and for intravenous nutrition too.
The Solus production site is fully GMP-certified, providing us with an option for the manufacture of Avanti lipids in North Asia in the future, too. So these are two good examples of near-term revenue growth opportunities from the second half of this year and beyond. Croda is also established as the leading independent supplier of adjuvants and systems which are essential to the development of future preventative and therapeutic vaccines.
And as you can see on the left, Biosector brought us a large heritage portfolio of aluminum adjuvants as well as pioneering capability in next-generational adjuvants using saponin. We have been expanding our adjuvant portfolio through exclusive licensing agreements, and we've agreed to partner with Botanical Solution and Amyris in recent months to provide reliable and sustainable alternatives for adjuvants that are essential to many current and future vaccines. We've received multiple inquiries from major vaccine companies on the day the partnerships were announced, reinforcing our confidence in the potential for incremental sales.
And we've also launched a new lipid-based adjuvant which is a specialized PHAD, and I'm being deliberately vague about what it is. This is proprietary in-house technology, brilliant technology, developed using world-class science and is already being sampled into 70 vaccine projects. We have a really strong platform for future vaccine development.
And finally, our nucleic asset delivery platform is growing rapidly. On the left-hand side, Avanti is leading the way, adding 70 new products to their catalog for drug discovery already this year. Again, this reflects world-class science and world-class R&D. Two-thirds of Avanti employees are in scientific roles, producing research that is frequently referenced in academic citations. This means the medical industry has referenced of anti-lipids in journals and peer review publications 4,800 times in the last year.
So all of this adds up to research sales growing by over 20% a year. And in terms of pharma clinical pipelines, there will be three phases of growth. First near-term growth will be supported by mRNA vaccines for infectious diseases, such as flu and combination covered flu vaccines. And as highlighted in the second box along, the pharma industry trials of these vaccines have grown by more than six times in the last year. We expect mRNA therapeutic cancer vaccines to hit the market next, and there has been a seven-fold increase in clinical trials for cancer vaccines as highlighted in the next box. And then beyond all of that, will come gene editing, where volumes of genetic material and delivery systems required are much higher.
So clinical projects have increased 1.5 times in the last year. Croda is supporting more than half of the clinical programs that specify lipid delivery systems and new mRNA vaccines are expected to come to the market in the next two years, initially vaccines for infectious diseases and then cancer, as I mentioned earlier. This will help to drive accelerated growth in our Pharma business from 2025 onwards.
So putting all of that together, and as we're in Consumer Care, we're investing heavily in our Pharma business to support the significant growth potential that we see. In June, we opened a new laboratory in Hyderabad to meet growing demand for small molecule and protein delivery. We've also broken ground at Lamar, USA, as part of our partnership with the US government where new capacity is due on stream in 2025. There's a lot going on in Pharma, new launches, new niches, a clinical pipeline that continues to expand as well as a continuous investment plan to globalize our drug delivery business.
So in summary then, despite the current challenges and headwinds, we have continued to make good strategic progress during the half, and that momentum will continue. We're leveraging our strong balance sheet, investing in both sectors where we see significant opportunities for future growth, both in the short term and beyond, and we're encouraged by the sequential improvement in Consumer Care as customer inventory levels steadily fall. And we continue to make very exciting progress in Life Sciences, in Pharma especially.
So in both sectors, we're responding to strong customer demand for innovation and sustainable solutions. And whilst visibility remains limited, Croda is well positioned to respond quickly when the environment normalizes, which it will. In the meantime, we'll keep doing the right things, including actions to enhance efficiency and address costs to protect profitability. And everything that I've seen in our business today underpins my confidence in Croda's strategy. The future outlook for our business looks very exciting indeed.
Let me stop there. Louisa and I are very happy now to take any of your questions. Thank you.
We'll now move on to the Q&A section of the event. [Operator Instructions] I understand the first question comes from Chetan Udeshi at JPM.
Yeah. Hi, morning, everyone. I…
Hi, Chetan. Good morning.
Hi, morning. So just first question was, you had that slide showing the progression of volumes in the Consumer Care division for second half last year onwards. I'm just curious, how much of that is just your normal seasonality? Because I guess Q4 is always the weakest quarter of the year. So in other words, are you seeing a recovery, which is more than what you would typically expect from a seasonal point of view? That's the first question. And the second question was on Life Sciences. I think you mentioned the visibility is still limited to two weeks. Is that across both the Consumer and Life Sciences business or in Life Sciences you have a higher visibility at this point than Consumer? And I think the question is more relevant for Crop, which clearly you mentioned a rapid decline in volume, which we've also heard from a few of your customers. Just curious how you think about this picture. Thank you.
Yeah. Thanks, Chetan. The volume was turned up there, so we could hear it in the end. So couldn't hear the first bit of the question, but I've got them both. Yeah. I mean on -- look, on volume recovery, no, I think that in an environment that we haven't seen before like this, and I haven't seen this for 32 years, the most important thing you look at is a sequential month-to-month trend to see what's going on rather than the comparator against last year because it's a very difficult comparative because it's changing all the time.
So I think the assumption we can make is that, look, we're seeing moderate improvement in Consumer Care. It is moving in the right direction. I think the point on seasonality is we would not necessarily see seasonality from quarter one, quarter two. The comparatives with those two broadly the same. I mean you can get into sun care applications in the summer and things like that. We work through sort of campaigns in those areas. But in the round, that's relatively trivial in the Consumer Care mix. So the best we can say is we're not seeing any deterioration. We're seeing steady progress ahead of us. You start from January to exit rates in June we're progressing.
And the chart in the slide is sort of trying to demonstrate that. You can see it's not a hockey stick coming back. There's -- as we all know, it's unlikely to materialize, but it's a steady improvement. And all the language in the businesses, we would expect that to continue in quite a moderate way.
We don't -- I think the other -- so the positive thing is it's not -- we're not seeing any deterioration. It's moving in the right direction. But the other point to make is we don't have the confidence in the data points that -- accurate data points that suggest this is going to come back much stronger in the near term, but our visibility is two weeks. So we're cautiously -- we're cautious with it, but it's improving. That's for sure, is the message on volume.
In terms of visibility, pretty similar, Chetan. We saw Crop Care, the visibility by and large in Life Sciences is the same as in Consumer Care, particularly when you see that customers are sitting in stock positions, then what you find is that they delay last-minute orders generally. And that's indiscriminate. That's not just in consumer, that's in industrial markets. And I would say mainly in -- and also in crop and pharma markets as well. So because of that visibility, very difficult to predict, but you can get swings in the month because of that more acute swings one way or the other. But by and large, that's where we are and that's right across the industry, I would say.
Thank you.
Thank you, Chetan. The next quest question comes from Sebastian at Berenberg.
Hi, Sebastian.
Good morning. Thank you for taking my questions. So this is Sebastian Bray from Berenberg speaking. I have two please. The first is on pricing strategy. If were one -- if one were to create a graph for pricing similar to what has been done for volumes in Consumer Care over the last few months, what would it look like? And how much agency do sales people have to make price cuts at Croda presumably to win back some market share? And any reason, I don’t now why market share have been lost but it looks like there has been a bit? And the second question is on polar lipids for vaccine -- COVID vaccine sales for 2024. Is it a reasonable assumption at this stage to put zero in the model for '24 or is there not enough visibility at this stage? Thank you.
Yeah. Thanks, Sebastian. Yeah, just the first question on pricing strategy. Yeah, I mean, look, I mean, we have a very sophisticated pricing strategy. I think in this type of climate, the most important thing we look at is, first of all, is the forward costings of our products. So what we're looking at is what are raw materials doing first and then making sure that we cost the new product recipe costings into customers. Generally, it's sort of -- the way we look at it is probably more around -- in the consumer care area, it's -- you start to think about this area of target business recovery. So in that target business recovery, we have very -- we look at customer combinations in a very thoughtful way. And then we will buy ourselves trying to back into some business if we think we need to buy ourselves back into it.
I mean sticking above all of this in Consumer Care is we believe about 75% of the decline in volumes, and we've done a lot of analysis like many companies, as you can imagine, in this environment, and our analytics, which show 75% of this is destocking and demand, but predominantly destocking, very difficult to decouple those two. So 25% is more self-inflicted Croda, which is around things like falsity marketing because of supply issues. In particular, we mentioned on the last call around the one-off outage that we had in the US, which sort of brought down volume numbers in the US. So there's a recovery underway to buy back into some of those businesses and some of those lost products and customer combinations. So we're doing that.
And that hasn't come straight away. That comes through the year, and we can map that into our model, and we can see the orders coming in. So what you find in the round though net-net, is you probably see raw material prices starting to drop further. I mean in quarter three relative to quarter two, we expect that to be 5%, 6%. So a little bit more than sort of quarter two to quarter three, but it's in the round, they're not falling down, they're not collapsing significantly. So demand broadly is still holding up quite well, we would say. So what you find is that in the margin, the margins are pretty rock solid because you give some at the bottom and you obviously hang on to it in the very secure bits of business we've got.
So in the round, you get a pretty stable margin environment for that. So pricing is that. Clearly, our job now is to go after as much business as we can. But I used to be a salesman, Sebastian. And one of the big things is in the sales environment in Croda is they haven't had much to sell in three years. Our factories have been full. It's been an oversold industry. So now it's a great environment to go out there and develop business. So we've got a lot of hungry salespeople around the world and Chief Execs spending quite a bit of time with the sales groups just getting excited about the opportunities that are coming our way.
So we're doing -- we'll be -- you’ll expect us to do all the right things there. In terms of COVID vaccine sales, I think it's too early. I mean our general remarks would be for the Pfizer business is very secure for this second half of the year. It's all committed. It's contracted. So there's no change there. So those numbers that we've given you, no change to that. I think next year, it's likely to taper the Pfizer-BioNTech volumes and value are likely to taper down further as we would expect because they're sitting on quite high stock levels, and that's government as well as themselves. And we're shipping in material for later in the quarter four, which probably will allow them to consume that for most of next year.
So there'll be maybe a little bit next year, but it will be significantly less than what we've got now. Having said that, we talked about the pipeline on one of the slides about the mRNA pipeline, particularly and the new fab launches that we've talked about as well. So the non-COVID pipeline is growing quite significantly, and we're really excited with that. And again, it's very difficult to put a number on that. But that will partly offset that shortfall in the Pfizer-BioNTech business for next year, but still moving parts. But the most important thing that we're looking at is making sure that we are doing everything we can to accelerate this pipeline because it's really -- it’s here for many years rather than just one year with Pfizer. So yeah, so I'm very pleased with that. So let me stop there.
That's helpful. Thank you…
Thanks, Sebastian. I'm just going to take a couple from the webcast. These come from the team of Waverton. The first question is, can you please talk about the increased competition in China appears to have impacted Industrial Specialties? Is this also seen in other divisions? And was the JV impairment also in Industrial? And then the second question is, how do you think about your market share in the various niche markets? And how do you think about that going forward?
Right. Okay. Let me pass to Louisa. Let's do the Sipo impairment, which is Industrial, by the way. But I'll let Louisa explain that, and I'll come back on Chinese competition and share.
Yeah. Thanks, Steve. Yes, the JV is a 65% JV in China, which sits in our Industrial Specialties business. We've seen EBITDA down significantly in the period, and that's both based on demand and price. So similar destocking trends that we're seeing in our other parts of our business in industrial. So that EBITDA or demand down is against the projections we used to support the goodwill value at the end of last year. So essentially, that's the main driver, the changes in the external environment demand and price which have led us to reassess that carrying value of goodwill.
Yeah. Great. And on the competition, I mean, I know a number of you have got reports out at the moment on that, which is the good reports on it. What you find -- what you normally find in a recessionary environment, particularly when it's sort of depressed market in China is you do see competition coming out of China into other markets temporarily. So we're seeing that. You can see that in parts of Europe and North America. Croda is largely unaffected because really these people, they don't have infrastructures in -- their companies don't have infrastructures, R&D, sophisticated selling mechanisms, knowledge of people and also in broader infrastructure like distribution hubs.
So what you find as they target the big volume product customer combinations, which tends to be the more upstream end of the market and the more commodity end of the diversified business. So that tends to be temporary. And then once China returns to normal, that product gets diverted back into China domestic channel. So you see that -- you're seeing that in a temporary way by and large for Croda, it doesn't really affect us. I mean we're aware of it, but it really doesn't affect Croda as we move the business more and more to a knowledge business. But the Sipo competition is specific to China, just on Louisa's point on impairments. So that's just more competition locally for those markets. And we don't have any control of the sales anymore for that business because that's now with cargo, of course, and has been with cargo for many years. So it's -- we're a really a core producer for them in the arrangement that we've got.
So -- but it's all industrial there. So that's why we've chosen to do that, the impairment. In terms of market share, I mean, we tend not to talk about market share. This recent -- we reflected on the last six months and 12 months. We've done a far more analytical assessment of our business, particularly in Consumer Care. And it's quite interesting to see it for what it is. And you can start to really get to some really clever output and better understanding of the trends in terms of business loss against demand, against destocking and the like. But the most important thing for Croda is to create markets, new markets.
We're always in current markets and we watch out our positions in the current markets. But the real growth driver for Croda is continued growth in the underlying current markets, plus moving us into faster growing niches and our job is to try and create as big a niches as we can and have as bigger market share in those niches as we can as well. So around the Board table, around the executive table, it's not about market share, it's about winning business, but it's about winning business by and large through clever innovation and taking an innovation and sustainability leadership in our markets there, too. So hopefully, that's answered your question.
[Operator Instructions] The next question comes from Gunther at Bernstein.
Hi. Thank you, David. Hi, Steve. Hi, Louisa. Thanks for the presentation. Few questions, please. Firstly, on the Flavors and Fragrance business. You mentioned 20% growth. That's quite impressive. Could you split how much of that is price and volume, and I'm sure there will be some FX component within that as well?
Yeah -- yeah, go on.
Do you want to take that one?
No. We were just we were just looking at your informality today with your Polo top on.
It's summer. Thank you. Thanks for noticing.
Yeah -- well, Gunther, give us the other question as well, and then we'll come back to both.
Sure. Yeah. Yeah. Secondly, just following up on the previous question on Sipo. Could you tell us how much book value is left in the Sipo assets, please? And then lastly, I'm going to push my luck on that one. I think -- I know what the answer is, but you gave that interesting Slide 7 with your customers' inventories. Could you share how you rank order those companies on Slide 7, please?
Well, look, on the F&F mix, we'll do -- I'll do the F&F mix. We'll get Louisa to give you a comment on the Sipo book value and then I'll try and give you some sort of reflection on the inventory -- comment on the inventory. Look, on the F&F side, I mean it's in the -- it’s in the slide actually, Gunther. I don't know whether you managed to look at the slide, but in the top left of page, whatever it is, there's one that shows the mix, which I think, if I can read it from here.
It's about 50-50. It's about 9% volume, 7% price.
So 9% volume, 7% price. The Flavors business is -- which is a smaller business is at 13%. So that the Fragrance business is significantly higher than that. And most of growth generally is coming from the Heartland, we call it. So it's the Middle East and it's Asia. They had some really great growth. And this Croda-enabled growth -- our positions in our core market and the reputation Croda has with a lot of customers, both big and small, is helping them win more business. So we're really pleased with the team and that growth is, as I said, it's -- I think on the -- in the presentation, it's a record period for them and certainly a record in our ownership as well, under Croda's ownership. So that business goes from strength to strength. And one of the reasons we bought it is its counter chemical industry cycles. It's growing well ahead, and it doesn't suffer from the same sort of destocking mechanisms that we see in our industry because the model is different. So we're really pleased with that. I think back to Louisa on Sipo.
Just a quick answer to the Sipo question, Gunther. The -- it's a full impairment of the goodwill value of Sipo. So there's no goodwill value left after we've taken this impairment. There's obviously sort of asset value, but I think that's probably a level of detail we don't need to get into but it’s a full impairment of the goodwill value.
And then in terms of inventory, I mean, I probably won't be answering your question directly, Gunther, but I think the best -- it's best to say -- look, two comments I think. First comment is a lot of the multinationals -- a lot of the issue in destocking for Croda and for many organizations is the big customers. The big customers find it difficult to manage stock. So their stock swings can be much bigger than small customers. And you can probably imagine -- you can imagine reasons why. It's much bigger infrastructure and more complex businesses. So to unwind stock is quite tricky for these people. I think the second point I would say, there is a range there. I think at one extreme, you've got Estee Lauder, who is sitting on quite a large stock levels or have been. And the other extreme is L'Oreal who are replenishing virtually fully now.
So -- and part of that is their nuances in their business models, I think, as well, where people are -- some of you are following the consumer companies as well, but Estee Lauder are more sensitive to Chinese consumers and travel more than L'Oreal, and that's been a bit more effective. So they could see a more drastic change to their near-term horizon than L'Oreal can. So -- and L'Oreal is a bit more a combination of lots of things, but quite a lot of mass market as well in L'Oreal, which is more predictable. So it's no surprise probably when you see that play out that you've got that range in sort of stocking accuracy, forecasting and the like.
But what it's done actually more than anything else, it's got us closer to our customers because we're talking to them on a regular basis, literally weekly now to not just about stock management, but just about everything. So I think that's been a sort of a really positive that's come out of this period that we're in.
Thanks, Gunther.
Thank you.
Two questions from the webcast and then we'll go to Isha Sharma at Stifel. But first, the webcast question. So Andrew at Mirabo says, could you kindly provide some color with respect to regional growth and destocking in your large geographical regions? And then George Haggas at Evelyn says, please comment on the divergence between growth and particularly volume growth in Beauty Actives and Beauty Care.
Right. I’ll have a go at the first one, and I'll play Louisa in and both of us have a go at the second one as well. But on the -- yeah, on the regional thing, I think I mentioned on the call a few weeks ago, destocking is not homogenous. And it's a function of the timing at which countries have come out of the pandemic. And we still see it in different -- logically, you see that in different periods around the world. So North America, for example, was first out of the pandemic, spending their way out of it. So the consumer spending was significant and our sales into the consumer effectively indirectly through our big customers have never been stronger through '21, '22, record results for Croda.
So clearly, that starts to settle down and unwind, and we've been probably now about 12 months in America, where we've seen some sort of destocking to different degrees. And I think it's clear in North America that it's a combination of destocking and demand. But all of our evidence says, back to my point earlier that this 75-25, 75% destock in stock demand and 25% is effectively sort of Croda self issues. So we're managing that 25% ourselves, trying to regain business and things. So -- but most of this is still listed as stock correction. I think Europe is not too dissimilar as well. You've got that combination there as well. So I think the major stocking -- destocking issues we got have been in America and Europe. We're seeing a little bit around the edges in Asia and Latin America, but not significantly.
And -- so when you look at that, we're looking closely -- probably the most close we look at is North America because North America is where you would expect, given the time period that we're now in, it's 12 months since they sort of -- we started seeing a slowdown of some description. We're expecting that to start to come back first. So all eyes are on America for us, like probably you as well. So that's something we'll be monitoring closely. But as I keep saying, visibility is about two weeks, which is the shortest visibility I've seen. So we'll see it when we see it, is the sort of message that we're giving you.
If I could start with the second question around the volume, the differential volume and price patterns in Consumer Care. I think we said when we came out with the full year results that we did expect to see some support from the price increases, the annualization of the price increases that we put through last year with some tempering as we came through this first half and then hoping that volume would pick up through the end of the first half and the second half.
Now obviously, the volume story is -- hasn't panned out like that, and we're rather weaker on that angle than we thought. But we are really pleased, referencing Slide 14, to see that price is holding up, particularly in the upper end of our portfolio. But as I said in the presentation, the fact that we've got sort of similar double-digit declines in volume across Beauty Actives and Beauty Care does underpin the fact that we are seeing quite a big market correction here. But that differential between the price/mix and Beauty Actives, where we've got a lot of our innovative NPP sales is obviously clearly stronger than in Beauty Care, where we tend to see more competition at the bottom end of that portfolio. So I think the trends are pretty much what we thought we would see, and we're really encouraged that, that Beauty Actives price/mix piece is holding up quite strongly.
Thanks. The next question is Isha Sharma of Stifel, please.
Hi, Isha.
Hi. Good morning. Isha Sharma from Stifel. I have two questions left, please. If I adjust for the GBP62 million sales in the first half last year with the 50% EBIT margin, it only explains around 2 to 4 percentage point decline year-over-year in the EBIT margin for Life Sciences, but you have indicated this to be around 8 percentage points. What am I exactly missing here, please? And the second question is on the guidance of $120 million sales and lipid sales for '24. Is it still valid? And could you please talk about the sequential trend that you see from Q1 to Q2 in your healthcare pipeline in general outside of the COVID-19 sales? Thank you.
Yeah.
Can we start with first one?
First one, yeah.
Yeah. So you're correct. The COVID-19 mix piece does account for the majority of the 8 percentage points of decline that we saw in the Life Science margin. The other couple of factors are, we are seeing a little bit of mix pressure from some adjuvant adjacencies that were also effectively in the COVID market just at the edges there. And also, we've got a little bit of mix in the underlying Life Science business around some of the higher-value adjuvants versus protein delivery. But the majority of it is around that COVID piece to the principal customer.
Right. Thanks, Louisa. Yeah, we'll start with the trends. I mean the second question I have answered already. Somebody already asked that, so I don't know, Isha, whether you missed that. On the sequential trends, it's all around -- I think the main trends we're looking at is the pipeline. I referred to that in the mRNA slide. So we've got multiple pipelines. In Pharma, we've got -- clearly, we've got a big Pharma pipeline that we talked to you about late last year at the Capital Markets Day. And we're obviously monitoring that on a regular basis. And I think the general trends are, of course, more and more projects coming into the clinical I, clinical II, but also into just the early-stage projects as well.
And we don't profess to know everything we're in but I think I made the point that we've got 4,500 or 4,800 citations from Avanti. So that means in medical journals around the world, Avanti is being talked about in lipids in 4,800 reports which sort of is a great proxy to say as a leading indicator for activity in the early stage of development. And then obviously, we can monitor publicly clinical I -- from clinical I stage onwards because that's public domain data.
But I mean we're encouraged with it. And I think the summary sort of my narrative was the near-term opportunities will be in an influenza flu and combination COVID flu treatments. And that in itself is looking interesting. But again, it's not in our hands. We don't know when these -- the big pharma are going to launch these. But it's -- it could be quite lumpy when it comes, but it could be quite significant too as well. But that's the -- so that's in the next probably two years, more '25 than '24. But we could see some sales next year, certainly, as we ramp up advanced sampling and small-scale material to sell.
And then beyond that is obviously this whole cancer treatment area, which is looking very interesting in itself. But influenza first is probably -- will come to the market if the science is proven. And then the next step would be the one or two cancer treatments, may be more than that, coming on the market after that. So I think that's the summary of what we think is happening. Again, we're beholden to our big pharma customers, most of them are big pharma, by the way. So they're sponsoring them themselves, and they've got deep pockets to invest in that. So we don't see any biotech squeeze in the pipeline that we see from others in this area. A lot of these pharmaceutical companies have really put in a ton of effort and cash into making sure these are successful. So that's sort of where we are, Isha.
Thank you, Isha. Charles Eden at UBS.
Hi. Morning. Thanks for taking my questions. Just a couple left for me, please. So firstly, on Consumer Care, you highlighted that volumes in June were above the first half average. Could you comment on how July has been trading and whether this trend gives you quiet confidence that the second half performance in Consumer Care might be somewhat better than what you achieved in the first half? And I ask that in the context, obviously, Unilever's results this morning where inventories have come down sequentially, which I guess at least at the margin is positive for the destocking trend sequentially?
And then second question, a bit of a broader question on the balance sheet, 0.7 times net debt to EBITDA, at the half or a little over 1 times when accounting for the Solus acquisition, I guess with more cash generation to come in the second half, presumably, how are you thinking about using this balance sheet? Is the intention still to pursue bolt-on M&A or could we see some shareholder returns here? Thank you.
Yes. Thanks, Charles. I mean I'll do first one and I'll let Louisa comment on the second. I mean, difficult to say. We can't talk about July yet. I mean it sounds daft, but we haven't finished July yet and we haven't done the analysis, and we would -- we do quite a lot of analysis now. But it's still difficult to see a trend, I think, even now to say that we're shooting forward. And you're going to see a massive recovery. I mean we just simply don't have the data points now. So we're still quite cautious with that. [Todd's] (ph) very positive with our customers. Innovation pipelines are great, but we're still working that through.
And as Gunther mentioned before in his question or I mentioned to him, it's spectrum of stocking points in the customers. And that's why it's quite -- 25% of our business in Consumer Care is in the big multinationals. So we can get a cross-sectional view of what's happening there, but it's very different across the piece there as well because there are so many multiple land touch points.
So I think we just say, look, we'll have a better understanding. I think the big month for the industry is September. Sometimes it can be when people don't normally change stocking positions as they go into the summer. I know that's sort of an old saying, but it still applies now probably more so. And I think once you come out in the summer, then people will start to look and replenish, most customers replenish in September for the rest of the year, and you can get a better view of outlook then from our customers. So I think that will be quite significant and quite important. So towards the end of September, I think, we'll start to better understand what that demand -- that outlook looks like. We'll get a better understanding of what the trends are, Charles, to be honest.
But two weeks visibility, it's a tough call for anybody at the moment. You can probably, you will rattle your big brains as well as ours, and we'll put them together, and we'll probably be wrong. But who knows, we just don't know. But that was that and Louisa, on the other point, which is about shareholder returns, and I can chip in.
Yes, the question was about our balance sheet strength. So yes, we're at 0.7 times at the end of June. We now jumped to 1.1 times after we paid the consideration for the Solus acquisition, which plays just after the period end. And clearly, that's -- even at 1.1 times, that's at the lower end of our targeted range of 1 to 2 times. Look, we continue to believe that we have good organic investment opportunities in the business, which is our priority for capital allocation. Steve has highlighted a couple of things in his presentation, particularly in China, where we think we have good returns for our investment. And I'd just like to take the opportunity to just draw your attention to slightly elevated capital -- CapEx levels this year at around GBP170 million to GBP180 million as we absorb largely the capacity investment in Pharma as well as some of the opportunities that Steve talked about.
We are really interested in bolt-on M&As. We continue to be scouting for those. But obviously, that's serendipitous when assets come up and whether they're at the right value. So the ultimate answer to your question, Charles, is if we find ourselves at the lower end of that range for a period in the medium term, then yes, we would have to consider whether there was a better use for that through shareholder returns. We're not yet at that point. But clearly, we are looking at that landscape.
I think I would just add, Charles, it gives us great optionality at the moment. And for Croda, it's a balance of making sure we keep things tight in the short term while we get through this headwind in the industry that everybody is facing. And that would strengthen -- but importantly, we're strengthening the future of Croda through this period as well. And we've always done that. This is the sixth cycle I've lived through. And every other one of them, we take the opportunity to strengthen our business. And we've got that fire power to do that. Now we can do that in different ways. But as Louisa said, CapEx is the most important because there's a lot of growth in the business for the medium term. And that's the cheapest and the best return in many ways for us.
And then the swing factor is bolt-on M&A versus some sort of share return, and that's something that we'll keep monitoring. But there's no black hole to fill in CapEx. So we're not expecting a big ramp-up again of capital. And I think once we've assessed what capital -- because we'll always reassess through these periods as well, how much capital we need in the business to deploy over the next three or five years? We'll do that through our senior team. And then that might create actually more opportunities to deploy some more funds as well because we're always reassessing what capital we need in the business.
But it's in a slightly higher level now because the growth potential is good. And our job is -- the most important thing in Croda, there's no knee-jerk reaction to what we're seeing. You won't see that. We'll react in our normal way, which is tightly controlling costs, but strengthening the business as well and it's keeping that balance and making sure we don't damage the business for the future because we're very well positioned for the future when the recovery comes.
Understood. Thank you very much.
Thanks, Charles. Matthew Yates of Bank of America, I think, is next. Hi, Matthew.
Hi, Matthew.
Thanks, David. Hey, everyone. Morning. A couple of questions. First one around Iberchem. So the numbers that you put in the presentation, both in terms of volumes and sales look pretty good. So I guess if you can just confirm that you're on track to deliver the three to five-year synergy targets? And then the reason I ask, if I'm not mistaken, you've released some accruals on the earn-out, which would suggest something is either behind budget or perhaps not making the stretch budget. So I'm just trying to understand the tone, which sounds very positive on that asset versus what's gone through the accounts? Second question, with the benefit of hindsight, well done on the timing of the PTIC sale, but it has left you with some small stranded costs that the rest of the business needs to absorb. Is there a plan or a time line from getting some of those costs out or are you just stuck with them for the foreseeable? Thank you.
Yes. All good questions. I mean, let me start with the F&F position and then I will play Louisa into the rest of F&F and the stranded costs. I mean, look, F&F, it's delivering what we expected it to. The run rate growth is significant and the growth is coming from where we expected it, Middle East, Asia and actually Latin America, now we've opened up our Brazil operation there. So it's good all-around growth.
I think the synergies, if we're honest, are probably a year behind. We're about one year behind, Matthew, partly because of the pandemic and partly because it's just -- it's a bit of inertia with our customers approving the products. I think the positive in synergies has been that we are starting to see through Croda's brand positions and just our good strategic positions with a lot of multinationals that we're starting to win some business, particularly where Iberchem is strong locally. So multinational business, in those areas like North Africa, parts of Southeast Asia and North Asia, where their manufacturing is nicely positioned to some of our customers brands as well. So we're starting to win there as well. So we've been pleased with the -- so we've been really pleased with the top-line performance. Synergies are building a year behind.
The other area that's just slightly behind where we want it to be is the profit and that's just because of this raw material headwind, particularly, that they've had sort of a one in a 10-year event for them, probably one in a 15-year event, but they had, if you remember, 35% increases coming through their business, which is very unusual. So they're just unwinding, and it will probably take the rest of this year to unwind. So we should see some margin benefit going into next year as raw materials sort of get back to then probably normal levels, I would say.
So there's -- so it's two things. It's inertia with customers on top-line synergies, although we're quite happy with the top-line growth. And it's -- bottom line, it's some raw material increases, which are unexpected over the last 18 months, which are going to unwind. So a combination of that.
Yeah. Matthew, I'll pick up a few extra points and then segue into the Equus piece. I think Steve's done most of the work for me on the first question. But from a technical point of view, we obviously have to look at that contingent consideration, considering some of the points that Steve's made around synergies and stretch targets, and we assess that liability at the end of the period and fair value that. And that's led to this single-digit million benefit to the P&L. It's less than 1% on the Consumer Care margin and obviously much smaller than that at the group level margin.
But actually, it's a good counter on the Equus piece because even though we've got a slight benefit from that contingent consideration unwind, we're still carrying, as you've correctly pointed out, about GBP1 million of headwind -- sorry, GBP1 million -- a percentage point of headwind in the consumer care portfolio for that Equus stranded cost. So we're pretty neutral at that level. And therefore, the sequential improvement in the Consumer Care margin from last year to this half still stands. But on the Equus stranded costs, look, there's -- I guess there's two strands.
One is if we're successful in buying another business and deploying those PTIC processes where we can actually spread some of those costs across new sales and new volume. Obviously, as I said before, we're looking for that, but that just depends on timing. And then the second thing is, it loops back around to doing the basics brilliantly and just looking at our cost base in a sensible, considered way to see if maybe we can do things slightly differently internally to increase productivity and our cost base, but those would be the two strands of the plan over time to try to mitigate the effect of that.
Thank you, Louis.
Thanks, Matthew.
Thanks, Matt.
Georgina Fraser at Goldman Sachs.
Hi. Thank you for -- hi, thanks for taking my questions. I've got two left. The first is just going back to CapEx. Is it fair to say we've got a bit of a higher CapEx guide for 2025 as well as this year and 2024? And if that's the case, is this kind of broader scope of CapEx opportunities or is it the CapEx you were planning is coming at a higher cost? And then second question. There have been a lot of moving parts in the portfolio, and then we've had some major kind of external cycle swings. So I just wanted to get your sense of where margins should normalize to and if that's something that you're expecting to see in 2024 or will that come later? Thank you.
Yeah. Well, let me start on the margin point, Georgina, and play Louisa in on margin and CapEx. I mean the margin -- look, the margin -- you can see in the numbers, the revenue lines are holding up pretty well in this fading environment. It's a margin that's significantly changed in the return on -- when you look at -- when I look at it from a return on sales point of view. A lot of that -- the majority of that is a function of volume, which is unusual for Croda. We talk about volume more in these meetings than we've done in 30 years.
But -- so I think a lot depends on -- the visibility is so short that if we do get volume swings back, clearly, that's going to significantly help margins. The product margin, I keep talking about with people is really solid -- is rock-solid. So our gross margin is the raw material in the pack, and we saw we -- we made the margin versus the selling price, we relate that to the selling price. That's holding up very well. So the good thing is if volumes come back, the margin should continue to come back pretty strongly.
But -- so I think a lot of it is dependent upon how quickly the volume comes back? When it comes back, how quickly it comes back? How significant that rebound is? And then margins will come back. So I think it's way too early to think about where they're going to be for '24. We'll have a much better understanding later in the year.
And we've mentioned -- what we've mentioned before that we probably will -- we will give a update, an October trading update as well because of the gist of volatility in the market and a number of people have come back to us and said, why wouldn't you do that? And I think that's right. So we were reflected on that. But we're still in half yearly reporting from then on in, I think. But we will give an update probably in October just because of this unusual period that we're all going through and we're living through. And I think it's only fair that we update the market on the trends that we're seeing. So we'll probably give you a better understanding of that in October.
Yeah. The only thing I would add on margin and probably a little bit of a repeat of what Steve said is that I guess there's a more linear path back to normalized margins with Consumer Care once those volumes come back. And obviously, the trigger point depends on when we get to that tipping point and how strong that is. But as we've already alluded to, we've got a few more moving parts in the Life Science portfolio, particularly, with the lipid business. And we've really got some encouraging news in the underlying business, but that is going to remain a bit lumpy. So predicting '24 at this point, I would agree with Steve, is probably a bit premature.
Look, on the CapEx, I think it's been well trailed that we're investing GBP175 million in pharma capacity across particularly nucleic acids and that, that was going to run from 2021 to '24, and we're well on with that and probably spent over half of that money. So we are going to see elevated capital through this year and next year, largely driven by that. I've already emphasized that we have got some other capital choices that we're making within that committed envelope of capital. But once we're through that bolus, we should be reverting more to a lower capital envelope. But I think the business case for that investment over the short term has been well trailed around that nucleic acid volume.
Thanks, Georgina.
Thank you.
And one final analyst question from Nicola Tang, Exane. Thanks for your patience, Nicola.
Thank you. Thanks for squeezing me in for the question. Just some small stuff left, following up actually on the comments around CapEx, Louisa, I was wondering if you could give us a bit more color on some of the other moving parts on free cash flow in the second half of the year? I think in the outlook you flagged an increasingly negative working capital. So could you talk about where you are on working cap, not just for the receivables, but also inventories? And I guess maybe interest and tax will step up in the second half of the year?
And then the second one, in terms of -- you talked about the 25% of volume impact in H1 and consumer being kind of self-inflicted Croda issues with the capacity and the demarketing, can you just confirm that all the capacity is now back online? And how quickly do you think as volumes come back, you can win back those volumes or is it -- could it be sort of lost volumes? Thanks.
Okay. We'll let Louisa start with first question and then I can take the second.
So we've covered CapEx. Working capital, we said in the statement that we'll have an outflow at the end of the year. Largely, the driver for that is receivables because just the maths of a large COVID shipment in the fourth quarter and a presumption of crop uptick in the fourth quarter. We will obviously be carrying a higher receivables balance at the end of the year. We continue to do good work on inventory. I've talked again about the fact that we've got the unwind of value from the balance sheet, but we're also improving days. Difficult one to call, though, whether we're in build mode by the end of the year or continuing to unwind, but I expect the receivables piece to be the major driver.
And look, there's some internal stuff around creditors, less material, but this time last year, we've obviously got a big sort of rem creditor in the books that we won't have this year, so that's another negative call for working cap. But we'll obviously update you a little bit more, but those are the reasons why we're probably in an outflow situation versus inflow, but we'll do the best we can and continue to do that on inventory.
Before I pass over to Steve, on the four points of the 14% decline in volume that we've attributed to our own internal pieces. Capacity is back. And I would just remind you that we said at the end of the '22 results that we expected it might take a couple of years to fully get that back. The charm offensive is starting to work, but I don't think it's going to be an immediate hockey stick back to win that business.
Yeah. And I think you probably answered the second question as well. I mean just a wider point on -- we don't have any constrained assets at the moment. I don't think we're along with that in the industry, by the way, Nicola. And then -- so importantly now, it's just trying to target recovery of that business that was self-inflicted, this falsity marketing as Louisa mentioned. And that just takes time. It will come through gradually, and we can monitor that because we've -- we can target that. And then starting to come back, but we'll take a few quarters before it fully comes back. And we understand that. So that should build through the second half and into next year as well.
Thanks, Nicola. Just over to Steve for a couple of closing remarks, and then we'll end the webcast there.
Yeah. Thanks, David. Well, thanks, everybody, and thanks for everyone, the great questions. I mean, for Croda, there really is no knee-jerk reaction. The important thing is, as you'd expect us to do is keep tight control of costs in the short term as we manage our way through these headwinds and also with our mind on strengthening the business too for the short, medium and long term as well. So it's a combination of both of those things. But we're in a good position. We'll do the right things for ourselves and for our investors too, and then we're very well placed for the recovery because we continue to continuously invest in this business. And it's all about innovation leadership, as you know, and sustainability leadership for Croda. And when we come out of this, we'll be in a very good position.
So thanks very much, everybody, and we'll see you when we see you, as we say. Thank you.