Okay, everybody. Good morning to you all, and welcome to another Croda webcast. 2018 half year results, the coolest room in London today. I mean, it's really cool, but, well done for the air conditioning anyway. As usual, it's me for a little bit of the highlights and then Jes on the numbers and then back to me on strategy and where we're going.
So let me let's get straight into it. Yes, it's been a very good start to the year. The sales growth that we've seen in 2017 has continued at that pace in the 1st half and we expect that to continue. It's mid sales mid single digit sales growth. Coming through.
We're growing the core and the core to you and to Croda is we're growing the organic business. It's always classic philosophy in Croda. It's profits ahead of sales value and its sales value ahead of sales volume. That's the spirit of what we do in growing the car. We've got record profits as a consequence of that.
And it's Robust top line momentum that's driving that. All sectors and all geographies, I'll come back to that shine a light on that. We're seeing further improvements in margin, which is driving return on sales improvement too, stretching the growth, all about, thinking bigger, how do we stretch the the financial targets by doing the right things. Those of you that came to the Capital Markets Day will hear us talk about 6 different buckets of growth and a lot of that's coming about bigger talking about bigger R and D bets, looking at technology acquisitions and smart partnership arrangements, getting Croda to think more external in our R and D as much as internal. And we're seeing innovation continue to grow just under 28% of group sales.
And 2 technology acquisitions this year already, Plant Impact And Nautilus. And it's a robust financial platform, strong free cash flow and the dividend up again 27th year, 8.6%. Delving deeper into the numbers, the sales growth of core business is up 4.7% in the three legs. We have got 3 strong legs of growth, all of them growing well. The fifty basis points is driven largely by the Performance Technologies business and we'll come back to that, but 25.4% return on sales And for the first time a new milestone over 100p for EPS growth for the group, 12% EPS growth.
So very strong performance in in the business and we're very pleased with that. Taking a broader look at sales, the really encouraging thing and the numbers is the breadth of the sales growth In the sectors, the pick is obviously Personal Care, 9.3% sales growth in the first half, but good resilient performance in Life Sciences And Performance Technologies. Innovation again, up a lot of the philosophy in Croda is it's clever growth not any growth. We don't want to fill our factories with everything. We fill it with selective materials.
So we want to improve the intellectual property in the business all the time. So from January to now, we have more intellectual property in the business. That's the sort of fundamental deep philosophy that we have in Croda, all driven by innovation And the regions, a comment on the regions, good broad based growth across all the regions. Asia continues to to outperform and is the highlight. We've been investing heavily in Asia, up 6%.
But I think the big recovery play for Croda has been in Latin America It's been headwinds there for the last 2 or 3 years. Interesting to see that that's starting to come back. A lot of that is self help measures for Croda we've invested heavily in our Brazil operations, Factory And R&D and we expect that to continue. Europe, Europe strong at 4% North America fire. So the Western economy is growing pretty well, but our emerging markets still growing pretty strongly too.
So, really well very pleased with the breadth of the geography of the growth. Into Personal Care then, it's been a terrific performance in the first half. 9.3% for the first half, 11% for quarter 2. We had to look back in the history books for a double digit quarter and we still can't find it, but certainly beyond 15 years since we've had a double digit sales growth in a quarter for Personal Care in very good shape. The 60% the minus 60 basis points negative is predominantly FX.
It's a trade flow from Europe into the dollar world. Don't forget Sederma's in there as well. So the Sederma entity is selling, it's got its factory in France, but it's selling predominantly in dollars. There's a little bit of a mix effect there too. We expect that margin to reverse in the second half as you see the assuming the exchange rates remain the same.
But the margin is improving through the first half. So that should continue. And the big thing in the industry, and you've heard it from us for a number of, a number of quarters now, this big move to barriers to entry for customers reducing or more customers are coming into this industry in a phenomenal rate. It's driven by the indie revolution. So these small indie companies, we're picking up a lot more of innovation.
So you've got a double whammy of more customers coming and the pace at which they're getting products on the market is quicker than the multinationals. That's been very helpful to the group. We've targeted that for several years. We're seeing the benefit of that now. But we're also seeing the benefit of the multinationals responding positively and they're responding in two ways.
They're innovating more, some more than others. We're capturing some big growth now in some big product launches for 1 or 2 of multinationals, but also they're acquiring these in these as well. It's a virtuous circle. That's driving more in these to come in the market and look for their big exit multiple 3 years or 4 years down the line. A multinational can buy them.
So you've got this very dynamic customer activity, which is driving more innovation and that's helping Croda both in the small and medium sized customers and at the big multinationals. It's really helpful. So one of the big reasons that it's moving from low to mid single digit sales growth to the higher sales growth is the MNCs are coming back. So the pace of MNC growth in the first half has been excellent for the group. And if you look across the businesses, actives, effects and formulations, all growing at 6% to 9% sales growth, solid sales growth in all of those regions.
In all of those businesses and supported by double digit innovation. You know, the NPP growth in this business is phenomenal. An outstanding performance on NPP and the pipeline will continue. So personal care in very good shape. And And some of that has to be commendable to Sandra entertained for you've got 3 businesses now.
There's self help there. We've got 3 managing directors that you saw in the Capital Market States driving extra focus, driving more innovation. So personal care in good shape. We're also encouraged with the Life Science performance. See, we call it resilience.
On the self forget, we have 1 API piece of business, which is, which is masking the strong performance of the the non API or the mainstream business in Croda. So 5.1% in simple language is million headwind in the first half from Par we expect about a 4,000,000 headwind in the second half. So we've had the significant amount 2 thirds of of the headwind in the first half. So it's a modest headwind coming for par. So we're nearly through the par headwind But if you look at the 7.4 percent that's built up of Incotec and crop protection plus health care all of those are growing at 6% to 9% as well.
So it's very similar to the 3 businesses in Personal Care. So we've got very good strong strong growth in our consumer businesses. And it's driven by if you look at it, it's driven by crop. I mean, the crop business is being outstanding. It's still growing very well.
And the Incotec returns are starting to come through. We've doubled the profit in Incotec over the last two and a half years. We're hitting our 20% returns and we feel that's the start of the growth. We've got it to 1st base. Our job now is to expand that further and we're investing heavily in China and America, particularly at R&D in Incotec.
So it's Classic Croda. We're shrinking the business to its core and now we're fast growing it around the world. And there's exciting opportunities there. And we're starting to see the use of Croda's ingredients into these coatings, seed coatings, which is driving some new innovation too. We shouldn't forget bio stimulants and plant impact.
They are in the numbers and they're masking the underlying profit, the mainstream profit performance of the business we bought Plant Impact a few months ago, probably going to be a GBP 4,000,000 loss to the year end as we would expect. But the biostimulant technology that we've got is every exciting as we thought it was going to be this is disruptive technology for the crop industry for the next 5 years and we've got very exciting plans to commercialize that. Through the Croda selling network. So we're in good shape. And a word on health care, health care behind the non API business is growing high single digit sales growth So that's the effectively the delivery systems we call high purity excipients, very strong performance there and it sometimes gets masked with the the other moving parts.
So resilient, but we would say behind the scenes, very encouraging performance in the business, And last but not least, we don't use the word impressive very much in Croda. We'll always just get on with it, but that is impressive performance, profit outstanding profit performance on modest sales growth, but 15.2% profit growth and not far away from our 20% return on sales, 19.3 percent now, 230 basis point increase. We're really impressed with the performance of this business. And it's the 3rd year running that we've had double digit sales double digit profit growth in the business. And I think the more encouraging thing is that's on flat NPP.
Sales. So we're getting there by doing the right thing, with value over volume strategy
and
the better profitability is coming through key two businesses. There's more focus in that business like in Personal Care as we reorganize and it's driving further innovation. And we're improving our knowledge intensity. Now our job Croda's job is to commercialize people's knowledge. It's not to commercialize metal capacity.
And once you start to do that, you can see the profitability can move up much quicker than you think. And very good sustainability profile as well in this business. Smart Materials has about 80% of its businesses from renewable ingredient people forget about that. So we're starting to see the benefit of the bidigratable and the quest for renewable ingredients. And I'll come back to that at the back of the pack is an important driver for the group and unstoppable trends.
But the new technology as well in Iron Phaser are coming through well. We've had that business for a few months and we're already starting to see double digit sales growth in iron phase and we haven't really started yet. But good work from Croda, but we we feel we can take that business to somewhere exciting too. So in summary, we've got strong commercial growth in Personal Care. We've got strong mainstream growth in Life Sciences and we've got strong profit growth in Performance Technology.
So the 3 businesses, we really believe we've got 3 strong legs of growth. Let me stop there and let Jazz take you through some more of the numbers. Thank you. Thank you, Steve. Morning, everybody.
Start by looking at the overall numbers on the income statement. As you're all aware, Creda is a global manufacturing and chemicals company that happens to be based in the UK. 95% of our sales are outside the UK. So clearly, we've had strongest early. So on a reported currency basis, you can see a small decline in the sales number but an increase in operating profit and in profit before tax.
Obviously, we manage the business on a constant currency basis, And there you can see the much stronger growth, 3.6% improvement in sales, for the business as a whole 4.7% improvement for the 3 core sectors that form our core business. And of course, growing profit faster than sales, which is important for us. So profit before tax up 7.7% in constant currency terms. Now those are presented on an adjusted basis before it sets items and amortization of intangibles. So the IFRS profit for tax 170.8 percent, we don't have a lot of bad stuff in those numbers.
So you're seeing numbers in IFRS that are very similar to our adjusted number. And as Steve said, 100.2p first half adjusted EPS. So great to be able to that pound mark on that basis. So let's look at sales growth, in more detail. And what's really encouraging for us is to see now three consistent halves of growth since we really saw a return to good growth in the first half of twenty seventeen.
So very strong growth second half last year, but but really good growth in the first half of this year at 4.7% for the core business. And we expect to continue to see mid single digit sales growth to continue when we look at our markets going forward. So that's very encouraging. So that top line momentum is carrying on. And that's really building on our market positions, our technologies and our innovation, which continue to drive.
Very encouraging the state of volume growth that we have across the consumer businesses, and I'll talk about that in a moment. And we are continuing to invest in new markets and 17 first half to 2018. We have, 1st of all, the industrial chemicals impact. Now actually we're quite happy if industrial chemicals goes down. It is primarily an outlet for co products, byproducts that we produce in the other three sectors.
So we really don't have a problem with that number being negative. So overall, the reduction in industrial chemicals overall impact on the group number 1.1% on a constant currency basis. Offsetting that, we have the existing core business growing by 3.9 and the acquisition impact primarily from the iron phase business that we acquired in Performance Technology in December last year. Adding 0.8%. So you can see the 3.9% and the 0.8% to 4.7% in the core business.
Take off the industrial chemicals, 1.1, you've got 3.6% growth for the business as a whole. And then you can see the significant impact of currency translation, 4.2 percent on sales, a little larger in profit terms, to give us the reported number just over million of sales in the first half year. Now breaking that growth down into how is it developed across each of the sectors. So as Steve said, Personal Care, very encouraging 9% growth overall really good balance there between volume and price and mix going on there. So we're very comfortable with that sort of shape to the growth.
In Life Science, you can see a bit of a negative pricemix effect, which is due to the API contract coming through there. But some good volume growth despite the exit from that API contract. So 2% growth overall in sales. And then for Performance Technologies, you can see that effect that Steve talked about as we transition that business towards higher value, higher margin products. So we have a 9% reduction in volume, so quite significant first half as we demarketed business.
And came out of lower margin product, but you can see an 11% improvement in price and mix. Although there is a little bit of raw material price recovery going on in that number. And that's mostly driven by mix. So a much richer portfolio. And of course, when Croda changes its portfolio in this way, we make more money as I'll, as I'll show you on a subsequent slide.
So very happy with that shape. Overall, for the group, therefore, 5% growth or 4.7% overall comprising 9% improvement in price mix and minus 4% volume, That minus 4% may feel a little odd, but of course it's so driven by the big volumes that go through the Performance Technology business and generally much bigger volumes in PT than in the 2 consumer businesses. So the group shape might look a little odd, but of course, it's driven by that restructuring of the portfolio in Performance Technologies. So we're very comfortable with that. And as I say, some limited raw materials increases in the first half year, which we fully recovered.
So turning to profit, how has that flowed through? The big profit increases, as you can see, are in Personal Care. And in Performance Technologies. So we change the shape. We take a lot of volume out of Performance Technologies.
We make more money out of that. At the same time, the growth in personal care and in the rest of the life science business has utilized that spend capacity in a very productive way. And so driving good profit growth at 1,000,000 overall including a slight reduction in profit in industrial chemicals. So if we look at how that profit change has flowed through into EPS, overall, as Steve said, 12% increase in the constant currency EPS, 7.3% in the reported currency EPS. First of all, the sales growth component, as I said, 3.6% increase for the group.
Improvement in operating margin, 50 basis points is worth 2.4% growth in EPS, giving you percent growth overall at the operating profit level and then another 1.7% coming from lower interest. Now two things going on in interest. Firstly, we have a lower pension interest charge due to the fact that we have a surplus position on our main pension scheme, the U. K.-based pension scheme, and that will be an ongoing benefit. And secondly, we have continued to capitalize interest associated with the North America bio surfactant plant.
So we're acquired on very large projects to capitalize the interest. And that's been worth about 1,000,000 in the first half. We don't expect that to continue in the second half. Because we are just approaching the end of the commissioning of that plant. So we would expect a million benefit in the first half to go away in the second.
Of course, it's a non cash issue. So, that overall 7.7% growth in PBT And then the other big benefit to EPS is the tax rate. So as we highlighted at the year end, the reduction in U. S. Federal taxes primarily is a big benefit to us.
The effective tax rate is coming down from just under 28% to just under 25% And again, we see that as an ongoing rate for the group, and that's added another 4.3%. So 12% growth in constant currency EPS
and a
minus 4.7% impact from currency translation. So turning to some of the cash components for us. First of all, in terms of CapEx, as we indicated, we expect to end the ramp now that we've seen in CapEx due to the North America biosefactant plant being built. It was 1,000,000 for the biosefactant plant in the first half last year, We spent 25 in the first half of this year and we're pretty much at the end of that. So we expect a fairly small residual spend in the second half.
As you can see, if you strip that out, the rest of the business is spending 1,000,000 consistently. I did guide you at the year end to around 1,000,000 as the ongoing level of CapEx. I still think that's about right although we may fall a little short of 75 in the full year on that non bio spend. As a result of the reducing level of CapEx and also the tax benefit we get in the U S, free cash flow is improving. Saw an increase of over 50% and we're only partway there.
So again, second half cash flow, I'd expect to continue to strengthen. Overall, the leverage is stayed about equal, the net debt is stayed about equal, so just under 1,000,000 and a fairly conservative one times leverage ratio. And then finally, just a word on pensions. We've had our 3 yearly actuarial valuation of the UK pension scheme, which is our key pension scheme, and that is in surplus on a technical provision basis. And therefore, there are no deficit funding payments required for that scheme over the next 3 years.
And if you look at the IAS 19 pension deficit, which of course the P and L effect rather than the more important cash effect, that is pretty flat. We're at a 1,000,000 deficit overall. So to fairly trivial on that basis. Okay. So that's the finances.
And I'll pass back to Steve to talk about some of our strategic developments.
Thanks, Jes. So we're back to connecting to faster growth markets, picking up that theme from the Capital Markets Day. We're growing the core can see that in the numbers really happy with the forms of the 3 businesses and we're stretching the growth. So growing the car and stretching the growth, it's not a pilates class. People think here it is in the board when I took them through this, but, it is called a strategy.
So I don't want you to get carried away with that activity, but if you want to do Pilates, that's fine with me. And when we talked about Capital Markets at the Capital Markets Day, we identified 6 growth buckets, which are important to the group. I mean, there's more now, but they are the big 6 that we're focused on in the business. What I want to bring to life with you today is sustainability. And you shine a sustainability lens on the group and it's very powerful.
A lot of our growth is coming from sustainability megatrend. And we mustn't lose sight of that. It's an unstoppable megatrend. If anybody out there thinks this is a fad or fashion or a short term, a short term trend, think again. We're talking to customers on a regular basis every day.
This is here to stay. Creating a number of great opportunities. So the megatrends, I won't spend too much time, but you've heard me talk about beauty and aging and health and well-being. People want to look good, feel good, they want to take medication where they feel they need to and they'll do that on a regular basis. That's increasing.
What added to that is living a balanced life with the planet that we've got, chimes really well with our crop business. Food consumption doubling, the land isn't everybody wants more bang for that, but with the chemicals and the ingredients that they use, big powerful trend for the group And if I look at the Performance Technologies business, this energy revolution and this circular economy using waste streams in the business, And for your own factories, but also for your customers' factories, really important. And this unprecedented technology change is creating a lot of opportunities particularly in Performance Technologies, there's lots of niches coming. And Croda's philosophy is we're here to create markets not destroying markets. So we see a number of these trends as a source of new innovation opportunities for the group are really important.
And if you look at how it's driving the group, top left, we've had 10 years of sustainability reporting and for investors and analysts alike, you know, start have a look at the, the reports and really interesting, interesting projects in there that's driving some significant growth for Croda. And in the appendix in the pack, there is a slide that describes a strong financial performance for the group over the last 10 years, but also the strong sustainability performance as well. So we're decoupling our financial performance from doing the right things, energy down, landfill down water usage down significantly, big numbers, but our profit up significantly, 5.5 times increase in profit over that that period. So we're doing the right things and we think that's important. And the stats don't lie, consumer trends are accelerating.
So this is a step for Beauty Care you just look in 2007, those products on the market with a what I'd call a sustainability claim hardly any 2017, a tenfold increase in that. And the more important stat is over about 11,000 products are on the market now. These are finished products that have got a sustainability claim. So that's 11,000 opportunities for the group to launch products into those formulations. That's big opportunities.
And To effectively try and reduce climate change, behind that is about 167 objectives really want to look at them, you can. But the important point for Croda is it's another theoretical exercise. We've mapped some of these objectives onto our business and we can see with government change and policy that we're starting to open up new markets for the group. And through that last 10 years of of reporting, we've taken a leadership position in sustainability. Now we are an industry leader, very well recognized for that.
We're proud of that. We're really delighted with that.
We're
really delighted with that. And that strong track record is starting to come through in the numbers as well. So we see it as a powerful growth driver. But I think with the appendix, that's classic CSR as we would say customer, the sustainability, reporting, that takes you to one step and that and we should be proud of that we are, but really the exciting bit is the new markets that are coming and how do we take advantage of that? And I want to try and bring that to life in the sectors for you.
So in Personal Care, there's lots of stats around this, but that's a big number, 65 effectively just over 1 in 2 products now. We've got a sustainability tagged to them in marketing, environmental or social positioning. And for Croda, that's excellent because a lot of our ingredients chime with them. The sustainability development goals that really sort of look strong against our business are 12 consumption and production, that's all about every day now our customers want safer ingredients, ingredients free from pollutants, preservatives, phosphates, sulfates, and Dan Dan. And if you look at the innovation, people want sustainable innovation, how can we reduce our carbon burden, but how can we also reduce our customer's carbon burden and we can have a much bigger impact on our customer's carbon burden carbon reduction than we can on our own and we think that some great opportunities, but just I won't go through all the examples.
Ethical sourcing is a big area for all of our customers at the moment. So we led the industry through responsible palm oil initially. We moved the industry to sourcing palm oil in a responsible way. Sales growth over the last 2 years, 60% for the group in responsible palm oil derivatives. We've led that.
We've captured the growth And you might be surprised, but we now have skin creams on the market with anti pollution actives. So when you're walking around big cities, you're putting cream on your face to protect you from the pollution exhaust fumes and the like and Sodoma have got anti pollution active. So if you're walking around London, you know where we are. But these are markets that weren't there 2 years ago. These are markets that are starting to be created as a consequence of the government policy, consumer interest and customer innovations.
And that's really important. And you'll never get anywhere in sustainability without good solid innovation and Croda's got a great track record. So you combine innovation and sustainability and you capture growth. And we think we're just on the cusp of of significant growth because this powerful megatrend is unstoppable and it's creating opportunities all the time. And it's not just in Personal K.
Now I look in Life Science and then 60% increase in agricultural productivity needed in the next 30 years about the to the point around food production and the lack of land around that. We shouldn't be surprised that the fastest growing business in Croda in the last 10 years has been our crop care business. And the reason we bought Incotec is because of that trend. This is an unstoppable trend and every day people want better delivery systems, more intelligent delivery systems such timing to that. The life on land and the good health and well-being will probably speak for themselves, but big pressure now to reduce to improve the quality of land, restore the land and stop the land being eroded any further and how do you get better soil fertility and the like and one of our examples there, drift reduction, we're world leaders in the drift reduction market.
It wasn't there 3 years ago. Legislation in America forced it imposed it. So it's the penal reforms for farmers spraying outside their boundaries, big fines So a drift reduction is helping the environment, it's helping the farmers and it's delivering it's delivering great growth for Croda. Then if anybody wants to go to our Edison Laboratories, you'll see this drift reduction laboratory now, which is world class. So we take a lead, but the point I'm trying to make is these markets are becoming they're opening up and they weren't there before and that's really important.
And I think on the other point, the point around the sustainability development goal number 3, health and well-being high purity excipients is the fastest growing technology in the group and has been for probably 5 years. Why do people want it? What takes out trace impurities? Takes out heavy metals like no other material can. So in topical creams are in cancer drugs, they want the purest of the pure.
They need that customers want that and they formulate with that. So that market is developing on the back of we would say powerful sustainability trends. So we're encouraged with the life science performance around that. And I think in Performance Technologies too, it's all about greenhouse gas reduction. Greenhouse gas emissions, the whole sustainable development goal philosophy is driven by greenhouse gas emissions really, but big numbers great than 80% needed.
What that what's that doing is driving clean energy, green energy, box number 7 for sustainable development goal and purity of water less water pollution. And how do we stop the plastic getting into the water, create a great opportunity? So examples there are reduced emissions. We've got lubricity additives that improved biodegradability of the formulation reduce the carbon dioxide emissions, new markets and water purity, we've got dispersants that improve the quality of the water these are growing markets for Croda and it's all on the back of legislation and investment by companies and by government to So sustainability is not just about personal care for the group, it's about all three businesses and that's why we see we're encouraged again with the results starting to come through. A lot of the growth is coming from these trends.
We don't expect these trends to reduce. We expect them to accelerate over the next few years. Really important. And again, it's all about innovation, delivering innovation against this and making sure that we can meet the unmet needs as they come along rather than a year or 2 afterwards. And if you look at our big projects, these are our biggest growth projects.
These are the things we get really excited about in the company. All sustainability. And again, you know, a lot of these from the Capital Markets Day, but just to pick a couple of examples out, Biocept actin plan just about onstream, it will be on stream before the end of quarter 3. And the excitement that we're starting to see with our them as is really good. They're going to see it gives them a chance to look at developing new brands, consolidating existing brands And we've been overwhelmed by the interests.
So that will be on stream. And financially for you, it'll be you should see that come through, starting to come through for quarter 4 in the numbers. And we all of our interest really is about positioning the products correctly in the eyes of our customers our customers are starting to see this as a new source of differentiation for them. Nobody else is on the market with it. Nobody else is think well people may be thinking about it, but we're seeing anybody else on the market too.
So we're in a very strong position to capitalize on that going forward. And back to the high purity excipients, you know, with doubling capacity in North America because of this big trend for reducing trace impurities in your products. So we're in a good position and we're investing heavily around this sustainability trend. Which is important. And, we shouldn't forget our technology led acquisitions.
This is the central focus in the group. It's driving a lot of passion and interest and excitement from, our commercial teams. This is where we want to go and we want a lot more of these, but I don't need to spend any time on them because you know them all, but a lot of them are based on sustainability, plant stem cells, marine biotechnology in nautilus, next generation sustainable surfactants, disruptive surfactants for Enzo and crop and so on. So we are investing heavily around sustainability. And we a lot of companies talk about sustainability as a parallel universe because I think sometimes they think they have to.
We're embedding that in the organization because it is driving a lot of the growth and that's really important. So in conclusion then, priorities remain unchanged It might come across borrowing fear, but the 3 priorities remain the most important priorities for the group. We apologize for being borrowing, but we deliver around the borrowing this. Delivered consistent top and bottom line growth that's starting to come through now. We screen well for mid single digit sales growth now.
We expect that to continue The innovation continues to increase and yes, we're accelerating the capture of new sustainable technologies and I'm just giving you some examples of of how we're starting to do that in the in the pack. I think on outlook where the word we use a lot is encouraging. The first half if you get behind the numbers the three businesses are in very good shape. Consumer business has got momentum, Performance Technologies transitioning to this high quality knowledge based business. In PP.
And yes, we're improving the cash generation and it under it does underpin our confidence in the full year. And I think I would say around second half mid single digit sales growth on improving margins. We expect those margins that we see in the first half to continue around that those levels too. So we screen well for that in the second half and that's what underpins the confidence. So that's the sort of figures that we're talking about.
Let me stop there and take our questions.
Hi, thanks. Can I start with 2, please?
The first one
on M and A, there were some headlines this morning on 1, you're potentially interested in Ashland. And 2, that you wouldn't be deterred by currently high multiples being paid in the industry. So if you could comment either in general terms on M and E spread it to you? I don't think you want to go.
I haven't seen it quite, but, yes, I mean, let me be very clear. I mean, Croda's strategy and you sort of see it lit up there is all about organic growth and it's all about technology bolt ons. That's where we get our excitement. That's our general focus to laser like focus the spirit of what we're doing, we've taken the board through our strategy 2 or 3 times over the last year or 2, and they're really excited about that as well. So the excitement for Croda is not buying big businesses for the sake of big businesses.
It's buying technologies. We really get excited. And the technology stable that we've got now is starting to really look disruptive in a positive way going forward. So our core plan is organic growth, growing the organic growth, the core as we call it and stretching and the stretching part is lots of technologies. We want this to be an incubator.
So if we look forward in 3 years' time, We don't have 6 or 7 technology businesses. We have 20 or 25 and we're commercializing those. We're good at commercializing those things and we get the best out of businesses when we link it to technology. So the parity focus is that there's whether it's miscommunication or whether it's a little bit of artificial artistic license from some, you know, what Bloomberg are like. That's our focus.
That is our focus. That is our focus. And we won't move away from that. And it's a deep passion for the business because the business are much more excited about growing technologies than buying a big business just for the sake of it. We're not we don't feel like we have to buy anything significant.
We just want to do We want to do the right thing by bringing on a lot of these technologies. And it's fertile ground and that's fertile ground in drop, but it is fertile ground. There's great opportunities for us in technologies. And to that point, just so you know, we're putting our money where our mouth is. We've, it's like a football team, but we've just trained up 24 scouts, not by scouts, but 24 scouts in the business to, to look at and search for technology acquisition.
So we're ramping up our technology acquisition quest and we're being overwhelmed by, the opportunities. So our job there is to sieve those heavily and then make sure that we're bringing on the conveyor belt of about 3 to 5 per year. And we want to talk to you more and more about these bolt ons because these are some of them some of them will win very handsomely. Some might not, but overall the net impact for the group is extremely positive. It's rich in NPP and it's rich in technology.
All good to take the question.
Just on that one point, Steve. So you didn't say to any at Bloomberg this morning, you were interested actually? No, no,
no, no, we didn't. We didn't. And the and the message that we said was that message that the excitement is all about the excitement is all about this small bolt on technologies. That's the core way that Croda wants to get involved in seeing our growth shape. Go forward.
Yeah, it's the right thing to do. So yeah, so for the avoidance of doubt, as they say, in the legal terms, our priority is that. And I think you saw that in the Capital Markets Day and you see that in how we talk. If you talk to the Croda people, that's what they're interested in. That's the priority.
Okay. So you're not going to buy BSF either? And my second question is
Definitely not. Second question is
on raw materials. You're starting to see some cost inflation on the feedstock side. Can you quantify that? And can you highlight what areas you're seeing, raw material cost inflation, what you're doing to pass that on?
Yes. I mean, we're not really it to be honest. I mean, we would say in the first half numbers, it's about we were talking about this just before, about 1% raw material inflation in group numbers for RMs in the first half, mainly skewed to Performance Technologies. Second half, we talked to Stuart, our head of operation, if we look at the RM picture pretty benign, we would say, similar similar to the first half. We're not Yes, don't forget, a lot of our materials are quite unique materials.
You know, we're buying Walgreens. We're buying fish oil. We're buying high receipt rate piles. They're the things that we worry about more than the petrochemical feedstocks in the market. So don't, don't basket us with others in that case.
But yes, so, I mean, pretty benign.
Yes, thanks, Andrew Stott, UBS. Stephen, can I go back to your comments on guidance for second half? Just thinking about the comps from last year, especially in Personal Care, and I get the point you made on par, it doesn't look easy to get to mid single digit. Even if your exit rate was pretty good in Q2. So what gives you that confidence?
Is it specific contracts in the multinational, something you obviously emphasized Is it other issues? Just wanted to because I get to sort of 3% or 4% with nothing changing.
So where we get to with that is, yeah, we look at it at the overall figure, margins for the group, slightly ahead, similar to first half. There'll be some moderation in turnover in Personal Care because let's on 11% is a perfect quarter for the group. If we could have 11% every quarter, Chief Executive would be delighted, but it's on weaker comps. You can see that from last year and we've had 1 or 2 new product launches for multinationals that haven't hit the market yet. So there's a bit of pipeline fill in there as well.
How we look at Personal Care is around mid single digits for the second half on improving margins. We expect the margin to move forward. There given the exchange rates where they are and if they stay there. So profitability wise will be similar to 1st half for Personal Care. Life Sciences, don't forget, we've had a bigger impact in power in the first half than in the second.
We're about 1,000,000 out of 1,000,000, so 1,000,000 in the second and the core businesses are growing pretty well underneath that. So we're happy with that. And then Performance Technologies, we're expecting some sales growth to come through on moderation of margin improvement in there. So the sort of reverse of Personal Care, if you see that, that all adds up in our mind to mid single digits.
Yes. And remember on Performance Technologies, the big growth, particularly in the oil and gas markets, was first half of twenty seventeen. So from July, we were starting the demarketing process around that. So as Steve said, you've got a change in the mix of the 3 sectors in there. But overall, we still feel that that should be 4% to 5% core business growth similar to the first half.
And can I just follow-up on Performance Tech? Is it on the maths of the leverage? I mean, 2, I think it was 2% growth in sales, 15% growth in EBIT? Is that really just mix? I mean, that seems pretty extraordinary.
Yeah. Do you want
to?
Yeah. So yeah, it's about Again, I think we had 26% growth in Oil And Gas in the first half of last year. So, a lot of that was quite low margin business as U. S. Shale production came back in and there were a lot of orders and they were taking a lot of capacity as well.
So you have the bottom slicing of all of that business coming out. You have general move to improve the mix of the products we've got And of course, we don't because we have multi sector plants, the fact that personal care and life science API, which is in one particular plant in the UK, because that those 2 are both growing in terms of volume, you're not really getting any stranded cost. So clearly, we've got to allocate the costs between the three sectors, and we do that broadly on a volume basis. So clearly, if you were taking that sort of volume out performance technology and not growing the other 2 business, then clearly you've got a fixed cost operating leverage issue. But because you've got the other 2 growing at the same time as this, then basically you see that improvement coming through.
So fundamentally, bottom sizing improving mix, but you do get the benefit of more volume going through the other 2 sectors.
Added?
Yeah. Hi. I had a couple. On the value over volume in PT, this has been featured for a long time, but was clearly quite a big impact in the first half. You mentioned just now that some of this perhaps is down to lower value oil business dropping out.
I wonder if you could just set out against the overall? And then with the overall, give us a sense of what the main movements have been where have you tackled this most and a sense of how this might develop looking forward? And then the second one is on the API business. You are talking about a $4,000,000 headwind in the second half and then that drops out. What are you doing in terms of replacing the omega-three API business?
And just an update please on the prospects elsewhere in omega-three?
Yes. Well, let me do value volume and then Jason can pick up API as well. Yes, I mean, the value and volume, so What you saw in 2017 first half was in the industrial businesses in all of our industry was a big demand increase, which was led by construction led by oil. And what that means for most people is obviously commodity prices go up and everything else. In our world, our oil business is at the lower end of the pricing and the and big volume.
So it's big volumes going through relatively low average selling prices on the in the Performance Technologies area. So that had a significant impact just that alone because you got that big surge So the comparatives were easier. But what we did is we our plant got very busy. We filled out factory. Now what a lot of the industry do is they're just tolerate that and then to bring the CapEx is on.
And we, of course, will bring CapEx on it the right way. But what we do in between is we demark it. So we look at the work the lowest quality business at 5 or 6 of our sites, which are largely driven by Performance Technologies. And so you've got a double whammy. So you've got you've got that mix effect and then you've got a demarketing campaign, which is, it's a well trodden path for Croda, and that has a mix improvement effect And I think the third thing on that would be the self help, he's got in Martin's team now, we've got smart materials and energy technologies and we've got more focus in those businesses, which is driving better thinking, better decision making, in those businesses.
So we're probably responding quicker that. So those three things are helping the story and delivering the mix. I mean, API and Jonas, do you want to comment on that now?
Yes. So, yes, we still think Omega 3s are an interesting area in pharmaceutical APIs. We've got a couple of product which are which have been and still are in clinical trial, obviously, where we're making an API for pharmaceutical majors. Which may or may not lead to drugs coming to the market. And of course, those will be patented drugs with long protections as opposed to, obviously, the North America contract, which was a generic, and we always thought that was going to be relatively lived and in the end, of course, it lasted for about three and a half years.
We were into it in 2014 and exited at the end of 'seventeen. And since then, the market pricing has dropped rapidly in that space, so we were right to pull out, otherwise, we would have had the sales this year, but no profit. So there is still interest in there, but it is a sort of small ring fenced part of the health care business within Life Science. So we've got a plant in leak, which can make the products. And if something comes through, that would be great.
And we'll see some significant growth as we go into the next decade, but we have no control over it. We have no visibility over it. So we don't it's not sort of core to the health strategy, but it's an interesting, adjacency really. The key thing for us in health care is it's all about a broad portfolio of excipients, particularly the high purity ones that Steve talked about, the hundreds of products to 100 of customers in lots of applications, And the reason that is so exciting is just that when you look at the pharmaceutical development pipeline, something like 50% of the products in in the pipeline of biologics, biologics need these complex excipients to deliver them into the body. And we're seeing the high growth coming through so much so that we've started a million investment in North America to expand, really to double our capacity of high purity excipients.
So the core health care business very typical Croda, high technology, lots of products, lots of customers, the APIs, yes, couple of products, couple of customers, may be interesting, but we just don't control that at all. So just so people get it.
The API sales in context to the total sales and life science percentage wise?
All right. So we're probably now doing we're doing less than 1,000,000 in existing APIs And, that's in Life Science business at 1,000,000.
The returns in Life Science, that are not driven by API. And as we move away from the contract, it's all about the 3 businesses, the 2 crop businesses and the health care delivery system business. They are the drivers and they're all growing very strongly. 6% to 9% all So, we're really pleased with that. We'll go to Martin because he's been, he's been holding on for a while down here.
Yes, thanks. Just following up on Andrew's performance tech question, really. I mean, mean, I think historically that division possibly wrong has been seen to be maybe the poor relation within the group and all the attention elsewhere, but the lease sort of returns now approaching 20 percent EBIT, those are high level, specialty returns. And you're talking about sort of new products in areas such as water purity, reduced emissions and soil. So internally within Croda now, do you think given how PT has essentially proved itself that it will get more attention and focus in terms of NPP development and so on?
Yes. He
must have
been talking to the head of the Pharma Technologies, that'd be Martin. No, but he's probably on the call listening, Chucklyn
Yes,
it absolutely does. And, they deserve the right for us to invest more and more on the business. And it's Classic Croda, it's just because of the results is because the markets are opening up. There's some great opportunities in some of these areas. And we're always consumer led as an organization.
We're always look for the next best thing in consumer personal care and life sciences, but we will start looking more and more in Performance Technology. So the scouting network that we put in place for 24 are training trained up for all three businesses. Their priority is balanced across the 3. And I'm quite frankly, Jes and myself, we'll be happy if a lot of them come in Performance Technologies But if they come in Personal Care, we'd be happy to. So yes, but what we're looking for is the same criteria.
Now they have to have this rich technology, lots of IP and they're going into fast new growth markets. And as long as we can find more in performance technologies, we'll be comfortable with that because the returns are getting to levels that we would expect any Croda business to be at. And 20% returns for this business. When you compare that to other industrial businesses out there, it's significantly ahead, but it should be because it's Croda. That's how we work.
Chatin.
No two questions. 1 on Personal Care. I just wanted to confirm, did you say the margin in second half in Personal Care will be same as first half?
No, I didn't. I didn't say that at all. And what I said was we'll moderate sales will moderate from 11% and we expect broadly mid single digit sales growth. On improving margins. So the margin is down 60 basis points.
We've got an FX short term issue. So it's assuming the FX remains where it is. We are Sodema selling to the dollar world in euros. You do the maths on it. That's likely to moderate through the second half?
Yes.
Euro strengthened really probably from August against the USD last year. So at today's rates, we'd expect that headwind to start to moderate. And that was the main driver to the reduction in the first half clearly our margins tend to be a bit stronger first half and second half. We're seasonally a little quieter in the second half, so tend to get exactly the same margin.
And the second question, again, sorry to follow-up on PT, but we've had this environment of tightness in chemicals generally, pricing going up is there, some element of maybe just stronger pricing because of tightness in some of the markets driving up the earnings, you think?
Yeah, not much. I mean, there is some, but not much, you know, we is this a cyclical event for Croda? And is it going to return to normal and we think a lot of it isn't. It's doing the right thing in the business. The quality of the products in our factories now are much higher.
We think the raw material climate is reasonably benign, so we don't expect it's certainly not going down. So we don't expect price attrition and nor do we expect further price increases. So There is a tightness, but it's mainly linked to the what I call the diversified companies out there. They're impacted more than we are. We think it's there to stay.
And as I said earlier, the encouraging thing is they haven't really started with NPP yet and there's a lot of good opportunities in the pipeline. So as we start to really monitor with the NPP growth program, for them then, we think that's very supportive of the 20% return on sales. So, yeah, Classic Croda to more innovation. Paul?
Thank you. Just a couple of quick ones. In terms of the biosurfactants launch shares into the 4th quarter, contribution, I think Steve you said starts then. What kind of profit impact do you think with that business can have in 2019? That's my first question.
Okay. So with 2018, first of all, we probably had a headwind of around about 1,500,000 a quarter from obviously having costs associated plant, we've offset that.
From Q1?
No, from for this year, yes, for each of this year, each quarter this year, we've had that. And of course in the first half, that's been broadly offset at the interest level by the fact that we've been capitalized in the interests. So we'll have that headwind in the third quarter. We expect that to disappear in the fourth quarter and as and therefore as we go into next year, you'll have productive value for that sort of 1,000,000 of headwind. And of course, we'll start to pick up the margin that is currently made by our suppliers on the ethylene oxide into that.
The exciting part of course is to then start to move sales ahead. But simply at the margin level, yes, we'll avoid the headwind of costs we've got and we'll start to have margin benefits.
So that's something around 1,000,000 is a good in point?
A few £1,000,000 we've said, yes, it's a good basis.
Thank you, Peter. And then the second piece is just on the acquisitions. I know plant impact is negative for this year. You're hoping to get it to breakeven year. So that's a 4 delta.
What about the other acquisitions? Any profit impact from those next year?
Yes. So the other ones that we've done, it's pretty trivial because we have just a very small handful of people in Nautilus Enza. As Steve said, plant impact 1,000,000 of which the best part of 1,000,000 is to come through in the second half year. And then the other one is Iron phase, which is currently loss making. So collect the 2 acquisitions impacted us just over 1,000,000 in the first half year in terms of additional operating losses that we wouldn't have had if we hadn't had the acquisitions.
Iron phase we see moving into profit as we go through the second half year. And then next year, we're looking for plant impacts to be breakeven as we guided on the first first quarter call. Now that's a function of sales. It's got early stage sales at the moment, but they clearly don't cover its cost because we have the formula in loss. So the key is the rate at which we can bring those sales of, bio stimulants into the market.
But right now, we're targeting to get that to breakeven. So we wouldn't expect to drag in 2019, but in the second half of this year, it's primarily about a 3,000,000 drag around plant impact. Brilliant.
Thank you very much. Yes.
Tom Wrigglesworth from Citi. So two questions if I may,
Steve.
The first one is just squaring up the kind of the mix of the performance of personal care growth, which is noted beauty actives being very strong obviously in the Neussoderma plant how is that going to affect the mix versus the margin improvement that you've guided for the second half and into 2019? Do you expect the community actives to be the major driver there? And second question, focused on cash tax seemed to be very low in the first half. So obviously the net income, the P and L tax was low, but I think there was £20,000,000 delta on cash tax? Any detail on that would be helpful.
Thank you.
Yes, just on the personal care mix, so the the message around margin improvement is assuming the mixes that we know probably
happen in the second half. So we will see a
margin improvement. What's driving it is All of them in the first half are growing at similar rates actually. FX and actives in percentage levels are growing a bit higher, but they're all between 6% and 9% and formulation business a little bit lower, but formulations is a bigger business, so do the maths on it. You get you do get a slight mix SKU. Going forward, we don't expect the mix change, too much in the second half, but probably a little bit more with the exchange rate benefit of actives to drive that a bit more.
So the and we've seen the sort of typical exit rates of quarter 2 are encouraging that we expect that to go forward. So they're all in good shape. And at the gross margin level, which is what we look at is a good indicator. They're all at or better than last year. 3 businesses 3 businesses are in good shape.
So we've just got an FX sort of uptick, which is a short term issue, which will reverse off for the second half.
So, Yes. Oh, yes, the tax, cash, tax, tax. Yes. So, yes, 2 different things going on. P and L driven by the lower federal rate coming down from 35% to 21% cash tax driven by not paying any U.
S, not expecting to pay any U. S. Federal tax probably for this year and next year. And that's a function of, the accelerated depreciation we can take on the North America biosfactants plant. So effectively, we can in principle, you could take that capital allowance in a year.
Although we don't actually make enough money in the U. S. To take it in a year. So that basically removes effectively U. S.
Federal cash tax for 2 years. Clearly in the P and L, you still that still goes through the P and L rate. It goes to deferred tax. But from a cash tax point of view, no cash in the U. S.
For 2 years.
Okay. Thank you.
Yes, Martin.
Yes, just to follow-up on the Atlas Point comment about the exciting thing next year could be new revenues, just I mean, it's obviously early days. Are you saying the hope is that you'd replace existing contracts when they roll off at essentially higher rates because of the green nature of the new product or are you hoping to generate new demand? Because I would have thought amongst existing customers' demand is it's pretty static that you can't generate a new market. It's just that you can sell the new product on different terms.
Yes. The so clearly the economics, there are 3 potential components to the economics of the at this point by Sacton Plant. The first is capturing the margin currently of our suppliers because we'll make the feedstock ourselves. And then the second component is to grow that market space. And then the third is potentially the Catra premium.
Around the fact that it's a green product, it's biosefactant rather than a petroleum based product. So those are the 3 components. And we expect them to sort of come in that sequence in terms of timing. So we clearly capture the margin as soon as we start to get into production. So we're looking at Fourth Quarter.
And then during next year, start to see some sales benefits of that coming through. In terms of the obviously, we're not really there to make ethylene, bio ethylene oxide, we're there to make down costs at of a downstream plant. That market is probably growing about 3%. So there is some market growth there. But it's really substitution.
So it's really the fact that we think that more of our customers, particularly in those markets that Steve talked about in sustainability, particularly personal care, particularly home care, that you will see customers wanting to a substitute our competitors product and B growing their own market because they're now offering a product which for the first time will perform as well as the petroleum based products where of course to now the problem's been, yes, you can get some green products, but they don't perform as well. Whereas here, we're going to make an identical chemical product basically, we think substitution and the opportunity to grow the market are very exciting in this project.
It's a bit like, technology acquisition you incate. What you have to do repo you bring it online, you get the margin improvement because we're substituting. We'll substitute all the products straight away. So within week 1, week 2, we're on to we've changed from petrochemicals to bioeconomics. But the really interesting and exciting thing is how do we talk to the marketing teams of our customers and reposition the brands because we're having those discussions now, but we've got to get the site up, you've got to get the products on stream And then it takes just inertia, it takes 6 months, maybe 12 months to reposition their brands for the new generation products.
And we call it white space, but a lot of good white space opportunities here. You're going to really see it towards the end of 2019 and into 2020. So next year is really a margin improvement story. Because you've taken the intermediate out the year, really 2020 is when we should start to see the strong sales growth, as a consequence of having that Great. Well, okay.
Well, thank you very much. And I'll leave it to, the or 59, chemical reporting today. All right. Thank you.