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Morningstar | Croda's first half reveals impressive margin improvement in performance technologies.

Croda is a British speciality chemicals company, known as the leader in skincare active ingredients for the personal-care market. Actives are a niche segment, but they have the highest value, as they allow companies to make performance marketing claims for their products, such as antiwrinkle creams. Continuous innovation and entrenched customer relationships have driven EBIT margins in Croda’s personal-care segment to nearly 35% in recent times, and contribution to group EBIT is now a hefty 47%. A key driver for the company is the percentage of sales from new, patented, or protected products. With NPP sales reaching record levels in personal care, we are hesitant to believe margins can continue to rise unabated. Nevertheless, we expect this segment to remain highly profitable. The life sciences segment (29% of EBIT) is another very profitable business, with EBIT margins around 30%. The business is divided into healthcare and crop care, and operates in fast-growing niches in both areas. The healthcare business is focused on excipients, which are inactive substances that serve as the vehicle for a drug or other active substance. While traditional excipients perform simple functions, Croda’s high-purity excipients are high-performance, as they are needed for challenging unstable active pharmaceutical ingredients in sensitive applications. Crop care produces adjuvants for fungicides, which improve absorption and efficacy. The high-value aspect is due to the technology being more complex for fungicides than for herbicides. Croda moved into the fast-growing seed treatment business with the acquisition of Incotec in late 2015. While this has initially dampened segment margins, we expect the acquisition to be integrated successfully. Croda’s industrial exposure is housed within the performance technologies segment (23% of EBIT). The company is targeting a 20% EBIT margin, versus current levels in the 16%-18% range. We think this goal will be reached over time, given ample room to increase NPP products. In addition, margins should be helped by the cyclical upswing in Europe and a recovering oil and gas sector.