In the first half of 2023, Croda International PLC (LSE:CRDA, Financial), a leading global specialty chemicals company, demonstrated its ability to adapt to challenging market conditions while continuing to invest strategically in its future growth. The company's performance remained in line with revised expectations, reaffirming its full-year guidance.
Throughout this period, Croda experienced a 6% decrease in pro forma sales due to customers reducing inventory levels in the consumer, crop and industrial markets. Despite these headwinds, its diversification across seven growth businesses proved beneficial, and the company made noteworthy progress across various sectors.
For instance, Croda's Consumer Care segment saw flat sales, demonstrating its resilience against a strong prior period. Sales volumes increased by 8% compared to the previous year, largely driven by strong demand for new and protected products, which accounted for 40% of total sales. The Beauty Actives segment experienced a positive mix, while the Beauty Care sub-sector showed the most significant volume improvement. Additionally, Fragrance and Flavors achieved an impressive 20% sales growth, driven by synergies and Croda-enabled growth initiatives.
Within the Life Sciences business, Croda made continued progress despite facing market challenges. Sales in Seed Enhancement and Pharma showed strong growth, excluding the prior period's Covid-19 lipid sales. However, Crop Protection faced rapid destocking in the second quarter. Despite these short-term fluctuations, the company remains optimistic, expecting Covid-19 lipid shipments to contribute to sales in the fourth quarter and supporting the pipeline of other nucleic acid drugs.
The Industrial Specialties unit experienced a sales decline of 20%, mainly attributed to destocking and reduced demand, with the prior period's divestment of PTIC also factored in. As a result, the operating margin decreased to 20%, impacted by lower volumes and the phasing of Covid-19 lipid sales. To protect profitability, Croda implemented temporary cost measures.
Financial performance
Croda reported an IFRS profit before tax of $165 million for the first half of the year, significantly lower than the $815 million recorded in the prior period, which was boosted by a $462 million divestment profit. Adjusted profit before tax amounted to $223 million, down from the first half of 2022's pro forma figure of $328 million. The 20% operating margin was impacted by lower volumes and the phasing of Covid-19 lipid sales. Despite the challenges, Croda maintained an improved free cash flow, with lower working capital outflow offsetting lower profits and higher capital expenditures.
In light of its resilient performance and confidence in future prospects, Croda maintained its interim dividend at 0.47 pounds (61 cents), matching the previous period.
Strategic investments and efficiency initiatives
Croda demonstrated its commitment to future growth by leveraging its strong balance sheet to invest in fast-growing niches. Notably, the company expanded its innovation capabilities in Asia, establishing new research and development labs in Shanghai, China and Hyderabad, India. Furthermore, Croda strategically partnered to access critical technologies, including scaling up its pharma segment with new capacity expected to be operational by 2025. As part of its growth strategy, the company successfully completed the $446 million acquisition of Solus Biotech, which brought valuable biotech-derived actives into its portfolio.
Its "Doing the basics brilliantly" program continued to drive ongoing efficiencies. By improving employee productivity and simplifying operating processes, the company aimed to enhance the customer experience. Among the initiatives, Croda introduced a new online order portal and self-serve data options to better serve its customers.
Megatrends and moving to pure-play consumer care and life sciences ingredients business
Croda has identified three critical global challenges affecting its markets and supply chains. The first challenge is the growing world population, which is expected to reach nearly 10 billion by 2050, with significant increases in Asia and Africa. To feed this population, a 70% increase in agricultural output is required. However, achieving this sustainably and regeneratively poses a challenge as agricultural yields have stagnated in some intensively farmed regions due to overuse of soils and chemical fertilizers. Restoring degraded ecosystems and promoting higher yields and resilient crops on less suitable land are essential steps.
The second challenge emerged from the pandemic, which exposed public health issues worldwide and amplified the demand for health care products. Consumers are now more conscious of their physical and mental well-being, seeking scientifically-backed ingredients to support their health. This trend toward healthier living has accelerated, creating a greater focus on products that positively impact physical and mental health.
The third challenge results from population growth and increasing consumption, particularly in developing countries with expanding middle-class populations. This surge in demand is exerting pressure on essential planetary systems such as water, climate, biodiversity and natural resources. Addressing this challenge requires transformative approaches to consumption and circularity.
In response to these global challenges, the consumer care and life sciences markets have inspired two technological megatrends. First, there is a significant move toward sustainable ingredients, driven by consumers' increasing preference for purpose-led brands that align with their values. Sustainability is projected to be the most influential driver of consumer markets in the coming decade and beyond.
Second, there is a shift towards biologic in the life sciences sector. Biologics, large molecules manufactured inside animal cells or micro-organisms, are already transforming medicine and are poised to revolutionize agriculture in the next decade.
In response to these megatrends, Croda has strategically repositioned its focus by divesting most of its industrial business and making key acquisitions. The company now operates as a pure-play entity, concentrating on high-value niches in the consumer care and life science markets. By aligning with these powerful trends, Croda is well-positioned to shape and adapt to the evolving market landscape.
Valuation
The company has a decent Piotroski F-Score of 7 out of 9 and a very safe Altman Z-Score of 6.21. Further, the company has a GF Score of 86, which indicates it has good outperformance potential.
Based on its historical ratios, past financial performance and analysts' future earnings projections, the GF Value indicates the stock is modestly undervalued currently.
Conclusion
Despite facing challenges in the first half of the year, Croda demonstrated its resilience and strategic acumen.
Diversification across growth businesses, continued investments in innovation and efficiency improvement initiatives have positioned the company for future success. With its full-year 2023 guidance reaffirmed and a commitment to delivering value to shareholders, Croda remains a robust player in the global specialty chemicals market.
