Hello and welcome to the Croda International PLC Q1 Results Call. My name is Jess, and I'll be your coordinator for today's event. Please note, this call is being recorded, and for the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question at any time. If at any point you require assistance, please press star 0, and you'll be connected to an operator. I will now hand over to your host, David Bishop, Investor Relations Director, to begin today's call. Thank you.
Good morning, and thank you for joining this Q1 update call covering our sales performance in the three months to the 31st of March, 2024. I'm joined this morning by Steve Foots, CEO, and Louisa Burdett, CFO. Hopefully, you've already seen the statement, so we will have a short introduction from Steve before taking questions. Can we ask the analysts to limit their questions to one per participant? Easy to say, please. Plus one supplementary only if necessary for clarification.
Yeah. Thanks, David. And David hasn't been drinking last night as well. But morning to you, everybody. Look, let me take you through the handful of key points that summarize what we've seen during quarter one. I'll use the final quarter of 2023 as the comparator, as quarter one, 2023, was a very strong quarter, as you know, in all of our businesses, actually, before destocking commenced in Crop Protection and industrial demand started to fall. But you have both the comparators and the R&S anyway. So anyway, we're starting to see early signs of recovery in some of our end markets, is the punchline. Firstly, Consumer Care has made an encouraging start, driven by a double-digit percentage increase in sales volumes in comparison to quarter four. Beauty Actives led the way with the strongest growth, particularly in North America and Europe.
Beauty Care also delivered a double-digit increase in sales with growth across all regions led by the Americas. Momentum has continued in F&F and Home Care, too. In common with our peers, we think quarter one benefited from some new-year restocking, but we remain cautiously optimistic about the recovery in actives and Beauty Care, plus continued momentum in F&F and Home Care. Secondly, the market continues to be more challenging for Life Sciences. In comparison to quarter four, sales were flat in Crop Protection, and they were lower in Seed Enhancement, although sales are seasonally second-half weighted here. We also saw a small decline in Pharma, excluding COVID lipids. Just on Pharma, as we indicated in February, we've seen the continued impact of destocking, primarily in Consumer Health, a bit of COVID-19 final normalization, and some phasing.
These challenges are temporary rather than structural and will fall away at some point. What's key is the sales of delivery systems for nucleic acid and protein-based drugs continue to grow, and we're also bringing new delivery technologies to market that will contribute more as the year progresses. And finally, Industrial Specialties saw higher volumes and a positive mix versus quarter four. So remember, it plays an important role in the overall efficiency of our manufacturing model, so we're pleased with the progress there. So in summary, then, group sales are up 8% sequentially, excluding the COVID lipids we delivered in the previous quarter. And overall, group results for the first quarter were in line with our expectations. Currency translation had an adverse impact of just under GBP 20 million on quarter one sales and approximately GBP 4 million on quarter one profit.
Looking ahead, we're on track to meet our previously stated guidance for group performance in the full year 2024. As a team, we remain focused on executing our strategy, and we have a clear set of priorities, which are to capitalize on the steadily improving demand environment in beauty care, accelerate the conversion of our exciting pharma pipeline, and continue to enhance and improve the way we operate while carefully monitoring costs. Alongside continued investment and innovation, these will drive our performance in the near term. Look, let me stop there, and Louisa and I are now happy to take your questions.
If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally, as you will be advised when to ask your question. Now, first question, it comes from the line of Matthew Yates from Bank of America. Please go ahead.
Hey, good morning, everyone.
Morning, Matthew.
I noticed a consistent theme across the press release seemed to be better product mix in consumer, health, and industrial. Does that mix help the margins, or is it still much more important that we just get volume across the sites to see that margin recovery? Thanks.
Yeah. I mean, what we're seeing is I think the main thing for margins, isn't it, is the big volume recovery. I mean, we've talked about that. The two areas, the two big theme areas last year were unusually a big volume decline on our assets and then quite an unusual mix effect in both businesses, both skewing to the negative. So the way back is really about volume recovery. I think in CC, what you're seeing is whether you look sequentially at quarter four exit rates, or you look at relative to quarter one last year, Consumer Care is double-digit volume growth and low to mid-single-digit price decline. But actually, underneath all of that is you're obviously starting to see with industrial coming through, utilization rates now at the factory coming up from, what, 55%-65%.
So we're starting to see some recovery coming through in the utilization rates as well, combination of consumer and IS there.
Yeah. Matthew, Louisa, I mean, I would reiterate that volume being one of our most positive indicators for the quarter. And the other thing that is helping a more positive trend on margin compared to what we were expecting is the fact that our internal destocking, so satisfying customer orders from stock, is coming to an end. So we're getting that benefit as well.
Perfect. Thank you, both.
The next question comes from the line of Charles Eden from UBS. Please go ahead.
Hi. Good morning. Thanks for the question. First, just to follow up on the sort of answer there to Matt's question, you talk about low to mid-single-digit price sequentially declining, sequentially versus Q4. Can you just sort of help us? I know this is a sales update, but just in terms of the direction of your raw materials, I just sort of think about things like wool grease into lanolin. It seems to be down sequentially and year-over-year quite a bit. So just sort of the context of how that pricing sits versus your raw materials. Then the second, the clarification. On the pharma business, obviously, sequentially sort of slight decline versus Q4. But in terms of the healthcare ambitions for the year, I assume you're still expecting sort of a strong, healthy growth for that platform in 2024. Thank you.
Charles, it's David here. Just quickly on the raw materials. They've broadly tracked the way that we said they were when we updated you in February, so down 2%-3% in the first quarter, which, as you know, continues the trend that we saw in 2023 when raw materials were down by 12% through the year. We're pretty good when we look ahead into the next quarter, and then it becomes more difficult to forecast what raw materials are looking like for the remainder of the year. And again, as we said in February, we think that we're probably reaching the bottom in Q2. So we may even see a little bit of inflation as we get towards the end of the second quarter, in line with what we said in February with the first quarter seeing continued deflation.
Yeah. And then your second question was that all right, Charles? We'll come on to your second question.
Yeah. It's just a reminder, though, that we do have some small bits of tactical pricing regain business, which we've talked about consistently, which is there's a discipline of time-bounding that. But that will be a minor contributor to the price dynamic in the sequential single-digit declines that we've talked about.
Yeah. And in the whole pharma area, what you're seeing is just more of a slower start in consumer health driven by some stock corrections more than anything else. But actually, the big platforms that we're obviously targeting, nucleic acid and protein delivery and the like, continue to strengthen. They should continue to strengthen through the year as new business starts to come on. We've coded in one or two interesting projects with revenue coming through the year. So there's some phasing for the rest of the year on that. So I think a lot will depend on how we see consumer health, which is a relatively small part about how do we see that coming back. But the rest of pharma looks fine.
That's helpful. Thank you.
The next question comes from the line of Chetan Udeshi from JP Morgan. Please go ahead.
Yeah. Hi. Thanks. With first quarter now under your belt, can you just help us understand how do you think about the phasing of the PBT, let's say 280, between first half and second half? I mean, do you have a more updated view on how should we think in terms of phasing? Thank you.
Yeah. No. I mean, it should be normal, shouldn't it? But we're coming out of this sort of second-order effect of the pandemic. But I would say, I mean, it's difficult to call because, I mean, a lot of this is around the volume loading of the plants, reconciling that with the margin recovery. And also, a lot depends on how we see the life science business, particularly crop, whether it comes back or not in any material volume. So I think it's still too early, Chetan. I think the encouraging signs as we exit quarter one are obviously on the consumer side more than anything else. And you've got consumer care slightly ahead of where we expected, life sciences slightly behind, and the consumer care slightly ahead is on more of the volume starting to come back.
So we've seen some moderation in order intake, but still at a good level. So we remain cautiously optimistic about consumer. So a lot of the sort of first half versus second half will depend on two or three different things, the volume loading in consumer care going forward, and this rebound in parts of life science, whether it comes or not, will determine the sort of split, I think. And that's the whole point this year of trying to update you quarterly, just to try and take you through the trends of each of the sub-businesses to better guide you, really.
Can I just quickly follow up on your comment on slight moderation in order intake in consumer? Do you think this is just a reflection of maybe some restocking in Q1, which is now maybe edging lower, or is this also something like a seasonality that you have seen in the past? I'm just trying to.
No. I mean, I think you've probably heard this from others as well. There's been some rebound. The order intake in late December, January was very strong. But actually, the order intake for COVID consistently through the quarter has come off a little bit, but still at a very high level. So our order intake volumes and therefore value are still giving us the optimism for, albeit we'll be cautious given we're coming out of the pandemic, the cautious optimism that we're in a good place. So exit rates in quarter one are fine. I think some people Easter phasing is an excuse in our organization. There is an Easter phasing issue this year, which is sort of three days less in March than last year. But actually, we see through that, and we see the continued momentum.
I think what we're all trying to work out, I think whether you're in fragrance and flavors, whether you're in COVID or whether you're in other parts of consumer, is where does the demand sit after that bit of restocking? But it still seems pretty okay to us.
Cool. Thank you.
The next question comes from the line of Sebastian Bray from Berenberg. Please go ahead.
Hello, everybody. Thank you. Good morning, and thanks for taking my questions. Can I just ask a technical one on the consumer care segment, please? Does the 5% constant currency growth include the contribution from Solus Biotech? Is this actually an underlying organic growth number on a scope-adjusted base? And sorry, just to follow up on the earlier question, did I hear right? To get to the midpoint of PBT guidance, we need a second-half-weighted recovery in life sciences. Thank you.
Will that Louisa do the first one?
Sebastian, the answer to the first is yes. It includes a contribution from Solus Biotech, but it's fairly minimal. As you know, the business plan for that is sort of quite accelerated in the latter years, but it does include that.
Yeah. And on balance, just to be clear, we didn't say that. But on balance, where we are at the end of quarter one, if you decode the statement, we're slightly ahead of where we expected in consumer, slightly behind in life science. I'll repeat that. If that trend continues, then we'll be obviously comfortably in guidance. So a lot depends on where consumer care goes from here and where life science goes from here. So one balances the other is the point we're trying to make.
That's helpful. Thank you.
The next question comes from the line of Lisa De Neve from Morgan Stanley. Please go ahead.
Hi. Two quick ones from my side. Can you provide sort of a quick update on the CFO change and if anyone has been found or where the process is at the moment? And then, two, can you sort of share a bit around your utilization rates and how they have progressed from the full year 2023 and what you expect for the year, or at least some qualitative comments around that? Thank you.
Yeah. Yeah. I mean, we're in the final. I think we mentioned that on the call. We're in the final stages of the CFO search. Very pleased with that. So an announcement will come when it comes. So we don't want to push that. It's more about diary management and finalizing with the board, the PLC board. So we won't give a date on that, but it's not far away. So yeah, as I said, it's a good comprehensive process there. I think utilization rates, I mentioned earlier on the call if you just joined, is utilization rates are improving. We're starting to feel it. Our multipurpose sites are all in slightly different places. But when we look at our utilization loadings, they've gone up from typically last year, they were 50%-55%. I'm looking at David to make sure that number's right.
We're exiting quarter one at about 65%. So clearly, that's a benefit. And that's going to help us because the margins are pretty stable, the gross margins in our world. And the volume loading is the most important thing for us to make sure we can keep that going. So as I said before, we're in the early stages of recovery in some of our markets, particularly consumer care and IS. So we're in a higher loading position now than we were at the start of the quarter.
The next question comes from the line of Amy Lianne from Barclays. Please go ahead.
Hi. Just one question from me. I wonder if we could talk a bit about normal seasonality versus, I guess, the current sequential momentum you're seeing on sales? Because obviously, I guess if you take Q1 at the moment, it implies you need some steps up in sales through the year. But I imagine there's also some seasonality anyway. So if you could give some guidance on, yeah, volume momentum versus seasonality between quarters, that'd be really helpful.
Hi, Amy. Mr. David again. So the seasonality is most distinct in Life Sciences where actually there's a strong Q4 weighting, particularly in Seed Enhancement, but also a little bit of a second half weighting in Crop Protection. As Steve's alluded to, we would normally expect the first quarter to be quite good in Consumer Care because of the new year restocking effect that I think has certainly been apparent this year for understandable reasons. But overall, we're seeing encouraging signs in Consumer Care that give us confidence for the remainder of the year, notably the fact that the growth is coming from all of our business units. The order book is 15%-20% higher than it was this time last year. And North America's leading the way, which is obviously the area that's been weakest for us over the last 12 to 18 months.
Net-net, I think the seasonality works in slightly different ways in the different business units. We're confident given the encouraging start in consumer care that we can build from here.
Great. Thank you very much.
The next question comes from the line of Artem Chubarov from Redburn Atlantic. Please go ahead.
Morning. Thanks for taking my question. I have one on crop protection, please. Would you be able to provide any color on volume price dynamics in the quarter, maybe some regional trends, and your overall assessment of where we are in the destocking cycle for the division? Thank you.
Yeah. I mean, I'll provide some general color. I mean, commit the team to give you some more data. I mean, don't forget last year, quarter one was very strong for all of our businesses. So the comparators are the most difficult for quarter one. Then obviously, it fell off the end of a cliff as we went into quarter two, crop and industrial, that is. I think generally, what our customers are saying is there's still. It's not getting any worse. You can see sequentially, it's broadly flat from quarter four. So it's stable at a weak level. And the likelihood is, it's going to. It's clear volumes are going to come back to some degree, and we would hope, but we can't be sure through the second half and beyond. But the rate at which that volume comes back is still the big question.
A lot of our crop customers are still unsure as to how that comes back. It's different for each one. But by and large, broadly, it now feels like it's going to be North America coming back first, then Europe, then Latin America. I think Latin America have a bit more of a weather issue with drought and things like that. But yeah, we're in a good place there. We're the number one delivery system supplier in the industry. We're cutting into thousands of formulations. So when it comes back, it will come back. So I don't think there's anything structural. We just have to wait for it to come back. But I'll pass to Louisa on the specifics of your first part of the question.
Yeah. The only data point that I would give to support Steve's statement is if we look sequentially, we've already indicated that at a total SBU level, we are flat quarter-over-quarter. But North America's definitely in pole position with single-digit growth, with EMEA and LATAM behind. I mean, Asia's looking good, but it's obviously a smaller business there.
Thank you. Thanks very much.
The next question comes from the line of Ranulf Orr from Citi. Please go ahead.
Hi. Morning, all. So just two, please. Firstly, just in consumer care, given the very strong January, would you mind giving the monthly year-over-year growth or if not that, at least the delta in growth between January and March so we can understand the exit rate a little better? And secondly, just on these new delivery systems you're bringing to market, can you kind of give an idea of what the contributions from those might be sales-wise over the year? Thank you.
Yeah. Just say the first question again.
Yeah. Could you give the monthly growth in consumer care, please? Through Q1. Given the very strong January, just to understand the sort of the phasing of it.
It's a good question. It's a good try, as I say. But we are trying to give you quarterly, and now you're asking for monthly. So look, it's fine. We're not seeing a massive change month to month, I think I would say that. It's not falling off the end of a cliff, far from it. So that's why we're still saying we remain cautiously optimistic. So we look at the order intake. I think the other point, the broad point I'd make in consumer is we're getting back to a normalized order visibility, which is important. And so we've got a better tracking. And I think our customers now are largely through this old destocking period. So for us, getting better visibility in the near term is we're getting more accurate assessments of that. But we're still coming through the final stages of a pandemic effect.
And I think quite rightly, our customers are quite cautious as well. And everybody's a bit cautious until we see the really firm trends coming through. But overall, we're pleased and encouraged with the progress.
On the farmer pipeline, we gave a number of examples in the full-year pack where each of those new delivery system technologies that we're bringing to market have peak annual sales values of around about GBP 20 million. Now, those peak annual sales values are not in 2024, but a number of them will start to generate some revenue as 2024 progresses. So individually, they're not material, but we hope there'll be a decent contribution from those new delivery technologies in 2024.
Great. Thank you.
The next question comes from the line of Isha Sharma from Stifel. Please go ahead.
Hi. Could you please quantify the growth in your drug delivery systems within healthcare? And just a small follow-up on that would be, how do you account for FX pricing from the Argentine peso? And if you could help us with the extent of that within the organic growth, please. Thank you.
Isha, hi. It's David here. On the drug delivery platforms, the areas where we're seeing continued growth are in nucleic acid delivery and protein delivery. So in line with what Steve said at the beginning, the areas of strategic focus for us are continuing to grow. And the area that we've seen some sequential decline is in adjuvant systems because of the COVID normalization, and then in small molecules because of the destocking in consumer health. And I'll hand that to Louisa to talk a little about FX.
Just broadly on FX, we've got two drivers. Just in our general business, obviously, we give you the framework around FX and what a movement in the U.S. dollar does. We've had a little bit of adverse in the first quarter. Steve talked about a GBP 4 million adverse impact at PBT level. The rates are coming back in our favor, so we're still fairly neutral on that. On the Argentinian piece, clearly, a little bit more difficult to predict. We're still obviously managing some probably GBP single-digit million risk there for the year. But the local team are moving to the degree that we haven't done it yet to U.S. dollar-based pricing. So we should come back into line with a more easy-to-predict sort of framework and heuristic. So yeah, U.S. dollar-based pricing where we can.
Thank you. The next question comes from the line of Gunther Zechmann from Bernstein. Please go ahead.
Good morning, all. Thanks for taking my questions. The first one, could you just remind us what you expect for non-COVID L&T revenues for this year, please? The second one, companies like Unilever recently are stepping away or delaying their midterm ESG targets. Could you just give some flavor how that impacts the Croda and your conversations with those customers, please? And then lastly, I know you don't guide for cash flow, but given the growth is improving and Steve, what you mentioned earlier about improving utilization rates in the plant, what should we expect for inventory builds for this year, please?
I'll start with the inventory question in cash. Look, cash flow in the quarter has been positive. Obviously, we had that tailwind from the COVID-19 debtors in January, but our stock management continues to be good. We will be building stock as we go through the year, particularly as we try to balance the crop recovery. But our working capital guidance from the end of the year remains unchanged.
Yeah. The non-COVID lipid revenue growth rate at high single- to mid-single-digit. We think we'll be a bit below our sort of longer-term run rate because of the headwinds that we've described. But mid- to high-single-digit is what we expect in the non-COVID pharma business.
Yeah. Just your point on Unilever. I mean, look, we had our big cosmetics exhibition last week. So [it gave] us the opportunity for the executives to sort of meet all of our senior customers. And the themes are slightly different for each of them as you'd expect because their brands are positioned slightly differently as well. But the big common theme is around sustainability. Everybody's moving to lower carbon in their products and trying to develop brands in that way. And that's given us a lot of reassurance that our strategy of moving to sustainable ingredients is the right one. So we're on our way, if you like, with them. And I think each one has their own opportunities and their own challenges. So it's difficult to try and draw too many specific themes, Gunther, around individual companies, if that's okay.
Thank you.
There are no further questions in the queue, so I will now hand the call back over to your hosts for any closing remarks.
Yeah. No, I think that's it. Thanks for the questions, everybody. Yeah, I mean, quarter one's been and gone. We'll guide you through each of the subsequent quarters. But encouraging start in some of our businesses, particularly Consumer Care and IS. But we've still got challenges with Life Sciences, with some of the crop and in Consumer Health primarily. So we'll monitor all of that with you, and we'll update you again in the middle of the year more fully. So thanks, everybody, and we'll see you then.
Thank you for joining today's call. You may now disconnect your lines.