Croda to End Year on Subdued Note as Profit Growth Wanes

Croda International Plc, 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 the end of the year 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 Croda’s 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 had 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 and the ultraviolet-blocking agent in suncream, is seeing a “bit more competition from time to time,” validating its strategy of cutting loose high-volume, lower-margin product lines accessible to others, Foots said. The market for top-end ingredients is growing at a “double-digit” rate, he said.

Foots, who took the helm at the start of 2012, is seeking to maintain a growth trajectory that propelled Yorkshire, England-based Croda into a FTSE 100 index stock from a 300 million-pound market value chemical maker a decade ago.

The personal-care and household-product ingredients market has attracted BASF SE, which purchased Croda’s larger competitor Cognis for about $3.8 billion in 2010. BASF said Oct. 25 that sales at its care chemicals division fell “slightly” in the third quarter on lower prices. Earnings gained on higher volumes and cost cuts, the German company said.

Clariant is also focused on the higher-margin segments of the personal-care industry, and is taking market share through innovation, CEO Hariolf Kottmann said in an interview today. The Swiss company’s product range will be broadened further with capital expenditure and acquisitions, he said.

Deploying Capital

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.

Croda shares traded 5.7 percent lower at 2,486 pence as of 11:55 a.m. in London after falling as much as 9.4 percent, the steepest intraday decline since August 2011. 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 easily absorbed.

Earlier this year, it 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 build the business to supply Asian markets beyond China.

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