Okay, everybody. Morning to you all, welcome to another Croda webcast, 2018 half-year results. The coolest room in London today. It's really cool. Well done for the air conditioning anyway. As usual, it's me for a little bit of the highlights, Jez on the numbers, back to me on strategy and where we're going. Let's get straight into it. 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 first half, we expect that to continue as mid-single digit sales growth coming through. We're growing the core, 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 it's sales value ahead of sales volume.
That's the spirit of what we do in growing the core. We've got record profits as a consequence of that, 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 financial targets by doing the right things? Those of you that came to the Capital Markets Day will hear us talk about six different buckets of growth, a lot of that's coming about talking about bigger R&D bets, looking at technology acquisitions and smart partnership arrangements, getting Croda to think more external in our R&D as much as internal. We're seeing innovation continue to grow, just under 28% of group sales.
Two technology acquisitions this year already, Plant Impact and Nautilus. It's a robust financial platform, strong free cash flow, 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 three strong legs of growth, all of them growing well. The 50 basis points is driven largely by the Performance Technologies business, we'll come back to that. 25.4% return on sales. For the first time, a new milestone, over 100 P for EPS growth for the group, 12% EPS growth. Very strong performance in the business, we're very pleased with that. Taking a broader look at sales, the really encouraging thing in 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. 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. We want to improve the intellectual property in the business all the time. 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. The regions, comment on the regions. Good broad-based growth across all the regions. Asia continues to outperform and is the highlight. We've been investing heavily in Asia, up 6%. I think the big recovery play for Croda has been in Latin America.
It's been headwinds there for the last two or three 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 strong at 4% and North America, 5%. The Western economy is growing pretty well, but our emerging markets still growing pretty strongly, too. That's really well. Very pleased with the breadth of the geography of the growth. Into Personal Care. It's been a terrific performance in the first half. 9.3% for the first half, 11% for quarter two. 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. It's in very good shape.
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. 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, assuming the exchange rates remain the same. The margin is improving through the first half, so that should continue. The big thing in the industry, and you've heard it from us for a number of quarters now, this big move to barriers to entry for customers reducing. More customers are coming into this industry in a phenomenal rate. It's driven by the indie revolution. These small indie companies, we're picking up a lot more of innovation.
You've got a double whammy of more customers coming on, 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. 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 one or two of the multinationals. They're also acquiring these indies as well, and it's a virtuous circle. That's driving more indies to come in the market and look for their big exit multiple three years or four years down the line if a multinational can buy them.
You've got this very dynamic customer activity, which is driving more innovation, and that's helping Croda both with the small and medium-sized customers and at the big multinationals. It's really helpful. One of the big reasons that it's moving from low to mid-single digit sales growth to higher sales growth is the MNCs are coming back. The pace of MNC growth in the first half has been excellent for the group. If you look across the businesses, Actives, Effects, and Formulations all growing at 6%-9% sales growth. Solid sales growth in all of those regions, in all of those businesses. Supported by double-digit innovation. The NPP growth in this business is phenomenal. It's an outstanding performance on NPP, and the pipeline will continue. Personal Care is in very good shape.
Some of that has to be commendable to Sandra and her team for, you have got three businesses now. There's self-help there. We have got three managing directors that you saw in the capital market stage driving extra focus, driving more innovation. So Personal Care in good shape. We are also encouraged with the Life Sciences performance. We call it resilience. Do not forget, we have one API piece of business, which is masking the strong performance of the non-API or the mainstream business in Croda. So 5.1% in simple language is GBP 8 million headwind in the first half from Par. We expect about a GBP 4 million headwind in the second half. So we have had the significant amount, two-thirds of the headwind in the first half. So some modest headwind coming for Par. So we are nearly through the Par headwind.
If you look at the 7.4%, that is built up of Incotec and Crop Protection plus Healthcare. All of those are growing at 6%-9% as well. So it is very similar to the three businesses in Personal Care. So we have got very good, strong growth in our consumer businesses. If you look at it is driven by Crop. I mean, the Crop business has been outstanding. It is still growing very well. And the Incotec returns are starting to come through. We have doubled the profit in Incotec over the last two and a half years. So we are hitting our 20% returns, and we feel that is the start of the growth. We have got it to first base. Our job now is to expand that further, and we are investing heavily in China and America, particularly at R&D in Incotec. So it is classic Croda.
We are shrinking the business to its core, and now we are fast growing it around the world. And there is exciting opportunities there. And we are starting to see the use of Croda's ingredients into these seed coatings, which is driving some new innovation, too. We should not forget biostimulants and Plant Impact. They are in the numbers, and they are masking the underlying profit or the mainstream profit performance of the business. We bought Plant Impact a few months ago. Probably going to be a GBP 4 million loss to the year-end, as we would expect. But the biostimulant technology that we have got is every bit as exciting as we thought it was going to be. This is disruptive technology for the Crop industry for the next five years, and we have got very exciting plans to commercialize that through the Croda selling network. So we are in good shape. And a word on Healthcare.
Healthcare behind the non-API business is growing high single-digit sales growth. So that is effectively the delivery systems we call high-purity excipients. Very strong performance there, and it sometimes gets masked with the other moving parts. So resilient, we would say, behind the scenes, very encouraging performance in the business. Last but not least, we do not use the word impressive very much in Croda. We like to just get on with it, that is impressive performance, profit performance. Outstanding profit performance on modest sales growth, 15.2% profit growth and not far away from our 20% return on sales. 19.3% now, 230 basis point increase. We are really impressed with the performance of this business. And it is the third year running that we have had double-digit profit growth in the business. And I think the more encouraging thing is that is on flat NPP sales.
We're getting there by doing the right thing with value over volume strategy, the better profitability's coming through the key two businesses. There's more focus in that business, like in Personal Care, as we've reorganized, it's driving further innovation. We're improving the knowledge intensity. Croda's job is to commercialize people's knowledge. It's not to commercialize metal capacity. Once you start to do that, you can see the profitability can move up much quicker than you think. Very good sustainability profile as well in this business. Smart Materials has about 80% of its business is from renewable ingredients. People forget about that. We're starting to see the benefit of the biodegradable and the quest for renewable ingredients. I'll come back to that at the back of the pack because it's an important driver for the group, unstoppable trends.
The new technologies as well in IonPhasE are coming through well. We've had that business for a few months, we're already starting to see double-digit sales growth in IonPhasE and we haven't really started yet. Good work from Croda, but we feel we can take that business to somewhere exciting too. In summary, we've got strong commercial growth in Personal Care, we've got strong mainstream growth in Life Sciences, we've got strong profit growth in Performance Technologies. The three businesses, we really believe we've got three strong legs of growth. Let me stop there and let Jez 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, Croda is a global manufacturing and chemicals company that happens to be based in the U.K. 95% of our sales are outside the U.K. Clearly, we've had stronger sterling. 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. There you can see the much stronger growth. 3.6% improvement in sales for the business as a whole, 4.7% improvement for the three core sectors that form our core business. Of course, growing profit faster than sales, which is important for us. Profit before tax up 7.7% in constant currency terms.
Those are presented on an adjusted basis before exceptional items and amortization of intangibles. The IFRS profit before tax GBP 170.8. We don't have a lot of bad stuff in those numbers, you're seeing numbers in IFRS that are very similar to our adjusted number. As Steve said, GBP 1.002 first half adjusted EPS, great to be over that pound mark on that basis. Let's look at sales growth in more detail. 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 2017. Very strong growth second half last year, but really good growth in the first half of this year at 4.7% for the core business.
We expect to continue to see mid-single-digit sales growth to continue when we look at our markets going forward. That's very encouraging. That top-line momentum is carrying on. That's really building on our market positions, our technologies, and our innovation, which continue to drive. Very encouraging to see the volume growth that we have across the consumer businesses, and I'll talk about that in a moment. We are continuing to invest in new markets and new technology opportunities. Just decomposing the movement in sales from 2017, the first half to 2018. We have, first of all, the Industrial Chemicals impact. 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. We really don't have a problem with that number being negative.
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 IonPhasE business that we acquired in Performance Technologies in December last year, adding 0.8%. You can see the 3.9% and the 0.8%, that's your 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. You can see the significant impact of currency translation, 4.2% on sales, a little larger in profit terms, to give us the reported number, just over GBP 700 million of sales in the first half year. Breaking that growth down into how has it developed across each of the sectors. As Steve said, Personal Care, very encouraging, 9% growth overall.
Really good balance there between volume and price and mix going on there. We're very comfortable with that sort of shape to the growth. In Life Sciences, you can see a bit of a negative price mix effect, which is due to the API contract coming through there. Some good volume growth despite the exit from that API contract. 2% growth overall in sales. For Performance Technologies, you can see that effect that Steve talked about as we transition that business towards higher value, higher margin products. We have a 9% reduction in volume, quite significant first half as we demarketed business and came out of lower margin product. 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, that's mostly driven by mix, a much richer portfolio. Of course, when Croda changes its portfolio in this way, we make more money, as I'll show you on a subsequent slide. 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 Technologies business. Generally, much bigger volumes in PT than in the two consumer businesses. The group shape might look a little odd, but of course, it's driven by that restructuring of the portfolio in Performance Technologies. We're very comfortable with that.
As I say, some limited raw materials increases in the first half year, which we fully recovered. Turning to profit, how has that flowed through? The big profit increases, as you can see, are in Personal Care and in Performance Technologies. 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 Sciences business has utilized that spare capacity in a very productive way, driving good profit growth at GBP 11 million overall, including a slight reduction in profit in Industrial Chemicals. 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 us the 6% growth overall at the operating profit level, then another 1.7% coming from lower interest. 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. Secondly, we have continued to capitalize interest associated with the North America biosurfactant plant. We're required on very large projects to capitalize the interest, and that's been worth about GBP 3 million 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.
We would expect that GBP 3 million benefit in the first half to go away in the second. Of course, it's a non-cash issue. That overall 7.7% growth in PBT. The other big benefit to EPS is the tax rate. 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 has come down from just under 28% to just under 25%. Again, we see that as an ongoing rate for the group, and that's added another 4.3%. 12% growth in constant currency EPS at a -4.7% impact from currency translation. 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 biosurfactant plant being built.
It was GBP 41 million for the biosurfactant plant in the first half last year. We spent GBP 25 million in the first half of this year, and we're pretty much at the end of that. 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 GBP 30 million consistently. I did guide you at the year-end to around GBP 75 million as the ongoing level of CapEx. I still think that's about right, although we may fall a little short of GBP 75 million 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.
Again, second half cash flow, I'd expect to continue to strengthen. Overall, the leverage has stayed about equal. The net debt has stayed about equal, just under GBP 400 million and a fairly conservative 1 times leverage ratio. Finally, just a word on pensions. We've had our 3 yearly actuarial valuation of the U.K. 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. If you look at the IAS 19 pension deficit, which of course, is the P&L effect rather than the more important cash effect, that is pretty flat. We're at a GBP 16 million deficit overall, so fairly trivial on that basis.
Okay, that's the finances, and I'll pass back to Steve to talk about some of our strategic developments.
Thanks, Jez. We're back to connecting to faster growth markets, picking up that theme from the capital markets day. We're growing the core. You can see that in the numbers. Really happy with the performance of the 3 businesses, and we're stretching the growth. Growing the core and stretching the growth. It's not a Pilates class. Some people think it is in the board when I took them through this. It is called a strategy, so I don't want you to get carried away with the activity. If you want to do Pilates, that's fine with me. 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're the big 6 that we're trying to focus on in the business.
What I want to bring to life with you today is sustainability. When you shine a sustainability lens on the group, it's very powerful. A lot of our growth is coming from that sustainability mega-trend, and we mustn't lose sight of that. It's an unstoppable mega-trend. If anybody out there thinks this is a fad or a fashion or a short-term trend, think again. We're talking to customers on a regular basis every day. This is here to stay. It's creating a number of great opportunities. The mega trends, I won't spend too much time, but you've heard me talk about beauty and aging and health and wellbeing. 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.
Added to that is living a balanced life with the planet that we've got. It chimes really well with our crop business. Food consumption doubling. The land isn't. Everybody wants more bang for their buck with the chemicals and the ingredients that they use. Big, powerful trend for the group. 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. This unprecedented technology change is creating a lot of opportunity, particularly in Performance Technologies. There's lots of niches coming. Croda's philosophy is we're here to create markets, not destroy markets. We see a number of these trends as a source of new innovation opportunities for the group, really important. If you look at how it's driving the group.
Top left, we've had 10 years of sustainability reporting. For investors and analysts alike, have a look at the report. Some really interesting projects in there that's driving some significant growth for Croda. In the appendix in the pack, there is a slide that describes the strong financial performance for the group over the last 10 years, but also the strong sustainability performance as well. 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. Five and a half time increase in profit over that period. We're doing the right things, and we think that's important. The stats don't lie. Consumer trends are accelerating.
This is a stat for beauty care. You just look in 2007, those products on the market with what I'd call a sustainability claim, hardly any. 2017, a tenfold increase in that. 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. That's 11,000 opportunities for the group to launch products into those Formulations. That's big opportunities. Effectively, to try and reduce climate change. Behind that is about 167 objectives. If you really want to look at them, you can. The important point for Croda is it's not a 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.
Through that last 10 years of reporting, we've taken a leadership position in sustainability. Now we are an industry leader, and we're very recognized for that. We're proud of that. We're really delighted with that. That strong track record is starting to come through in the numbers as well. We see it as a powerful growth driver. I think with the appendix, that's classic CSR, as we would say, the sustainability reporting. That takes you to one step, and we should be proud of that, we are. Really the exciting bit is the new markets that are coming, and how do we take advantage of that? I want to try and bring that to life in the sectors for you. In Personal Care, there's lots of stats around this, but that's a big number.
65, effectively, just over one in two products now have got a sustainability tag to them in marketing, environmental or social positioning. For Croda, that's excellent because a lot of our ingredients chime with them. The Sustainable Development Goals that really sort of look strong against our business are 12 and 9. The responsible consumption and production, that's all about every day now, our customers want safer ingredients free from pollutants, preservatives, phosphates, sulfates, and, 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 customers' carbon burden? We can have a much bigger impact on our customers' carbon burden, carbon reduction, than we can on our own. We think that there's some great opportunities. I won't go through all the examples.
Ethical sourcing is a big area for all of our customers at the moment. We led the industry through responsible palm oil. We moved the industry to sourcing palm oil in a responsible way. Sales growth over the last two years, 60% for the group in responsible palm oil derivatives. We've led that. We've captured the growth. You might be surprised, but we now have skin creams on the market with anti-pollution actives. 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. Sederma have got anti-pollution actives. If you're walking around London, you know where we are. These are markets that weren't there two years ago.
These are markets that are starting to be created as a consequence of either government policy, consumer interest, and customer innovations. That's really important. You'll never get anywhere in sustainability without good, solid innovation, and Croda's got a great track record. You combine innovation and sustainability, and you capture growth. We think we're just on the cusp of significant growth because this powerful mega-trend is unstoppable, and it's creating opportunities all the time. It's not just in Personal Care. I look in Life Sciences, and 60% increase in agricultural productivity needed in the next 30 years, 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 Protection business. The reason we bought Incotec is because of that trend.
This is an unstoppable trend. Every day, people want better delivery systems, more intelligent delivery systems. It's chiming to that. The Life on Land and the Good Health and Well-being probably speak for themselves, but big pressure now to improve the quality of land, restore the land, stop the land being eroded any further. How do you get better soil fertility and the like? One of our examples there, drift reduction. We're world leaders in the drift reduction market. It wasn't there three years ago. Legislation in the U.S. forced it, imposed it. It's the penal reforms for farmers spraying outside their boundaries, big fines. Drift reduction is helping the environment, it's helping the farmers, and it's delivering great growth for Croda. If anybody wants to go to our Edison Laboratories, you'll see this drift reduction laboratory now, which is world-class.
We take a lead. The point I'm trying to make is these markets are opening up, and they weren't there before, and that's really important. I think on the other point, the point around the Sustainable Development Goal number 3, health and wellbeing, high-purity excipients is the fastest-growing technology in the group and has been for probably five years. Why? Why do people want it? It takes out trace impurities, takes out heavy metals like no other material can. In topical creams or in cancer drugs, they want the purest of the pure. They need that. Customers want that, they formulate with that. That market is developing on the back of, we would say, powerful sustainability trends. We're encouraged with the Life Sciences performance around that. 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. Big numbers, greater than 80% needed. What's that doing? It's 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? Creating great opportunities. Examples there are reduced emissions. We've got lubricity additives that improve biodegradability of the formulation, reduce the carbon dioxide emissions, new markets, water purity. We've got dispersants that improve the quality of the water. These are growing markets for Croda, it's all on the back of legislation and investment by companies and by government, too. Sustainability is not just about Personal Care for the group, it's about all three businesses.
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. It's really important. 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 two afterwards. 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. It's all sustainability. You know a lot of these from the Capital Markets Day, just to pick a couple of examples out. Biosurfactant plant, just about on stream. It will be on stream before the end of quarter 3.
The excitement that we're starting to see with our customers is really good. They're going to see, it gives them a chance to look at developing new brands, consolidating existing brands, we've been overwhelmed by the interest. That will be on stream financially for you should see that come through, starting to come through for quarter 4 in the numbers. 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 thinking, people may be thinking about it, we're not seeing anybody else on the market, too. We're in a very strong position to capitalize on that going forward.
Back to the high-purity excipients, we're doubling capacity in North America because of this big trend for reducing trace impurities in your product. We're in a good position and we're investing heavily around this sustainability trend, which is important. 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. A lot of them are based on sustainability. Plant stem cells, marine biotechnology in Nautilus, the next generation sustainable surfactants, disruptive surfactants, Forenza, and Crop and so on.
We are investing heavily around sustainability and 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. In conclusion, priorities remain unchanged. It might come across boring for you, but the three priorities remain the most important priorities for the group. We apologize for being boring, but we deliver around the boring-ness. 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 we're accelerating the capture of new sustainable technologies. I've just given you some examples of how we're starting to do that in the pack.
I think on outlook, 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 is transitioning to this high quality knowledge-based business, NPP. We're improving the cash generation and it does underpin our confidence in the full year. 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 those levels, too. We screen well for that in the second half and that's what underpins the confidence. That's the sort of figures that we're talking about. Let me stop there and take your questions. Thank you. Gunther.
Hi. Thanks. Can I start with two, please?
Yeah.
The first one on M&A, there were some headlines this morning, on, one, your potential interest in Ashland, and two, that you wouldn't be deterred by currently high multiples being paid in the industry. If you could comment either in general terms on-
Yes
regarding the M&A strategy or however specific you want to go.
Yeah, no. I haven't seen the report, but, yes. Let me be very clear. Croda's strategy, and you sort of see it lit up there, is it's all about organic growth and it's all about technology bolt-ons. That's where we get our excitement. That's our general focus. It's a laser-like focus. The spirit of what we're doing, we've taken the board through our strategy two or three times over the last year or two, and they're really excited about that as well. 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. Our core plan is organic growth, growing the organic growth, the core as we call it, and stretching.
The stretching part is lots of technologies. We want this to be an incubator. If we look forward in three years' time, we don't have six or seven 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. The priority focus is that. Whether it's miscommunication or whether it's a little bit of an artificial artistic license from some You know what Bloomberg are like. That's our focus. That is our focus. That is our focus. We won't move away from that. 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 don't feel like we have to buy anything significant.
We just want to do the right thing by bringing on a lot of these technologies. It's fertile ground. I know it's fertile ground in Crop Protection, it is fertile ground. There's great opportunities for us in technologies. To that point, just so you know, we're putting our money where our mouth is. It's like a football team, we've just trained up 24 scouts. Not Boy Scouts, 24 scouts in the business to look at and search for technology acquisitions. We're ramping up our technology acquisition quest, and we're being overwhelmed by the opportunities. Our job there is to sieve those heavily, then make sure that we're bringing on a conveyor belt of about three to five per year. We want to talk to you more and more about these bolt-ons, because some of them will win very handsomely. Some might not.
Overall, the net impact for the group is extremely positive. It's rich in NPP, it's rich in technology.
Well, good. Second question. Just on that one point, Steve. You didn't say to anybody at Bloomberg this morning you were interested in Ashland?
No.
I put that to bed.
No, we didn't. The message that we said was that message, that 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. It's the right thing to do. Yeah. For the avoidance of doubt, as they say in the legal terms, our priority is that. I think you saw that in the capital markets today, 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, you're not going to buy BASF either. My second question is on-
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?
We're not really seeing it, to be honest. 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 to the first half. Don't forget, a lot of our materials are quite unique materials. We're buying wool grease , we're buying fish oil, we're buying high-erucic rapeseed oils. They're the things that we worry about more than the petrochemical feedstocks in the market. Don't basket us with others in that case. Pretty benign.
Thank you.
Andrew?
Thanks. Andrew Stott, UBS. Steve, can I go back to your comments on guidance for the 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. What gives you that confidence? Is it specific contracts in the multinationals, something you obviously emphasized?
Yes.
Is it other issues?
Yeah, sure.
because I get to sort of three or 4%.
Yeah, okay.
with nothing changing.
Where we get to with that is, we look at it, that is the overall figure. Margins for the group, slightly ahead, similar to first half. There will be some moderation in turnover in Personal Care because let's be honest, 11% is a perfect quarter for the group. If we could have 11% every quarter, Chief Exec would be delighted. It is on weaker comps, you can see that from last year. We have had one or two new product launches for MNCs that have not hit the market yet. There is 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. Profitability-wise, we will be similar to first half for Personal Care.
Life Sciences, do not forget, we have had a bigger impact in par in the first half than in the second. We have had GBP 8 million out of GBP 12 million, GBP 4 million in the second half. The core businesses are growing pretty well underneath that. We are happy with that. Performance Technologies, we are expecting some sales growth to come through on moderation of margin improvement in there. The sort of reverse of Personal Care, if you see that. That all adds up in our mind to mid-single digits.
Yeah. Remember on Performance Technologies, the big growth, particularly in the oil and gas markets, was first half of 2017. From July, we were starting the demarketing process around that.
Yeah.
As Steve said, you got a change in the mix of the three sectors in there. Overall, we still feel that that should be 4%-5% core business growth, similar to the first half.
Can I just follow up on Performance Technologies? It's on the math of the leverage. I think it's 2% growth in sales-
Yeah
15% growth in EBIT.
Yeah.
Is that really just mix? That seems pretty extraordinary.
Yeah. Do you want to?
Yeah, yeah, it's about, again, I think we had 26% growth in oil and gas in the first half of last year. A lot of that was quite low margin business as US shale production came back in, and there were a lot of orders, and they were taking a lot of capacity as well. 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. Of course, because we have multi-sector plants, the fact that Personal Care and Life Sciences ex the API, which is in one particular plant in the U.K.. Because those two are both growing in terms of volume, you're not really getting any stranded cost. Clearly, we've got to allocate the cost between the three sectors, and we do that broadly on a volume basis.
Clearly, if you were taking that sort of volume out of Performance Technologies and not growing the other two businesses, then clearly you've got a fixed cost operating leverage issue. Because you've got the other two growing at the same time as this, then basically you see that improvement coming through. Fundamentally, bottom slicing, improving mix, but you do get the benefit of more volume going through the other two sectors.
Yeah. Adam?
Yeah. Hi, I had a couple. On the value over volume in PT, this has been a feature 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 wondered if you could just set that against the overall. 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.
The second one is on the API business. You are talking about GBP 4 million headwind in the second half, and then that drops out. What are you doing in terms of replacing the Omega-3 API business? Just an update, please, on the prospects elsewhere in Omega-3.
Let me do value volume, and then Jez, you can pick up API as well. The value and volume, 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. 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 big volume. It is big volumes going through, relatively low average selling prices in the Performance Technologies area. That had a significant impact, just that alone, because you got that big surge, so the comparatives were easier. What we did is our plant got very busy. We filled our factory.
What a lot of the industry do is they just tolerate that, and then they bring the CapEx on. We, of course, will bring CapEx on it the right way. What we do in between is we demarket. We look at the lowest quality business at 5 or 6 of our sites, which are largely driven by Performance Technologies. You've got a double whammy. You've got that mix effect, and then you've got a demarketing campaign, which is a well-trodden path for Croda, and that has a mix improvement effect. I think the third thing on that would be the self-help. 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. We're probably responding quicker to that.
Those three things are helping the story and delivering the mix. API, Jez, do you want to comment on that at all?
We still think Omega-3s are an interesting area in pharmaceutical APIs. We have got a couple of products which have been and still are in clinical trial, obviously, where we are making an API for pharmaceutical majors, which may or may not lead to drugs coming to the market. Of course, those would 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 short-lived. 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 2017. Since then, the market pricing has dropped rapidly in that space. We were right to pull out, otherwise we would have had the sales this year, but no profit.
There is still interest in there, but it is a sort of small ring-fenced part of the Healthcare business within Life Sciences. We have got a plant in Leek, which can make the products. If something comes through, that would be great, and we will see some significant growth as we go into the next decade. But we have no control over it. We have no visibility over it. It is not sort of core to the Healthcare strategy, but it is an interesting adjacency, really. The key thing for us in Healthcare is it is all about a broad portfolio of excipients, particularly the high-purity ones that Steve talked about. Hundreds of products to hundreds of customers in lots of applications.
The reason that is so exciting is just that when you look at the pharmaceutical development pipeline, something like 50% of the products in the pipeline are biologics. Biologics need these complex excipients to deliver them into the body, and we are seeing the high growth coming through, so much so that we have started a GBP 25 million investment in North America to expand, really to double our capacity of high-purity excipient. The core Healthcare business, very typical Croda, high technology, lots of products, lots of customers. The APIs, couple of products, couple of customers, may be interesting, but we just do not control that at all.
Just so people get it, the API sales in context to the total sales and Life Sciences percentage-wise?
We're probably now doing less than GBP 10 million in existing APIs.
Yeah.
That's in the Life Sciences business, over GBP 200 million.
The returns in Life Sciences, they're not driven by API. As we move away from the par contract, it's all about the three businesses, the two Crop Protection businesses and the Healthcare delivery system business. They are the drivers, and they're all growing very strongly, 69% all. We're really pleased with that. We'll go to Martin because he's been holding on for a while down here.
Yeah, thanks. Just following up on Andrew's Performance Technologies question, really. I mean I think historically, that division, possibly wrongly, has been seen to be maybe the poor relation within the group and all the attention elsewhere. These sorts of returns now, approaching 20% EBIT, those are high-level specialty returns. You're talking about new products in areas such as water purity, reduced emissions, and so on. 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?
Yeah. You must have been talking to the head of Performance Technologies, have we, Martin? No, he's probably on the call listening, chuckling away. Yeah, it absolutely does. They deserve the right for us to invest more and more on the business. It's classic Croda. It's not just because of the results, it's because the markets are opening up. There's some great opportunities in some of these areas. We're always consumer-led as an organization. We'll always look for the next best thing in consumer Personal Care and Life Sciences. We will start looking more and more in Performance Technologies. This scouting network that we put in place for 2024 are trained up for all three businesses. Their priority is balanced across the three. Quite frankly, Jez and myself, we'll be happy if a lot of them come in Performance Technologies.
If they come in Personal Care, we'll be happy too. What we're looking for is the same criteria. They have to have this rich technology, lots of IP, and they're going into fast new growth markets. As long as we can find more in Performance Technologies, we'll be comfortable with that. The returns are getting to levels that we would expect any Croda business to be at. 20% returns for this business, when you compare that to other industrial businesses out there, it's significantly ahead. It should be, because it's Croda. That's how we work. Chetan.
Two questions. One 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. What I said was sales will moderate from 11%. We expect broadly mid-single digit sales growth on improving margins. The margin's down 60 basis points. We've got an FX short-term issue. It's assuming the FX remains where it is. We've got Sederma selling to the dollar world in EUR. You do the maths on it. That's likely to moderate through the second half.
Euro strengthened really probably from August against the USD last year. At today's rates, we'd expect that headwind to start to moderate. That was the main driver to the reduction in the first half. Clearly, our margins tend to be a bit stronger first half than second half. We're seasonally a little quieter in the second half, so tend to get exactly the same margin.
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?
Not much. There is some, but not much. Is this a cyclical event for Croda, and is it going to return to normal? 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. It's certainly not going down, so we don't expect price attrition, nor do we expect further price increases. 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. As I said earlier, the encouraging thing is they haven't really started with NPP yet. There's a lot of good opportunities in the pipeline.
As we start to really motor with the NPP growth program for them, then we think that's very supportive of a 20% return on sales. Yeah, classic Croda, more innovation. Paul.
Thank you. Just a couple of quick ones. In terms of the biosurfactants launch, Jez, into the fourth quarter contribution, I think, Steve, you said starts then. What kind of profit impact do you think that business can have in 2019? That's my first question.
Okay. With 2018, first of all, we've probably had a headwind of around about GBP 1.5 million a quarter from obviously having costs associated with the plant. We've offset that.
From Q1?
No, for this year. Yeah. For each of this year.
Yeah, each quarter of this year.
Each quarter of this year, we've had that. Of course, in the first half, that's been broadly offset at the interest level by the fact that we've been capitalizing the interest. We'll have that headwind in the third quarter. We expect that to disappear in the fourth quarter. Therefore, as we go into next year, you'll have productive value for that sort of GBP 6 million of headwind. 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. Simply at the margin level, yeah, we'll avoid the headwind of costs we've got, and we'll then start to pick up the margin benefit.
Something around GBP 8 million is a good starting point.
A few million GBP we've said, yeah, is a good basis.
Yeah. Thank you.
You're welcome.
The second piece is just on the acquisitions. I know Plant Impact is negative for this year. You're hoping to get it to break even next year, so that's a GBP four delta. What about the other acquisitions? Any profit impact from those next year?
Yeah. 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, GBP 4 million, of which the best part of GBP 3 million is to come through in the second half year. The other one is IonPhasE, which is currently loss-making. So collectively, the two acquisitions impact us just over GBP 2 million in the first half year in terms of additional operating losses that we wouldn't have had if we hadn't had the acquisitions. IonPhasE we see moving into profit as we go through the second half year, and next year, we're looking for Plant Impact to be break even, as we guided on the first quarter call. Now, that's a function of sales.
It's got early-stage sales at the moment. They clearly don't cover its cost because we have the GBP 4 million loss. The key is the rate at which we can bring those sales of biostimulants into the market. Right now, we're targeting to get that to break even. We wouldn't expect to drag in 2019, but in the second half of this year, it's primarily about a GBP 3 million drag around Plant Impact.
Brilliant. Thank you very much.
Yeah.
Tom Wrigglesworth from Citi. Two questions, if I may, Steve.
Yeah.
The first one is just squaring up the kind of the mix of the performance of Personal Care growth. Obviously, you noted Beauty Actives being very strong, obviously in the new Sederma plant. How is that going to affect the mix versus the margin improvement that you've guided for the second half and into 2019? Are you expecting Beauty Actives to be the major driver there? The second question focused on cash tax seemed to be very low in the first half. Obviously, the net income, the P&L tax was low, but I think there was a GBP 20 million delta on cash tax. If any detail on that would be helpful. Thank you.
Just on the Personal Care mix, the message around margin improvement is assuming the mixes that we know will probably happen in the second half. We will see a margin improvement. What's driving it is all of them in the first half are growing at similar rates, actually. Effects and Actives in percentage levels are growing a bit higher, but they're all between six and nine, and Formulations business a little bit lower, but Formulations is a bigger business, do the math on it. You do get a slight mix skew. 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. We've seen the sort of typical exit rates of quarter two are encouraging that we expect that to go forward.
They're all in good shape. At the gross margin level, which is what we look at, is a good indicator. They're all at or better than last year, the three businesses. Three businesses are in good shape. We've just got an FX sort of optic, which is a short-term issue, which will reverse obviously second half.
Yes.
Cash tax?
Yes, the tax, cash tax.
Yeah. Two different things going on. P&L driven by the lower federal rate coming down from 35% to 21%. Cash tax driven by not expecting to pay any U.S. federal tax, probably for this year and next year. That's a function of the accelerated depreciation we can take on the North America biosurfactants plant. Effectively, 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. That basically removes, effectively, U.S. federal cash tax for two years. Clearly, in the P&L, that still goes through the P&L rate. It goes to deferred tax. From a cash tax point of view, no cash in the U.S. for two years.
Okay. Thank you.
Yeah. Martin?
Just, Jez, to follow up on the Atlas Point comment about the exciting thing next year could be new revenues. 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? Are you hoping to generate new demand? I would have thought amongst existing customers, demand is pretty static, that you can't generate a new market. It's just that you can sell the new product on different terms.
Clearly, the economics, there are three potential components to the economics of the Atlas Point biosurfactant plant. The first is capturing the margin currently of our suppliers, because we'll make the feedstock ourselves. The second component is to grow that market space. The third is potentially to capture a premium around the fact that it's a green product. It's biosurfactant rather than a petroleum-based product. Those are the three components, we expect them to sort of come in that sequence in terms of timing. We clearly capture the margin as soon as we start to get into production, so we're looking at fourth quarter. During next year, start to see some sales benefits of that coming through. Obviously, we're not really there to make bio-ethylene oxide. We're there to make the alcohols of a downstream plant.
That market is probably growing about 3%. There is some market growth there, but it's really substitution. 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 competitor's 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. Of course, up 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, Incotec. What you have to do is you bring it online, you get the margin improvement because we're substituting. We'll substitute all the products straight away. Within week one, week two, we're on to the change from petrochemicals to bioeconomics. 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. We've got to get the site up, we've got to get the products on stream, and then it takes just inertia. It takes six months, maybe 12 months to reposition their brands for the new generation products. 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, I think, 2020.
Next year is really a margin improvement story because you're taking the intermediary out. Really, 2020 is when we should start to see the strong sales growth as a consequence of having that.