Croda Hoards Cash for Growth as Europe, Cropcare Blights Results

Croda International Plc (CRDA), which reported a 28 percent jump in first-half cash flow, plans to hold on to the funds as it accelerates a search for technology to acquire, according to Chief Financial Officer Sean Christie.

Chief Technology Officer Keith Layden has a team of 10 seeking bolt-on targets, Christie said in an interview.

Expansion into the cosmetic-additives industry by Clariant AG (CLN) and Evonik Industries AG (EVK) has heaped pressure on Croda to maintain an edge by focusing on higher-margin active ingredients. The U.K. company has already made targeted acquisitions to add stem-cell technology and patented products, while backing away from areas that are less differentiated.

“We’re accelerating our efforts to find very clever bits of technology,” said Christie. “We’re fine with buybacks and special dividends: We’ve already got a generous mainstream dividend policy so we’re not shorting our shareholders.”

A deal of size could help sustain Croda’s value creation, according to Canaccord analyst Alicia Forry. Investor concern that Croda will struggle to maintain its historic pace of margin improvement has weighed on the FTSE100 index member this year.

The Snaith, Yorkshire-based company has risen 3 percent, compared with an advance of 18 percent at Clariant, which is selling commodity businesses to focus on specialty chemicals for the oil and gas industries and personal-care items.

Growth Worries

Croda dropped as much as 7.2 percent to 2,384 pence, the biggest intraday decline since December 2008, and traded at 2,467 pence as of 1:22 p.m. in London.

The company reported second-quarter earnings before interest and taxes of 71.1 million pounds ($109 million), an increase of 4.4 percent. Analysts in a Bloomberg survey predicted 71.4 million pounds, according to an average estimate. A slowdown in the European automotive industry and delays to the planting season cutting orders for additives used in fungicides and other crop chemicals hurt profit.

Markets in Europe are expected to remain tough in the near term, Christie said in the interview. Farming trends have now normalized after drought in the U.S. and Europe’s extended winter, with sales at the Crop Care division currently “quite strong,” according to the CFO. Its move into top-end ingredients used by companies such as Nivea for their range of sunblock creams added to growth at the consumer care segment.

Last year, Croda hired Layden to spearhead research into biotechnology and the use of bacteria and proteins to manufacture products such as the anti-wrinkle additive in top-end face creams. Among projects, the company is working with drugmakers to release pharmaceuticals using its Omega 3 fatty acid technology.

The world’s second-largest cosmetic-ingredients maker generated 111.7 million pounds ($171 million) in cash, and its net debt stands at 0.7 times earnings. That’s the eighth lowest among members of the STOXX 600 Chemicals index.

Christie said the subject of buybacks isn’t considered on a quarterly basis.

To contact the reporter on this story: Andrew Noel in London at anoel@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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