Croda to End Year on Subdued Note as Profit Growth Wanes

Croda International Plc (CRDA), the world’s second-largest manufacturer of cosmetics ingredients, forecast stagnant profit in the fourth quarter, held back by “subdued” markets and unfavorable currency moves.

The maker of active ingredients for L’Oreal SA and Procter & Gamble Co. will suffer through year-end from weaker currencies in Japan and India, where it operates plants. Croda’s third-quarter pretax profit gained 5 percent to 58.6 million pounds ($94 million), missing analysts’ estimates of 61.3 million pounds on average. The shares, which trade above most of its peers at a price to earnings ratio of 20 times, dropped the most in more than two years.

“On 20 times earnings, there’s nowhere to hide,” said Martin Evans, an analyst at JPMorgan Chase & Co. in London. “With underlying sales growth of only 0.8 percent and a pretax miss, investors are likely to punish Croda, again.”

Croda said high-volume, lower-margin products saw sales declines of more than 10 percent, in an ingredients market where competitors including Clariant AG are expanding. Chief Executive Officer Steve Foots is betting that innovation and the introduction of new technology can sustain Croda’s growth path. Competitors are “nibbling” at a few of the more differentiated products too, he said on a call.

More Competition

Croda, which supplies the anti-wrinkle agents in face cream, is seeing a “bit more competition from time to time,” validating its strategy of cutting loose the high volume, lower margin product lines accessible to others, Foots said. The market for top-end ingredients is growing at a “double digit” rate, the CEO added.

Foots, who took the helm at the start of 2012, is seeking to maintain the growth trajectory that’s propelled Yorkshire, England-based Croda into a FTSE100 index stock from a 300 million-pound market value chemical maker a decade ago.

BASF SE (BAS), Croda’s larger competitor, said Oct. 25 sales at its care chemicals division fell “slightly” in the third quarter on lower prices. Earnings gained on higher volumes and cost cuts, the Ludwigshafen, Germany-based company said.

Croda reported a slowdown in its performance technologies division that supplies materials and ingredients for lubricants to BP Plc, Exxon Mobil Corp. and Fuchs Petrolub SE.

Deploying Capital

Shares of Croda traded 6.1 percent lower at 2,474 pence as of 10:57 a.m. in London after falling as much as 9.4 percent, the steepest decline since August 2011 on an intraday basis. JPMorgan’s Evans lowered his earnings per share estimates for this year and next by 1 percent and 4 percent, respectively.

Chief Financial Officer Sean Christie said the company will hold off returning cash to investors as it looks into opportunities to deploy capital.

Amid an absence of larger takeover opportunities, Croda has stuck to acquiring small companies with useful technology that can be bolted-on.

Earlier this year, Croda acquired Sichuan Sipo Chemical for 38.2 million pounds to expand in the market for fatty-acid products in China. Foots said there are plans to rapidly grow the business to supply Asian markets beyond China.

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

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