Final Results - Pre-tax Profit Up 20%

Croda International PLC 1 March 2000 Croda International Plc Preliminary Results Announcement 1999 Croda today announces its preliminary results for the year ended 31 December 1999: Highlights £m 1999 1998 Increase Turnover on continuing operations 368.9 349.8 5.5% Pre-tax profit before exceptionals on 41.2 34.2 20% continuing operations Earnings per share before exceptionals 20.4p 15.7p 30% Dividends per share 10.70p 10.35p 3.4% - Earnings per share up 30% - Oleochemicals profits up 21% on sales up 8% - Oleochemicals margins up to 17% - Oleochemicals now 83% of Group trading profit Commenting on the results, Chairman, Keith Hopkins, said: 'In 1999 we saw a strong performance throughout the year. The good result in Oleochemicals came from a combination of higher margin sales, strong volume growth and lower vegetable oil raw material prices. So far this year we have continued to see the good levels of demand we saw last year. The commissioning of our new plant in Singapore and many new product launches across the world lead us to expect that we will build on the progress made last year.' For further information, please contact: Mike Humphrey, Chief Executive Tel: 0385 307786 Barbara Richmond, Group Finance Director Tel: 0467 252627 Financial Dynamics Tel: 0207 831 3113 Charles Watson Tom Baldock Or visit our web site at: www.croda.co.uk where the presentation given to analysts will be available midday today. Chairman's Statement I am pleased to report that profits before tax and exceptional items in continuing operations were 20% higher at £41.2m than the £34.2m we achieved last year. Sales in continuing operations were up 5.5% at £369m. With a similar tax charge to last year earnings per share before exceptional items at 20.4p were up 30%, and comfortably cover the proposed dividend for the year of 10.7p (1998 10.35p). This includes a recommended final dividend of 7.05p compared to the second interim dividend of 6.8p we paid last year in place of the final. The final dividend will be paid on 7 July 2000 following shareholder approval at our AGM in April. Trading Overall we saw a continuing strong performance throughout the year. This contrasted markedly with the weak trading we saw in the second half of 1998. Group sales volumes were 4% higher than in 1998 and volumes in Oleochemicals rose by 6% leading to an increase in sales turnover in that sector of 8%. Operating margins in Oleochemicals climbed to 17% (1998 15.2%) and reached 17.8% in the second half of 1999 due to a combination of higher margin sales, lower vegetable oil prices and strong volume growth. Sales of skin care treatment specialities were again particularly successful. Early last year we formed Crodarom from our existing botanicals extracts business and Phybiotex, acquired with Sederma. The operation is based at the new modern factory in Chanac in France and this combination led to good profit growth and shows much promise for the future. Once again our American Oleochemicals operations were outstandingly successful with strong growth in sales and profits. In Asia sales grew a remarkable 31% as our new plant in Singapore came on stream. This will be fully commissioned during the first half of this year. This new capacity will provide the platform for further growth in the region. In Japan profits grew strongly both with higher domestic sales and increased export volumes of high value specialities. We saw more modest sales growth in Europe and sales to UK manufacturing industry remained depressed. Overall our Industrial Chemical sales were flat with profits down £1.3m mainly due to import competition in the UK market reducing prices as a consequence of the strong performance of the Pound against the Euro. The continuing weakness of the Euro is unhelpful to the Group to say the least, as our main competitors are based in Germany. Corporate Development We continue to focus our business on our speciality chemical operations and we announced earlier this year our withdrawal from the dyes and pigments business. Similarly we announced a far reaching restructuring of our manufacturing operations and the revenue cost of this at £8.3m is included in our results as an exceptional item. We estimate that the cost savings from this initiative will be around £5m per annum. Unfortunately this involves many redundancies and the closure of a number of older units but it is essential we maintain our competitiveness and continue to modernise our factories. Finance Capital expenditure in 1999 was £30.7m (1998 £31.3m) compared to depreciation of £19.1m (1998 £18.2m). The major part of this spend was at the new plant in Singapore which will be officially opened later this month. Amortisation of acquired goodwill was £0.5m compared to £0.2m last year. The exceptional charge of £7.4m after operating profit is made up of the costs of closure of our dyes and pigments business and further costs relating to the paints business we sold in 1998. During the year we continued our programme for our employee trusts to purchase shares to cover our share option liabilities rather than relying on issuing new shares. In 1999 we purchased 3.2m shares which cost £8.1m and now cover 71% of the outstanding options. Net debt increased to £116.9m (1998 £107.4m) with gearing of 76% at the year end and comfortable interest cover of 6.4 times. 76% of our net debt matures after more than three years. E-business I suppose it is necessary to say that after the preparations we made we passed into the new millennium without incident. Across our Oleochemicals business we are now undertaking a major IT investment to improve our supply chain efficiency and provide a fully integrated system from supplier to customer. The implementation of the first stage will be completed this year and then rolled out across the world. Our strategy in E-commerce is to use the new technology to reduce the cost of doing business and provide ever closer links to our customers. Undoubtedly in our industry business to business transactions via the internet will become a major way of doing business. People Reaching the year 2000 seemed for many of us a milestone in our lives. Once again we owe our thanks for the good results last year to the hard work and effort put in by all our employees. The Board, on behalf of our shareholders, thanks them and wishes them good luck and every success in this new millennium. Outlook So far this year we have continued to see the good levels of demand we saw last year. While the weakness of the Euro remains a concern the prices of our vegetable oil raw materials are stable at lower levels than recent years. Our operational restructuring aimed at lowering our cost base is well underway. The commissioning of our new plant in Singapore and many new product launches across the world lead us to expect that we will build on the progress made last year. Operating Review Group trading profits from continuing operations increased by 14% from £46.1m in 1998 to £52.4m in 1999. This result was further confirmation of the continuing strength of our true speciality business. We achieved robust global sales growth and a pleasing increase in margin. The success story in North America continued with another substantial move forward in sales and profits, driven by increased new product launches. In Asia, we had our best ever performance in both sales and profits, with a very good contribution from Japan. Sales in continuing businesses were up by a healthy 34% and we expect to accelerate growth in this region in the years to come, underpinned by the exciting new plant in Singapore. European business continued well with one or two exceptions, though competition was unremitting in the face of the weak Euro. We successfully completed the combination of our German and French herbal extracts units into a single site entity based in a new technologically advanced factory in Southern France. The Sederma business continued to thrive and increased its rate of new technology introduction to the discerning segment of the Personal Care market. The nascent Lipids business is now on a rapid growth course. We achieved good success with the supply of highly purified natural oils to major branded dietary supplement manufacturers. More important for the long term, joint developments in prescription treatment products show good prospects for lipid derived treatment of a number of chronic conditions. It is sad to report the closure of the Colours division. Unfortunately, global consolidation in dyestuffs had decimated margins and even the major companies struggle to cope with low cost Asian producers and a ruthlessly competitive market place. We continue to invest in the latest technology at our global scale plants in America, Europe and Asia. The greenfield site in Singapore has now been transformed into the most advanced low cost production unit in the world for speciality esters and ethoxylates. Further focussed investment in our key business areas will continue to provide much needed capacity for our global sales organisation. We have announced the closure of a number of older inefficient sites, to enable us to concentrate our resources and implement the latest, low cost production technologies at our remaining units. Established in late 1998 in Barcelona, Croda Iberica's sales performance exceeded demanding targets. During 1999, we also opened our second South American operation in Argentina, following the continued success of Croda Brasil, and early signs are very positive. We constantly embrace new technology and begin rolling out our new computer systems across the Oleochemicals businesses at the end of the first quarter. This will enable us to more easily take advantage of low cost transactions via the Internet and give improved service to our customers. We recently strengthened the senior management team by appointing David Barraclough and Keith Gregersen to the Executive Committee. David is responsible for Croda's Oleochemicals operations in the Asia Pacific region and Keith will direct our Oleochemicals businesses in the Americas. 1999 was a year of increasing focus on the high growth, high margin areas of Croda. We will continue to improve the quality of the business, and to enhance value for all our stakeholders. Croda is rich in innovation and we will seek suitable technically based acquisitions to complement the impressive organic growth in our core speciality business. Oleochemicals Results 1999 1998 £m £m External turnover 255.6 235.7 Trading profit 43.5 35.9 Capital employed 226.8 210.6 Return on capital 19.2% 17.0% With turnover up 8% and profits up 21%, this was an excellent performance from the core speciality business. Margins improved to 17%, benefitting in the second half of 1999 from softening base oleochemical prices. In contrast with 1998, there was also a strong sales performance in the final six months. The achievement of consistently high margins is firmly based on constant innovation allied to creative global marketing. The perfect example of this is found in our business in the Americas. Sales in the Americas were up to a record £110.9m from £96.3m in 1998, most of this increase coming from ongoing strong growth in the USA. Innovation in products and marketing techniques is the basis of our success in this, the most dynamic of all global Personal Care markets. 1999 saw our business in Asia bounce back with a vengeance with 34% growth in sales in continuing operations. Our decision to stay focussed on this market during the recent financial turmoil has been fully vindicated. The new Singapore plant is now on stream and will be fully commissioned during the first half of 2000. Initial demand is very strong and this highly efficient plant will give us cost leadership in speciality oleochemicals. It is the only combined speciality ester and ethoxylation site in South East Asia and it is well placed to take advantage of an exciting growth region. Croda Japan again improved its profitability in a difficult domestic market, helped by sales of technologically advanced products through the Croda marketing networks in the USA and Europe. The UK market for our specialities was fairly flat, but there was a welcome recovery in profitability from our UK production operations, mainly as a result of new product introductions with higher added value. Although the prices of vegetable oils are now significantly lower than a year ago, there is no sign of an end to the slump in world demand for wool. This means that woolgrease, an important raw material obtained as a by-product of the wool washing process, remains in tight supply and therefore at a historically high price. Substantial price increases have been instituted for the derivatives we sell to compensate for the high cost of the raw material. Croda Colloids improved its profitability by focussing on new and unique non-animal derived products for healthcare, personal care and food. The successful opening of new wholly owned marketing operations in Spain and Argentina expanded our global reach and gave added strength to our superb worldwide network. We experienced more modest growth in Europe than in recent years, though some markets including Spain, Scandinavia, Germany and Poland extended their impressive growth record. 1999 was a year of growth, a more benign raw material environment and an ever increasing focus on new, more advanced processes and new product development. The effect of the process changes can most clearly be seen in Singapore, where the new plant has much reduced cycle times compared to our older units. Whilst new product development is an integral feature of all our Oleochemical businesses, our recent acquisition, Sederma, once again led the way. They increased the rate of new product introduction, raised profits and drove sales higher through the Croda network, especially in the USA. Some of the recent developments have the potential for large sales, particularly in skin care. Industrial Chemicals Results 1999 1998 £m £m External turnover 113.3 114.1 Trading profit 8.9 10.2 Capital employed 68.0 71.8 Return on capital 13.1% 14.2% This sector has a much higher proportion of its business in the UK and as a result suffered from relentless competition from European suppliers taking advantage of their weakening currency. Sales were flat and profits fell by over £1m compared to 1998. Operating margins fell slightly on continuing businesses. There were good performances in technical oils and especially in fire fighting chemicals which moved forward strongly, consolidating its European market leadership. Sales in Adhesives continued to grow, especially in the USA and new technology will improve profitability in 2000. There were welcome signs of recovery in the second half of the year for Seatons and Application Chemicals, and an increased profit contribution from our joint venture paints operation in Australia. We made the decision to exit the manufacture of dyestuffs and pigments in the face of massive global consolidation and suicidal pricing by the major players. Future Plans The modernisation of manufacturing operations has continued. We announced the closure of plants in Belgium, Luton and Belvedere. Our aim is to improve profitability, increase efficiency and invest in safer, more environmentally sound processes. We will constantly pursue value enhancing acquisitions in our core speciality areas and improve or dispose of under performing businesses. Financial Review Trading 1999 saw the ongoing transformation of the Group into a focussed speciality chemical business, with the closure of our loss making Colours division and the announcement of the restructuring of a number of our continuing operations. Demand again moved ahead strongly with 6% volume growth in our Oleochemicals business compared to 4% in 1998. Industrial Chemicals saw a recovery in volume with a 1% volume increase in 1999. We experienced strong sales growth, particularly in the Americas and the Far East. The strength of the Japanese Yen and US Dollar benefitted the Group's results in translation of profits a little more than the negative effect of the weakening Euro. Net interest payable fell to £7.5m (1998 £8.0m) with the reduction in the UK interest rates and, together with our higher trading profit, increased our interest cover to 6.4 times (1998 5.0 times). Exceptional items There are two exceptional items, one relating to continuing businesses and the other to discontinued businesses. The largest exceptional cost is the £8.3m for restructuring a number of our continuing businesses of which approximately 50% will be a cash cost, the balance being the write-off of assets. Taxation As anticipated at the time of last year's results announcement, our tax rate for 1999 was 32%, the same as 1998. With an increasing proportion of our profits being generated overseas we expect our tax rate to show a modest increase in 2000. Dividend The Board is proposing a final dividend of 7.05p making 10.70p for the year, a 3.4% increase. As a consequence of higher earnings our dividend cover rose to 1.9 times (1998 1.5 times). Treasury Operating cash inflow in 1999 was £58.8m, £2.4m above 1998. Capital expenditure of £30.7m was 1.6 times depreciation. The major element was the spend on our new facility in Singapore. The Group's treasury policies are approved by the Board and are subject to periodic reporting and review. As with most companies the major financial risks faced by the Group relate to currency, interest rates and the availability of capital. Currency exposure, which arises on trading when goods are sold or purchased in currency other than those of the operation concerned, is hedged with forward currency contracts or currency bank balances. The Group does not currently hedge forecast sales and purchases. Although 33% of the Group's operating assets are located outside the UK and denominated in foreign currencies, we choose not to hedge this translation exposure but it is reduced by matching interest expense to foreign currency earnings. Interest is paid on borrowings which are predominantly in Sterling, US Dollars and Euros. To reduce exposure to large changes in interest rates, a proportion of Group debt is maintained at fixed rates. Group policy is to maintain the fixed rate debt at below 50% of total net debt. The proportion was 29% at the year-end. To ensure the Group has adequate funding, Group policy is to have less than 30% of net debt due for repayment within one year. This figure was 20% at the year-end, with a further £29m of undrawn committed facilities available. The Group also aims to maintain an even repayment profile for its debt, with no more than one third of committed facilities falling due for repayment at any one time. Employee share ownership As reported last year, the Group has implemented a programme of funding all its employee share and option schemes primarily by the purchase of shares on the open market rather than the issue of new shares. At 31 December 1999 the employee trusts held 4.3m Croda shares at a cost of £10.6m. Following approval at the 1999 Annual General Meeting, we launched a savings related share scheme for our overseas employees and I am pleased to report options over 486,715 shares were taken up by 263 of our 846 overseas employees. Croda International Plc, Preliminary announcement of trading results for the year ended 31 December 1999 Group profit and loss account Continuing Discont 1999 Contin Discont 1998 operations inued Total uing inued Total Before Except operati operat operati exceptio ional ons ions ons nal items items £m £m £m £m £m £m £m Turnover 368.9 - 2.9 371.8 349.8 25.5 375.3 Operating profit Group operating profit 45.8 (8.3) (0.7) 36.8 39.4 (2.2) 37.2 Share of associates' operating profit 2.9 - - 2.9 2.8 - 2.8 Total operating profit 48.7 (8.3) (0.7) 39.7 42.2 (2.2) 40.0 Exceptional loss on disposal and closure of discontinued operations (7.4) (18.0) Net interest payable (7.5) (8.0) Profit before taxation 24.8 14.0 UK taxation (3.5) (3.3) Overseas taxation (9.4) (6.9) Tax on exceptional items 1.4 (0.9) Profit after taxation 13.3 2.9 Minority interests and preference dividend (0.4) (0.4) Profit attributable to ordinary shareholders 12.9 2.5 Ordinary dividends (14.1) (14.0) Reserves transfer (1.2) (11.5) Earnings per share Pence per share Pence per share Basic 9.7 1.8 Before exceptional items 20.4 15.7 Ordinary dividends Interim 3.65 3.55 Second interim - 6.80 Final 7.05 - Summarised balance sheet At 31 At 31 December December 1999 1998 £m £m Fixed assets 196.4 184.7 Stock 64.1 62.5 Debtors 110.4 106.0 Creditors and provisions (99.2) (89.9) 271.7 263.3 Shareholders' funds 153.4 154.8 Minority interests 1.4 1.1 154.8 155.9 Net debt 116.9 107.4 271.7 263.3 Movement in shareholders' funds 1999 1998 £m £m Profit attributable to ordinary 12.9 2.5 shareholders Ordinary activities (14.1) (14.0) New share capital issued - 1.5 Goodwill written back on disposals 0.4 13.8 Currency translation differences (0.6) (0.7) Net movement in shareholders' funds (1.4) 3.1 Opening shareholders' funds 154.8 160.7 Prior period adjustment - (9.0) Closing shareholders' funds 153.4 154.8 Note There were no recognised gains or losses except for those included above. Summarised cash flow 1999 1998 £m £m Group pre exceptional operating 45.1 37.2 profit Depreciation 19.1 18.2 Goodwill amortisation 0.5 0.2 Working capital (5.6) 2.1 Other (0.3) (1.3) Operating cash flow 58.8 56.4 Interest (7.2) (7.8) Dividends paid (9.3) (14.4) Taxation (12.2) (10.5) Fixed assets purchased (30.5) (31.1) Purchase of own shares (7.9) (2.7) Acquisitions - (11.7) Disposals 0.4 32.2 Other (1.1) 3.3 Movement in net debt from cash flows (9.0) 13.7 New finance lease contracts (0.2) (0.2) Exchange differences (0.3) - Movement in net debt in the period (9.5) 13.5 Notes to the preliminary announcement 1. Segmental analysis of continuing operations (pre-exceptional) 1999 1998 £m £m Turnover Oleochemicals 255.6 235.7 Industrial Chemicals 113.3 114.1 368.9 349.8 Trading profit Oleochemicals 43.5 35.9 Industrial Chemicals 8.9 10.2 52.4 46.1 Central costs (3.7) (3.9) Operating profit 48.7 42.2 Turnover by geographical destination United Kingdom 90.4 99.1 Rest of Europe 100.6 98.0 Americas 110.8 96.0 Asia 36.2 27.0 Rest of World 30.9 29.7 368.9 349.8 2. Exceptional items before operating profit 1999 1998 £m £m Restructuring provision 8.3 - 3. Exceptional items after operating profit The loss on disposal and closure of discontinued operations in 1999 of £7.4m principally relates to the disposal and closure of the Colours business and includes goodwill written back of £0.4m. The 1998 loss principally related to the Coatings business, including goodwill written back of £13.8m, and further costs relating to this disposal were incurred and charged in 1999. 4. Additional matters: a. The financial information above is derived from the Group's full statutory accounts on which the auditors have reported; their reports were unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. Statutory accounts for 1998 have been filed with the Registrar of Companies and those for 1999 will be delivered following the Annual General Meeting. b. The final dividend of 7.05p will be paid on 7 July 2000 to shareholders registered on 9 June 2000. c. The above financial information has been prepared on the basis of the accounting policies which are to be set out in the Group's 1999 statutory accounts, and in accordance with all applicable UK accounting standards and the Companies Act 1985. The accounting policies are consistent with those applied in previous years as set out in the Group's 1998 statutory accounts, with the exceptions set out below, which arise as the result of the adoption of new UK accounting standards: (i) The previous policy of the Group was to expense environmental costs on operational sites as incurred unless either the site ceased operation, or the obligation was probable, accurately quantifiable and material to the financial position of the Group at which point provision would be made. FRS 12 requires provision to be made immediately where a constructive or legal obligation is identified and can be quantified. This change in accounting policy results in a prior period adjustment, reducing shareholders funds at 1 January 1998 by £9 million and increasing provisions by a corresponding amount. (ii) The Group has adopted the transitional provisions of FRS 15 and as a result no further revaluations will be carried out and previous surpluses will be retained. (iii) Neither of the above changes of policy resulted in the reported profit and loss account figures being different from those which would have been reported under the previous policies.

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