Croda International PLC

LSE:CRDA

Earnings Call Transcript 2022-Q4

[Steve Foots, Group Chief Executive]

Good morning, everyone, and a warm welcome to our full year results presentation.

Great to see lots of you in the room and many online as well, too. As usual, I'm here with Jez, our final appearance on the public stage together after an eight-year partnership. So, it's official now, Hugh Grant is retiring. His successor -- a lot of people think he looks like Hugh Grant. His successor, Louisa Burdett, is here -- could have called you something else there, Jez. But his successor, Louisa Burdett, is here today, and hope you get a chance to see -- say hello and see her afterwards as well. She's looking forward to introducing herself over the coming months and formally taken over in three weeks as well. And I'm very much looking forward to working with Louisa, and should be great for Croda.

Okay then, usual agenda then; this morning with some overview comments from me before Jez on the numbers and then back to me to get you excited about direction of travel for Croda in terms of our strategy. We'll then, of course, be very happy to take any of your questions.

Okay, then. So, on to the results then. It's been another milestone year for the group with a huge amount of progress across all areas of the business, strong growth in both core sectors and most geographies. And after adding £150 million of profit in 2021, we've delivered results -- record set of results again in '22. We've added a further £50 million of profit, and that's despite divesting our industrial business halfway through the year and much lower sales of lipid systems during the pandemic. It's quite a remarkable achievement, and it demonstrates the strength of the organic growth in the business, and also shows our ability to navigate the challenging macro environment, too, while successfully managing significant input cost inflation and supply chain disruption.

A major highlight this year has been the further portfolio evolution in the group. We've exited cyclical industrial markets to increase our focus on faster growth niches in both Consumer Care and Life Sciences, bringing our business closer than ever with the exciting emerging mega trends that we see around the business. And we've continued, as you'd expect us to, to invest in innovation, bringing new products to market, whilst building our pipeline for continued growth in the years to come.

The progress is driven by our operating model, the bedrock of our business, and it's reinforced by a relentless focus on commercializing people's knowledge, that's what we do, alongside disciplined investment and strong execution. And for the first time in Croda's history, sales increased above £2 billion and profits exceeded £500 million, quite an achievement of that, too. And I've been really pleased with our ability to manage significant raw material cost inflation. We haven't seen that for about 15 years in the group, sign of a strong business when you can move profits forward. Price/mix was a massive 24%, reflecting the need to recover these costs. And we've announced an 8% increase in the full year dividend, continuing our unbroken track record of dividend growth of more than 30 years.

So, turning to the sectors then. I'm very pleased with the strong progress that we've made in our core businesses. Consumer Care is becoming ever more resilient, achieving record sales and profits last year. The renaissance in Beauty Care continues, thanks to the strong demand for sustainable ingredients. Solar Care was especially strong, reflecting high demand for mineral sunscreens. And while sales of equal, bio-based surfactant saw a threefold increase as well. F&F is bringing great balance to the portfolio. Whilst our industry had to manage significant destocking in the second half, they posted their best half for two years, growing more than 10% in constant currency. So very strong growth there in emerging markets, supported by sales synergies building to.

We continue to see a structural shift in consumer demand towards sustainable ingredients, and we're responding to this with a shift to buyer-based and biotechnology across our portfolio. You'll hear a lot more of that over the next year or two. And as expected in Consumer Care, the second half was impacted by customer destocking, following strong demand in 2021, particularly in North America. It also reflects selected demarketing that we've chosen to do on lower-margin products due to some capacity constraints. This is a classic destocking cycle playing out in the industry. So important to look at Consumer Care's performance through the lens of the year as a whole.

Life Sciences had another great year, building on exceptional 2021, where we benefited from the strong demand for COVID-19 vaccines. And while lipid system cells reduced for COVID vaccines, all other areas grew double-digit growth. Crop Protection was a standout performer as we continue to benefit from a growing demand for sustainable solutions. We made excellent progress in pharma, not least in growing our pipeline of non-COVID delivery systems. And we've also repositioned the business to increase its focus on fast growth areas and empower further biologics delivery.

As you know, we've got six strategic priorities, and we've made excellent progress delivering against each one of them this year. We've continued to focus on strengthening Consumer Care and expanding Life Sciences, focused on fast-growing niche markets. We're continuing to see fast growth in Asia, where we now have over 1,500 employees, more than in North America. Our recent agreement to acquire Solus Biotech is going to further accelerate our progress, which I'll come on to later. We're scaling biotechnology with more than 100 biotech-derived products now in our portfolio. And our scouting network is building our pipeline of potentially technology acquisitions. So, lots of momentum and excellent strategic progress this year.

And we've just -- and we've been just as focused on delivering our non-financial targets, too. As you can see from the slide, with progress against all of our KPIs, we've delivered a 20% reduction in Scope 1 and 2 against our baseline year and with 81% of suppliers now engaged to improve the sustainability of our products. And crucially, we're taking the organization with us with three-quarters of our employees recommending Croda is a place to work.

We're also giving back to the communities that we work in. It's about impact, positive impact. The Croda Foundation has committed £3 million to 21 grants across 19 countries, and it's impacting nearly 15 million lives, and we've just started. So many of these projects utilize the skills and expertise of our people. So, for example, we're helping to enhance the yield of seeds native to the Amazon, so that indigenous people can use their land more effectively. So, all it all a great year and we're all set for the year ahead, which I'll come back to, and we continue to do the right things in Croda, and we do them very well.

Now let me hand over to Hugh for more detailed run-through of our financial performance -- I mean Jez.

[Jez Maiden, Group Finance Director]

Okay. Thanks, Steve, and good morning, everybody.

As Steve has highlighted, through consistent execution, the group has another record financial performance in 2022. Reported sales and adjusted profit before tax both increased by 11%, with sales exceeding £2 billion and adjusted profit exceeding £500 million for the first time ever. EBIT return on sales was broadly flat at 24.7%. Adjusted profit before tax increased by £50 million to £496 million. The effective tax rate on adjusted profit rose slightly over 2021 to 22.8%; that's still a bit below our medium-term guidance of 24%. Adjusted EPS was up 9%, up £272, and we've proposed an 8% increase in the full year dividend to £1.08. Free cash flow has started to improve with some softening in input cost inflation with a 9% increase in 2022 to £167 million.

Turning to the IFRS reconciliation. Exceptional items worth £38 million, primarily an impairment of the goodwill acquired with the stand-alone Iberchem flavors business in 2020, which is behind its acquisition plan. Intangible amortization was unchanged at £34 million, and we delivered a profit on divestment of the PTIC business of £356 million. So as a result, on an IFRS basis, profit before tax nearly doubled to £780 million.

Turning now to the sales bridge. The chemical sector has seen significant inflation since the start of 2021 with our raw material basket increasing by 23% in 2022 on top of 17% in '21. Encouragingly, this basket peaked in Q3 and has seen modest declines in Q4 and into the current quarter, although we do continue to see inflation in the other operating expense areas, particularly labor and energy. In response, our powerful operating model has allowed us to successfully recover these inflationary increases, including the benefit of new innovative products' price/mix added 24% year-on-year. Organic volume in the retained business declined by 6% year-on-year, the impact of divesting the majority of the PTIC business in June '22 resulted in a 13% decline in sales; that's the impact on total sales of not owning the divested business in the second half year. Acquisitions added 1%. We also benefited from sterling's weakness, particularly against the U.S. dollar, which increased reported currency sales by 5%.

You can also see on the right-hand side what the impacts would have been had we not owned the PTIC divested business at all during 2022. Sales would have been £191 million lower than we're reporting today. So that's the sales you need to deduct in order to arrive at the baseline number for 2023.

So, this slide looks at the same bridge but for adjusted operating profit. Organic growth in 2022 added £53 million to adjusted profit with growth across all three sectors. This was an excellent performance, particularly as Steve said, given that lipid sales reduced by $60 million from the peak of 2021's COVID-driven demand. The PTIC divestments reduced operating profit by £27 million being the benefit we had in the second half of 2021 compared with not owning the business in the second half '22. There was again a small acquisition profit benefit and currency translation added £19 million. Again, on the right-hand side, you can see what the benefit was in the first half from owning the PTIC business pre-divestment. Operating profit would have been £39 million lower than actually reported. So again, that's the profit that you need to adjust for in baseline in the 2023 performance.

So, looking now from a geographic destination perspective, all regions saw good growth in sales and profit other than North America. Asia achieved a record year with strong demand, particularly in Life Sciences and also delivered modest growth in China despite the pandemic lockdowns. Demand in Western Europe remained robust despite higher prices and energy costs with strong growth, particularly in Crop Protection and in Beauty Care. Latin America enjoyed good growth, led by demand in the regional crop protection market and supported by Consumer Care demand, including the new F&F operation there. Eastern Europe saw a negative financial impact from the closure of our Russian business, which overall represented 1% of group sales in 2021. In North America, sales were very strong in 2021 and peaked in the first quarter of 2022. Since then, demand has softened in Consumer Care and Pharma, the latter partly reflecting lower COVID-19 demand post pandemic.

Now we look at the global sector performance. Consumer Care delivered a solid performance, with sales up 18% and adjusted operating profit 9% higher. Margin was, however, diluted by lower volume and an adverse business mix.

2021 has been an exceptional year in Life Sciences. So, it was very pleasing to see continued sales and profit growth in '22. Life Sciences delivered 19% sales growth and 10% higher adjusted operating profit, despite a reduction in COVID-19 vaccine demand, as Steve mentioned. Return on sales reduced to 33.6% due to Crop Protection being a larger proportion of the sales at a slightly lower margin, together with a normalizing lipid systems margin.

The new Industrial Specialties sector holds the remaining industrial businesses and the supply agreement with the new PTIC owner. Sales declined year-on-year due to the divestment, but was strong in underlying terms, thanks to robust commodity prices globally. Despite the divestment, operating profit still increased year-on-year, and return on sales was in line with our expectations, close to 16%.

Looking at that 18% sales growth for Consumer Care, the sector saw the largest impact from inflation recovery with price/mix 22% higher. By contrast, volume was 12% lower, which was driven by two primary components.

Firstly, we had seen very strong demand from customers back in 2021 to meet post-pandemic consumer recovery with customers also buying ahead to mitigate surging inflation and secure supplies in problematic global supply chains. In the second half of 2021 alone, Personal Care sales were 20% up year-on-year. Then during the first half of 2022, supply chain issues eased somewhat, and it became clear that there were significant excess stocks across both our customers and the retail supply chain. This led to destocking by customers in the second half of 2022, particularly in North America, which also has significant onward customer export to China, where retail sales were impacted by COVID Lockdowns. Overall, destocking is estimated to have accounted for 5 percentage points of the 2022 volume drop.

Second factor is that we suffered some capacity constraints earlier in the year. This was due to high demand in areas such as solar and hair care. But later in the year, we suffered some plant downtime constraining supply from some of our sites. Both these factors caused us to de-market, which we hope to recover as 2023 progresses. And this impacted sales by another 5 percentage points. In addition, we exited our Russia operation, reducing sales by 1 percentage point. Previous acquisitions added 2% to overall sales growth and currency added 6%.

Across the four businesses in Consumer Care, Beauty Care and Fragrances saw the strongest growth with increasing demand for sustainable ingredients and the recovery in emerging markets benefiting Iberchem after the weakness it saw in 2021. Asia continues to be a strong growth market in Consumer Care. We're investing more resource there as well as agreeing the Solus Biotech acquisition in South Korea. That will cement our presence in three key skincare technologies: peptides, retinol and ceramides.

Profit in Consumer Care grew overall through a combination of underlying sales growth and currency benefits. However, return on sales declined to 22.8%. This was impacted by operating gearing on lower volume, particularly in the fourth quarter, together with a weaker business mix as Beauty Care and F&F were the stronger performers compared with the higher-margin Beauty Actives business. Just under 1 percentage point of the decline also represents the reallocation of dis-synergy costs following the divestment of the PTIC business, which will be recovered as proceeds are reinvested into more growth through acquisition.

Now following our standing year in -- for Life Sciences in 2021 with rapid expansion of the Pharma business following the Avanti acquisition and exceptional COVID demand-driven vaccine, it was great to see further progress in '22. Sales grew by 19% with performance strengthening in the second half of the year. Price/mix grew by 6% and volume was 8% higher, giving total underlying growth of 14%. There were no acquisitions during the period, but currency at 5%.

2022's strong performance was achieved despite the anticipated 40% decline in sales of lipid systems due to lower demand from our principal COVID-19 vaccine customers. But the balance of the Pharma business, together with Crop Protection and Seed Enhancement, all grew sales double-digit percentage terms. Crop Protection was the standout business, benefiting from strong agricultural commodity prices and a good demand environment.

Within Pharma, the nucleic acid delivery systems business is developing its portfolio from the blockbuster COVID-19 vaccines, which drove demand in 2021 to the new mRNA and gene therapy vaccines and therapeutic drugs for the future. 2022 sales in the business were approximately $170 million, a little ahead of our expectations at the half year, mainly due to higher COVID-19 vaccine demand in Q4, although sales are still well down on their peak of $230 million in 2021. More excitingly, sales outside the principal COVID-19 vaccine customers represented almost 40% of the 2022 lipid business and are expected to overtake COVID vaccine demand in 2023, where we still expect to deliver £120 million of total lipid sales. Overall, 2024 lipids should be stable with '23, and then we will see growth from new applications in mRNA and gene therapy from the growing innovation pipeline thereafter.

Turning to cash flow. EBITDA grew strongly. Working capital increased by £134 million, reflecting the inflation on inventory and receivables values, which added £82 million to working capital with an underlying increase of £50 million in holding higher stocks and having higher receivables. With raw material prices peaking in Q3, working capital has started to reduce, a trend which we expect to continue in 2023. CapEx was a little below our guidance of £150 million to £160 million. This was due to a delayed phasing with the proceeds from the PTIC divestment. Net debt reduced to £295 million, which is a leverage ratio of 0.5 turn of EBITDA.

On that theme, this is a reminder of our capital allocation policy, particularly relevant given our low gearing level post the PTIC divestment. Policy remains unchanged from what I've shown previously, and the divestment is allowing us to deploy more capital to support expansion in higher growth, higher return in Consumer Care and Life Science markets.

Firstly, we're investing organic capital spend with a rich theme of growth opportunities in new capacity, product innovation and geographic expansion. Our typical CapEx remains around 6% of sales or £120 million per year. And in addition, we're partway through our Pharma investment program to meet the growth in proteins, vaccine adjuvants and particularly nucleic acid delivery. Croda is investing £175 million in this program with an additional £75 million being provided by U.S. and U.K. government.

Secondly, we committed to pay a regular and increasing dividend to shareholders with '22's 8% increase, continuing an over 30-year unbroken record of dividend growth.

Thirdly, we're complementing our organic investment with targeted acquisitions and technology adjacencies in line with our preferred approach to buy and build [Technical Difficulty] in both Consumer Care and Life Sciences.

And finally, we monitor leverage against our target policy of 1x to 2x EBITDA, returning surplus capital to shareholders where that's identified.

So, I'll now hand you back to Steve to talk about those strategic opportunities. Thank you.

[Steve Foots, Group Chief Executive]

Thanks, Jez.

Okay, then. So, as I said earlier, the portfolio evolution has been a major part -- major highlight in 2022. Croda is now more closely aligned with the exciting emerging megatrends that we see. Now, world is about health and well-being that you know, but it's also about feeding and growing population and living sustainably, and that's what drives us. And these are the mega trends giving us a greater demand for more sustainable ingredients. And this move to biologics, which is just starting for us. And that's transforming medicine. And today, and we'll transform agriculture over the next decade, too. So, we're planning ahead. And as you can see, we're reshaping our portfolio, and over the last five years with strategic technology acquisitions, enabling Croda to meet the big changes that we're seeing.

And following the successful sale of our industrial business in the summer, we are now a stronger margin, high returning, less cyclical and higher knowledge-intensive business. It's about commercializing people's knowledge in crude. And we'll invest the proceeds from this sale as we normally do on building our knowledge base all around the world and strengthen our market-leading propositions.

We go to market via these seven businesses, dynamic businesses, highly-focused businesses that you're familiar with. They all have managing directors running them. And they're enabling Croda to expand within each of these industry niches, which are growing fast, so much faster than others. And what's even more exciting is these niches are all getting much bigger. So, the growth profile for Croda in the next four or five years is a lot different to the last five years. This underpins our confidence in being able to deliver more consistent sales growth across Pharma, Crop and in Consumer Care over the next three years.

There's a much greater depth and breadth as well to our portfolio, if you can see on the top right, very well-balanced now relative to three years ago. And all these businesses have strong growth characteristics. They all should grow, and this is reinforced by a very well-balanced geographical footprint now. We're strong in all parts of the world.

So, as we look to 2023, no surprise, but our strategic objectives remain unchanged. It's all about delivery, delivering further progress in each of them. And in particular, in Asia, we will move quickly to integrate Solus Biotech once under our ownership, and we'll also launch a Scope 3 emissions index to reinforce our sustainability leadership in Consumer Care, and continue to commercialize our exciting pharma pipeline in Life Sciences that we talked to you about in October. We'll focus on ensuring that our biotech investments delivers higher NPP, too, and expand our pipeline of potential acquisitions and deliver additional benefits to customers through automation as well.

So, coming back to each of the sectors, then in turn, shining a light on strengthening Consumer Care. The chart there shows how we're growing our business in Asia. It's been a top priority, and we've been steadily increasing our investment in the region over the last few years. The personal care market is growing rapidly. And as our technical marketing and sales network has evolved, we're generating strong growth in the region, as you can see from the chart at the bottom right.

And within the region, China is growing fastest, no surprise there. And we're very well established there serving the domestic market through imports and local production. We are replicating our U.S. model, too, increasing our ability to serve a growing customer base of indie brands. And we've committed more CapEx to build a sustainable surfactant plant in India and scale up a site in Singapore to develop sustainable biopolymers, all about this shift to sustainable ingredients.

So, turning to innovation then in Consumer Care now. One of our big innovation projects is scaling biotech to harness its potential alongside our conventional chemical technologies. Croda is already a leader in biotechnology-derived beauty actives, again, you've heard that from us before, and we're bringing more and more products into the market. These include on the left, Nautil, an anti-aging active that makes skin look younger by enhancing oxygenation, one for our senior sell-side in the room and an analyst, not looking at him. And there's also Monar as well, which treats skin pigmentation disorders associated with menopause. Both are based on technologies we've acquired over the last decade. And biotech's potential extends well beyond actives to things like animal keratin and also on hair care and microbial cleaners rather than chemical ones. So, biotechnology for Croda is very much carbon reduction with great performance.

And as I mentioned, our strategy is to strengthen Consumer Care, and our acquisition of Solus Biotech in South Korea announced earlier this month will just do that, very exciting for us. It's a global leader in biotech skin actives. It's been around for 30 years. It's got a lot of knowledge in the business. Solus brings a very exciting portfolio of ceramides, phospholipids, as well as an emerging capability in bio-retinol as well. Effectively, with all three businesses, that's how we look at that. Very exciting ones, too.

The number of new personal care products containing ceramide, you can see in the graph, has doubled over the last five years. Principally for skin care, you'll see it as premium skincare, but increasingly for hair care formulations, too. And ceramide are essentially the glue that holds our skin cells together and keep our skin barrier intact and healthy. So, a big -- they have a big role underneath the surface of the skin. And whilst this capability opens up opportunities for us all around the world, the fastest-growing ceramide market is in Asia. So, this gives us a strong foothold in the region.

Phospholipids a very exciting, too. They are natural and sustainable filling a gap in our portfolio, which will bring real benefits to our customers as delivery systems for cosmetics. And under our ownership, we'll be able to significantly accelerate Solus' growth through access to our technical and innovation capabilities around the world, particularly in formulation and by leveraging our global selling network, still the most valuable thing in Croda today. We're targeting 5x growth over the next five years.

And as a strategic bull's eye, as you can see, from the wheel, it gives us a bigger portfolio of natural sustainable active ingredients for our Consumer Care business. Products containing natural ceramides are at the luxury end of the market. So, it's premium skincare, Sederma 2.0. So, it will increase our exposure there. And Solus also brings a GMP-certified plant focused on high-growth Asian pharma markets. So, their natural phospholipids are an immediate plug-and-play into our excipients portfolio, providing important delivery system ingredients for injectable drugs and intravenous nutrition as well. They're also developing lipids, which are complementary to Avanti. So, there is real opportunity for us to accelerate nucleic asset delivery growth here as well. So, phospholipids are very important for the pharma business, too. It's Sederma 2.0. We will help them deliver that, and it's Avanti 2.0 as well, help them deliver there. So importantly, the two premium franchises in the group Solus will strengthen both of them and transform them to the next level. That's why we're interested in them.

We'll also be able to establish a central hub from which to scale our biotech capabilities in Asia now. Their skills and knowledge will enhance our current activities and help us deliver on our ambitious sustainability targets. And finally, as our first manufacturing location in Korea, Solus accelerates our fast-growing Asia plan, providing a springboard to premium and luxury markets across North Asia and beyond. So, a great year for Croda. We're very excited. Great for Personal Care. Great for Pharma as well.

Just turning to Life Sciences then. The opportunities here are also very significant across all three businesses. Remember, it's Crop, it's Seed and it's Pharma. In Crop Protection here, conventional Croda's leading innovator here in this area with technology to help our customers reach their new sustainability goals. For example, Syngenta awarded Croda its reduction in carbon supplier award on the left here, Daniele, on the picture there as well. Reducing carbon benefit, we're creating value for customers by reducing carbon as well as giving them great products.

We're also investing in systems for biopesticide as well that use microbials and RNA. They're starting to come on the market. It is a much smaller market at the moment, but growing much quicker. And for example, here is a delivery system for a biofungicide that is far more specific than chemical equivalents. Again, our ingredients are driving the next generational biopesticides.

And in Seed Enhancement, our range of microplastic-free seed coatings are generating successful results from field trials with all major customers across all regions. So, this is creating significant growth opportunities for the seed treatment business as well.

And turning to finally to Pharma. Our drug delivery technologies are generating revenue across all stages of the drug cycle. So, working from left to right, excluding COVID-19 vaccines, the balance of the Pharma business delivered good global double-digit growth in '22. And our delivery systems play a key role in thousands of patented and generic drugs that have already been commercialized, providing the strong foundation. So, we're growing from a strong foundation.

When we look at the clinical programs, 1,800 projects today in the clinical field. And this is really exciting and underpins our double-digit percentage sales growth target for Pharma that we talked to you about in October. And with the possibility of breakout growth clearly on top of that, if some of these hit the market with big blockbusters. The pipeline is fed by our relationships, in the third column, the 5,000 companies and research institutes that we are working with, that feeds the pipeline into the clinical program. And then, finally, at the end, we have our own innovation pipeline that pulls it together new technologies that haven't been launched yet.

So, overall, when you look at it all, it's really exciting to see it's the breadth and the depth of the program that we're involved in, and that's really exciting. And that will support our £1 billion Pharma business ambition by 2030. And again, you heard that from us before.

So, just to shine a light on some examples for you. On the left, in operation today, Herceptin is the world's leading drug for breast cancer. It uses monoclonal antibodies to stop the cancer cells from growing and dividing, and uses our specialty excipients in its delivery system. So, on the market now, we're saving lives with our products, smart science to save lives.

And also, with only one commercialized mRNA application today for COVID-19 vaccines, not surprising that most nucleic acid delivery drugs are in clinical development or discovery. Interesting ones, that are not far from the market, are the ones where you use a combination of COVID and flu vaccines. And we're in a Stage 3 trial right now with a number of other flu projects behind as well. So, a combination drug of COVID and flu, not far from the market.

And how to deliver drugs to the brain is an important question when we look at drug discovery. The blood brain barrier, for example, does a great job keeping out unwanted substances, but also impeded drug transport to the brain. We're working with an Asian biopharma company, which has developed a carrier technology, to solve this challenge, opening up the possibility of treating in an array of rare diseases. And in terms of our own innovation, we're working with a leading Danish health institute -- research institute to develop two new adjuvant systems there, too. These are for novel therapeutic vaccines that have huge potential for treating already contracted diseases.

So, in wrapping -- in summary and wrapping things up, we've had a good start to the year with the group trading in line with our expectations. In Consumer Care, customer destocking should end in the first half, supporting continued sales growth this year there. And in Life Sciences, good sales growth in Crop and our non-COVID Pharma business should offset lower carbon COVID lipid sales through the year. So, overall, our performance is expected to be more second-half weighted, reflecting the divestment of our industrials business in the first half last year and phasing of COVID-19 lipid shipments, too. So as ever, the power of our operating model and focus on fast-growing niches will enable Croda to deliver consistent superior returns.

So, there's a lot to be excited about. We feel like there's a growth machine in Croda which is bigger than it was in the past coming to you and to us. A portfolio that is more aligned to the fast growth megatrends, more opportunities that are getting bigger, a transformative pharma pipeline with increased resilience in Consumer Care and a strong balance sheet to support continued investment to deliver this growth and value to you and our wider shareholders.

So, finally, I just want to thank Jez very much for the role that he has played with me for eight years. We've been a great partnership, and he's done a terrific job for Croda. And he leaves with our best wishes for a long and happy retirement. So, thanks for everything, Jez.

Okay. We'll stop the webcast there, if that's all right. And then, we'll take some questions. There is some bacon sandwiches or sandwich with some description. Sorry, I beg your pardon. We're staying with the Q&A, yes, but after the Q&A, when it's finished, if people want to stay around to see Louisa and everybody else. Daniele is here and Fitz here as well. You're very welcome to have a coffee with us and a sandwich afterwards, if you haven't eaten this morning.

[Steve Foots, Group Chief Executive]

Right, let's start now. Come on Gunther, we'll let you go first again.

[Gunther Zechman, Bernstein]

Thank you. And thanks, Jez, for your communication to the markets as well and your role at Croda. Steve, if I can start with a couple, please. The first one, you mentioned softening in raw material costs you're starting to see. So, if there's a guidance you could provide for the full year? What are your planning assumptions for raw material costs and any guidance around energy and logistics, which you said is still increasing?

Second of all, coming back to Slide 17, minus 5% for customer destocking, how do you calculate that? And what -- another way of putting it, what are the error bars around it? And what are the error bars around the guidance that this will end with H1?

And bonus question is, why did Croda not increase the dividend 30 years ago? You've been with Croda for 30 years.

[Steve Foots, Group Chief Executive]

Yes. I joined in 1990, so just before I joined. But no, I mean, let's do raw materials. Interesting, raw materials softened quarter four from quarter three by 4%. We expect about a similar figure into quarter one from quarter four, but we're not seeing a big slide of raw material increases, and we're not forecasting that this year, still quite a lot of moving parts. And that's a positive because that means demand is still holding up pretty strongly. Proxy for that, 70% of our -- a large portion of our raw materials are veg related and natural related, and they're a function of demand. So, you would see that come off if demand drop. So that's reinforcing in many ways of the strength in demand, which -- and we think this destocking is the main area there.

Jez, on the energy costs -- I'll come back to the demarketing in a minute, but just...

[Jez Maiden, Group Finance Director]

Yes. So, we will have an increase year-on-year. Energy costs in '21 were about 2.4% of sales value. Last year, they were about 3%. So, we're anticipating some energy cost increases, but of course, they look a lot lower now than they did just three or four months ago. We have hedging in place typically on a rolling basis for about four to six months. So, we won't benefit from all of the recent reduction. So, I'd expect some increase, but I mean, we're probably talking up to 50 basis points of sales. So, we're in a relatively small sort of area. I suspect we're probably a little bit more focused on labor inflation because that tends to be a bit more of a drag. I think logistics is settling down now. But obviously, labor is quite big. Cost of living increases tend to go through a little bit, obviously, in arrears.

So, I think in '23, you'll see a bit more of that increase in labor costs coming through. But nothing that we haven't sort of planned for. And as Steve said, in a slowly declining raw material [Technical Difficulty] just protect margin around the delayed inflation or the later inflation that comes through those OpEx lines.

[Steve Foots, Group Chief Executive]

Just on the Slide 17 demarketing, we were out in the summer, and I think we messaged very clearly that we expected a correction in volume in the second half of the year, which we've seen. If we reflect on that, though, it's quite mixed. Asia has been delivered more positively than we thought. We thought the volumes would come down a bit more in Asia. We thought there would be a little bit more in Europe as well. But the big slide has been in North America, and that surprised us on the downside. But in balance, actually, so this demarketing is not rife everywhere right around the world. Yes, there is some volume moderation in Asia and Europe, but it's relatively small from what we expected in the middle of the year.

So, the center of attention for us is North America, where you have seen this year. And you can argue that you can look at that in different ways and say, well, they were first out of the pandemic. The America always spends its way out of problems. So, there's been a huge rebuilding of demand. And actually, when you reflect on it, probably quite a bit of that's gone into stock in the first part of this year. So, what you see is a big correction, and that's what we're seeing at the moment.

In terms of defining that and how we measure that is we look at patented products. So, what you can see with all of our product customer combinations is in destocking is they don't cancel orders, they just move them back and they move them back for a month or two months or even three months. So, we can map quite well in a geography, a certain part of the geography, how that's moving. Sometimes it moves forward, sometimes it moves up. So, if we see a restocking, you find that orders that were placed on the books for two months of time will come forward and vice versa. So, we then -- so that 5% comes from a very close look at.

And we tend to look at patented products because the Croda's products, they've got the 100% patents. Nobody can -- we're not competing with business or having two sources of -- in with customers. So, you find with that, that it's a pure look at our demand, you can get a good idea. And because we've got thousands of products and customers, you can get a reasonable assessment of that. So that's our assessment of the 5% on demarketing.

And your bonus question was 30 years ago, wasn't it? What was the share price 30 years ago? Careful now, probably about £2.00, I think, I would imagine, £1.50, but there you go. So yes, I mean -- so we think half of that is destocking. And the industry is calling it destocking, and it was calling it destocking, it's because it comes to an end sometime. We're not calling it about them. I don't think anybody -- we're not seeing this demand reduction or this attrition while this trading down. We're not hearing that from a lot of our customers. We're just seeing quite a lot of stocking points. And what you're seeing is this unraveling. And it's very hard to see when it comes back. But my history would say we've gone through six cycles now. And it's -- it always takes a little bit longer to come back. When it comes back, it comes back quite quickly, because there's always an exaggeration at the ends of the cycle, whether you're going into the cycle or you're coming out of the cycle. You either have not enough stock or you have too much stock. So, our assessment is that's why we're thinking it's more sort of first half rather than a quarter one impact.

Jez, anything else?

[Jez Maiden, Group Finance Director]

No, I think that's fine. We do cross-check the broader product range. So, we map obviously, were what the sales pattern for every product is and so forth and do some data analytics against that, and then we compare that with the sort of customer relationship management system that tells us because you always follow up with customers. I mean the difference, I think, in our ingredients, which have relatively small quantities is the customer's reaction to having too much stock is literally to cancel two, three months' worth of orders. It's not like filling up a tank where you just sell a bit less to top up the tank, because that's moving more slowly. In our case, you literally take two, three months out, and we've seen that most particularly in North America. So, it's fairly easy to track and so forth.

Obviously, on the demarketing side, it's relatively easier for us to do because that's a positive decision by us, because either we're very capacity constrained as we were in the first half or because we've had to take some plants offline as we saw in the second half to catch up really and catch up with maintenance, so we can map those. You don't get all of that business back straight away, but you work to recover that business with the customers. So I think we'll get a steady recovery of the second half demarketed product, but it won't all come back in one go, because clearly, these are non-patented products and the customer has gone elsewhere because we couldn't supply them.

[Steve Foots, Group Chief Executive]

Charlie?

[Charlie Webb, Morgan Stanley]

Yes, thank you. Charlie Webb, Morgan Stanley. Maybe just following up on the Consumer Care piece. As we look at '23 and you're talking about destocking, which is hard on SAC, when it ends, but you expect it to end at some point. How do your expectations look for Consumer Care in terms of growth, price/mix versus kind of lagging or lapping positive price for inflation? And likewise, also margins, obviously, a very divergent margin performance first half, second half in '22. How do you expect that to kind of expand or kind of go into '23? So that would be the first question.

And just secondly, on Life Sciences. When you think about your biolipids business ex-Pfizer and the developments you're seeing both in '22 into '23 and you look at your guidance '24 kind of flat, but the COVID pieces aren't moving all that much, is there a chance you're being too conservative there? I mean, what are you seeing in terms of the orders in terms of demand for sampling for new products, et cetera?

[Steve Foots, Group Chief Executive]

Okay. Let me start then and I'll get Jez to pick up margins and back to me on lipids. Yes, I mean, as we look through the year now, we're a bit like the demarketing, we look at data points. More of our data points are positive than the negative. I mean they're not all positive, but they're more positive than negative. And in terms of real data that we can see, China started very well for Croda, led by actives. So, the premium skin market is coming back in China, duty-free, travel, borders opening up, people spending on expensive skin creams.

So, we expect actives to have a good start in China. And that should pull some volume to North America as well, because people forget, but probably about 20% or 30% of the ingredients that we shipped to America are formulated in America, then they go into China. So, China should drive a bit of recovery in North America, too. So, we've seen that. We had a good start geographically in most regions. Americas still soft, not getting any worse and signs of the order books are improving through March, April in North America. So, we would expect that, and that sort of chimes with the China comment I just made.

I think if you look at the businesses, Life Sciences has had a very good start across the board. The F&F business is continuing to strengthen. That's a good balance in the consumer portfolio. That's growing in emerging markets. Active has had a good start. So actually, so if you look at it in the round, and it's really just the Beauty Care business for that to come back fully, which is when you work the math out, is what, 20% of the group or 18%. So actually, most of the businesses have started reasonably well. Regions are fine. Our one area that we want to see recovery is North America. So that's where the area of focus is for the group.

Jez, on margins?

[Jez Maiden, Group Finance Director]

Yes. So, in terms of -- if you look at the impact on margin in the second half year, really three factors, you've got reduced volume. So, you've got this operating gearing effect of significantly lower volume, volume down nearly 20% in consumer in H2. You've got a business mix effect because of Beauty Care and F&F being the stronger parts and active has been relatively quiet. And then you've got the dis-synergy effect from -- which is really about regional and central costs that used to get allocated to the PTIC business. It's sort of fixed cost. And until we deploy the capital in new businesses and they pick up their share of the cost, they've got to go somewhere. So, they go to consumer into Life Sciences basically. So those are the three effects.

If you look at 2023 and look at how that could recover, we'd expect the volume effect to unwind progressively, obviously, as the destocking comes to an end. We've already got through our own capacity constraints and plants off-line. So therefore, that part back up. So now it's all about market demand and the end of destocking. So, I think you'll get a steady unwind of gearing.

On mix, as Steve says, actives has started more encouraging. Actives is usually the first is slow and then the first to recover, and we're certainly seeing some early signs of that. So that should help the mix. The dis-synergy effect, which is a bit less than 1 percentage point of margin across two businesses, will stay with us until we got until we've reinvested that capital hopefully later this year into '24.

So, I think we can get -- margin-wise, we do see Consumer Care as a business that should be averaging about 25% return on sales. We're a bit below 23% in 2022. And therefore, I think we can probably get sort of halfway back in '23, but it will probably be '24 before you see the full recovery, given we know the first half is going to be a bit slow.

[Steve Foots, Group Chief Executive]

And back to lipids, in good shape. As you said, the £120 million for '23 is less than half of that now becomes the principal partner. And if you think where we were two years ago, the majority of that was a principal partner. You can't see that through the numbers. So, we've derisked the principal partner revenue. And that's pretty -- that's very firm, I would say. The nuances of the contract there are very committed. So -- but that second half -- the principal partner is the second half -- in the second half, all of those sales. And that's just because it's a bit like what we talked about, this destocking. Every government was running around trying to purchase things. We're in a normal, what I'd call, a normal supplier/customer relationship with the stock on the ground. But it just happens there's quite a bit of stock in the system. So, it's second-half weighted because that demand is still there, but it's firm. Those orders are very committed. So that -- the principal contract is fine.

So, then as you say, the question is the majority of the business now is -- lots of moving parts. And people forget we bought Avanti, it was $40 million of lipids. We paid the headline figure for the core business. We had the earnout for the principal partner. So, the core business is growing well, and we shouldn't forget that. So that's got a lot of growth in. And that's got a core lipid growth plus quite a lot of the discovery into clinical programs and growing. And I think £120 million is fine, we're fine with that. We don't want to change that. A lot will depend. As you know, there's moving parts, a few in clinical [Technical Difficulty] we really don't know when they hit the market if they do eventually at the market. If they do -- if we thought they were significant, then we'd update the market on a regular basis. But I think the interesting thing there is the COVID flu vaccine, which looks like it's not far away. Now again, we're in a lot of different pharma projects and we don't know which one is going to hit the market first.

So, the £120 million we think is still a very good guide for next year, but the principal partners amount in there is second half -- in the second half of '23. Sebastian?

[Sebastian Bray, Berenberg Bank]

Thank you. Sebastian Bray of Berenberg Bank. Two questions, please. The first is on the Avanti lipids COVID-19 vaccine project. From memory, when the contract was announced in 2020 late-ish time, there was a three-year period after which it would come up for partial renegotiation towards the end of '23. What is up for renegotiation there, baseline volumes or price?

And the second question is also on polar lipids or lipids more broadly, but it has a different tack. It's quite an ambitious sales target for Solus Biotech to increase fivefold the number of sales over the next five years. Is it using Avanti capacity? Do you just take the technology and run it on the fermentation tanks in the U.S. and Europe? Because my thinking is, come '24, '25 unless there is a real pull-through of flu vaccine demand, some of that capacity, which will be newly built, would probably be a bit underutilized. Is the idea just to put personal care lipids in there to fill it? Thank you.

[Steve Foots, Group Chief Executive]

So, in relation to Solus, yes. Yes. Well, we do Solus first, and I'll come back to lipids. I mean, Solus is a capital-light business. We buy knowledge. So, we think as we grow this business significantly, it doesn't need a huge capital injection. So, I don't worry about that. And they have biotech facilities and partnerships locally. So, it doesn't need to be scaled up in Europe and North America for us. But one customer order with one contract can half that multiple. This insignificant business to be had there.

And we are -- I'd like to think we are very well known in the consumer industry. And we have a number of our strategic partners encouraging us to buy things like this, because they're single sourced or they're just desperate to globalize these products. And it's a bit like that planned stem cell business we bought several years ago, where one or two of our leading multinational partners could not formulate with them globally because they didn't have the strength that they could support them globally with the rollout. In this case, Croda's number one in the world in sustainable actives. So, we know what we're doing. So this is a great opportunity for us. It doesn't need a huge amount of capacity.

But the other synergies or the black box synergies will be, it opens up a biotechnology brain for Croda in the fastest growth area of the world for Croda, which is North Asia. And we've got -- you talk to [Dr. Chalena, Dr. Leiden] (ph), Professor Leiden, our issue is not launching products. We've got a lot of products to launch in Croda. This is operational scale. So, we see this as a vehicle for operational scale as well. And it's got the potential for a pharma as well, as you say. So, we're fine with that. We've got lots of opportunity, 7,000 customers in consumer. And we haven't even talked about phospholipids yet, because everybody thinks it's a ceramide business. It is phospholipids, we wanted to get into phospholipids for about five years, and this is a great vehicle for Croda to get into phospholipids. Because phospholipids goes three different application areas in pharma and one big one in personal care. So, phospholipids goods across everywhere. So, don't worry about capacity.

In terms of your other question was connected with Avanti lipids, yes, you're right. I mean it's interesting because the relationship with our partner always changes. I mean, in the outset, it was just about supplying it. Now it's about partnering in lots of R&D programs because as you can imagine, mRNA now is in several applications. not just with Pfizer, but with BioNTech separately as well. So, I think our next-generation contract will reflect that. So, there'll be discussions around the existing business, but there'll be discussions more about the partnership potential of the future as well. And if we've got anything to say on that, we'll let you know.

[Jez Maiden, Group Finance Director]

I think in terms of -- the key thing to remember that we did $190 million roughly with the principal customers in 2021. We did just around $100 million in '22. We're estimating $40 million to $50 million in '23. So yes, there is some -- you could say, directly on that application, there is some uncertainty because there's only a framework ingredient for years four and five. But at that point, you're at £40 million to £50 million. We think there is residual COVID demand for vaccines. So, we think that you could well carry on at that sort of level going forward.

But clearly, we have to put this in context and say that's been the great surprise really of buying Avanti for the medium-term R&D development and actually getting this huge opportunity, which has clearly also helped pay for Avanti much sooner than we expected. But as Steve said, we're managing that down to a level where it becomes a bit more noise, I guess, in the overall performance and the opportunities of the new areas. So yes, I think there's opportunities to carry on at that sort of level going forward on COVID specifically, but it isn't that meaningful in terms of then how the business performs going forward.

On your point about capacity, I think, yes, we're very clear that on the pharma expansion on nucleic acids, it is unusual for us in that we are putting the capacity in before the market needs or at the time that the market needs, hopefully, around '24, '25, the cusp there, whereas we would traditionally probably see how market developed, then get capacity in and maybe end up constraining the market growth. And we're very clear that nucleic acids and lipids is so exciting. We don't want to be in that position. There's a real first-mover advantage for having been the first company to commercialize the lipid delivery system. And we believe that we need to be there offering these projects that Steve has talked about the opportunity. So yes, there could be a little bit of managing that capacity through '25 as projects come on stream, but we're absolutely convinced the right thing to do has been to invest this £175 million to be ready for that market, real explosion in '25, '26.

[Sebastian Bray, Berenberg Bank]

That's helpful. Thank you. And just to clarify, can you use Avanti capacity to make Solus Biotech products? Or is that you don't know yet at this stage?

[Steve Foots, Group Chief Executive]

We can, but we look at it the other way as well, of course, I can use Solus site to make Avanti products. That's a benefit and more exciting for us, because can we make mRNA lipids ultimately, potentially all really high-quality pharma ingredients for North Asia, if you look at the China market and the North Asian market generally. So, we see this -- it's got a lot of opportunity for us.

Matthew? Sorry, Chetan, I'll come to you shortly.

[Matthew Yates, Bank of America]

Thanks. Matthew from Bank of America. Maybe just to follow up on the Solus. You're describing it [Technical Difficulty].

[Steve Foots, Group Chief Executive]

It's completely incremental. And also, what it does as well is Sederma is a great vehicle for indies in the world. Entrepreneurial start-ups always start with pentapeptides, but they'll also start with ceramide as well into their formulation. You can use -- you need them both in the same formulation. One produces aging, the other one gives you rapid moisturization, kind of a brilliant product out there on the all-in. But it's -- they're mutually exclusive in terms of competition and they're used in different vehicles for the surface of the skin. So, yes, so it's effective.

[Matthew Yates, Bank of America]

And maybe this one for Jez. On the Iberchem impairment, the £35 million or so, just to be clear on this, you're saying this is principally on the flavors part rather than the fragrance part, if I understood correctly. When you did the deal, there was a question over whether flavors was core and to be kept. Can you sort of update us your thinking on that? And just from a sort of accounting nuance, why short term the forecasting period from 10 years to five, which obviously aggravates any short-term changes?

[Steve Foots, Group Chief Executive]

I'll take the first bit and then Jez...

[Jez Maiden, Group Finance Director]

Yes.

[Steve Foots, Group Chief Executive]

So, I mean, they're a bit unlucky. I mean we went down to have a look at. I mean the issue they've got is they've got a one in a 15-year event, which is a 34% increase in raw materials. It's all on the flavors. The fragrance business is taking on very well. So, what you've seen is a strong revenue growth, as we expected, in line with the management plan, but the margins are squeezed. So, it's hit profitability in the short term. And that was a question, it's a technical consideration in the math, let's say, how quickly can you get back to your management plan? And then that was the -- and we ended up taking the decision that we did, which was just to give it -- because we can't be sure that the raw materials are going to rebound very quickly.

But when we look at the business, it's a very good business. There's no structural change in the business. It's just had one of those in the 15-year event and an impairment calculation by the partner in the room as well. That's what happens. You have to take a view of that. And I think you'll see that a lot in the industry this year for people who bought recently acquired businesses that, for some reason, you got caught with the margin squeeze. But really, you can't -- you're best to take the impairment and that can reverse in the future.

But that business, just to your second point about the future, it's a business that we like to really run for a while to better understand it and it's got great growth trajectory. You'll see a margin improvement performance. It started well. It's got a nice geographical spread of its assets, and it doesn't really bother us at the top of the company. It's growing. It's got good growth, doesn't need much capital. And we like to grow the EBITDA for two or three years and then take another view because I think it's a prized asset for people. But we want to improve the profitability after we come out of this big shop on the raw materials.

Jez, anything?

[Jez Maiden, Group Finance Director]

Yes. So, absolutely, completely flavors, completely that stand-alone business unit. The fragrance headroom on current value of goodwill is over £100 million. So, we're very happy with where fragrance is performing relative to the acquisition plan. So -- and of course, that's our strategic business within that sort of 75% of that business. So very much a stand-alone business and just taking a view around that recovery.

In terms of the shorter period, that's basically accounting guidance. Basically, you should generally be using five years and then a terminal rate. On new fast growth businesses, we've tended to use 10 in the past, but we've come into line with normal practice there. So, it's five years. And as you allude to, you do remove that outperformance that you would probably normally have in your model for years six to 10. So that also provides some impact. But it's the right thing to do to reduce the goodwill carrying value there, and we'll see how the business develops, as Steve said.

[Steve Foots, Group Chief Executive]

Okay, Matthew. Chetan, you have your hand up at the floor.

[Chetan Udeshi, J.P. Morgan]

Chetan from J.P. Morgan. So, two questions. First, maybe for Jez. In terms of the split of profit between first half and second half, usually, it's 47-53. How are you expecting that seasonality or split this year?

The second question was just going back to the discussion around destocking and capacity constraints in the consumer business. I was just looking at -- maybe my calculation might not be entirely correct, but the volumes in the consumer business are down probably 6%, 8% versus 2019? I mean clearly, the market has grown in that period. So, I'm just trying to understand why should there be any capacity constraints for Croda? And also, how do we tie that destocking comment, given that since 2019, the volumes for Croda hasn't grown in that consumer business. So, I think those are the two questions.

[Steve Foots, Group Chief Executive]

Jez, do you want to start on the seasonality and the split?

[Jez Maiden, Group Finance Director]

Yes. So, I think we'll be a little bit -- well, we'll be more second half weighted. I mean the key thing is, obviously, when you do the comparisons, the two big biggies are £39 million profit that we made in the first half of last year on the PTIC divestment. So, we won't have that £39 million. And then, secondly, we'll across the year as a whole will be $50 million lower on lipids and you can put that sort of in a relevant sort of health care margin and sort of get the effect of those. So, I guess that's the year-on-year comparison.

In terms of the seasonality, we will also be a bit more second half. The principal customer on the COVID-lipid side has said that they don't want to take the volume until second half year. They've talked publicly about inventory levels and so forth. But it is firm demand. So, we know it goes in the second half of '23. But they don't need any in the first half of the year for the COVID vaccine.

And then, in terms of the Consumer Care balance, yes, it will be a little bit more second-half weighted. So, I think we'll be something around 50-50, maybe slightly more of that in the second half year than the normal seasonality of 53-47, as you say.

So, some year-on-year comparisons and then some seasonality pushing that into the second half year, basically for COVID demand in Life Sciences and for the rate of Consumer Care recovery from destocking.

[Steve Foots, Group Chief Executive]

Okay. And, do you want to kick off the second one, capacity, too? It's quite...

[Jez Maiden, Group Finance Director]

It's a good question. I need to go back and look at the comparative volumes. But I mean, the key thing that was as well as the destocking effect, we're in the position on the Consumer Care where we had been running flat out really for 18 months from the beginning of 2021. I mentioned on the slides that we had a 20% increase in Personal Care sales in the second half of '21. I mean complete way above our cycle, where we sort of expect about mid-single-digit growth across the cycle as a whole for Consumer Care. And there, obviously, initially, you're working from -- and it's very hard for the chemical industry to react and do 20% more. And therefore, you are using inventory to some extent, and you end up with a constrained inventory for the products that are selling really well. You've always got more inventory at the products that are not selling so well. So, you start to basically not have the capacity to meet the customers' service needs.

The other thing is you need some downtime on the plants to do the essential maintenance and so forth. And we just got to a situation in the second half where we had to have two or three plants offline for a period of time to do that maintenance work. So, you get a bit of an artificial constraint to the volume, which we do think comes back, although it doesn't come back straight away because you need to win that business back. And of course, the business you shed is the lower-margin business where the customer can go to somebody else to get it. You don't shed the products that they're entirely reliant on you for. So, I think you've got that artificial break in the second half year, even though there's a big impact from destocking, there's a demarketing effect as well in there. So, we finished that work now, and so we're back fully on stream within that.

[Chetan Udeshi, J.P. Morgan]

Thanks.

[Steve Foots, Group Chief Executive]

Yes. I'll just add to that. I mean, the weakest part of your business is where that disappears is the bigger volume as well, naturally for us as well, because most of our protected intellectual properties in the small volume, high value. So, we would say that as well. Yes. David? Can we have a mic on you. This will be a good question from my Head of IR.

[David Bishop, Head of Investor Relations]

It's on behalf of Isha Sharma at Stifel. And Isha asks, Europe seems to be holding up well. Are you considering a possibility it might follow North America in destocking?

And her second question is, what are your thoughts on Givaudan's acquisition of some of Amyris' ingredients and more generally on synthetic biology?

[Steve Foots, Group Chief Executive]

Yes. I mean we're not seeing it. That's a question that we ask ourselves quite regularly. This is the Europe one, about Europe. But we've had a good start. And again, with Croda, there's a lot of moving parts in Europe in each of the countries. So, we've got a good set of data points there. So, we're not expecting that. We don't see that. We see just it's located in America, and we would expect that to rise.

I mean, yes, Givaudan, you're going to see more announcements like this from Croda as well in partnering with some organizations where they've got biotechnology capability. We've got -- we've all got probably great ideas and great products. But what sometimes we don't have is that capability to scale up quickly in the business as well. So Amyris is one partner which we're very aware of and there's plenty of others as well. But they're products that they partner whether not potentially competing products for us, but they're in a lot of those probably similar formulations as well. That's on squalane more than anything else. So yes, so -- but you'll see a lot more for the industry because the industry has to move -- is moving to biotechnology and it asks to move pretty quickly.

So, moving to partnership agreements is one way you quickly commercializing your IP. So, we have -- in our strategy, we have a buy, build and rent model effectively. And we need a combination of all of those. So, we'll be scaling up biotechnology in Sederma in Korea, the U.K., North America, but we'll also be partnering as well. And our issues we've got in our pipeline, we have a lot of biotechnology products ready to go. So, it's -- the handbrakes on commercializing them through scale up operational scale.

That's probably the few questions. Come back to you Charles.

[Nicola Tang, BNP Paribas Exane]

Thanks. Hello. It's Nicola Tang from BNP Paribas Exane. Actually, it did prompt some questions, Steve, because there was a follow-up on that. I was wondering if you could talk about the broader sort of M&A pipeline and the areas that you're looking at or whether we should expect much to happen in 2023?

And related to that around capital allocation, could you remind us, Jez, in terms of with that £175 million of investment into pharma, how much between '21 and '24, how much is left, just to kind of confirm CapEx above the usual base, £120 million for this year? Thank you.

[Steve Foots, Group Chief Executive]

Yes. I mean, very active, as you'd expect us to be on M&A. But the priority -- and you've heard this probably 1,000 times from the CEOs, we're interested really great technology, intellectual property, clever people, provincial businesses, really, in many ways, but they have the ability or we have the ability to globalize these around the world. So, Avanti is a good example, Denmark, the vaccine business, now Korea, they've all got brilliant intellectual property. We diligence that really robustly, prudently in many ways because we have to be sure that, that technology is -- can be globalized. And then we use the selling network to really globalize this. So that's the type of businesses we're looking at.

Daniele, he has got a scout, a Chief scout, works for him. Dave Shannon got chief scout for him as well. So, their job is to hunt the technologies. We have a list of technologies, which is probably the most valuable thing in the group, and so a listed technologies that probably not many will have on their list. So, we know what we're looking for. And it's interesting. The list is going -- as you get focus in there, we put our best business development people on that. So, they understand the technology. So, we'll see. We'll see what happens, but it's going to be more in the same line as the Avanti, the Solus Biotech. It's really brilliant technology that can be commercialized around the world.

On the...

[Jez Maiden, Group Finance Director]

In terms of the Pharma capital program of £175 million from '21 through '24, we're probably about halfway through the net spend. So, we spent about £90 million so far. We're probably a bit less than that because more of the government funding comes in the latter stages of the program. So, a bit less than halfway through sort of overall, I guess, in terms of progress. We were a bit behind, as I said, in terms of where we expected. I think I was guiding you around £150 million at the half year, we came out sub-£140 million. So, I think there'll be some catch-up in '23. So, I think for '23, I'd be thinking £160 million, £170 million, that's sort of £120 million of the base program. That's very consistent because it's spread across sort of 20 plants around the world. But on the Pharma program, I think we'll probably be spending more of the order of £50 million. So, I think for this year, a bit of catch-up from the -- or catch up the '22 on the spend, then complete the program in '24. To you.

[Steve Foots, Group Chief Executive]

Okay.

[Sam Perry, Credit Suisse]

Thanks. Sam Perry from Credit Suisse. Can I ask about the dynamics on expectations for Crop Care into '23? Because if I look at the LatAm growth of 19% this year, I think '21 was also a very strong year and compare that with the expectations across the crop technologies for sort of mid- to high-single digit, what do you expect in terms of demand destruction in '23 and maybe pricing and ability to hold on to that as well? Thank you.

[Steve Foots, Group Chief Executive]

Yes, our view is, I mean, it's had a great 18 months. You can see that in the numbers. And it should continue like that. I mean it's got very favorable market around it. So, we think the crop team, probably first half will continue very similar to what we've seen in the last 12 months and then probably moderate in the second half to its normal growth levels. It's normally around a mid-single-digit sales growth environment. If you look at it for the last sort of 10, 15 years in Croda, you get the volatility quarter-to-quarter, but actually, annually, it normally trades around that mid-single digit. So, the model is a strong first half and a more normalized second half. And the raw material prices are staying pretty high. So, there will be some discussions with customers around pricing inevitably. But it's -- it all depends. That could increase depends on raw material, what raw materials do, but we're well versed in managing those relationships.

[Sam Perry, Credit Suisse]

Because things like fertilizer prices coming off impact, or that's sort of an alternative way to increase yield impact your ability to hold pricing or not so much?

[Steve Foots, Group Chief Executive]

Just some macro drivers, but it's not really fertilizer. But I mean a lot of ours is innovation pipeline. We're into some of the sort of next-generation stuff. So, the most important thing for the crop customers is how did they get more bang for their buck on the field. So, can they get products out that deliver x-percent yield savings, 5%, 10%. So, there's always an encouragement to launch new things.

So that you find with Croda, we're always in some of those -- we're number one innovation partner in the industry now in corp. People forget that. They always see us as personal care and pharma. We're number one in crop. So, we have early sight of a lot of -- and we have a lot of strategic partnerships there. So, I think with Croda, the work that we did three or four years ago is starting to bear fruit because it takes three or four years to get these to market.

So, there is some macro, don't get me wrong. It's not -- I wouldn't peg it on fertilizers. There's a bit of everything really. But the growing areas that are really important to us in Europe, Latin America and North America and all three for 18 months have been strong, and we expect those to continue in -- certainly in the first half.

So yes, but it's a really good business for Croda. Charles, I'm going to come back to you, but seeing you, you're next. Mubasher?

[Mubasher Chaudhry, Citi]

Mubasher from Citi. Just a couple of questions on Iberchem. If you can update us in terms of how the synergies are going, how the margin development is growing, especially for 2022? And then, what you feel like is the right number for 2023?

And then, a couple of comments on specialty excipients [indiscernible] quite a strong year in '21. How has that developed in '22? Just a few for the top-line, please? That would be helpful.

[Steve Foots, Group Chief Executive]

Well, F&F we're really pleased. We've talked about the impairment question. But on the flavor side, it's growing very well through the year. I don't forget, it's emerging market exposed. It's about -- sorry, fragrances, yes, 83% of our F&F business is exposed to emerging markets. So, fragrances has done very well throughout the year. And actually, it's got stronger through the year, which is interesting. And that's part of the reason we're buying the business because it's a nice balance to the chemical industry portfolio and Consumer Care as well.

Synergies are developing well. I don't think we'll -- you might push it on a number, we're not going to give you a number, but it is moving in the right direction. We're capturing good synergies now. And I think the big thing that's coming through in the synergies is our relationship with some of the either the multinationals we call them are the regional dynamos where we didn't expect to pick up some business. But we're picking up business where particularly where Iberchem assets are strong, North Africa, Latin America, Southeast Asia and where they match the locations of our strategic partners, we start to win some business there.

On the flavors side, I mean, it's going well. The issue is this, they've had a big raw material increase. So, it's recovering that margin through this year. But both of them have got very good sales growth characteristics in the business. So, we expect '23 to be good for both sides of that business.

Jez, do you want to add anything?

[Jez Maiden, Group Finance Director]

So, do you want to talk about specialty excipients?

[Steve Foots, Group Chief Executive]

Yes.

[Jez Maiden, Group Finance Director]

So yes, so I think it's interesting because if we look back, I think it was 2019, we did the Capital Markets event on the specialty excipient platform, which was obviously the sort of homegrown platform within what's now the Pharma business and sort of unveiled just how strong that was. And we've consistently seen growth of 10% to 30% across that that delivery platform. And that continues. We are much more focused now where we talk much more about vaccine adjuvants, which, of course, we acquired in 2018, in December '18.

And then, of course, the lipids platform of nucleic acid delivery acquired in 2020, which, as Steve said in his chart, are less mature and, therefore, more development growth opportunity. But the biggest area of sales is still in those protein specialty excipients. And the growth is still very much there in terms of injectable delivery systems for drugs. So, continuing to expect yes, 10% to 30% growth across that platform. And that's why you struggle to see that big drop in lipids post-COVID-19 because the protein and excipient platform is growing so well and the vaccine adjuvant platform is growing well.

So yes, we're just building each of these platforms on in turn and getting more and more excited as we do that.

[Steve Foots, Group Chief Executive]

Okay. Charles, you've been waiting patiently over here.

[Charles Eden, UBS]

Thank you Just one follow-up for me. It's Charles from UBS. Just in the Life Sciences business, obviously, you've got some headwind from a revenue perspective from the lipids business, but clearly, crop seems to be growing well still. The healthcare [ex-lip] (ph) is going well. Are they growing well enough to offset the lipids business, i.e., will you grow organic sales in Life Sciences in '23 as you see it today? And then, maybe you could just talk a little bit about the margin expectation, because I appreciate that mix is a negative on the margin. But could you help us versus that 33.6% margin in '22, how the margin might look for '23? Thank you.

[Steve Foots, Group Chief Executive]

Jez, do you want to kick it off I'll...

[Jez Maiden, Group Finance Director]

Absolutely. No, really, really a good question there, Charles. The -- so at the sales level, we would expect the growth in Crop Protection, Seed Enhancement and non-COVID lipid Pharma to offset the $50 million decline. Because if you put the numbers in the model, we have about -- we've reported £680 million of Life Science sales, there's about £550 million of the non-COVID part of that. And that market should be growing between mid-high single digit really. So, I think if you put that in, we should be generating enough growth at the sales level to offset the lipid decline.

So, I think overall, as we look at the year, we think Life Science is broadly flat. But as you say at the margin level, you probably won't quite get there in terms of profit because healthcare platforms tend to be a higher margin, a bit higher margin than the crop care platforms. As Steve said, it's still very much a crop that's growing there. So, I think that we'll do well to keep the profit flat year-on-year in Life Sciences, but we certainly should keep their numbers whole in terms of Life Sciences sales. Does that make sense?

[Charles Eden, UBS]

Yes.

[Jez Maiden, Group Finance Director]

[indiscernible] he's smiling gently, something all right?

[Steve Foots, Group Chief Executive]

Martin at the front.

[Martin Evans, HSBC]

Yes, thanks. Martin Evans, HSBC. Just back on Nicola's question really on M&A, I mean the technology space, [indiscernible], has fallen, derated, valuations have come down. And yet, in your particular niche, is it the case that price is still non-negotiable? I mean, Solus was, I think, roughly 10 times sales, whatever, and it's all to do with whether the seller wants to join the Croda Group and not so much on negotiating the price down? Or is -- or do you see valuations potentially this year as the cost of money goes up falling?

[Steve Foots, Group Chief Executive]

It's mixed. I mean, just for everybody's benefit, I mean, when we look at -- when you look at really relatively small EBITDA businesses, which have got brilliant growth and they're into sort of second-generation or third-generation proven growth, but needs to be scaled, then of course, we look at the multiple, like we always would expect us to. And we look at that probably more than most. But the most important valuation to Croda is in our hands with this technology, around the Croda world, what is year three and year five and year seven look like? And then we have to value these businesses on the strength of that.

The other way of looking at this, if we didn't buy this business and we wanted to buy in three years' time, be a much bigger figure, and we probably wouldn't want to buy it. So, we're trying to buy them at their early stages. It might look like they're big multiples, but for this type of business, it's derisked on the strength of the strategic bullseye where it takes so many boxes, there's growth streams everywhere. But I think it will be different. Normally, we would expect quite a lot of our businesses to be mid-teens in terms of multiples and things like that. And valuations are coming down in certain areas, but they're not in others as well. And so, I think it's a mixed picture.

But there will be opportunities in the future to get things at relatively modest multiples, but if there's something that looks really interesting for us at big multiples. And we think for us and for you and for everybody else, we can create enormous shareholder value, then we'll do that. You look at Avanti, it's a bit like the Avanti model. We paid $175 million for that. There's some of that value in our books now. And if we wanted to sell that, which we're not, by the way, is a lot more than that. And that's the type of thing that we can do very well.

So, we're more interested in rapidly-growing brilliant technologies than we are at doing big deals. I wouldn't say for the sake of it, but big deals that are out there. That's not really where we see the direct into trouble, because we see a lot of good opportunities in that technology space. But I think my point in summary to that is the valuation is dependent upon the individual business. It always will be. And we look at all of the right metrics to look at that. But the lens is always three, five and beyond as to how we turbocharge that growth.

[Martin Evans, HSBC]

And can I also echo our best wishes to Jez for a long and happy retirement. I think Jez, we first met in '98. So that's -- what is that, sort of 25 years...

[Jez Maiden, Group Finance Director]

Probably [indiscernible]

[Martin Evans, HSBC]

Yes, exactly. A lot of water passed under the bridge.

[Jez Maiden, Group Finance Director]

Thank you.

[Martin Evans, HSBC]

But no have a great retirement, Jez.

[Jez Maiden, Group Finance Director]

Thank you.

[Steve Foots, Group Chief Executive]

Yes. I think on that, that's a great way to finish. So, thanks again, Jez, for everything you've done. Thanks. Good questions.

We'll stop the webcast now. Happy with that, David. And then, if people want to stay around, hang around, we're upstairs for a sandwich.