Croda International Plc

Results for the six months ended 30 June 2016

Croda International Plc ("Croda" or "the Group"), the speciality chemical company that creates high performance ingredients and technologies relied upon by industries and consumers globally, today announces its half year results for the six months ended 30 June 2016.

Strategy delivering - improved profit driven by strong innovation

pp: percentage points

First half year highlights

Our strategy is continuing to deliver:

·     More protected innovation: New & Protected Products (NPP) sales increased to 27.5% of constant currency sales† (2015: 26.1%)

·     Key technology platforms growing: constant currency sales up 2.1% including Incotec acquisition

·     Improved operating margin: up 0.8 percentage points to 25.7% (2015: 24.9%) at constant currency, reflecting increased innovation and technology-driven growth

·     Strong bottom line performance: adjusted profit before tax up 6.3% in constant currency - adjusted earnings per share (EPS) up 10.0% in reported currency

·     Robust cash flow from operating activities: funding over £56m of capital investment for future growth

·     Continued dividend growth: interim dividend increased by 5.6%, following payment of 100p special dividend in June 2016

Steve Foots, Croda's Chief Executive, commented:

"Despite subdued demand in the first half of 2016, we have delivered a strong bottom line performance, improving our operating margin through a richer product mix, whilst also increasing profit and the dividend. Our strategy is driving more protected innovation, closer customer intimacy and a greater focus on key technologies for future growth.

"Although we remain cautious given the continued economic uncertainty, we expect to deliver further top and bottom line progress in the second half of 2016. The Group is on track to deliver our expectations for the full year, in constant currency terms, while Sterling weakness will benefit our reported results."

Sector financial summary

* 2015 sector sales of £4.5m and adjusted operating profit of £0.6m have been restated for a reclassification of toll product from Life Sciences to Industrial Chemicals

^† excluding Incotec, where the NPP component has yet to be assessed

Further information

Jez Maiden, Group Finance Director                                     Tel: 01405 860551

Conleth Campbell, VP Investor Relations

Charlie Armitstead, Teneo Strategy                                       Tel: 020 3603 5220

A presentation for investors and analysts will be held at 0900 BST on 26 July 2016 at the Andaz Hotel, Liverpool Street, London EC2M 7QN. The presentation will be audiocast at www.croda.com

Definitions:

Constant currency results are translated to Sterling at the prior year average foreign exchange rates

Sales in Latin America are primarily based on US dollars, which is used as the functional currency for constant currency sales translation

The Core Business comprises Personal Care, Life Sciences and Performance Technologies. The Industrial Chemicals sector sells co-streams, undertakes toll processing and develops novel industrial applications

Operating margin is adjusted operating profit divided by sales. Adjusted operating profit is before exceptional items, acquisition costs and amortisation of intangible assets arising on acquisition

GROUP PERFORMANCE REVIEW

Strategy delivering - improved profit driven by strong innovation

Despite subdued demand in the first half of 2016, we have delivered a strong bottom line performance, improving our operating margin through a richer product mix, whilst also increasing profit and the dividend. Our strategy is driving more protected innovation, closer customer intimacy, a greater focus on key technologies for future growth and leveraging our industry-leading position in sustainability.

In the first half of 2016, sales growth of 2.1% in constant currency was driven by organic growth from our key technology platforms - including skin actives, sun care ingredients, high purity health care excipients and crop delivery systems. This was supplemented by last year's technology-driven acquisition of Incotec, our seed treatment business. Together, these more than offset softer market demand due to weaker economic conditions in the Americas.

This technology focus, supported by continued product innovation, led to a further increase in the Group's operating margin, up 0.8 percentage points to 25.7% (2015: 24.9%) in constant currency. New and Protected Products (NPP) sales increased to 27.5% of total sales, adding new intellectual property (IP) to our product portfolio and supporting pricing power through the novel benefits we deliver to our customers.

We have continued to reduce sales of low value-add products, with the improved quality of our product mix helping to deliver profit growth of 6.3% in constant currency, outstripping the growth in sales value and generating a double digit percentage increase in adjusted EPS. This was supported by a strong cash flow from operating activities, funding over £56m of capital investment for future organic growth and an increase in the interim dividend.

We also continue to build on our industry-leading position in sustainability, where we are differentiated from our petro-chemical based peers. Two thirds of our raw materials already come from natural sources and this should exceed 70% once our new non-ionic biosurfactant plant is completed in North America in the second half of 2017. Sustainable sourcing will continue to increase as a priority for our customers and their consumers, and Croda is exceptionally well placed to meet this need.

Reported sales up 7.8%

Group sales increased by 7.8% to £608.7m (2015: £564.6m). This included a £32.2m benefit from currency translation as Sterling weakened in the first half of the year. Sales in constant currency increased by 2.1%, with Incotec adding 4.1% to Group sales in its first complete half year since acquisition.

Underlying sales (which exclude the impacts of currency translation and acquisition) declined by 2.0%, largely reflecting our strategy of reducing sales of low value-add co-products and tolling business in Industrial Chemicals. By contrast, underlying sales in the core business (Personal Care, Life Sciences and Performance Technologies) were close to flat. Sales in several key technologies saw strong growth, which offset weaker sales in less differentiated areas amid more subdued macroeconomic conditions.

Top line sales growth in Asia and Europe

We continued to grow the core business strongly in Asia, up 7% in underlying terms, driven by increased proximity to local and regional customers, together with transfers from sales through distributors to our direct selling model. Sales in China and India performed particularly well. Positive consumer confidence in Europe helped underlying sales in the core business increase by 3%.

These strong regional performances were offset by lower underlying sales in the core business in the Americas, with North America down 6% and Latin America 11% lower. North America saw export customers adversely impacted by the strong dollar and some US customers have relocated manufacturing overseas. Sales in Latin America, which are predominantly denominated in US dollars, remained weak due to challenging macroeconomic conditions, although sales value rose in local currency.

Robust profit growth with adjusted EPS up 10.0%

Adjusted profit before tax increased by 9.4% in the first half of the year, up £12.8m to £148.5m (2015: £135.7m) and was 6.3% higher in constant currency. This impressive performance reflects our continued focus on growing the bottom line faster than the top line. Adjusted EPS grew by 10.0% to 79.0p (2015: 71.8p).

Innovation and improved product mix driving strong profit improvement

The improvement in profit reflected an increase in operating margin of 0.8 percentage points to 25.7%, at constant currency. This was achieved despite the dilutive effect of the lower margin Incotec acquisition. This progress was driven by our relentless focus on innovation, with record sales of NPP which grew well ahead of overall sales and now represent 27.5% of Group sales (2015: 26.1%), excluding Incotec. Innovation, coupled with growth in key technology platforms and an improved mix from actively reducing sales of low value add products, helped drive the margin increase. There was also a currency transaction benefit from the impact of weaker Sterling on UK exported production. As a result, adjusted operating profit increased to £152.6m (2015: £140.8m) and was 5.3% higher in constant currency.

Cash generation funding organic growth investment

We continue to generate good cash flow. This supported capital investment of approximately three times depreciation, including our North America non-ionic biosurfactant plant, to underpin future organic growth. Net debt at the end of the first half year was £419.4m (31 December 2015: £259.3m) and reflected payment of the 100p special dividend in June 2016. Leverage of 1.3 times EBITDA is in line with our capital allocation policy.

The EU referendum and outlook

With over 95% of sales and 80% of production outside of the UK, Croda is a truly international group. The terms of a future exit from the EU by the UK are unclear. We will continue to monitor this area.

Although we remain cautious given the continued economic uncertainty, we expect to deliver further top and bottom line progress in the second half of 2016. The Group is on track to deliver our expectations for the full year, in constant currency terms, while Sterling weakness will benefit our reported results.

SECTOR PERFORMANCE REVIEW

The Group continued to generate profit growth in its core business in the first half of 2016.

Skin actives driving margin growth in Personal Care

Sales in Personal Care increased by 5.2% to £207.4m (2015: £197.1m). On a constant currency basis, sales were 0.5% lower than prior year, although the second quarter saw modest positive growth. Adjusted operating profit rose by 13.5% to £73.1m (2015: £64.4m) and was 8.9% higher at constant currency, a record first half profit. At constant currency, operating margin increased to 35.7% (2015: 32.7%). Our strategy is focused on targeting profitable top line growth, by leveraging increased innovation and IP; getting closer to customers, particularly in fast growth regions; and fulfilling current trends in sustainability and digitalisation.

Sales grew strongly in Actives and sun care ingredients. We are expanding innovation and production capacity at our Sederma business and saw good demand for recently launched actives, including Majestem, recognised in April by In-Cosmetics for its contribution to sustainability. This was supported by growth in our 'IRB by Sederma' plant cell skin active ingredients and from plant extracts at Crodarom. We are also investing in new capacity in Europe for our innovative sun care ingredients, responding to demand for broader spectrum UVA/UVB protection, meeting enhanced regulatory standards. Overall, NPP sales reached a record level as we focus on winning with customers through bigger and better innovation.

Expansion in Asia continued at pace, with a double digit percentage rise in constant currency sales. Progress in converting customers from distributor to direct sales supported rising demand, particularly in North Asia, alongside expansion with local and regional customers and from being close to key trends. These include the growing leadership of Korean cosmetics, the emergence of new internet-savvy 'digital' customers and expanding our presence in local emerging markets.  

Sales in Europe were also good, up high single digit percentage in constant currency, supported by positive consumer sentiment. Sales were weaker in Speciality products, particularly in North America, due to lower export-driven sales, and in Latin America, due to weakness in US dollar-based demand, although sales grew in local currency.

As part of our Technology Innovation Group (TIG), we continue to identify exciting early stage technologies to acquire for future commercialisation. In the first half of the year, we acquired Inventiva, an encapsulation technology business with growth opportunities in skin actives and across the broader Personal Care market.

Growth in Life Sciences boosted by Crop Care and Incotec acquisition

Sales in Life Sciences increased by 25.6% to £143.6m (2015: £114.3m). On a constant currency basis, sales were 19.1% higher than prior year, reflecting the benefit of the first half year of trading from the newly acquired Incotec seed treatment business, which added £23.0m in sales. Adjusted operating profit rose by 1.3% to £40.4m (2015: £39.9m) and was unchanged in constant currency. Our strategy is to grow our high value-add technologies in health care excipients and crop care adjuvants, through innovation and customer collaboration, and to grow in seed treatment by leveraging Incotec's technology and market opportunities.

Underlying sales, which exclude currency translation and the Incotec acquisition, fell by 1.0%. As anticipated, this reflected lower sales of our Omega-3 active pharmaceutical ingredient (API) in North America, following supply chain stocking in the comparator period for the customer's product launch. We expect sales to remain below prior year in the second half of 2016, reflecting increased generic competition. Sales of new APIs using this technology platform are growing steadily, including two new registrations in the first half, but will not be sufficient to offset this decline fully in 2016.

Excluding APIs, underlying sales grew steadily. Growth in high purity excipients continued, notably in Europe, and in India where we are increasing our market presence. Sales of our Crop Care delivery systems outperformed the market, particularly in the first quarter, reflecting successful collaboration projects with multinational and regional customers, and providing a positive outlook for this market.

At constant currency, operating margin reduced to 29.3% (2015: 34.9%). This reflected the dilution impact of integrating the lower margin Incotec acquisition. During 2016 we are combining the technology and operational capability of Incotec with Croda. Implementation of the integration programme is now underway, including rationalisation in smaller markets which do not offer the potential to grow profitably, focusing innovation on maximising commercial opportunities and simplifying the organisational structure. The cost of implementing this programme is being taken as an exceptional charge, including £2.0m charged in the first half of the year. We are excited by the opportunities in seed treatment to refine the business and increase the operating margin, while identifying opportunities to grow.

Improving product mix in Performance Technologies

Sales in Performance Technologies increased by 5.3% to £195.5m (2015: £185.7m). On a constant currency basis, sales were 0.3% lower than prior year. Adjusted operating profit rose by 13.3% to £35.8m (2015: £31.6m) and was 11.4% higher at constant currency. At constant currency, operating margin increased to 19.0% (2015: 17.0%). Our strategy is to improve the operating margin to 20% by increasing innovation, expanding outside of the traditional European heartland of the business and enhancing the product mix by exiting low value-add products.

The first half of 2016 saw good progress in implementing this strategy despite some soft industrial markets. We exited low margin products in Coatings & Polymers, driving better profitability through greater differentiation, in line with our focus on value rather than volume. Sales from NPP increased, with excellent progress in market development of our novel patented slip additive in the Polymer Additives business, and encouraging technical developments in antimicrobial surface innovation. We continue to increase sales into Asia, which is at an early stage of penetration, with the Sipo joint venture in China delivering profitable growth. Lower sales levels in the challenged oil and gas markets have now stabilised and we are developing technology-based niche markets, such as flow assurance.

Refining our presence in Industrial Chemicals

Sales in Industrial Chemicals reduced by 7.9% to £62.2m (2015: £67.5m). On a constant currency basis, sales were 12.4% lower than prior year. Adjusted operating profit declined to £3.3m (2015: £4.9m) and was 38.8% lower at constant currency. At constant currency, operating margin decreased to 5.1% (2015: 7.3%). This performance was in line with our strategy to reduce the volume of low value-add products and tolling, while creating new novel industrial applications for the co-products that we produce from our core business manufacturing processes. During the period, our investment in biofermentation of crude glycerine started up in the Netherlands. This project converts a low value commodity co-product stream into energy, reducing external sales but increasing Group profit through lower plant power costs.

Interim dividend increased by 5.6%

Following the strong financial performance in the first half of the year, the Board has increased the interim dividend by 5.6% to 32.75p (2015: 31.0p). The dividend will be paid on 4 October 2016 to shareholders on the register on 9 September 2016.

SUPPORTING FINANCIAL DATA

Currency

Currency translation had a beneficial impact on both sales and profit, due to the weakness of Sterling against the US Dollar ($) and Euro (€). In the first half of 2016, Sterling averaged $1.433 (2015: $1.524) and €1.283 (2015: €1.365). Currency translation increased sales compared to 2015 by £32.2m (5.7%) and adjusted profit before tax by £4.3m (3.0%).

Sales

Sales increased by 7.8% to £608.7m (2015: £564.6m). At constant currency, sales rose by 2.1%, reflecting the Incotec acquisition towards the end of 2015 which contributed £23.0m in the period. Underlying sales reduced by £11.1m, primarily due to reductions in co-stream and tolling products in Industrial Chemicals.

Underlying sales in the core business were broadly flat across the half year. Sales in Personal Care and Performance Technologies improved slightly as the year unfolded, offset by slower sales in Life Sciences, primarily due to inventory stocking in 2015 for a major API launch.

In the core business average sales volume reduced by 1.1%, with average price/mix up 0.6%.

Adjusted profit

Adjusted operating profit rose by 8.4% to £152.6m (2015: £140.8m). On a constant currency basis, adjusted operating profit increased by 5.3%.

In constant currency, adjusted operating profit from the core business grew strongly. Profit in Industrial Chemicals was lower, reflecting a reduction in tolling and co-product sales.

The net interest charge decreased to £4.1m (2015: £5.1m), reflecting a lower pension financing cost and capitalised interest on construction of the non-ionic biosurfactant plant. Adjusted profit before tax increased by £12.8 million to £148.5m (2015: £135.7m).

The effective tax rate on this profit was unchanged at 28.2% (2015: 28.2%). The tax rate is driven by the geographic mix of profit and the exposure to higher tax rates outside the UK, where the statutory rate was 20%. There are no other significant adjustments between the Group's expected and reported tax charge based on its accounting profit.

The adjusted profit after tax for the half year was £106.6m (2015: £97.4m). Adjusted basic earnings per share (EPS) increased by 10.0% to 79.0p (2015: 71.8p).

IFRS profit

Adjusted profit is stated before exceptional items, acquisition costs and amortisation of intangible assets arising on acquisition. The Board believes that the adjusted presentation (and the columnar format adopted for the Group condensed income statement) assists shareholders in better understanding the underlying performance of the business and is adopted on a consistent basis at each half year and full year results.

The total charge for exceptional items, acquisition costs and amortisation of intangible assets arising on acquisition was £3.4m (2015: £0.1m). This comprised an amortisation charge of £1.4m (2015: £0.1m) and an exceptional charge of £2.0m (2015: nil). The latter relates to reorganisation of the acquired Incotec business, with a larger exceptional charge expected in the second half of 2016. There were no acquisition costs in the period (2015: nil).

The profit after tax for the period on an IFRS basis was £103.9m (2015: £97.3m) and basic EPS were 77.0p (2015: 71.7p).

Cash management

A strong cash flow is core to Croda's strategy. In the first half of the year, the Group increased EBITDA to £174.1m (2015: £159.7m), which funded an increase in working capital of £33.6m, reflecting increased inventory cover from seasonal raw material purchasing and accelerated purchases ahead of planned maintenance, and net capital expenditure of £56.8m. Free cash flow was broadly unchanged at £49.9m (2015: £46.7m). In addition to the regular final dividend, a special dividend of £135.7m was paid in June 2016.

Net debt at 30 June 2016 increased to £419.4m (31 December 2015: £259.3m), including £22.4m due to currency translation, primarily on weaker Sterling. Our financial position remains robust, with leverage (the ratio of net debt to EBITDA) of 1.3 times, substantially below the maximum covenant level under the Group's bank facilities of 3 times.

During the first half of the year, following its acquisition of Incotec and the declaration of the special dividend, the Group increased its committed debt facilities. The existing committed bank facilities were increased by approximately £126m to £552m, with the majority extended to 2021. In addition, the Group placed the equivalent of $256m (approximately £183m) in the US private placement market, maturing in 2023 and 2026, at an average fixed interest coupon of 2.1%. This provides ample liquidity to meet the Group's immediate plans and potential opportunities, at a relatively low interest cost. At 30 June 2016 the Group had £427.5m (31 December 2015: £239.9m) of cash and undrawn committed credit facilities available.

Dividend and capital allocation

Croda seeks to deliver high quality earnings, measured through a high return on invested capital (ROIC), well in excess of its cost of capital, future earnings growth and strong cash returns. The Group's capital allocation policy is to:

1)   Reinvest for growth - through organic investment in capital projects to grow in our core business, product innovation and growth in emerging markets, to deliver a superior ROIC. During the first half of the year, we invested at nearly 3 times depreciation, funding asset replacement, future growth investment and construction of our non-ionic biosurfactant plant in North America. The latter investment is planned to complete in the second half of 2017 and will secure a key supply chain, while creating exciting 'white space' opportunities in new sustainable alkoxylates;

2)   Provide regular returns to shareholders - we pay a regular dividend to shareholders, representing 40 to 50% of adjusted earnings over the business cycle. The Board has declared an interim dividend of 32.75p, an increase of 5.6% (2015: 31.0p);

3)   Acquire promising technologies - we supplement organic growth by acquiring companies with promising technologies and in markets adjacent to, and consistent with, our current capabilities. Following the acquisition of Incotec in seed treatment in December 2015, we added Inventiva, an encapsulation technology business, in June 2016; and

4)   Maintain a strong balance sheet and return excess capital - we target a balance sheet leverage of 1 to 1.5 times (excluding benefits on retirement benefit schemes), although we are prepared to move outside this range if circumstances warrant. Following the payment of the special dividend of 100p per share in the first half of 2016, leverage (net debt:EBITDA on a bank covenant test basis) is 1.3 times (31 December 2015: 0.8x), in line with this policy. The Board will consider further returns to shareholders in the event that leverage falls below the target range.

Retirement benefits

The post-tax deficit on retirement benefit plans at 30 June 2016, measured on an accounting valuation basis under IAS19R, increased to £110.9m (31 December 2015: £55.9m), primarily reflecting an increase in liabilities due to lower discount rates. However, cash funding of the various plans within the Group is driven by the schemes' ongoing actuarial valuation reviews. The triennial valuation to 30 September 2014 for the Group's largest pension scheme, the UK Croda Pension Scheme, showed that the actuarial valuation deficit had been eliminated, taking into account the final scheduled deficit payment of £22m paid in January 2015. As a result, no further deficit funding payments to this scheme are required before the next valuation.

Other matters

The principal risks and uncertainties facing the Group are set out in note 9. Related party transactions during the period are set out in note 10.

Statement of Directors' Responsibilities

Independent Review Report to Croda International Plc

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Croda International Plc's condensed consolidated interim financial statements (the "interim financial statements") in the half-yearly financial report of Croda International Plc for the 6 month period ended 30 June 2016. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

·     the Group condensed interim balance sheet as at 30 June 2016;

·     the Group condensed interim income statement and Group condensed interim statement of comprehensive income and expense for the period then ended;

·     the Group condensed interim statement of cash flows for the period then ended;

·     the Group condensed interim statement of changes in equity for the period then ended; and

·     the explanatory notes to the interim financial statements.

The interim financial statements included in the half-yearly financial report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the condensed consolidated interim financial statements and the review

Our responsibilities and those of the Directors

The half-yearly financial report, including the interim financial statements, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose.  We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of the interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

26 July 2016

Leeds