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Edited Transcript of CRDA.L earnings conference call or presentation 24-Jul-19 8:00am GMT

Half Year 2019 Croda International PLC Earnings Presentation

East Yorkshire Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Croda International PLC earnings conference call or presentation Wednesday, July 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jeremy K. Maiden

Croda International Plc - Group Finance Director & Director

* Stephen Edward Foots

Croda International Plc - Group Chief Executive & Director

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Conference Call Participants

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* Andrew Gregory Stott

UBS Investment Bank, Research Division - MD and Research Analyst

* Charles L. Webb

Morgan Stanley, Research Division - Equity Analyst

* Isha Sharma

MainFirst Bank AG, Research Division - Analyst

* Nicola Tang

Exane BNP Paribas, Research Division - Analyst

* Theodora Lee Joseph

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas P Wrigglesworth

Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst

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Presentation

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [1]

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Well, morning, everybody. Welcome to another webcast from Croda. As usual, a few words from me, then Jez with more details. And then back to me on the strategy. I would say, welcome, and it's 38 degrees outside, but it feels like it's minus 38 degrees in here. So welcome to the refrigerator, everybody. I hope you stay warm before you go out. Anyway, more on the overview from me. Resilient performance despite the subdued market conditions, we think it's been a very competitive performance.

Core business sales were in line with prior year despite the subdued market conditions. And obviously, the strong comparator in the first half as well. So operating profit unchanged, and it's the strong -- it's a strength in our gross margins, that's protecting our profitability, as you'd expect, your great innovation behind that.

Profit before tax slightly below -- slightly lower than last year due to primarily interest charges from the Mantis effect in plants, as we've called out before with you, and very strong cash generation. You were through this capital ramp. You'd expect that most of our EBITDA converts to cash now. And we don't need a huge amount of CapEx in the business going forward to support the growth with GBP 70 million, GBP 75 million. So you'd expect strong cash generation to continue. So very strong performance in cash generation, and that's likely to continue. And the fundamentals incurred a very strong, I'll come back to that. But NPP sales continue to increase, climbing again and moving ever closer to our 30% threshold.

Just a little more on the numbers, getting behind that, you've reported currency sales up 2.4%, probably flat in constant. A brilliant performance in Life Sciences, outstanding performance in many ways, we don't use that word very much, partly offset by some slowness in Personal Care, which we'll come back to USA, China, confined to that, but we'll explain more about that.

And Performance Technologies, with a week or so slightly behind last year. But I mean it's the Life Sciences, which is driving the highlights and the big push in -- behind that with our Health Care and Crop Care.

If you look at the operating profits, we protect our profits through great margin improvement and strong innovation, but also a good tight cost control as well this year with the macro blip that you are seeing. And the margin is 25.1%, excellent given the current climate out there. It's attribute to the strength of the model that sits behind that. So got continued progress, it's the consumer markets that are driving the growth for Croda. Yet here they are together, Life Sciences, particularly. But in terms of margin improvement, very strong all round.

I just want to dwell on this slide because we don't normally call out external factors in Croda. We sort of see them as excuses for the management team when they come to us, we're very micro-led as an organization. But they are significant this year, and they are impacting. So we need to call them out and explain a little bit more about what's happening out there. And we're certainly not alone in the chemical industry with it, but there's 3 external factors primarily it's USA/China trade dispute. If you're starting applying 20%, 25% duties on chemicals, it's a blunt instrument. It has an impact in the industry, all parts of our industry, not just in the commodity areas. It's in specialty chemicals, too. And anybody who's got serious trade flows there will have some sort of short-term impact.

We are feeling that, to a degree, particularly in our Personal Care, but mainly in our industrial businesses. The China Daigou, it's pronounced -- it might be difficult for some people to pronounce a Daigou legislation. These are Chinese nationals going to Japan, Korea, liking the products coming back into China and then commercializing those products, and an internet-based social major approach. Chinese government are modernizing the channel, which we fully support. But that has a knock-on impact short-term to small customer demand in China. And we'll bring that to life with you through Jez's slides.

And of course, the auto slowdown, which I think you're well aware of with lots of other industrial companies that are out there. The fundamentals are great. This is a fantastic business. We've got a short-term blip in macro. What we look at increasingly is the bottom 2 boxes, the innovation is stronger than ever. The output of our activities is the most important thing in innovation, you're 28.3% innovation, more and more high quality, high-margin products going to our customers, creating great value. And the other thing that we don't really show you, but internally, we have a number of KPIs for our customer engagement -- increasing customer engagement, and we have been deliberately vague there with the ticks, but we are very excited about what's behind that.

NPP pipeline in all sectors well ahead '19 versus '18. And you look at all other engagement in quite sample inquiries, product launches, customer launches, customer interactions, everything looks very positive, which supports our view that this is a macro blip rather than something more structural in terms of recessionary characteristics out there. We don't see it that way. We think it's some false changes from politics, geopolitics, getting in the way of a true demand. And actually, you can see that more than anything in the strong price/mix effect, the volume decline, minus 6% in Personal Care and minus 8% of Performance Technologies, quite unusual. I'm in the industry, 29 years now. You don't normally see that. You certainly don't see that for Croda in a normal trading year or 2.

And actually, when you get behind those volume numbers, quite a lot of NPP -- our NPP volumes are down, which tells you that it's more a macro demand rather than a market share. As you -- nobody else -- our customers don't want to reformulate away from our NPP.

And know the competition -- knock-in competition substitute that. So it is a proxy for demand. And the important thing about the business model is the pricing element of the price mix. Gross margin percentage ahead in all 3 businesses driven by innovation. And the protection of profit comes from that margin improvement in the business. And actually, the thing that we get most excited about is this Life Science price mix. There's a great chance for Croda to leverage pricing in a different way. Franchise agreements and profit shares under like a great model in Life Science and the Life Science business is starting to show, hopefully, but certainly, how exciting that growth can look like going forward. And the margin improvement story in Life Sciences, there's no reason in the near to medium term that those margins will get to Personal Care margins, 34%. And actually, if you look back 2 or 3 years in Life Sciences, they were there, the 34% prior to Incotec. So we expect them to get up to that level in the next 2 to 3 years.

So all-in-all, robust, for what we're in control of, it's a robust outlook. We just like this macro blip to be behind us sooner rather than later. So let me stop there and pass on to Jez for the details.

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Jeremy K. Maiden, Croda International Plc - Group Finance Director & Director [2]

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Thanks, Steve. Morning, everybody. So beginning with the income statement. Overall, sales, including Industrial Chemicals, were up 1.7% in reported currency but 1% lower in constant currency.

Operating profit broadly flat at GBP 179.4 million. Interest costs, GBP 5 million higher year-on-year. The primary driver behind that is that in the first half of last year, we were capitalizing interest on the Eco plant construction, that finished at the end of the first half last year. Therefore, that interest obviously flows now into the P&L rather than going to the balance sheet. So higher interest costs there. Plus, of course, we did the special dividend towards the end of the first half year.

As a result, adjusted PBT, GBP 170.6 million, and after deducting intangible amortization, which is really the only difference between that number and IFRS. We have an IFRS profit before tax of GBP 166.2 million.

The basic earnings per share at 98.2p were 2% lower. There's no change in our tax rate either in the first half year or anticipated for the full year. So it's just a little below 25% for the tax rate. And the interim dividend is being increased by almost 4%.

So looking at the sales bridge. Volume was down 5% in the core business, but we have an encouraging improvement in price/mix of 4%. Behind that price/mix, our broadly stable raw material prices. So it's not a price recovery, it's all about mix improvement, better quality innovation, better quality products and ingredients to our customers. And this is probably a point worth highlighting in terms of differentiation to a number of our peers in the specialty chemical space and then F&F.

What we're doing, remember, is converting natural commodities into products. And in those markets, we haven't seen significant raw material price changes. So that price increase, reflecting, as I say, good innovation and also a reduction in low-margin business.

M&A added 1% growth. That's the Biosector acquisition that we made in December in Life Sciences, and that left the overall constant currency sales basket unchanged versus the first half of 2018. On top of that, currency added about 2%, reflecting sterling's weakness primarily against the dollar in the first half year, fairly stable against the Euro and reported currency sales, therefore, up 2%.

Looking at the impact on profit, actually, not a lot going on here, a little change overall, slight negative from the sales impact on profit. And M&A slightly negative. Biosector is profitable, but we had a full half year of plant impact, the acquisition we made in April of 2018, which is loss-making, and that's now lapped into the numbers for the second half. A small currency benefit, again, on profit, and therefore, reported currency operating profit, up 0.5%.

So looking at operating profit by sector. Personal Care set profit down GBP 4 million, driven by lower sales. Life Science grew by GBP 9 million, reflecting strong demand in both Health Care and Crop Care. And the Performance Technology profit was GBP 5 million lower, reflecting a reduced demand.

Industrial Chemicals profit down a little bit as we continue to remove tolling and by-product sales from that business.

Return on sales, as Steve said, continues to be very robust. The Personal Care return on sales was 33.3%, down 80 bps on the previous year.

Life Science went back up through the 30% level, up 70 bps. And the Performance Technology return on sales gets a little bit more affected by the impact of lower volume. It's more of a volume business, and therefore, reduction in volume tends to have a bigger proportion impact on the return on sales, which doesn't tend to be as true of the consumer businesses, which are less operationally geared. So the group return on sales down just 30 bps in the first half versus the first half last year. So although it's subdued environment, the profitability remains strong.

So in Personal Care, beginning there, really a game of 2 halves. External issues, as Steve said, impacting the U.S. and the North Asia market. Growth here, minus 10% in the first half year driven by the significant trade headwinds that Steve addressed. Away from these markets remained in growth and probably broadly consistent with what we saw in the latter part of 2018. So growth, not particularly changing in the markets away from the U.S. and North Asia.

Western Europe, up 4%; Lat Am, up 2%. So some quite encouraging growth numbers there. And as I said, continuing to protect the margin of 33.3%. So it's clear for us that the fundamentals in Personal Care haven't changed. And that once the trade headwinds moderate, we expect to see a return to growth.

So let's just unpack those 2 different halves of the Personal Care business a little bit more. You will all be aware, of course, of the US/China trade dispute. And what we've seen as the impact here is, firstly, reduced consumer confidence in the U.S. and China, which really probably started from the fourth quarter of '18, and the first tariffs came in August of '18. So that has definitely had some impact on consumer confidence.

U.S. beauty, consumer sales, as we show here, have bumped around, around flat. And in China, we've seen hardest yet consumer data in China, but certainly a weak PMI, generally running in negative territory at the moment. So that's impacted confidence. Secondly, U.S. customers who are exporting to China have been hit, first of all, by tariffs in August last year, and then by an increase to 25% tariffs in June of this year. And then we've seen lower demand from U.S. and Chinese customers. And of course, some quite erratic, sort of, stocking patterns going on, so that's an overall, quite a substantial impact from the trade dispute.

The second issue is a local one to China, as Steve said, the Daigou legislation is really all about harmonization. It's about bringing Chinese regulation up to similar standards that we see in other countries. It's about pumping down on surrogate shopping, about stopping consumers and entrepreneurs going to other countries, typically, Japan and Korea, buying product and then selling it either locally or Internet based. We aren't necessarily going through all of the legislative hurdles and the Chinese government's been clamping down on that. We think that's a good thing for the medium term. It normalizes the market. But clearly, it has had some impact on local customer sales.

It's also impacted ourselves in Japan and Korea because they are important export markets into China. And that's been a big driver of growth in the last 2 to 3 years. So going through this period of standardization really. And then the final thing, which is had an interesting effect is we've seen a reduction in the tariffs charged to non-U. S. imports by China with tariffs on European imports coming down from just over 8% to just under 3% on Personal Care products. And there's no doubt that we've seen a real benefit in, particularly Western Europe multinationals, who are now more competitive in the Chinese market. So our sales into Western Europe for re-export to China has definitely benefited from that.

So by contrast, the European, South Asia and Lat Am markets have continued in growth. Western Europe, the strongest performer; but Lat Am, seeing a progressive macroeconomic improvement. And in South Asia, good in pockets, particularly around the Indian and Indonesian markets and recovering from the, sort of, halo impact of slowdown in China.

If we look at the 3 businesses in Personal Care, Beauty Actives, first of all, has continued in growth. The prestige market has tended to have more confidence, particularly in the developed markets of North America and Europe. So that's good news with Beauty Actives supported by recent investment we've made in Sederma. In Beauty Effects, Europe and Lat Am, have been strong, particularly with millennial consumer products, and we're adding to the range of technologies we have in Beauty Effects, which is a business we do want to grow over the coming years.

Beauty Formulation has been the most subdued of the businesses. It is more exposed to a bit more of a mass market slowdown. But interestingly, we've seen the sales -- same sales impact on both NPP and differentiated products. What I suggest to us is that the market has slowed down rather than that we have lost business because classically, if we loss business, we'd expect to see it away from the NPP products. So we think that there's clear signs here that it's the market that's slower.

Multinational relationships continue to be very strong, doing well with multinationals and also local and Indie customers, where we're able to help them formulate their products.

As Steve said, Life Sciences, standout performer in the first half year, double-digit sales and profit growth and an increase in return on sales as well. And innovation is very much driving this business. We're at 29% NPP of sales now in this business. Health Care pretty independent of macro, driven much more by the drug development pipeline and the demand for complex oncology drugs and for biologic molecules is certainly helping our high-purity excipient delivery system business.

Sales up 15% organically. And on top of that, we have the first contribution from the Biosector vaccine business that we bought, and we're very excited about what we think that, that technology can bring for us.

So Health Care, really strong. Crop Care, actually, really pleasing as well. 4% growth in Crop Care, which, I think, is good against the crop environment at the moment.

North America was negatively impacted by both the impact of tariffs on exports to China, particularly of soya, and of course, of severe weather earlier in the growing season. But the recent investment that Croda has made in growing our presence, particularly in Lat Am, has really paid off. And sales in Lat Am in crop have more than doubled in the first half year against 2018. So what's happening is Lat Am farmers are picking up the slack in -- on sales into China created by North America farmers being disadvantaged by the tariffs. So much more global footprint for us in crop and working very well for us.

Finally, in Performance Technologies, in line with other competitors, we have seen some tough or some soft markets in Performance Tech in the first half year, about 25% of sales in Performance Tech end up in the automotive sector, and clearly, that's been a tough area. It has -- it particularly impacts smart materials. We do a lot of polymer and coatings additives that end up in the automotive business, by contrast, Energy Technologies is a much more diverse business serving marine markets, renewable energy and after-sales market in terms of automotive. So less effective by the automotive slowdown and broadly flat overall in its sales.

Sector volumes are down about 8%, but that's been offset by an improvement in the price mix, which is good. But as I said, there's more of a volume impact on the Performance Tech business in the margin, it has dropped a little bit to 18% but the NPP is good. We're at a record 19%, and of course, in the second half year, the Home Care business, in particular, will benefit from the start-up of the biosurfactant plant and alongside Personal Care.

So finally, on cash, strong improvement in the free cash flow, as we anticipated. Better working capital management than in the previous period. Lower CapEx so now much more in line with our GBP 80 million annual guidance on CapEx now that we finished the biosurfactant project. And of course, the GBP 150 million special dividend paid in May, increase in the leverage to 1.5x. And therefore, they're after expected to decline.

So thank you, and I'll pass back to Steve for -- to talk a little bit about our strategy.

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [3]

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Thanks, Jez. And yes the short-term blip, certainly won't get in the way of Croda's strategy, which remains unchanged. It's a great business, great story and a strengthening story as well. I just want to bring to life, in many ways, our strategy with a new sense of -- a renewed sense of purpose that's coming with that. And let me explain a bit more. We want to see Croda more in the next 5 to 10 years as an organization that has working for the greater good. We want to deliver great financial results. But the nonfinancial performance of the organization is becoming more and more important to us, to our employees and to all of our stakeholders. We -- you'd be delighted to know we had a competition internally to try and really ask what defined the sense of purpose around the organization. Rather than spend GBP 5 million or GBP 10 million with management consultants, we decided to do it ourselves. So we have this competition.

We have about 1,200 people engaged in the organization with responses to the competition. An American employee won the competition, and we've done with Smart Science to Improve Lives. And It's really quite important to us because the organization really wants this. They're engaged with it, and we think it's going to drive a high level of commitment from the organization and a high level of performance. And the Smart Science to Improve Lives is really there to -- it defines us very well now. And in many ways, it links very well to our past. We're entrepreneurial in our spirit. But actually, the application of our products is something that we want to spend more time, and we should be disappointed if we deliver great financial results, if our energy consumption, our outcome, the outside emissions are increasing. We think we can decouple that.

But very more important than that, when we apply the United Nations development goals, we've got 8 there, which we think are the most important for Croda. And there's billions of pounds worth of investment going in there. I sit on the -- in the U.K. government Board for the chemical group and I chair that. And you can see a lot of money from the U.K. going there. It's the same everywhere else. And what that's doing is leading to more opportunities for us and Croda thrives on new market opportunities. So we think by applying our knowledge here, it's going to get us into faster-growing markets, and that's the deep thought with this.

And as you do that, we've worked with the Board through our long land strategy, 10-year strategy and coming out from that is a need to make more choices. And what we -- the output of that from the STG mapping work, would say that, yes we really want to expand Life Sciences as a priority. That's where Croda is moving to. Investment -- incremental investment, acquisitions, people, we want to move there really quickly. And we want the Life Science business to be as profitable as our Personal care business as quickly as we can. And it's got great growth potential.

And as Jez highlighted in the numbers, we're very excited about that. And we are very excited about Personal Care as well. I don't want you to be misguided that we're not -- it's a great business, but it's more mature because we've been in Personal Care for longer. So the growth profile in Life Sciences will be better. It's got margin improvement in it, and it's got sales growth in it.

Our Personal Care, we're happy with the -- these margins where they are, 33%, 34%. We just want more sales growth coming through on that. And that will continue, I'm sure.

And then in Performance Technologies, we're getting excited about some of the opportunities for new markets. The new markets are opening up very quickly. And our job there is to invest in some of those faster-growing new markets there and concentrate less on some of the slower growing markets too. So all-in-all -- so that's where we're going. Not a big change to where we are, but a bigger emphasis on Life Sciences is the message from the group. And if you look at each of the businesses, the expansion in Life Sciences is breadth and depth in technologies. But it's also geography expansion as well. We will major on investing in Asia, in particular in North Asia. We see a lot of opportunities there. We have a relatively small team, sales, marketing and research team now. And we think just bolstering that up from day 1, we'll have an incremental benefit to the group, some really good opportunities there. And the other thing to call out on this slide is, we haven't been slow to acquire and invest into this space. The last 3, 4 years, Incotec, plant impact Biosector and SiSaf is a joint collaborative investment with a partner there. It has some great technology in there, particularly in encapsulation and around polymeric chemistry as well so really good potentials. And a lot of them -- this is a thriving incubator now for Croda and lots of opportunities around the world. So Life Science in a really good position, but we want to invest more, and we will be investing more in that.

And in Personal Care, we've got great strength around the world. But in emphasis terms, I now guide you to the top-right and bottom-right boxes. We're connecting with digital in a way that we haven't done before. And some of the stats you saw earlier about customer engagement. A lot of that is driven by digital. So we've got live chats now on our website. So when potential customers and customers connect with us on our websites, we can then have conversations with them and include them in our -- in -- capture information in a way that, perhaps, we haven't captured before, which is leading to more engagement with customers and potential customers, really important. We're rolling that digital model out around the world. We expect that to target new customers rather than big customers. So mainly target small Indie-type populations that are coming on board around the world.

And our Indie customer growth will continue to excite us with the level of growth that we see in the -- and also you shouldn't be surprised here, we're supporting some of the world's leading brands, some new launches coming out in the second half or through -- certainly through '19, 1 or 2 of them are out now. But it's not just Boots but Chanel, Clinique, Estée Lauder and Clarins. We're in a lot of their product supporting their next-generation premium brands, and you wouldn't be surprised that Croda is leading that technology with them. So well placed for further growth. As we say, we like the American -- U.S. situation to resolve itself quickly, and Personal Care will be restored to growth. So in a good place. And also we -- refining Performance Technology, they call it refining because we want to move -- step up into higher-margin opportunities. And through sustainability, there will be more and more opportunities, probably more opportunities in Performance Technologies than in Personal Care in many ways. So we're excited about some of those opportunities.

The innovation now. If you look at the bottom, that box is at a record level, it's still lower than the other 2 businesses, but you would expect that because it's still a younger business, but 19%. It's getting there. We'd like that to 25% as quickly as we can. And we just announced the technology acquisition in Rewitec, which is renewable energy. So very clever technology for wind turbines. So we're betting on and they have patented technologies in that area, and we're betting on the fact that, I think there's going to be more wind turbines around in the next 20 years than where they are now. Great technology. The antiaging of wind turbines we're going in. It has a great future-proof wind turbines for the next generation. And it's recommended by the leading insurers as well as the primary technology for wind turbines. So great little technology acquisition, not a huge amount of spend, but great potential. And I think the other thing there is, this close of project at the top we acquired a small business for about GBP 4 million, and we've increased the sales 10x in the first 3 years, 4 years, and that's the type of model that we're looking at as an example.

We take great technology, latent technology. We put it into the selling network of Croda, and we can fast grow that. Big margins. Limited resource needed, and certainly, limited production needed for these things as well. So very good. And aback, this supports our sort of, fundamental thought process of moving the quality all the time, leveraging our quality, getting our patent protection in the business. And then if you just look at our investment -- our investment is there to do the right things, but it's there to maximize our positive impact and a lot of these you're aware of. But look at the high-purity excipients expansion in North America on stream, so that's to satisfy fast growth in drug delivery. It's sustainability. And it's driven by people wanting to feel good and look good. And high-purity excipients are delivering great growth and also plants themselves. They're the next-generation, sustainable, skin actives and some great opportunities there for the group.

You can't think of anything more sustainable there, and lots of other good acquisitions, which are around -- our thinking around betting on future growth markets through sustainability because that's where we're going. So really important to us. But it's not just about maximizing impact. It's about minimizing environmental impact. We're look -- we're taking a keen eye out on our factories and making sure that our investment there is to reduce environmental pollution, improve efficiencies, effective. And a lot of this, whether it's renewable heat capacity or a water conservation at the bottom right, a lot of this is great for financial performance, but it's doing the right thing for the business as well, which we think is very important. And we're now trying to shine the lens of sustainability on our investment programs in and around the Croda world.

So finally, just returning to a summary of the strategy. You've heard it a lot before, it might be a broken record, it's consistent, and we're growing in quality, and we are not changing our strategy. This blip is a blip. We don't -- we shouldn't worry too much about that. We've got to make sure we're doing the right things for the medium, long term. So expansion of Life Sciences, strengthening Personal Care, refining Performance Technologies, they are the big messages that you're going to hear more and more from Croda. And as a plug, I mean we've got a seminar in October. I think it is Charlie where we want to do a deep dive with you on Life Sciences. I think Life Sciences is a fast growth area. And we'd like to share some of our growth profiles there in technology platforms and the people, going to see some of our people as well. So we're going to host that in London in early October. So I think that's important for you to get your heads around the Life Science agenda.

And in outlook, we remain cautious. I think we've chatted with each other and have chatted with a few of you. We're probably more cautious than otherwise we would have been in the middle or early part of quarter 2. April and May were good, June, very quiet for the group and probably consistent with what you're seeing in the industry. So that's allowed us to be more cautious. And otherwise, we probably would have been. And our caution is around, just on this, we want this macro. We can't see this macro situation resolving itself overnight. But as a reminder, our order intake is about 4 weeks -- 4 to 6 weeks, so we wouldn't see it. So we're just a bit more cautious than otherwise, we would have been given the exit rates for quarter 2.

But overall, this is a great business, resilient business in good shape and poised for further growth.

So I will stop there and take your questions.

Hope everybody's warmed up as well. Andrew?

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Questions and Answers

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Andrew Gregory Stott, UBS Investment Bank, Research Division - MD and Research Analyst [1]

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Yes, Andrew Stott, UBS. A couple of things. So on Personal Care, the data we have on China doesn't look like the data you have on China. So you said that the small customers are your problem. So it's the obvious conclusion that you're over indexed, if you like, with small customers in China and that you're offset, to some extent, but not enough obviously for the period, is a L'Oreal sale in France has then exported. So is that what's going on?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [2]

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Yes, that's expected. It is important. And most of our sales in China are small and local customers. And our MNCs is a relatively small proportion. So it's not too different to the group. MNCs for Personal Care is 25% and of Personal Care and 75%, small customers. That's the similar profile in China. So the effect that we're having, which is unusual, is the small -- the MNC growth in China is still positive for Croda, and we have a very good position there. But the small customers, and there's lots of them, have a big negative in the first half, and this is just this jolt from the modernization regulation. So it's just a -- they have to pause, they have to register, they have to comply. That's just taking time. And then you expect that, and we're starting to see that come back through small customers. So it is a positioning effect with most of our businesses, small customers there. But the L'Oreal thing is the import one.

So Jez made the point. So due to import duties for cosmetics in China have changed in the middle of last year, they were at 8.6%, I think. And they moved them down to 2.9%. What that's encouraging is the L'Oreal's of the world from France to ship their finished products into China increasingly and not just their but Clarins and so they encourage a premium, the brands -- the top brands to ship from European production. And that's the major flow, it's not an American flow. Now of course, we look at our French business, and our French figures are good. We're not surprised with that. So we are very -- we are picking up business that way. And our European numbers are a bit stronger than probably they otherwise would have been because of that. So you've seen a slight diversion of traffic and L'Oreal will not see that will not be impacted in the trade issues as much as somebody like we are because it's Western Europe to China, and they don't have that.

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Andrew Gregory Stott, UBS Investment Bank, Research Division - MD and Research Analyst [3]

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And the second question I have was, Jez, you mentioned on Crop Care that you're doing really well in Lat Am. But if I look at, say, some gentle numbers on Friday, and it sounds like BSF and Bio and Corteva are even worse. The global number is negative, and you're plus 4 in Crop Care. So it's the obvious conclusion that you're just way bigger in Lat Am than they are.

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Jeremy K. Maiden, Croda International Plc - Group Finance Director & Director [4]

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No, I think the -- I mean Lat Am is a big market for the crop side players. So I don't think we're bigger. I think we will probably underrepresented previously. And also we were importing most of our adjutants, our delivery systems in from Europe and North America, which meant that we were exposed to up to 35% tariffs into Brazil and so forth. So we made the move about 18 months ago to move much more of the production to Brazil. So we were in continent, which is good for tariffs, but it's also good for customers because they like you to be a bit more local. And I think if you stand back and look at it, we -- Crop Care has been one of the -- probably the strongest performer organically for the group over the last 10 years. And it's been the most consistent growing business, and we've probably outgrown in the market by an average of 3% to 4%.

So I think, our positioning in more towards the new products that our customers are producing through our collaboration agreements with them, where we work with them alongside them on the bench with their latest actives has exposed us to the faster-growing parts of the market. And so I think, we are consistently outperforming the crop market, doing 3% to 4% better than wherever the crop cycle is. But also our increased presence in Lat Am has undoubtedly gone down well with customers. And I think, we're picking up a bigger share of business as well. So you have this overall move from North America to Lat Am for the sales, particularly into China, the biggest market for soya, for example. But underlying that, you have this increased local presence, this strong position in R&D, and that's why we feel really good about crop and why we believe that medium-term crop should be growing mid- single-digit growth, almost independently, not entirely of what the crop macro and cycle is doing.

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [5]

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Tom Wrigglesworth from Citi. So 2 questions, if I may. Firstly, on Health Care, 15% growth, could you break out the price/volume mix? And also trying to understand how sustainable we should think about that type of -- that rate of growth in the order book that you have going forwards for the Health Care business? And then on the Personal Care side of the equation, is that the maximum impact, that negative 10%, and that's it? Or is the exit rate mean that there's a bit more to come? You talk about Asia getting progressively better. I just wanted to qualify the outlook on the impact versus that comment?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [6]

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I mean -- yes, I mean you saw the price mix for Life Sciences, which is very positive. Prices up 10%, 11%. We expect the Health Care a bit of that to be bigger than that. And I think we'll say that. And I think, the thing that really excites us about Health Care is you can, and in partnership with customers, they do accept franchise agreements, profit shares and royalty payments and the like, and that's what's attracting us to the space because our innovation, we can charge a product margin that we normally do. But on top of that, there is a recognition that we can partner up with some of the biggest projects with potential of second margin as well, which is what we'd like. And nothing -- what's not to like about that. But it would be really important for us, but a lot of it's driven by this high-purity excipients, we're deliberately vague about what it is, what it does, but increasing a bit like what Jez says as in crop. We are moving into a sweet spot in Health Care with positioning of our innovation, more and more of the actives in Health Care are becoming 3-dimensional, biological. What that means is, you need more stable excipients and delivery systems to deliver performance, better performance, and that's what those products do. So I mean the best way of looking at Life Sciences, we've always said, it's a mid- to high single-digit sales growth through the cycle. We love it to do 13% overall every first half and every quarter. It isn't going to do that. It's going to have big gross shoots, and then maybe most of June growth, but it will, over the cycle, it's mid- to high-single digits, really, really well positioned. We just want to invest more in that. So we'll do that.

Yes, Personal Care probably -- we are cautious with it because it's difficult to read. Well, to be honest with you, it's difficult to read this macro. This, sort of confidence level, which is reducing demand and this erratic and unpredictable stocking, which is in the system, not out of this, chemical industry is not great for managing stock, it never has been, 29 years in the industry, and it never gets it right through the cycle. And I think what we're seeing is a correction. Absolutely, a correction. And I think most of us would have said, Chief Exec would have said, second half, in this early part of the year when I was addressing you.

Second half will be much stronger than the first half because we'll get through that in the first half because we think it's destocking. And I think I'm one, and I don't think I'll be the only one that's saying, actually, we're not seeing the market pick up, and we're not guiding to see the market pick up in the second half. But -- and it's because we can't see it in the short term. Now it may do, and you'll probably know about it than we do when you see all the stats coming out. So it's difficult. It's difficult to read. We'd like to think we're through the west, certainly, in China, it is -- you'd expect that to start to come back through the second half. But we want to get through this, and we still think Personal Care is a 3% to 5% growth -- a growth machine for Croda through the normal cycle, and there should be no reason why we can't get back to that. But we're rightly being cautious for the second half because it's a bit opaque out there.

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Nicola Tang, Exane BNP Paribas, Research Division - Analyst [7]

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And Nicola Tang from Exane BNP. I actually wanted to follow-up on the comments you just made on the exit rate for Q2. And whether this was -- the comments you're making on the limited visibility on the order book were mainly due to the Chinese trade rules or also because of this daigou regulation? And on the daigou regulation front, you're assuming a pickup in Asia in the second half. But was there any sort of stocking ahead of this regulation in H2 of last year?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [8]

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Yes, it's mainly primarily trade war related, we think, is the soft -- the exit rates are a function of mainly that, if we're honest. The daigou legislation issue is a specific issue. I'm talking group, but this is a specific issue for Personal Care in China. And I think we -- I think the caution, the exit -- June normally is a very strong month for the industry. It's normally a top 2 month or a top 3 month and it's a quiet month for, well, certainly for Croda. So that's what has given us caution. We just think it's trade war related. Some of the tariffs came on late in quarter 2 as well. So there's a reaction. The application of the tariffs to 20%, 25% into China came on late in quarter 2, some of them. So there's probably a reaction to that. And it's difficult to work through at the moment, if we're honest. But the Chinese factors, we think, will be fine. There's lots of it in China. And also in China, don't forget, we've got tiny market share. So we're still growing with other customers. America, we think, is just going to take a little longer to come back in Personal Care, but mainly in the industrial, particularly in the industrial areas, it will take a bit longer. And there's weak auto affect out there, which will work its way through in the normal way as well.

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Nicola Tang, Exane BNP Paribas, Research Division - Analyst [9]

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And then I had a second question on the Crop Care side or in Life Sciences. Can I confirm, was all the acquisition due to biosector? And what did plant -- how has plant impact getting along?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [10]

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Yes. I mean everything is going well. Plant, in fact, we really like the technology. The technology is great. It's ahead of its time, and that's why we bought it. Sales are going to be a bit slower to come on because of that. And also don't forget in Crop, it takes a bit longer to get it through the innovation programs of our customers. It's a bit longer approval time. So a bit longer than we originally thought but still in very good shape. And it can -- has the potential of delivering very strong growth, but likely to be more 2020 than second half 2019.

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Charles L. Webb, Morgan Stanley, Research Division - Equity Analyst [11]

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Charlie Webb, Morgan Stanley. Maybe just one on Atlas Point. It feels like that has been -- the ramp-up, or the re-ramp-up of that plant has been kind of pushed back, pushed back. I think you're now expecting end of Q3 to get that up and running. How is that looking? How are the, kind of, biocertifications going with customers? And are you still on track, 2020? I mean is this '19 just a bit of a transitory...?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [12]

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No, it's fine. It's fine, I mean it's driven by me in many ways. Process safety for Croda is very important. And I'm wanting to make sure we're dotting "i"s, crossing "t"s to get this plant onto -- it's, the commissioning started. So you have to start with pressure testing and everything. The regulation or the regulators that are supporting us, they're very comfortable with that. And quite rightly, they're wanting to make sure that everything is fine. So it's -- it will -- it comes on through but it takes a few weeks for it to build up. So we'll be making product through the next -- towards the end of quarter 3, and we'll be selling products at the end of quarter 3. So the impact on P&L and the finances is really a quarter 4 effect rather than a quarter 3 effect. So I think some of you might have had it in for quarter 3, which is a -- which might be a part of your question, but it's really a quarter 4 effect. But I'll tell you the interest in biosurfactants is really good, really strong. And as I reminded you all in February, the prolonged delay in this is not delaying innovation because we've managed to get a lot of the samples out to our customers beforehand. So we're still managing to talk to a lot of the marketing teams and the R&D teams of our customers. So they're positioning their brands in anticipation of us coming on stream. So we should see some quick wins coming through. But realistically, by the time they've positioned the product, they've launched the product, it's going to be a 2020 effect rather than a 2019 effect. But we'll get some financial benefits because -- as Jez has described to you in the [better]. Yes, it's on stream, it will be on stream. There's no operational issues. Commercially, now we're getting just tuned into capturing that growth as quickly as we can.

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Charles L. Webb, Morgan Stanley, Research Division - Equity Analyst [13]

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Okay. And just thinking about that, the financial effect. So we've kind of talked about a GBP 3 million benefit from Atlas Point on an annualized basis. Obviously, Q2, we continue to lap some sort of costs in Q3, and then we get some of that positive effect in Q4. So is it roughly a GBP 5 million headwind now expected for the full year,

or a bit more than that?

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Jeremy K. Maiden, Croda International Plc - Group Finance Director & Director [14]

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So yes, we guided to GBP 2 million a quarter, while we were not running the plant. And then on initial start-up a GBP 3 million profit, as you say, Charlie. And that initial GBP 3 million is simply from the replacement of buying in feedstock to making it ourselves. That's not the big benefit obviously as the plant. The big benefit is then growing bio-based volumes of sales to our customers and substituting for competitors, petrochemical product. But the GBP 3 million is a good, sort of, start-up number. So yes, that's right. So we'll have about a -- yes, we'll have net, probably around about a GBP 5 million net cost in 2019 based on 3 quarters of not running, subject to what Steve just said. Obviously, there's a handover. And then 1 quarter of picking up that benefit. So yes, a fair number. And then next year, GBP 3 million, but then progressively starting to build new volumes with customers in Home Care, Personal Care and indeed some other areas.

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Charles L. Webb, Morgan Stanley, Research Division - Equity Analyst [15]

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And then maybe just secondly, on Health Care obviously a very strong first half. Just thinking about that, we've already kind of had the question, that just to get a bit more sense in terms of the growth profile there, as you said, very strong first half, we still have to got bio-sector to contribute, again -- sorry, bio-sector to contribute again in the second half. But what kind of runway are you looking because as you're obviously lapping perhaps softer comps in Life Sciences. But should we still expecting more at the upper end of that, that range that you've given kind of mid- to high-single digits?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [16]

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I mean a question for second half? Yes. I mean we -- it will moderate. I think it will moderate in the second half, no doubt. But it will still be a mid-, high-single digit sales growth, I think, in Health Care, from what we can see. But I mean through the cycle, it's certainly going to be that. And hopefully, a little bit more going over the next -- through the cycle, we say. There isn't really a cycle [but I'll just give] over the next 2, 3 years. We're really excited. And I think what we're watching closely is how biosector integrate. How do we see that ramp-up. Classic in Croda is, the first year is positioning. I've always called it that. We have to get the products through the right channels to the right customers or to more customers. We've just unraveled a major distributor of theirs in North America. And we've been very delighted with the number of customers that are behind that. Got a lot of customers that we can then target with our innovation. And so there's some margin improvement there to come through as well that you expect. So we're positioning ourselves well. But it's that base, higher period excipient business, which is the core, the core driver, and all of these as an additive to that. So yes. So I mean it will moderate second half because it's had a very strong first half. But we feel we're in a very good position with it.

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Charles L. Webb, Morgan Stanley, Research Division - Equity Analyst [17]

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And margins, likewise, moving in the same direction.

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [18]

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Yes, I mean it's some of the highest margin businesses in Croda, if not the highest margin performance. And the margins in Life Sciences will start to climb. I think we've always talked to you about Performance Technologies to 20%, but Life Sciences, we're getting more comfortable now that we've had the up and down of power in and out of the business. You're starting to see the business for what it is, which is moving towards ever closer to 34%. And I know the internal business teams would love to be ahead of Personal Care margins. Personal Care margins are very stable, 33%, 34%. But they were there, like, if you look back, prior to Incotec, our margins in Health Care were -- Life Sciences were 34%. So we expect to get back there. So we can see a runway to that now. So that's good. So -- and good sales growth so that's there too. The excitement when we look at it, that you've got sales growth and you've got margin improvement in that business.

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Unidentified Analyst [19]

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[Ronald] for Redburn. Just a quick question on your tweaked -- your strategy. Is there any additional CapEx or restructuring costs above what you've previously discussed associated with this?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [20]

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No, no. I mean it's not really tweaked. Actually, it's just a -- looking 10 years out and then coming back to now, it's more an emphasis change. It's making better choices with our capital anyway. But we've got a lot of cash that comes off the business. You can see that in your forward projections. The strategy is there to make sure that we do the right thing with the -- how do we deploy the cash is a key question for Jez and myself. And what we want to do is to put it into high-technology growth. Growth markets. So -- and we're betting on, we're big on sustainability. We're betting on new market opportunities being created in the next 3, 5 years, and that's where we're targeting. And if there's any excess that comes back in, Jez is very clear. We're very disciplined with that. For allocation purposes, there will be cash returns, if we go below 1x, but we would rather much prefer to invest in the business. I think you'd want us to.

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Isha Sharma, MainFirst Bank AG, Research Division - Analyst [21]

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Isha Sharma from MainFirst. I just quickly wanted to ask you, what are the kind of trends that you actually seeing in the U.S. in your end-market, especially for Personal Care? And how the competitive space is developing given that some of the flavors and fragrances players, for example, are claiming to grow very well. And so just as an idea of how the competitive space is developing? That's my first question. The second would be, is it fair to assume that improvement in Performance Technologies that we should have seen already in '19 is kind of now delayed because of the market environment? Or do we still expect that to -- we still expect to see some in the second half of the year?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [22]

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Okay. Yes, I mean Personal Care in -- I mean trends in Personal Care in the -- you see the Nielsen data or the RI data. So Personal Care broadly flat in consumer data trends. And that's skin and hair. So skin and hair care are broadly flat. But what we have to think about, in North America, is it's still a big R&D brain for the world for innovation. So we do a lot of innovation in North America for Croda, for customers that export their products as well. So there's a lot of attention needed for that. But generally, it's just a softness. I mean our logic to that is, we think with a trade war, the disposable income available to U.S. families is reducing because what's not happening is the China products are still coming in, and everybody's still paying for them because they're not being filled by U.S. manufacture yet. Whether that happens -- and that's the strategy, whether that happens in the end, we'll see. So everything is a little bit more costly. And I think what you've got is just a subdued consumer environment because there's a bit of disposable income squeeze out there.

But in the round, it's a great -- Personal Care in North America is great. We've got a strong position. There's nothing in our numbers that says our fragrance and flavor friends are coming into our space. They're not, you can see that through the NPP program. So -- and we wouldn't expect that as well. So yes, so we just want to see that come back. And your other question on Performance Technologies. Yes, I mean we still think it will take time for that sales to come back. We don't expect it to deteriorate any further from the first half. But it's all the auto supply chain. As you see, it's just coming back to the suppliers now. It's -- there's 2 or 3 levels in the supply chain. And now what you're starting to see the real demand. So the real demand, I think, on us, is a proxy for the true demand for their demand for the car. So it feels like it's more in line. So I think if we start to see a pickup there, we'll see a pick up too. But the other thing we will constantly refine that business. So the innovation underpinning this is, it's getting a stronger business. And the weakness is just in the smart materials area. It's only a part of that, which we are sort macro. The Energy Technologies business is broadly flat, that's a good -- really good business. And in this current climate, broadly flat in that business, I think, is a good result.

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Unidentified Analyst [23]

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I apologize for this one. Significantly, apologize. But Halloween is approaching. Could you just remind me of what you said early in the year about hard Brexit and what you've done with raw materials? And how you plan around WTO tariffs, et cetera?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [24]

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Yes. I mean we're -- Jez leads the team. So Jez can comment as well. Yes, we all take it seriously. I think a lot of it is, around the edges, it's stock management. It's making sure your stock's in the right place, where it can be, and we do that very well. We're lobbying the government on behalf of the industry. I chair the industry group. So our big message is, we don't want a hard Brexit, and we want -- if we have to have a Brexit, we want some sort of pathway to it rather than a sort of cliff edge because that will be disruptive for our industry. There's a lot of trade flow in the chemical industry across multiple borders. We're impacted in a certain minor way. Croda -- we have less than 5% of our sales in the U.K. So I think for Croda, it's a management around classic stock management, making sure we do the right thing. And then we'll see what happens, but I think it's going to be an interesting ride, as we all know, but we'll see. But Jez, do you want to comment on the detail?

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Jeremy K. Maiden, Croda International Plc - Group Finance Director & Director [25]

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Yes. I'd say probably more Ground Hog day than Halloween, Andrew. That's -- so we got it already for the end of March, and we're just going to kick it all off again and get it ready for the 31st of October, just in case. So yes, Steve says, from the soft Brexit point of view, fairly minor impacts: 4% of sales in the U.K.; 16% of production in the U.K.; tariff impacts from WTO low -- well, mid- to high-single digits, millions, of which there'd be some sharing of that between ourselves and our customers. So we're not really concerned about tariff impact from point of view of profitability, or the risk around that.

So Steve said, it's all just about physical contingency planning to make sure that we've got some elevated stocks in the right locations between the U.K. and Continental Europe. And we put those in place through the first quarter. We unwound in a second. We'll rewind from now through to the end of October, in case we see some physical disruption, and that's really what we're managing for. Regulation all in place, so we've reregistered all the overseas products that are sold in Continental Europe under a U.K. registration, which is obviously valid under EU laws. We've reregistered all of those products in the Continental Europe entity. So that -- so we can do that. We would do the same with the U.K. product -- manufactured products as and when the European regulator accepted those reregistrations. They won't at the moment because the current registrations are still valid, because we're still in the EU. So those are the things that we've done. So we've done everything that we can. And it's a tactical contingency planning exercise, not a structural or strategic impact on us.

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Theodora Lee Joseph, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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Theodora Joseph, Goldman Sachs. My question is, with your outlook, you actually expect for a slight improvement in the second half. And with that, I'd like just like more color around how you kind of quantify slight? And your assumptions behind it, considering that actually within Life Sciences, you expect a moderation in growth. And Personal Care, you talk about how it actually is quite okay. So kind of your assumptions behind your guidance?

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [27]

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Jez, do you want to have a go?

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Jeremy K. Maiden, Croda International Plc - Group Finance Director & Director [28]

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Yes. Theodora, thanks. The -- so I think there's a few items we can bridge about why the second half profit is better than the first half profit. We were down GBP 4 million in reported currency PBT, in the first half. That included a GBP 3 million headwind from capitalized interest, which we stopped capitalizing interest when we finished the main construction phase of the biosurfactant project in June last year. So the half 2 to half 2, you don't see that headwind. Obviously, the interest was higher last year. We were about GBP 8 million of interest in the second half year, we were 3.5 in the first half year.

But clearly, lapping will be much closer to that. The only change in interest will be driven by the special dividend that we made. So it'll be a little bit higher in interest but not for that. We don't have a -- we're lapping plant impact, whereas we had a bit more than GBP 1 million loss in the first quarter on plant impact as it's effectively no sales with about a GBP 5 million cost base per year. So you haven't got that lapping effect. So you've got those sorts of changes. I think in terms of overall trends, as Steve said, we wouldn't particularly expect Performance Technology sales to be different. I don't think you can point to a short-term rebound in automotive and other demand in industrial and technical applications.

Life Science. Yes, we're guiding to a more of our medium-term numbers rather than saying we'll be double-digit every period. Personal Care, we do think Personal Care will probably be closer to flat because we can see an improving trend in Asia. But we're not yet seeing an improving trend in the U.S. And of course, the comparators do get a little easier as we get into fourth quarter on Personal Care, where we were seeing the slowdown. So I think those things collectively make us feel that we will be slightly better in the second half in the overall profitability performance, but not orders of magnitude better. It's not the environment to make that call.

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Stephen Edward Foots, Croda International Plc - Group Chief Executive & Director [29]

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And I think I would add, the big caveat to all of that is, we're not assuming markets to improve through the second half, but we're also not expecting the markets to deteriorate as well. We're expecting exit rates of quarter 2. So quarter 2 trends continue. And it is very opaque out there. It's unusual. It is unusual.

Okay. That's great. That put [one won't you] when you go out of here. Thank you very much.