Hello, welcome to the Croda Trading Update. My name is Caroline, and I'll be your coordinator for today's event. Please note, this call is being recorded, and for the duration of the call, your lines will be on listen-only mode. However, you'll have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand over the call to your host, Mr. Steve Foots, the CEO, to begin today's conference. Thank you.
Morning, everyone. Many thanks for joining this call. A few thoughts from me and then Louisa and back to me, and then we'll take questions. Hopefully, you've had all the chance to read the trading update we issued, first thing that covers the period of 1st of July, 2023 to date, our third quarter. Whilst July and August are normally slow months for Croda, our performance in quarter three was weaker than anticipated, as customers have continued to reduce their ingredient inventories in Consumer Care, Crop, and in industrial markets, depressing our sales volumes, so quite indiscriminate across all markets. The macro environment is tougher than I've seen in my 30 years in the industry, and as we continue to see the ripple effects from COVID and the unprecedented stocking and destocking that followed, it's difficult to be precise.
But we believe the indiscriminate volume reset that we are seeing has been due to a combination of both destocking, which is the main driver in our Crop markets right now, and a weaker demand environment, which is having an impact in some consumer markets and most obviously in industrial markets. Visibility remains low at about two weeks, and with no indications of a significant rebound to come in the fourth quarter, we now expect full year 2023 Group Adjusted PBT to be between GBP 300 million and GBP 320 million. There are really three things that have changed for us since our half one results in July. In order, firstly, in Consumer Care, sales volumes in Beauty Care were lower than expected in July and August, with North America not recovering from quarter two.
Beauty Care sales volumes have improved in September, and we expect the recovery to continue through the remainder of the year, albeit now from a lower base. Half two profit margins in Consumer Care are expected to be lower than half one, due to the negative leverage impact of lower volumes and adverse business mix. Secondly, in Life Sciences, sales have weakened further in Crop Protection, with improvement now expected to commence in the first half of next year. And thirdly, weak industrial demand globally is continuing to adversely impact Industrial Specialties, both ingredients that we sell direct and via the Cargill supply agreement in particular. So we're not expecting IS to be profitable in the second half of the year. I'll make a couple of further comments about sector trading before handing over to Louisa to run through the self-help measures we've taken to protect profitability.
In Consumer Care, the strong price mix is continuing to offset lower volumes in Beauty Actives. FNF sales remain strong, the business is having an excellent year, and Home Care sales are recovering well, led by our sales of technologies that are differentiated by sustainability. Sales of our ECO surfactants, for example, are up by around 25% so far this year. In Life Sciences, Seed Enhancement continues to perform well, with the business firmly on the right side of regulation, such as EU's recent adoption of measures that will ban the use of microplastics in agriculture in the next five years. A really great opportunity for our microplastic-free innovation in seed treatment. In Pharma, we expect to deliver Lipid Systems to our principal COVID-19 vaccine customers as planned, and non-COVID sales to remain resilient as customers' innovation pipelines continue to develop.
Our pharma business continues to make great progress with its industry-leading position in biologics delivery. We're particularly excited to see the continued expansion of our pharma clinical pipelines for nucleic acid-based drugs, including encouraging results from trials of mRNA vaccines for infectious diseases such as flu. Our recent partnerships and new product launches are helping to further strengthen our pipeline of opportunities, so pharma pipeline going from strength to strength. Now, over to Louisa to cover cost measures and our focus on cash.
Good morning, everyone, and thanks. Thanks, Steve. Just on the cost point, we've implemented some measures since the second half of this year to protect our short-term profitability. As we've seen volumes reset downwards, we've been optimizing our production to match that lower demand, largely through reduced shift patterns and plant shutdowns, and more recently, make to order contracts with customers, I beg your pardon. That's helped us to reduce costs, including energy and freight. Outside of production, our main focus has been budgeted cost avoidance through tight control of headcount and other measures such as travel bans, although some job losses have regrettably been necessary in the U.S. Variable pay is another saving, and these cost measures are incorporated into our guidance for the full year 2023.
But in addition to that, there are opportunities to drive efficiency savings by simplifying our business processes and ways of working, and by consolidating our site footprint, principally those sites that serve industrial customers such as Cikarang in Indonesia, which we have closed. We're working through those plans now, and the changes will result in some annual cost savings from 2024 onwards, and we'll talk to you more about that at our full year results. On cash, we're actively managing the cash position. We're particularly focused on managing down inventory levels with some good progress since we last spoke to you, and we're continuing to strike a balance between investing in future growth opportunities and maintaining our capital discipline. We do have quite a large number of in-flight capital projects, including the pharma expansion for LNP and facilities in India, China and Fragrances.
But we're challenging the pace of these where we can, as well as all non-committed and non-safety critical CapEx projects. Back to Steve for some final remarks, and then we're going to open up to questions.
Yeah, thanks, thanks, Louisa. So as you can see, we're focused on protecting profitability by controlling what we can control, but at the same time, is driving incremental sales growth by increasing customer sales activity. Our relationship with customers and their demand for innovation are going from strength to strength, and this is what will drive the rebound on our performance when the supply chains from our core markets have been fully rebased and the macro environment improves. So let's stop there, and, Louisa and I are very happy to take your questions from now.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. Please limit your question by one for each, to allow everyone an opportunity to ask questions. We will take the first question from line, Chetan Udeshi from JP Morgan. The line is open now. Please go ahead.
Yeah, Hi. Thanks. Morning, I joined a few minutes late because I was in the queue to get the operator. So apologies if these were already addressed earlier in the call. But I was just doing the math of implied second half EBIT, and I think you are essentially saying the contractual COVID business is expected to come as expected. So let's say, I think from memory, it was GBP 20 million of earnings in Q4. So the implied second half PBT is about GBP 115 million, and you guys did, you know, GBP 175 million. So let's say it's a decline of GBP 60 million, give or take. Can you help us understand what, like, what is the magnitude of that decline to GBP 60 million in second half versus first half, between the two divisions and different buckets?
The second question was just looking into now next year, what are the key moving parts besides the macro improvement, that we should be, sort of thinking about? And sorry, last small question: You said the pharma business at lipid was resilient. Can you maybe explain a bit or, you know, expand a bit on that resilient topic? I mean, are we talking about smaller declines than the rest of the group, or is that business still growing year on year? Thank you.
All right. Thanks, Chetan. Louisa, do you wanna kick off on EBIT? And I'll come back on 2024 and pharma.
Yeah, absolutely. Hi, hi, Chetan. We previously guided to GBP 370 million-GBP 400 million PBT. We're now saying GBP 300 million-GBP 320 million. If you take the midpoint of GBP 310 million from the bottom of the previous range of GBP 370 million, we've got, as you said, about a GBP 60 million drop. Broadly, half of that is Consumer Care. To Steve's point, we had a weak July and August with the Consumer Care run rate going backwards from our exit rate in H2, which we think was influenced by the summer. We are seeing a pickup in September, as Steve said, and the Q4 projection is based on a small pickup, but from a lower, a lower base, a lower gradient, as it were. A quarter of the GBP 60 million drop is from Crop.
And again, reiterating what Steve said, this is because that Q4 tick-up that we'd assumed in our GBP 370 million guidance is not happening. Then the last quarter is a combination broadly skewed towards Industrial Specialties, obviously, destocking in that sector, and then some adverse FX headwinds to make up the final bulk bit of that quarter. So half quarter, quarter is how I would split that GBP 60 million. I'll pass it over to Steve for 2024.
Yeah, well, let me kick off with 2024 and, I'll let you play you in as well. So we're not providing formal guidance for 2024 yet, as you'd probably expect with the volatility, but particularly as visibility remains limited to a couple of weeks. I think GBP 420 million looks optimistic at this point from what we can see. But increasingly positive sentiment coming in Consumer Care customers, you know, we should be fully through the destocking by the end of the year, turn of the year, with Estée Lauder, particularly at the extreme, hopefully ready to place orders again in a normal way, at the turn of the year. So yeah, we're getting through that.
By the end of the year, Crop will have seen three successive, pretty negative quarters of destocking. So we should see improvement in the first half of next year there as well. And then the pharma business is making great progress. You know, we're not expecting the $60 million of COVID Lipid sales that we're delivering in quarter four to repeat in 2024, but that will replace by some good revenue growth from the pipeline that's already coming through. So I think that's the sort of 2024. I mean, on the... On, and we'll update in February as well. I think one of the big things is the, as volumes come back, what we see is this margin will come back pretty quickly, but we can't call when that's gonna happen.
The product margins, as I call them, are still at very robust levels. So you know, when we get good quality revenue growth across the board, we should see some margin improvement coming through at the same time, is my point there. But again, we'll update you more in February on that. In pharma, it's just less negative. It's resilient, though, so it's doing well. I think the area that's had some exposure there, like in consumers, being the consumer health area, as you'd sort of expect, you know, the dermatological creams, medicated shampoos, and the like.
If you look at the underlying business performance, and if you accept the COVID normalization to one side, which is the lipids and some reduction in vaccine adjuvants from the COVID, the underlying business is progressing very well, and we're really, we're really excited with that. We're pleased with that. I think in terms of—just to go on in terms of the pipeline, you know, in pharma particularly, Virodex, we launched just recently, as you heard from us in the middle of the year. That's going to generate some mid-single digit millions of pound of revenue. Squalene will do well next year, as will FAD as well.
So all of those three are recent launches and will generate, you know, a
round GBP 10 million worth of revenue just on those three products alone. And then, of course, we've got the flu vaccines, which are coming more broadly. And, you know, the clinical researchers you've probably seen with Moderna, Sanofi, Pfizer, and everybody else, is developing at pace, and, we're watching with interest, well, more than interest. And, and obviously, we've got a number of lipids in some of those formulations as well. So, so, you know, the pharma pipeline looks really encouraging. One or two more new launches that you haven't heard from us, particularly into this whole bioprocessing area, that we're focused on as well. You'll hear more about that probably in February.
In pharma, in a good way. I think the other areas, just on the innovation side, just to support, you know, when this demand comes back in seed, I talked about that in my opening remarks. This microplastic-free regulation change is significant. You know, we saw it coming a couple of years ago. It's been formalized in Europe just last week. What that means is an extra revenue stream from 2024 for seed treatment, for microplastic free and into 2025. That's great, and we're world leaders in that microplastic free. Yeah, we'd expect that. Just to complete it, for Consumer Care, you know, ECO surfactants growing very well, as you'd expect.
You know, we took that big decision a few years ago. And then, you know, patented biotech surfactant launch is coming later this year in sophorolipids , and we've got a patented biodegradable platform, hair conditioning platform, coming out later this year, too. So all of those add to growth. So, you know, at the innovation level, we're really pleased. You know, it's... The customer activity is great. Our and the innovation pipelines are healthy. We just need the world to rebase in its supply chain and demand to get back to some sort of a some sort of level, you know, probably a moderated level from where it was in 2019, but a level that that is still relatively high. And that's our model.
We're quite naturally cautious for next year, where we are today. So hopefully, in a long way, Chet, and that answers that.
No, that's thanks. That answers most questions. Thank you.
Thank you. We will take the next question from line, Gunther Zechmann from Bernstein. The line is open now. Please go ahead.
Hi, good morning. Couple of questions, please. The ag recovery that you now guided to be pushed out to H1 2024, Steve, you mentioned that's just two weeks order book visibility. So, what is the basis, other than what you said in the previous questions, that it will have had that business three quarters of destocking by year-end? And then, Louisa, if I can ask you on capital discipline, as the paragraph in the press release, should we expect some CapEx cuts on that, and in what area? What is the new CapEx guidance, please? And lastly, maybe for Louisa as well, how much should we expect from the cost measures that you've initiated? Thank you.
Yeah, thanks, Gunther. Yeah, just on the ag then, and I'll pass to Louisa. I mean, look, on the ag side, it's our best guesstimates, based on that. You know, when we talked to you in June and then July, it was the same. You know, the mechanisms we use are, there's a concentration of customers, and we know them very well. You know, we have strategic partnerships with most of them. So our intelligence is as accurate as it can be, listening to our customers. But of course, there's a, as you probably get with everybody else at the moment, the customer's forecasting is about as inaccurate as ours. You know, so they know what they know, but they don't know for sure.
So, you know, we have to rely a lot on, on what they tell us. But I think their message is: Look, it's still actually quite buoyant out there on a relative basis, with Crop prices still high. So, you know, the trading environment isn't bad, but their general sense is, just given when they look at their stock levels relative to—There's about four or five key products that nobody else can supply in the world, apart from Croda. You know, we're registered in thousands of formulations in Crop with us, going back to the ICI days, actually, with Uniqema and, and Syngenta, way back. So we can model that quite well with the demand on that, and that's what we tend to look at. So it's based on, it's based on more customer conversations.
It could change, but, you know, we'd rather, you know, we, we'd rather be cautious on that than not, because we simply don't see the data points that would encourage us to say that we're gonna have a better quarter for than we think. And, and the, the order intake wouldn't suggest at the moment that we're gonna see, you know, we're gonna see like a hockey stick or some sort of, you know, ramp up. So, that's, that's why we've, we've called it the way we have. Louisa, over to you.
Yeah, sure. I'll start with capital and then move through cash and cost. We previously guided, Gunther, to GBP 170 million-GBP 180 million on CapEx. I'm expecting that to moderate towards the lower end of that guidance range. The difficulty we've got, as I said in my statement, is that we are, we've got some of these large in-flight committed projects that are difficult to slow down. And actually, in the short term, we've got for the rest of the year. So we're doing what we can on that, as I said, trying to challenge the pace. But sometimes it's not helpful to moderate those because they tend to get more expensive.
But I'm expecting it to be at the lower end of that previous CapEx guidance range. But positively though, on cash more broadly, the working capital discipline in the business continues to be strengthening. The regions have done really well in getting their stocks down. Obviously, with slower sales, the debtors are down, and at the end of the quarter, we're in a really good inflow working capital position. I'm keeping the guidance for the full year that we will have an outflow just because... I'm sorry, an outflow on working capital, just because of the timing of the lipid debtors. But the working capital discipline is good, and I think that's gonna help our cash position.
On cost measures, look, we don't have a very significant cost base. If you look at our cost base, we're not known to be—well, we're kind of known to be Yorkshire mean. And given the cyclical nature of this volume drop, we're trying to balance that short-term profitability, but not damaging our growth for the future. 'Cause we are innovative, and our model is predicated on, you know, that local proximity to customers. And, you know, while I don't want this to sound defensive, a lot of our sites are shared, so it's quite difficult to push through total shutdowns of plants, which is where often you get some of the big savings from. But we are doing what we can. We're controlling what we can across multiple themes.
We have done quite a lot of cost avoidance around new headcount and travel. Where incremental costs have occurred, like salary inflation in the year, we're going to counter that with clearly no variable pay, which will keep us whole. I've already mentioned some redundancies in the U.S., which will give us some small annualized cost savings from 2024. The big piece that we're working on at the moment is whether we can look more at our ways of working, some of the fragmented ways that we work across the globe, and thinking about that for 2024 and beyond. That's the theme of how we're looking at our cost, Gunther.
But, it's this balance of trying not to pull too much cost down, when really the issue is not cost, it's needing to, as Steve said, get that revenue back, customer demand. So I'll leave it there.
Thank you, bud.
Thank you. We will take the next question from line, Nicola Tang from BNP Paribas. The line is open now. Please go ahead.
Thanks. Hi, everyone. Thanks for taking the questions. First, actually, they're both on the Consumer Care side. Steve, sorry, I missed the very beginning comment you made. I think you talked about kind of pricing versus volume dynamic. I'm sorry that I missed it. I was wondering if you could repeat and just perhaps talk a bit about how pricing has been developing and whether you feel like maybe there are areas where you've maybe pushed pricing too hard and it's tested elasticity, or whether the volume declines we're seeing are still related to, you know, weaker end demand and the destocking side. And then maybe could you give a bit more of a steer in terms of the margin decline in Consumer Care in the second half versus the first half?
Perhaps with respect to some of the drivers around, I understand, you know, less operating leverage, but perhaps some of the initial cost savings or, you know, stuff like that coming through, combined with, you know, mix, and also maybe you could comment on how inputs have trended as well. Thanks. I'm sorry, that's in roles. Yeah.
Thanks, Nicola. Yeah, well, let me do the first question. I'll pass to Louisa on margins. Yeah, I'm just looking at the—if you look at the Consumer Care mix analysis, so quarter three versus quarter two in 2023, and it's a trend. Overall, actually, volumes, volumes are up 2%, but the price effect is down 5%, which, which equates to hardly any, you know, 0% mix effect. So that means overall it's sort of a -2% in the, in the, in the price mix. So, so actually we're, we're, yeah, it's pretty robust. It's slightly different across the different businesses, but we're not, we're not seeing a big volume decline, really.
You know, you're seeing actually you're 2% up, and that's being driven by home care and fragrance and flavors up well, and beauty actives and beauty care down modestly, more than anything else. I think if you, you know, you saw that graph that we put up in July, in one of the earlier slides, when we're looking at the recovery of volumes in Consumer Care, it's just- you could just extrapolate that line... along its bottom from June, July, and there's some potential uptick now. September, September's a little bit better, and order intake for October looks a little bit better. It is what it is. I think I would make an overarching comment that we're not, we're not worried that volumes are declining significantly further.
We're just not seeing that uptick that we would expect to continue. But as I said, June and July and August looks like for us and the industry, it looked like, you know, everybody shut up shop early and closed the door effectively, and you found in all markets, from Industrial to Crop to Consumer, that it was lower than we expected. So we're all playing catch up, and we're playing catch up as well now. So that's that. I think, just... Well, let me pass to Louisa, on the margin side, and I might come back and make another comment.
Yeah. Hi, hi, Nicola. You know that we finished H1 at 21% in Consumer Care, and obviously we're gonna be lower than that in the second half, principally driven by that July and August performance, which, which, which was weak, and that gearing effect. We've also got, as you've alluded to, you know, we're, we're, we're really pleased with the FNF performance, which is really strong, and home care is also performing well, but it's obviously a very small part of our business and, and at the lower end of margin. So it's our margin in H2 is going to be lower than that 21%, and by default, the full year margin in Consumer Care will be lower than the 20% that we'd signaled before.
Yes, we've got some pressure from that Beauty Care part of the portfolio.
I would just add as well, Nicola, that one thing, you know, a lot of our sites are shared across all markets, so, you know, when you look at the big value drop between quarter two and quarter three, in terms of sales, at the top has been, you know, a reduction in Industrial Specialties and a reduction in Crop, in sales value. They're the two, so. But they share, in some cases, in quite a lot of cases, they share Consumer Care sites as well. So, you know, you have this unusual situation that we don't talk about too often, where you get some margin reduction in Consumer because of weakness in other markets. And you've got that running through as well, through the second half as well.
So that's, that's sort of exacerbating the problem for now. So that's why there's probably, you know, an impact to the margin that perhaps you wouldn't have expected from exit rates in quarter two, if you get my drift.
Just to clarify on that, is it shared, you mean across the three-- You're talking about the three segments, so there's headwinds across the three segments?
No, I'm talking about like a factory that's selling into all businesses. You know, if you see a bigger reduction in Industrial Specialty sales or Crop sales, like a Mevisa site in Spain or an Atlas Point site in America, where they supply in all. If you get a reduction in some businesses, then the margin effect, because the margin can be impacted in other, in the consumer business as well. There is a bit of weakness in consumer, but the margin impact is additional to that, because of the weakness in other businesses on the same plan, if you get my, if you get my understanding.
Yes.
So it's the cost.
Yep
... absorption across the site.
Okay, good. Thank you.
Nicola, Steve, just to finish that up and maybe to sort of anchor this, you know, we talked about 21 in the first half. I would imagine that there's probably gonna be a, you know, a 2%-3% impact on the full-year margin in Consumer Care for the full year, negative, obviously.
Yep. Thank you.
We will take the next question from Matthew Yates from Bank of America. The line is open now, please go ahead.
Hey, good morning, everyone. Appreciate this, this might not be the easiest answer, given you're one of the first companies to update on, on trading over the summer. In the first half, there was an acknowledgement that some of the weakness was self-inflicted or market share loss, and you were going to respond with some more tactical pricing. Can you share some thoughts as to... Do you, has, has that pricing initiative failed to recover any volume? Do you think you need to do more to try and retake some share? Is the weakness you're seeing really not a function of price elasticity at all, in terms of just customer buying decisions? Thanks. Yes. Thanks, Matthew.
Yeah, I mean, it's targeted, it's working to a degree, but when we thought most of it, or a significant amount would just be becoming each quarter through 2023, what we're seeing from our customers is they're just saying: "Look, we don't need it. We recognize where you are, but we're still sitting on stock levels that are higher than we'd like." So I think it's a fundamental market issue. You know, we're pretty sophisticated at what we need to do.
So, and we can measure it, Matthew, you know, there's about $50 million-$60 million of target business that we wanted to go after, and, we probably, we're probably in the books or in, you know, through, through this year, it's probably, you know, 20% of that, maybe, maybe a little bit more. And we're guiding everything else. We're not losing it. It's just, you know, the customers actually don't want it yet, and, and they're saying they will buy it, when, when stock levels are, are getting, are getting back to norm, to, to normal. So it's a fundamental market issue. I think the other thing I would say is, particularly at the multinationals, and you find that not just in Consumer, but in Crop, is we think they're taking their stock levels down to lower levels than they've previously done in the past.
So, and that's more from their organizations. You can imagine th e pressure on their cash and, and balance sheets. So I suspect that we're gonna end the year with quite emergency stock levels in some of our customers or so—well, let's just say lower stock levels than they would normally want to carry. And I think that's a consequence of just the environment that we're trading in as well. So, we're obviously watching that closely as well.
Okay. And just as a follow-up, you referenced that chart that showed, you know, potentially a couple of false starts we've had this year on calling a trough and an improvement, and your guidance is certainly not making any heroic assumptions into year-end. That, your comments around September and October, do you think that's really just volume that was deferred from what may have otherwise been earlier in the summer? Or is there anything about order patterns in terms of frequency or magnitude that does suggest any confidence coming back from the customers thus far?
Yeah, I mean, I'll pass to Louisa in a minute, but I mean, just my overarching comment is, I think we were surprised with July and August that we've been supplied, surprised with on the downside, as we exited. You could argue August was always likely to be quiet because it normally is, but July was very quiet as well, I think, and that's right across every industry. And so you're starting from a lower base. September is on its way back, but September was, for me, is always, you know, in 30 years in the industry with six cycles, you tend to look at September as a sort of swing, a swing month to replenish for the year.
And it's coming back, but you wouldn't say it's swinging back in a really positive way. It's just coming off its bottom. Order intake is mixed around the world, but the area that's improving for us is Europe, for Beauty Care particularly, and generally in consumer. So, but it's still difficult to quantify what that really means because, you know, easily order intake, you know, orders can be pushed out at a drop of a hat or pushed in at a drop of a hat. But sentiment definitely is improving, and I would say particularly in Europe. But Louisa, do you want to just add one or two more comments to that?
Yeah, I'll just build on that Western European comment. And look, it's just reiterating that it is patchy. But if we look at our September, say, order intake in Western Europe, which we're obviously tracking, they do look comfortably higher than 2021 and 2022. And we've got orders exceeding sales for about the fourth month in a row. So that's giving us sort of some preview that we're gonna get some lag benefit, you know, maybe in late Q4 and H1. But stress that we're not seeing that across all regions, which, you know, underpins what Steve's saying, that to get a consistent picture through this is quite difficult. But we just continue to monitor those signs where we can.
Okay. Thanks, Louisa. Thanks, Steve.
Yeah, thank you.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the next question from line Charlie Webb from Morgan Stanley. The line is open now, please go ahead.
Morning, everyone. Sorry to kind of follow up on a question that's been asked, I think, a number of times. But just in terms, if you can help us a little bit more, help me a little bit more around the kind of negative operating leverage you see in Consumer Care, and you obviously also flag mix. So just trying to understand here, is this a case where obviously demand is weak, you've obviously taken your plant utilization rates lower than you would otherwise like, have you also been forced to sell product you otherwise wouldn't like to sell, as in lower margin product, and that's the negative mix effect, just to keep utilization rates at a kind of critical level? I'm just trying to, you know, so this is a bit of a conducive surprise negative.
It's just trying to get my head around.
Yeah, sure. Let me start on the commercial point, and then Louisa can add to that. But I mean, on the commercial point, I mean, look, we never go back to fill factories full of really crap business, I call it. You know, we don't need to do that. There's still plenty of what I'd call, you know, pretty good business out there that we can go after. And don't forget, as a reminder, you know, in America particularly, we sort of said, we called out with our analytics, 75% of all of the volume decline is coming from market, you know, a combination of destocking and demand. And we still think that's the case. Our analytics haven't changed there.
The 25% to self-help bit, where we've had factories offline, and we're trying to come back with new business. You know, and Matthew's point was around the same line as, you know, have you-- has that failed or, you know, you're not getting the business back? We have a targeted way of doing that, and we do that in a very, in a very good way, and we can monitor that literally weekly, monthly. You know, 20% of the target business probably that we wanted to get, we're gonna get this year. The rest of it will come next year. That's only because customers have got sitting still on high stock levels.
And they're saying, "We get it, we understand, but we actually don't need it at the moment." And actually, we've got a lot of customers wanting to buy from Croda. So, you know, we're in a good position. So I think your pricing point is a little bit around the edges, where the average price is coming off, but it's obviously, you know, it's trivial in the grand scheme of things. The real issue is you've got... It's like a perfect storm when you've got all markets that are weak together on shared sites and under utilization rates are below where we would normally expect it, quite significantly in some places.
Then what you get is that you can get this, that sort of, disproportionate of cost across there, which, which can harm some businesses more than others. So, you know, it's very, very unusual. In 30 years, I've never seen Industrial Specialties down, Crop down and Consumer down all at the same time for that length of time. That's the issue. And you get these, these, these weird effects. I mean, of course, on the upside, when business comes back, obviously you get the margin coming back. The most important thing for the chief exec is I look at the quality of the margin, and the quality of the margin is really robust at the product level.
But what you're seeing, and what we're seeing is this, you know, this all net out because of the inefficiencies in factories, which is something that, you know, we never talk about because we never need to. So that's the issue. It's a combination of those factors. But Louisa, are there any more facts for Charlie? You wanna mention?
No, I wouldn't. You know, I don't want to labor the... I'm not gonna labor the same point. I think you've pointed quite correctly to the fact that this is plant utilization rates. And Charlie, it comes back down to sort of what we're thinking about on cost.
Because, you know, if you think about our fixed cost base in the factories, versus our fixed cost base, in sort of more indirect costs, you know, Steve talks about the product margins being stable, but if, you know, if we're thinking about this being lower for longer, you know, the footprint of not necessarily the production sites, which are more difficult to change, but you know, maybe some of our legal entities and places like that, to help the denominator in this unit cost equation. So, I would just reemphasize that this is plant utilization, rather than us, as I said, going for more negative mixed products.
Okay. And just one kind of quick follow-up on IS, and you know, given that's kind of turned negative, obviously part of that's gonna relate to this lower operating rates. Is some of it also just product margins, given these are kind of byproducts you sell in the market, are they also very weak? I get obviously that especially that side of the business, that hasn't changed, but maybe in IS it has.
Not really. I mean, it's, it's much the same. You know, we, you know, a significant amount of our trade now goes through Cargill, so a lot of the ex Croda people are with Cargill. And, you know, when you talk to them as well, you know, their business is well off for, you know, for quarter four and, you know, quarter, quarter three and four. So it's demand, it's, it's, it's, it's demand led. You know, the margins are-- I think I've always said, you know, they're not all byproducts, actually, Charlie. You know, 30%-40% of that business is byproducts, and actually what we've got left, that we trade with, we've sold most of the byproduct business with the, with the deal.
So, what we've got left is sensible, sensible business with, with, you know, half decent margins. So it's, it's not a margin collapse there, it's a leverage issue, that Louisa talked about, Louisa talked about, and also just general demand issue because of destocking, you know, around the patch. And that's, that's right across the piece there as well. It's not not seemingly one industry within the Industrial Specialties market. It's, it's, you know, it's, it's broad, broad brush.
Okay. Thank you very much.
Thank you. We will take the next line from Kevin Fogarty from Numis. The line is open now, please go ahead.
Hi, morning everyone. Thanks for the opportunity. I had one question left, and it was really around the Industrial Specialties business. And just, I just, you kind of highlighted in the previous answer, just in terms of the kind of weakness you've seen there, I just wondered if you could give any commentary around the particular end markets, where you've seen that weakness. Has there been any kind of standout end markets, and any sort of real change, I guess, in the last couple of quarters? You know, have some sectors been weaker than others or surprises in terms of demand there? That would be helpful.
Yeah, I mean, I think it's difficult. I understand the question, and it's difficult to give you a, an answer, but we've got-- We look at, you know, the, the two arrangements we've got. We've got the core Croda business. So if you look at, you know, sort of, if you look at quarter, our sort of forecast for the year, you know, the core Croda business is likely to be down around about 25%-26%. But the supply agreement that we-- So, so the other bit of the business, which is a bit smaller than that, is 44% down, and that's the supply agreement to Cargill.
Mm.
So the point we're making is, it's that business that we've transferred to Cargill is weighing on us as well. I mean, you know, our industrial business is down. The Cargill business that they have is things like polymer additives into the polymer industry, and you've got things like into construction and the, that, that's the main, the main area there. But generally for us, if I just look at our business, it's, there isn't one market, you know, it just seems to be just everywhere. You know, and July, July and August particularly, were quite indiscriminate, everywhere.
Great. Okay, thanks for the added color. Thanks a lot.
Thank you. We will take the next question from line, Charles Bentley from Jefferies. The line is open now, please go ahead.
Thank you very much for taking my question. Just on this point around Consumer Care and the balance of the year, I mean, you talk about recovery. Is that versus kind of July and August, or versus kind of continuing, versus where we are September in 2022 levels? I just want, just in the context of the risk to Q4 being worse than expected, I mean, Steve, you said, look, your customers are taking inventory levels to levels they've, that you've not seen in a long time. Rates are where they are, the cost of holding inventory is much higher. I mean, if I was them, I'd probably be destocking into the year end.
Is there not a risk that that kind of forecast of things improving through Q4 proves optimistic and maybe kind of September and October is a bit high? It'd just be helpful, kind of whether or not that's factored into the guidance or not. Thank you. Yeah, thanks. I mean, probably best for Louisa to take you through that. I think she's better placed for that question.
Yeah. In terms of the trajectory, the way the Q4 guidance has been positioned is that it is the trajectory is lower than the trajectory we were coming, the run rate we were coming out of in Q2. It is slightly higher than the run rate we saw in July and August. I guess it's a balance between a weak first two months of the quarter and a slightly stronger Q2. We think that we've positioned this appropriately, otherwise, you know, we wouldn't have put the guidance out. You know, the sentiment is clearly weaker, and we were surprised at how weak July and August were. Hopefully the...
You know, we're not projecting too much incremental growth in the fourth quarter, and we typically have quite a soft December, which is factored into the forecast.
Okay, great. Just to follow up on that, is that still assuming? It's assuming year-on-year growth for Q4, though?
Well, for the group, we've got,
For Consumer Care, sorry, volumes.
For volumes, yes, just slightly. Yes, because we've had a weak Q4. Yes, we had a weak Q4 last year as well.
Thank you very much.
Thank you. We will take the next question from line, Alex Sloane from Barclays. The line is open now, please go ahead.
Yeah. Hi, morning, all. Thanks for taking the questions. Actually, it was just to circle back on the comments Steve made around customer inventory levels and maybe those being taken down to levels, you know, not previously seen before by year end. I wonder if you could frame that in terms of, you know, how you're expecting inventory levels at key customers to sit at year end versus maybe pre-pandemic levels, and how that might differ across key end markets? Thanks.
Yeah, I mean, it's just anecdotes that we've heard from a number of customers. And we'll model that in the right way. I mean, you know, you can look at that as well through their annual reports and their, you know, their releases. But it's not. I wouldn't say it's unilateral everywhere. But clearly, when we're looking at this and we're talking closely, particularly I'm talking about the multinationals, particularly in consumer. It feels like it's a natural. We shouldn't be surprised with that. I mean, we've seen this before. You know, I think I've said to you all quite a few times now, in the six cycles that I've seen in 30 years, in every cycle, you know, we get it, the industry gets it wrong with management of stock.
So in an upcycle, you know, we put too much stock into our supply chains, and in the down cycle, we exaggerate it on the downside. And I think, you know, I wouldn't be surprised if this is a case where it's exaggerated on the downside, just because, you know, because of sentiment, but also because it's near the end of the year as well. You tend to find psychologically in organizations with your customers, that as you move towards the end of the year, well, there's no surprise that you probably get a bit more pressure for balance sheet working capital management, in the right way. So, you know, that could skew you to the downside.
So, I'm not saying it's everywhere, but, the industry gets it wrong, and I suspect it will get it wrong this time as well. But I think the unusual thing about this cycle is that it's very difficult to predict growth. I don't think we're gonna see a big hockey stick when we wake up in January, I don't think anybody's predicting that. But I suspect that, you know, we'll have a better understanding as we come to you in February as to what the supply chains are doing. But we would expect by February that the supply chain for Consumer Care in the multinationals has been corrected.
That's what we believe, and that we can have a much better understanding of, what that means for, for one, real demand for next year, and then two, for pickup in stock from where we are, and we'll get a better assessment of that then. So, so hopefully that, that answers that.
Thank you.
Thank you. There's no further question in the line. I'll hand it back over to your host for remarks. Thank you.
Yeah, okay. Well, thanks, everybody, for that. You know, a perfect storm for us and probably for the industry, but everything's coming together. You know, weak core markets, weak Europe and America, and weak, weak margins because of, because of, loading on the factories, unprecedented and, and something I haven't seen in 30 years. The upside of that, of course, is the potential is significant, the innovation pipeline is excellent, really great, particularly in pharma, but Crop and Consumer Care too. Product margins are robust, and as our once our business recovers, you know, sales and margins will come back together. So that's the, that's the upside. It's just we, we'll manage you through that, as well as you manage us through that as well, I guess, through, through the course of the early part of next year.
But we'll update you in February as to where things stand. But we're. There's no panic in Croda, and actually, the innovation pipelines are in a really good place. So, we just have to manage ourselves through this like, like you do. So thank you, thank you, and we'll see you, we'll see you in February.
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