Morning, everybody. Welcome to another webcast from Croda. As usual, a few words from me, then Jez, with more details, back to me on strategy. I would say welcome. It's 38 degrees outside, it feels like it's -38 degrees in here. Welcome to the refrigerator, everybody. I hope you stay warm before you go out. More on the overview from me. You know, resilient performance despite the subdued market conditions. You know, we think it's been a very competitive performance. Core business sales are in line with prior year despite the subdued market conditions obviously the strong comparator in the first half as well too. Operating profit unchanged, it's the strength in our gross margins four to six's protecting our profitability.
As you'd expect, you know, great innovation behind that. Profit before tax, slightly below, slightly lower than last year due to primarily interest charges from the Mantis surfactant plant, as we've called out before with you. Very strong cash generation. You're through this capital ramp. You'd expect that most of our EBITDA converts to cash now. You know, we don't need a huge amount of CapEx in the business going forward to support the growth, you know, with GBP 70 million-GBP 75 million. You would expect strong cash generation to continue. You know, very strong performance in cash generation, and that's likely to continue. And the fundamentals in Croda are very strong. I'll come back to that.
You know, NPP sales continue to increase, climbing again and moving ever closer to our 30%, you know, 30% threshold. Just a little more on the numbers, getting behind that. You know, you've got reported currency sales are up 2.4%, broadly flat in constant. A brilliant performance in Life Sciences. Outstanding performance in many ways. We don't use that word very much. Partly offset by some slowness in Personal Care, which we'll come back to. USA, China, confined to that. We'll explain more about that. Our Performance Technologies, with a weak auto, slightly behind last year. You know, it's the Life Sciences which is driving the highlights and the big push in behind that with our Health Care and Crop Care.
If you look at the operating profit, you know, we protect our profits through, you know, great margin improvement, strong innovation, but also good tight cost control as well this year with the, with the macro macro blip that you are seeing. The margin's 25.1%. Excellent, given the current climate out there. It's a attribute to the strength of the model that sits behind that. Continued progress. It's the consumer markets that are driving the growth for Croda. You know, you add them together, Life Sciences particularly. In terms of margin improvement, you know, very strong all round. I just want to dwell on this slide, you know, 'cause we don't normally call out external factors in Croda.
We sort of see them as excuses for the management team when they come to us. You know, we're very micro-led as an organization. They are significant this year, and they are impacting. We need to call them out and explain a little bit more about what's happening out there. We're certainly not alone in the chemical industry with this. There's three external factors. Primarily, it's USA, China, trade disputes. You know, if you're starting applying 25% duties on chemicals, it's a blunt instrument. It has an impact in the industry, all parts of our industry. Not just in the commodity areas. It's in specialty chemicals too.
Anybody who's got serious trade flows there will have some sort of short-term impact, we're feeling that to a degree, particularly in our Personal Care, but mainly in our industrial businesses. The China, Daigou, it's pronounced, might be difficult for some people to pronounce that, Daigou legislation. These are Chinese nationals going to Japan, Korea, liking the products, coming back into China, and then commercializing those products on an Internet-based social media approach. Chinese government are modernizing the channel, which we fully support, but that has a knock-on impact short term to small customer demand in China. We'll bring that to life with you through Jez's slides.
Of course, the auto slowdown, which I think you're well aware of with lots of other industrial companies that are out there. The fundamentals are great. You know, this is a fantastic business. We've got a short-term blip in macro. What we look at increasingly is, you know, the bottom two boxes. You know, the innovation's stronger than ever. The output of our activities is the most important thing in innovation. You know, 28.3% innovation. You know, more and more high-quality, high-margin products going to our customers, creating great value. The other thing that we don't really show you, but internally we have a number of KPIs for our customer engagement and increasing customer engagement, and we're being deliberately vague there with the ticks. We are very excited about what's behind that.
You know, NPP pipeline in all sectors well ahead, 2019 versus 2018. You look at all other engagement, sample inquiries, product launches, customer launches, customer interactions. Everything looks very positive, which supports our view that this is a macro blip rather than something more structural in terms of recessionary characteristics out there. We don't see it that way. We think it's, you know, some forced changes from politics, geopolitics getting in the way of true demand. Actually, you can see that more than anything in the strong price mix effect. You know, the volume decline -6% in Personal Care and -8% in Performance Technologies, quite unusual. You know, I'm in the industry 29 years now. You don't normally see that. You certainly don't see that for Croda in a normal trading year or two.
Actually, when you get behind those volume numbers, quite a lot of NPP, our NPP volumes are down, which tells you that it's more a macro demand rather than a market share issue. You know, nobody else, our customers don't wanna reformulate away from our NPP. Nor the competition, nor can competition substitute that. You know, it is a proxy for demand. The important thing about the business model is the pricing element of the price mix. You know, gross margin percentage ahead in all three businesses, driven by innovation. The protection of profit comes from that margin improvement in the business. Actually, you know, the thing that we can get most excited about is this Life Sciences price mix. You know, there's a great chance for Croda to leverage pricing in a different way.
Franchise agreements, profit shares, and the like, you know, great model in Life Sciences. The Life Sciences business is starting to show, hopefully you, but certainly us, how exciting that growth can look like going forward. The margin improvement story in Life Sciences, there's no reason in the near to medium term that those margins will won't get to Personal Care margins 34%. Actually, if you look back two or three years in Life Sciences, they were there, 34% prior to Incotec. We expect them to get up to that level in the next two to three years. All in all, robust. For what we're in control of, it's a robust outlook. We just like this macro blip to be behind us sooner rather than later.
Let me stop there and pass on to Jez for the details.
Thanks, Steve. Morning, everybody. Beginning with the income statement overall. Sales including industrial chemicals were up 1.7% in reported currency, but 1% lower in constant currency. Operating profit broadly flat at GBP 179.4 million. Interest cost GBP 5 million higher year-on-year. The primary driver behind that is that in the first half last year, we were capitalizing interest on the ECO plant construction. That finished at the end of the first half last year, therefore, that interest obviously flows now into the P&L rather than going to the balance sheet. Higher interest cost there. Plus, of course, we did the special dividend towards the end of the first half year. As a result, adjusted PBT GBP 170.6 million.
After deducting intangible amortization, which is really the only difference between that number and IFRS, we have an IFRS profit before tax of GBP 166.2 million. The basic earnings per share at GBP 0.982 were 2% lower. There's no change in our tax rate, either in the first half year or anticipated for the full year. Just a little below 25% for the tax rate. The interim dividend is being increased by almost 4%. Looking at the sales bridge, volume was down 5% in the core business, but we had an encouraging improvement in price mix of 4%. Behind that price mix are broadly stable raw material prices.
It's not a price recovery, it's all about mix improvement, better quality innovation, better quality products, and ingredients to our customers. This is probably a point worth highlighting in terms of differentiation to a number of our peers in the specialty chemical space and in F&F. What we're doing, remember, is converting natural commodities into products. In those markets, we haven't seen significant raw material price changes. That price increase, you know, reflecting, as I say, good innovation and also reduction in low-margin business. M&A added 1% growth. That's the Biosector acquisition that we made in December in Life Sciences. That left the overall constant currency sales basket unchanged versus the first half of 2018.
On top of that, currency added about 2%, reflecting sterling's weakness primarily against the USD in the first half year, fairly stable against the EUR. Reported currency sales therefore up 2%. Looking at the impact on profit, actually not a lot going on here. Little change overall. Slight negative from the sales impact on profit. M&A slightly negative. Biosector is profitable, but we had a full half year of Plant Impact, the acquisition we made in April of 2018, which is loss-making, and that's now lapsed into the numbers for the second half. A small currency benefit again on profit, therefore, reported currency operating profit up 0.5%. Looking at operating profit by sector, Personal Care sector profit down GBP 4 million, driven by lower sales.
Life Sciences grew by GBP 9 million, reflecting strong demand in both Health Care and Crop Care. The Performance Technologies profit was GBP 5 million lower, reflecting reduced demand. Industrial chemicals profit down a little bit as we continue to remove tolling and by-product sales from that business. Return on sales, as Steve said, continues to be very robust. The Personal Care return on sales was 33.3%, down 80 basis points on the previous year. Life Sciences went back up through the 30% level, up 70 basis points. The Performance Technologies return on sales gets a little bit more affected by the impact of lower volume.
You know, it's more of a volume business and therefore, reduction in volume tends to have a bigger proportion impact on the return on sales, which doesn't tend to be as true of the consumer businesses, which are less operationally geared. The group return on sales down just 30 basis points in the first half versus the first half last year. Although a subdued environment, the profitability remains strong. In Personal Care, beginning there, really a game of two halves. External issues, as Steve said, impacting the U.S. and the North Asia markets. Growth here minus 10% in the first half year, driven by the significant trade headwinds that Steve addressed.
Away from these markets remained in growth and probably broadly consistent with what we saw in the latter part of 2018. Growth not particularly changing in the markets away from the U.S. and North Asia. Western Europe up 4%, LatAm up 2%. You know, some quite encouraging growth numbers there. As I said, continuing to protect the margin at 33.3%. It's clear for us that the fundamentals in Personal Care haven't changed, and that once the trade headwinds moderate, we expect to see a return to growth. Let's just unpack those two different halves of the Personal Care business a little bit more.
You will all be aware, of course, of the U.S.-China trade dispute, and what we've seen as the impact here is firstly reduced consumer confidence in the U.S. and China, which really probably started from the fourth quarter of 2018, and the first tariffs came in in August of 2018. That has definitely had some impact on consumer confidence. U.S. beauty consumer sales, as we show here, have bumped around flat. In China, we've seen harder to get consumer data in China, but certainly weak PMI, you know, generally running in negative territory at the moment. That's impacted confidence. Secondly, U.S. customers who are exporting to China have been hit, first of all, by tariffs in August last year, and then by an increase to 25% tariffs in June of this year.
Then we've seen lower demand from U.S. and Chinese customers, of course, some quite erratic sort of stocking patterns, you know, going on. That's a overall quite a substantial impact from the trade dispute. The second issue is a local one to China. As Steve said, the Daigou legislation is really all about harmonization. It's about bringing Chinese regulation up to similar standards that we see in other countries. It's about clamping down on surrogate shopping, about stopping consumers and entrepreneurs going to other countries, typically Japan and Korea, buying product and then selling it either locally or Internet-based, without necessarily going through all of the legislative hurdles. The Chinese government's been clamping down on that. We think that's a good thing for the medium term.
It normalizes the market, clearly it has had some impact on local customer sales. It's also impacted our sales in Japan and Korea because they are important export markets into China. That's been a big driver of growth in the last two to three years. Going through this period of standardization, really. The final thing, which has had an interesting effect, is we've seen a reduction in the tariffs charged to non-U.S. imports by China, with tariffs on European imports coming down from just over 8% to just under 3% on Personal Care products. There's no doubt that we've seen a real benefit in particularly Western Europe multinationals who are now more competitive in the Chinese market.
Our sales into Western Europe for re-export to China have definitely benefited from that. By contrast, the European South Asia and LatAm markets have continued in growth. Western Europe the strongest performer, but LatAm seeing a progressive macroeconomic improvement. South Asia, good in pockets, particularly around the Indian and Indonesian markets, and recovering from the sort of halo impact of slowdown in China. If we look at the three businesses in Personal Care, Beauty Actives, first of all, has continued in growth. The prestige market has tended to have more confidence, particularly in the developed markets of North America and Europe. That's good news for Beauty Actives, supported by recent investment we've made in Sederma.
In Beauty Effects, Europe and LatAm have been strong, particularly with millennial consumer products, we're adding to the range of technologies we have in Beauty Effects, which is a business we do wanna grow over the coming years. Beauty Formulation has been the most subdued of the businesses. It is more exposed to a bit more of the mass market slowdown. Interestingly, we've seen the same sales impact on both NPP and differentiated products. What that suggests to us is that the market has slowed down rather than that we have lost business, because classically, if we lost business, we'd expect to see it away from the NPP products. We think that there's clear signs there that it's the market that's slower.
Multinational relationships continue to be very strong, doing well with multinationals, and also, local and indie customers, where we're able to help them formulate their products. As Steve said, Life Sciences, standout performer in the first half year, double-digit sales and profit growth, and an increase in return on sales as well. Innovation is very much driving this business. We're at 29% NPP of sales now in this business. Health Care, pretty independent of macro, driven much more by the drug development pipeline, and the demand for complex oncology drugs and for biologic molecules is certainly helping our high-purity excipient delivery system business. Sales up 15% organically, and on top of that, we had the first contribution from the Biosector vaccine business that we bought, and we're very excited about what we think that that technology can bring for us.
Healthcare, really strong. Crop Care actually really pleasing as well. 4% growth in Crop Care, which I think is good against the crop environment at the moment. North America was negatively impacted by both the impact of tariffs on exports to China, particularly of soya, and of course, of severe weather earlier in the growing season. The recent investment that Croda has made in growing our presence, particularly in LatAm, has really paid off, and sales in LatAm in Crop have more than doubled in the first half year against 2018. What's happening is LatAm farmers are picking up the slack in on sales into China, created by North America farmers being disadvantaged by the tariffs.
Much more global footprint for us in crop and working very well for us. Finally, in Performance Technologies, we have seen some tough or some soft markets in Performance Technologies in the first half year. About 25% of sales in Performance Technologies end up in the automotive sector, clearly that's been a tough area. It particularly impacts Smart Materials. We do a lot of polymer and coatings additives that end up in the automotive business. By contrast, Energy Technologies is a much more diverse business, serving marine markets, renewable energy, and after-sales market in terms of automotive, less affected by the automotive slowdown and broadly flat overall in its sales.
Sector volumes are down about 8%, but that's been offset by an improvement in the price mix, which is good. As I said, there's more of a volume impact on the Performance Technologies business and the margin. It has dropped a little bit to 18%. The NPP is good. We're at a record 19%. Of course, in the second half year, the Home Care business in particular will benefit from the start up of the biosurfactant plant alongside Personal Care. Finally, on cash, strong improvement in the free cash flow as we anticipated. Better working capital management than in the previous period. Lower CapEx, now much more in line with our GBP 80 million annual guidance on CapEx now that we've finished the biosurfactant project.
Of course, the GBP 150 million special dividend, paid in May, increasing the leverage to 1.5 times, and therefore, thereafter expected to decline. Thank you, and I'll pass back to Steve for, to talk a little bit about our strategy.
Thanks, Jez. You know, this short-term blip, certainly won't get in the way of, Croda's strategy, which remains unchanged. You know, it's a great business, great story, and a strengthening story as well. I just wanna bring to life, in many ways, our strategy with a new sense or a renewed sense of purpose that's coming with that. Let me explain a bit more. You know, we wanna see Croda more in the next 5-10 years as a, an organization that has, you know, working for the greater good. We want to deliver great financial results, but the non-financial performance of the organization is becoming more and more important to us, to our employees, and to all of our stakeholders.
We, you'll be delighted to know we had a competition internally to try and really ask what defined the sense of purpose around the organization. Rather than spend GBP 5 million or GBP 10 million with management consultants, we decided to do it ourselves. We had this competition. We had about 1,200 people engaged in the organization with responses to the competition. An American employee won the competition, and we've gone with Smart science to improve lives. It's really quite important to us 'cause the organization really wants this. They're engaged with it. We think it's gonna drive a high level of commitment from the organization and a high level of performance.
The Smart science to improve lives™ defines us very well now, and in many ways it links very well to our past. You know, we're entrepreneurial in our spirit. Actually, the application of our products is something that we want to spend more time on. We should be disappointed if we deliver great financial results, if our energy consumption or our carbon dioxide emissions are increasing. You know, we think we can decouple that. Probably more important than that, when we apply the United Nations Sustainable Development Goals, we've got eight there which we think are the most important for Croda. There's GBP billions worth of investment going in there. You know, I sit on the U.K. government board for the chemical group. I chair that.
You can see a lot of money for the U.K. going there. It's the same everywhere else. What that's doing is leading to more opportunities for us. Croda thrives on new market opportunities. We think by applying our knowledge here, it's going to get us into faster growing markets. That's the deep thought with this. As you do that, we've worked with the board through our long-lens strategy, 10-year strategy. Coming out from that is a need to make more choices. What we, the output of that, from the SDG mapping work would say that, you know, we really want to expand Life Sciences as a priority. That's where Croda's moving to. You know, investment, incremental investment, acquisitions, people, we want to move there really quickly.
We want the Life Sciences business to be as profitable as our Personal Care business as quickly as we can. It's got great growth potential. As Jez highlighted in the numbers, you know, we're very excited about that. We are very excited about Personal Care as well. I don't want you to be misguided that we're not. You know, it's great business, but it's more mature because we've been in Personal Care for longer. The growth profile in Life Sciences will be better. It's got margin improvement in it, and it's got sales growth in it. Our Personal Care, we're happy with these margins where they are, 33%, 34%. We just want more sales growth coming through on that. That will continue, I'm sure.
In Performance Technologies, we're getting excited about some of the opportunities for new markets. New markets are opening up very quickly, and our job there is to invest in some of those faster growing new markets there and concentrate less on some of the slower growing markets too. All in all, you know, sort of that's where we're going. Not a big change to where we are, but a bigger emphasis on Life Sciences is the message from the group. If you look at each of the businesses, you know, the expansion in Life Sciences is breadth and depth in technologies, but it's also geography expansion as well. We will major on investing in Asia, in particular North Asia. We see a lot of opportunities there.
We have a relatively small team, a sales, marketing, and research team now. We think, just bolstering that up from day one will have a incremental benefit to the group, some really good opportunities there. I think the other thing to call out on the slide is, you know, we haven't been slow to acquire and invest into this space. You know, the last three, four years, you know, Incotec, Plant Impact, Biosector, and SiSaf is a joint collaborative investment with a partner there and some great technology in there, particularly in encapsulation and around polymeric chemistry as well. You know, really, really good, really good potentials. A lot of them, you know, this is a thriving incubator now for Croda and lots of opportunities around the world.
Life Sciences in a really good position, but we want to invest more and, you know, we will be investing more in that. In Personal Care, you know, we've got great strengths around the world. In emphasis terms, I think I'll guide you to the top right and bottom right boxes. You know, we're connecting with digital in a way that we haven't done before. Some of the stats you saw earlier about customer engagement, a lot of that is driven by digital. We've got live chats now on our website.
When potential customers and customers connect with us on our websites, we can then have conversations with them and capture information in a way that perhaps we haven't captured before, which is leading to more engagement with customers and potential customers. Really important. We're rolling that digital model out around the world. We expect that to target new customers rather than big customers. You know, mainly targeted at the small indie-type populations that are coming on board around the world. Our indie customer growth will continue to excite us with the level of growth that we see in there. You shouldn't be surprised, you know, we're supporting some of the world's leading brands.
Some new launches coming out in the second half or certainly through 2019. One or two of them are out now. You know, it's not just Boots, Chanel, Clinique, Estée Lauder, Clarins. You know, we're in a lot of their products, supporting their next generation premium brands. You wouldn't be surprised that Croda's leading that technology with them. You know, well-placed for further growth. As we say, we'd like the American, U.S. situation to resolve itself quickly, and Personal Care will be restored to growth. In a good place. Also, you know, we're refining Performance Technologies. I call it refining because we want to step up into higher margin opportunities. Through sustainability, there will be more and more opportunities.
Probably more opportunities in Performance Technologies than in Personal Care, in many ways. We're excited about some of those opportunities. The innovation now, if you look at the bottom left box, is at a record level. It's still lower than the other two businesses, but you would expect that because it's still a younger business. 19%, it's getting there. You know, we'd like that to 25% as quickly as we can. We've just announced a technology acquisition in Rewitec, which is renewable energy, very clever technology for wind turbines. We're betting on Now they have, you know, patented technologies in that area, you know, we're betting on the fact that I think there's going to be more wind turbines around in the next 20 years than where they are now. Great technology.
The anti-aging of wind turbines, we're calling it. It future-proofs wind turbines for the next generation. It's recommended by the lead insurers as well as the primary technology for wind turbines. You know, great little technology acquisition. Not a huge amount of spend, but, you know, great potential. I think the other thing there is, you know, this FloSolve project at the top, we acquired a small business for about GBP 4 million, and we've increased the sales 10 times in the first three years, four years. That's the type of model that we're looking at as an example. We take great technology, latent technology, we put it into the selling network of Croda, and we can fast grow that.
Big margins, you know, limited resource needed, certainly limited production needed for these things as well. You know, very good. In fact, you know, this supports our sort of fundamental ethos of moving to quality all the time, leveraging our quality, getting more patent protection in the business. Then if you just look at our investment, you know, our investment is there to do the right things, but it's there to maximize our positive impact. A lot of these you're aware of, but, you know, have a look at the high purity excipient expansion in North America on stream soon. That's to satisfy fast growth in drug delivery. It's sustainability. It's driven by people wanting to feel good and look good.
You know, high purity excipients are delivering great growth. Also, plant stem cells, you know, they're the next generation sustainable skin actives, and some great opportunities there for the group. You know, you can't think of anything more sustainable there. Lots of other good acquisitions which are around our thinking around betting on future growth markets through sustainability, because that's where we're going. Really important to us, but it's not just about maximizing impact, it's about minimizing environmental impact. We're taking a keen eye now on our factories and making sure that our investment there is to reduce environmental pollution, but, you know, improve efficiencies effectively.
A lot of this, whether it's renewable heat capacity or water conservation at the bottom right, you know, a lot of this is great for financial performance, but it's doing the right thing for the business as well, which we think is very important. We're now trying to shine the lens of sustainability on our investment programs in and around the Croda world. Finally, just returning to, you know, summary of the strategy. You know, you've heard it a lot before. It might be a broken record. It's consistent, we're growing in quality, we're not changing our strategy. This blip is a blip. We shouldn't worry too much about that. We've got to make sure we're doing the right things for the medium long term.
Expansion of Life Sciences, strengthening Personal Care, refining Performance Technologies. They are the big messages that you're gonna hear more and more from Croda. As a plug, I mean, we've got a seminar in October, I think it is, Charlie, where we wanna do a deep dive with you on Life Sciences. I think Life Sciences is a fast growth area, and we'd like to share some of our growth profiles there and technology platforms and the people. We want you to see some of our people as well. We're gonna host that in London in early October. I think that's important for you to get your heads around the Life Science agenda. In outlook, you know, we remain cautious.
I think, you know, we've chatted with each other and I've chatted with a few of you. You know, we're probably more cautious than otherwise we would have been in the middle or early part of quarter two. April and May were good. June, very quiet for the group and probably consistent with what you're seeing in the industry. That's allowed us to be more cautious than otherwise we probably would have been, and our caution is around just on this. We want this macro. We can't see this macro situation resolving itself overnight. As a reminder, our order intake is about four weeks, four to six weeks, so we wouldn't see it. We're just a bit more cautious than otherwise we would have been, given the exit rates for quarter two.
Overall, this is a great business, resilient business, in good shape, and poised for further growth. I will stop there and take your questions. Hope everybody's warmed up as well. Andrew?
Yeah, thanks. Andrew Stott, UBS. A couple of things. On Personal Care, the data we have on China doesn't look like the data you have on China. You said that the small customers are your problem. Is the obvious conclusion that you are over-indexed, if you like, with small customers in China and that your offset to some extent, but not enough obviously for the period, is a L'Oréal sale in France?
Yeah
That's then exported?
Yeah.
Is that what's going on?
Yeah. Let's explain because it's important. You know, most of our sales in China are small to small and local customers. Our MNCs is a relatively small proportion. It's not too different to the group. You know, MNCs for Personal Care is 25% of Personal Care and 75% small customers. That's the similar profile in China. The effect that we're having, which is unusual, is the MNC growth in China is still positive for growth. We're, you know, in a very good position there. The small customers, and there's lots of them, have a big negative in the first half, this is just this jolt from the modernization regulation.
It's just they have to pause, they have to register, they have to comply, and that's just taking time. You know, we expect that, and we're starting to see that come back through small customers. It is a positioning effect with most of our business is small customers there. The L'Oréal thing's an important one. Jez made the point. Duty, import duties for cosmetics in China have changed in the middle of last year. They were 8.6%, I think, and they moved them down to 2.9%. What that's encouraging is the L'Oréals of the world from France to ship their finished products into China increasingly, and not just them, but Clarins. They encourage the premium brands, the top brands to ship from European production.
That's the major flow. It's not an American flow in there. Of course, we look at our French business, and our French figures are good. You know, we're not surprised with that. We are very. You know, we're picking up business that way, and our European numbers are a bit stronger than probably they otherwise would have been because of that. You've seen a slight diversion of traffic, and L'Oréal will not be impacted in the trade issues as much as somebody like we are because, you know, it's Europe, Western Europe to China, and they don't have that.
Thanks. The second question I had was, Jez, you mentioned on Crop Care that you're doing really well in LatAm. If I look at, say, Syngenta numbers on Friday, and it sounds like BASF and Bayer and Corteva are even worse, the global number is negative, and you're plus four in Crop Care. Is the obvious conclusion that you're just way bigger in LatAm than they are?
No. I think the, I mean, LatAm is a big, you know, big market for the crop science players. I don't think we're bigger. I think we were probably underrepresented previously, and also we were importing most of our adjuvants, our delivery systems in from Europe and North America, which meant that we were exposed to up to 35% tariffs into Brazil and so forth. We made the move about 18 months ago to move much more of the production into Brazil so we were in continent, which is good for tariffs, but it's also good for customers because they like you to be a bit more local.
I think if you stand back and look at it, Crop Care has been one of the probably the strongest performer organically for the group over the last 10 years. It's been the most consistent growing business, and we've probably outgrown the market by an average of 3%-4%. I think our positioning in, more, you know, more towards the new products that our customers are producing through our collaboration agreements with them, where we work with them alongside them on the bench with their latest actives, has exposed us to the faster-growing parts of the market. I think we are consistently outperforming the crop market, doing 3%-4% better than wherever the crop cycle is.
Also our increased presence in LatAm has undoubtedly gone down well with customers, and I think we're picking up a bigger share of business as well. You have this overall move from North America to LatAm for the sales, particularly into China, biggest market for soya, for example. Underlying that, you have this increased local presence, this strong position in R&D, and that's why we feel really good about Crop and why we believe that medium-term Crop should be growing mid-single-digit growth, almost independently, not entirely, of what the Crop macro and cycle is doing.
Thanks.
Thanks. Tom Wrigglesworth from Citi. Two questions, if I may. Firstly, on Health Care, 15% growth, could you break out the price volume mix? Also trying to understand, you know, how sustainable we should, you know, we should think about that rate of growth and the order book that you have going forwards for the Health Care business. Then on the Personal Care side of the equation, is that the maximum impact, that negative 10%, you know, and that's it? Does the exit rate mean that there's a bit more to come? You talk about Asia getting progressively better. I just wanted to qualify, you know, the outlook on the impact versus that comment. Thank you.
Sure. I mean, yeah, I mean, the You saw the price mix for Life Sciences, which is very positive. You know, price is up 10%-11%. You know, I would expect the Health Care bit of that to be bigger than that. I think we'll say that. I think the thing that really excites us about the Health Care bit is, you know, you can And, and I think in partnership with customers, they do accept, franchise agreements, profit shares, and royalty payments and the like. That's what's attracting us to the space because, you know, our innovation, we can charge a product margin like we normally do.
On top of that, there is a recognition that we can partner up with them if we're in some of the biggest projects with potential improvement with the second margin as well, which is what we like. You know, what's not to like about that? You know, what would be really important for us. You know, a lot of it's driven by this high purity excipient. You know, we're deliberately vague about what it is, what it does. Increasingly, a bit like what Jez says in Crop, we are, you know, moving into a sweet spot in Health Care with positioning of our innovation. You know, more and more of the actives in Health Care are becoming three-dimensional, biological.
What that means is you need more stable excipients and delivery systems to deliver performance, better performance, and that's what those products do. I mean, you know, the best way of looking at Life Sciences, we've always said, is sort of mid to high single digit sales growth through the cycle. You know, we'd love it to do 13% overall every first half and, you know, every quarter. It isn't gonna do that. You know, it's gonna have big growth shoots and then, you know, maybe more subdued growth. It will, over the cycle, it's mid to high single digits. You know, really well positioned. We just want to invest more in that. We'll do that.
Your Personal Care point, you know, we are cautious with it because it's difficult to read. You know, we'll be honest with you, it's difficult to read this macro. You know, this, you know, this sort of confidence level which is reducing demand and this erratic and unpredictable stocking which is in the system. No doubt, this chemical industry is not great for managing stock. It never has been. 29 years in the industry, it never gets it right through the cycle. I think what we're seeing is a correction, absolutely a correction.
I think most of us would have said, chief execs would have said, you know, second half in the early part of the year when I was addressing you, second half will be much stronger than the first half because we'll get through that in the first half because we think it's destocking. I think, you know, I'm one, and I don't think I'll be the only one that's saying, actually, we're not seeing the market pick up, and we're not guiding to see the market pick up in the second half. It's because we can't see it in the short term. Now, it may do, and you probably know it better than we do when you see all the stats coming out. It's difficult to read. We'd like to think we're through the worst.
Certainly in China, it is starting. You'd expect that to start to come back through the second half. You know, we wanna get through this, and we still think Personal Care is, you know, a 3%-5% growth, a growth machine for Croda through the normal cycle. There should be no reason why we can't get back to that. We're rightly being cautious for the second half because, you know, it's a bit opaque out there.
Thank you. Nicola Tang from Exane BNP. I actually wanted to follow up on the comments you just made on the exit rate for Q2, and whether this was the comments you were making on the limited visibility on the order book were mainly due to the Chinese trade rules or also because of this Daigou regulation. On the Daigou regulation front, you know, you're assuming a pickup in Asia in the second half, but was there any sort of stocking ahead of this regulation in H2 of last year?
Okay. Yeah, it's mainly primary trade war related, we think, is the soft. The exit rates are a function of mainly that, if we're honest. The Daigou legislation issue is a specific issue. I'm talking group, this is a specific issue for Personal Care in China. I think, you know, I think the caution, the exit, June normally is a very strong month for the industry. It's normally a top two months or a top three months, it's a quiet month for certainly for Croda. That's what's giving us caution. We just think it's trade war related. Some of the tariffs came on late in Q2 as well, there's a reaction.
The application of the tariffs to 20%, 25% into China came on late in quarter two, some of them. There's probably a reaction to that. It's difficult to work through at the moment, you know, if we're honest. You know, the Chinese factors we think will be fine. You know, there's lots of different challenge. Also in China, don't forget, we've got tiny market shares, so we're still growing with other customers. America, we think, is just going to take a little longer to come back in Personal Care, but mainly in the industrial, particularly in the industrial areas, it'll take a bit longer.
There's a weak, you know, there's a weak auto effect out there, which, you know, will work its way through in the normal way as well.
Okay. Then I had a second question on the Crop Care side or in Life Sciences. Can I confirm, was all the acquisition, due to Biosector? How's Plant Impact getting along?
Yeah. I mean, you know, everything's going well. Plant Impact, we really like the technology. The technology is great. It's ahead of its time, and that's why we bought it. Sales are gonna be a bit slower to come on because of that. Also, don't forget, in Crop, it takes a bit longer to get it through the innovation programs of our customers. You know, there's a bit longer approval time. A bit longer than we originally thought, but still in very good shape. You know, has a potential of delivering really strong growth, but likely to be, you know, more 2020 than second half 2019.
Thank you. Charlie Webb, Morgan Stanley. Maybe just one on Atlas Point. It feels like that has been the ramp up, the re-ramp up of that plant is being kind of pushed back. I think you are now expecting end of Q3 to get that up and running. How is that looking? How are the kind of buyer certifications going with customers?
Yeah.
Are you still on track 2020?
Yeah
2019 just a bit of a transition year?
It's fine. I mean, it's fine. I mean, you know, it's driven by me in many ways that, you know, process safety for Croda is very important, and I'm wanting to make sure we're dotting I's, crossing T's to get this plant on stream. The commissioning's started. You have to start with pressure testing and everything. The regulation or the regulators that are supporting us, they're very comfortable with that. Quite rightly, they're wanting to make sure that everything's fine. It will start. It comes on stream. It takes a few weeks for it to build up. We'll be making product through the next towards the end of quarter three. We'll be selling products at the end of quarter three.
The impact on P&L and the finances is really a quarter four effect rather than the quarter three effect. I think some of you might have had it in for quarter three, which is fair enough, which might be a part of your question, but it's really quarter four effect. I tell you, the interest in biosurfactants is really good, really strong. As I reminded you all in February, the prolonged delay in this is not delaying innovation because we've managed to get a lot of the samples out to our customers beforehand. There's, you know, we're still managing to talk to a lot of the marketing teams and the R&D teams of our customers, so they're positioning their brands in anticipation of us coming on stream.
We should see some quick wins coming through. Realistically, you know, by the time they've positioned the product, they've launched the product, it's gonna be a 2020 effect rather than a 2019 effect. We'll get some financial benefits, of course, that Jez has described to you in the past. It will be on stream. There's no operational issues. Commercially now, we're getting just tuned into capturing that growth as quickly as we can.
Okay. Just thinking about that, the financial effect, we've kind of talked about a GBP 3 million benefit from Atlas Point on an annualized basis. Obviously, Q2, we continue to lap some sort of costs in Q3, and then we get some of that positive effect in Q4. Is it roughly a GBP 5 million headwind now expected for the full year or a bit more than that?
Yeah, we guided to GBP 2 million a quarter while we were not running the plant, and then on initial startup, GBP 3 million profit, as you say, Charlie. That initial GBP 3 million is simply from the replacement of buying in feedstock to making it ourselves. That's not the big benefit, obviously, of the plant. The big benefit is then growing the bio-based volumes of sales to our customers and substituting for competitors' petrochemical product. The GBP 3 million is a good sort of start-up number. Yeah, that's about right. We'll have about a, we'll have net probably around about a GBP 5 million net cost in 2019, based on three quarters of not running, you know, subject to what Steve just said.
Obviously, there's a handover, and then one quarter of picking up that benefit. Yeah, fair number. Next year, GBP 3 million, progressively starting to build new volumes with customers in Home Care, Personal Care, and indeed some other areas.
Sure. Maybe just secondly on Health Care, obviously, a very strong first half. Just thinking about that, I know we've already kind of had the question, but just to get a bit more, more of a sense.
Which I didn't answer.
In terms of the growth profile there, you know, as you said, very strong first half. We've still obviously got Biosector to contribute again Sorry. Yeah, Biosector to contribute again in the second half. What kind of runway are you looking? 'Cause you're obviously lapping perhaps tougher comps in Life Sciences, but should we still expecting more at the upper end of that range that you've given, that kind of mid to high single digit?
I mean, the question for second half. I mean, it will moderate. I think it will moderate in the second half, no doubt. But it will still be, you know, mid-high single-digit sales growth, I think, in, you know, in Health Care from what we can see. But, I mean, through the cycle, it is certainly going to be that and hopefully a little bit more, going over the next, you know, through the cycle. There is not really a cycle for Health Care, but over the next two, three years, we are really excited. I think what we are watching closely is how Biosector integrates. How do we see that ramp up? You know, classic in Croda is the first year is positioning. I have always called it that. You know, we have to get their products through the right channels to the right customers or to more customers.
We've just unraveled a major distributor of theirs in North America, and we're being very delighted with the number of customers that are behind that. You know, 'cause you know, you get a lot of customers that we can then target with our innovation. You know, there's some margin improvement there to come through as well that you'd expect. You know, we're positioning ourselves well. It's that base high purity excipient business which is the core driver, and all of these are sort of additive to that. Yeah, I mean, it will moderate second half because it's, you know, it's had a very strong first half. You know, we feel we're in very good position with it.
margin's likewise moving in the same direction?
Yeah, I mean, you know, it's some of the highest margin businesses in Croda, if not the highest, you know, margin performance. The margins in Life Sciences will, you know, start to climb. I think we've always talked to you about Performance Technologies to 20%, Life Sciences, we're getting more comfortable now that we've had the up and down, the par in and out of the business. You know, you're starting to see the business for what it is, which is, you know, moving towards ever closely to 34%. I know the internal business teams would love to be ahead of Personal Care margins. The Personal Care margins are very stable, 33%, 34%. They were there.
You know, if you look back, prior to Incotec, our margins in Health Care were, you know, Life Sciences were 34%. You know, we expect to get back there. We can see a runway to that now, so that's good, and good sales growth. You know, that's the sort of the excitement that when we look at it, that you've got sales growth and you got margin improvement in that business.
Brilliant. Thank you.
Hi, Ranulf for Redburn. Just a quick question on your tweak to your strategy. Is there any additional CapEx or restructuring costs above what you've previously discussed associated with this? Thanks.
No. I mean, no. I mean, it's not really tweaked, actually. It's just, it's just looking 10 years out and then coming back to now, it's more an emphasis change. It's, it's making better choices with our, with our capital anyway. You know, we've got a lot of cash that comes off the business. You know, you can see that in your forward projections. You know, the strategy's there to make sure that we do the right thing with, how do we deploy the cash is a key question for Jez and myself. What we want to do is to put it into high technology growth markets. You know, we're big on sustainability.
We're betting on new market opportunities being created in the next three to five years, and that's where we're targeting. If there's any, you know, excess that comes back, you know, Jez is very clear. We're very disciplined with that. You know, for allocation purposes, you know, there will be cash returns if we go below one times, but we would rather much prefer to invest in the business, like you'd want us to.
Hi. Isha Sharma from MainFirst. I just quickly wanted to ask you what are the kind of trends that you actually see in the U.S. in your end market, especially for Personal Care, and how the competitive space is developing, given that some of the flavors and fragrances players, for example, are claiming to grow very well, and, just as an idea of how the competitive space there is developing. That's my first question. The second would be, is it fair to assume that the improvement in Performance Technologies that we should have seen already in 2019 is kind of now delayed because of the market environment, or do we still expect that we still expect to see some in the second half of the year?
Yeah. Okay. I mean, Personal Care, I mean, trends in Personal Care, I mean, you know, you see the Nielsen data or the IRI data. Personal Care, broadly flat in consumer data trends, you know, and that's skin and hair. Skin and hair care are broadly flat. What you have to think about with North America is it's still a big R&D brain for the world for innovation. We do a lot of innovation in North America for Croda for customers that in-export their products as well. You know, there's a lot of attention needed for that. Generally, there's just a softness.
I mean, our logic to that is we think, you know, with the trade war, you know, the disposable income available to U.S. families is reducing because what's not happening is the China products are still coming in, and everybody's still paying for them because they're not being filled by U.S. manufacture yet. Whether that happens, that's the strategy. Whether that happens in the end, we'll see. Everything's 1 little bit more costly, and I think what you've got is just a subdued consumer environment because there's 1 bit of disposable income squeeze out there. In the round, you know, it's a great Personal Care in North America is great. We've got 1 strong position. There's nothing in our numbers that says our flavors and F&F are coming into our space. You know, they're not.
You can see that through the NPP program. You know, and we wouldn't expect that as well. Yeah, we just want to see that come back. Your other question on Performance Technologies, yeah, I mean, we still think it will take time for that sales to come back. We don't expect it to deteriorate any further from the first half, it's all, you know, the auto supply chain, as you see, you know, it's just coming back to the suppliers now. You know, there's two or three levels in the supply chain, now as you're starting to see the real demand.
The real demand, I think, on us is a proxy for the true demand for their demand for the cars. It feels like it is more in line. I think if we start to see a pickup, then we will see a pickup too. The other thing, we will constantly refine that business. The innovation underpinning this is, you know, it is getting a stronger business. The weakness is just in the Smart Materials area. There is only a part of that which we are sort of macro to. The Energy Technologies business is broadly flat, which, you know, that is a really good business. In this current climate, broadly flat in that business, I think is a good result.
Thank you very much.
Apologize for this one. Significantly apologize. Halloween is approaching.
I'm not that bad, am I?
Can you just remind me what you said earlier in the year about hard Brexit and what you've done with raw materials and how you plan around WTO tariffs, et cetera?
Yeah, I mean, we're, you know, Jez leads the team, so Jez can comment as well. You know, we all take it seriously. I think a lot of it is around the edges. It's stock management. It's making sure your stock's in the right place, where it can be. We do that very well. You know, we're lobbying the government on behalf of the industry. I chair the industry group. You know, our big message is, you know, we don't want a hard Brexit, we want, if we, if we have to have a Brexit, we want some sort of pathway to it rather than a sort of cliff edge, because that will be disruptive for our industry. You know, there's a lot of trade flow in the chemical industry across multiple borders.
We're impacted in a sort of minor way. Croda, you know, we have less than 5% of our sales in the U.K. I think for Croda, it's a management around Classic stock management, making sure we do the right thing. Then, you know, we'll see what happens, I think it's gonna be an interesting ride, as we all know. You know, we'll see. Jez, you wanna comment on the detail?
Yeah, I'd say probably more Groundhog Day than Halloween, Andrew. We got it all ready for the end of March, and we're just gonna kick it all off again and get it ready for the October 31st just in case. Yeah, Steve says from the sort of, from the soft Brexit point of view, very, very minor impacts. You know, 4% of sales in the U.K., 16% of production in the U.K. Tariff impact from WTO, you know, low, well, you know, mid to high single digits, millions of GBP, of which there'd be, you know, some sharing of that between ourselves and our customers. We're not really concerned about the tariff impact from point of view of profitability or the risk around that.
As Steve says, it's all just about physical contingency planning to make sure that we've got, you know, some elevated stocks in the right locations between the U.K. and Continental Europe. We put those in place through the first quarter, we unwound in the second. We'll rewind from now through to the end of October in case, you know, we see some physical disruption, and that's really all we're managing for. Regulation all in place, we've re-registered all the overseas products that are sold in Continental Europe under a U.K. registration, which is obviously valid under EU laws. We've re-registered all of those products in a Continental Europe entity so that we can do that. We would do the same with the U.K. product, manufactured products, as and when the European regulator accepted those re-registrations.
They won't at the moment because the current registrations are still valid 'cause we're still in the EU. Those are the things that, you know, we've done. We've done everything that we can, and it's a tactical contingency planning exercise, not a structural or strategic impact on us.
Theodora Joseph, Goldman Sachs. My question is, with your outlook, you actually expect for a slight improvement in the second half. With that, like more color around how you kind of quantify slight, and your assumptions behind it, considering that actually within Life Sciences you expect a moderation in growth. Personal Care, you talk about how it actually is quite opaque. Kind of your assumptions behind your guidance.
Jez, do you wanna have a go?
Theodora, thanks. I think there are a few items we can bridge about why the second half profit is better than the first half profit. You know, we were down GBP 4 million in reported currency PBT. In the first half, that included a GBP 3 million headwind from capitalized interest, which we stopped capitalizing interest when we finished the main construction phase of the biosurfactant project in June last year. Half two to half two, you don't see that headwind. Obviously, the interest was higher last year. We were about GBP 8 million of interest in the second half year. We were GBP 3.5 million in the first half year. Clearly lapping will be much closer to that.
The only change in interest will be driven by the special dividend that we made. It'll be a little bit higher in interest, but not for that. We don't have a We're lapping Plant Impact, whereas we had a bit more than a GBP 1 million loss in the first quarter on Plant Impact, as it's effectively no sales with about a GBP 5 million cost base per year. You haven't got that lapping effect. You've got those sorts of changes. Think in terms of overall trends, as Steve said, we wouldn't particularly expect Performance Technologies sales to be different. Don't think you can point to a short-term rebound in automotive and other demand in industrial and technical applications. Life Sciences, yes.
You know, we're guiding to our mid- to medium-term numbers rather than saying we'll be double-digit every, you know, every period. Personal Care, we do think, you know, Personal Care will probably be, you know, closer to flat because we can see an improving trend in Asia, but we're not yet seeing an improving trend in the U.S. Of course, the comparators do get a little easier as we get into fourth quarter on Personal Care, where we were seeing this slowdown. I think those things collectively make us feel that we will be slightly better in the second half in that overall profitability performance, not, you know, orders of magnitude better. It's not the environment to make that call.
I think I would add, you know, the big caveat to all of that is we're not assuming markets to improve through the second half, but we're also not expecting the markets to deteriorate as well. We're expecting exit rates, you know, exit rates of Q2, sort of Q2 trading to continue. It is very opaque out there. It's unusual. It is unusual. Okay, that's great. Wrap up warm, won't you, when you go out of here. Thank you very much.