Croda Cuts Profit Outlook on Strong Pound, Weaker Margins

Croda International Plc, the world’s second-largest supplier of cosmetic ingredients, cut its profit forecast amid a strengthening pound and subdued demand in Europe. The shares fell the most in almost three years.

Pretax profit for the year is expected to dip below the level of 2013, the Snaith, England-based company said today. Weaker sales of industrial chemicals and a “slightly less favorable” product mix in consumer care led margins to deteriorate in the second quarter, it said.

The dip in performance will heap pressure on Chief Executive Officer Steve Foots to reignite Croda’s growth after years of expansion and peer-group leading profitability. The company is suffering from a bigger-than-expected burden tied to currencies, while a slowdown in European markets is hampering sales of mid-priced ingredients for personal care and household products.

“Whilst the escalation of currency headwinds should come as no surprise, it is disappointing to downgrade forecasts again,” said James Tetley, an analyst at N+1 Singer. “It is clear that stubbornly subdued conditions in Europe are a factor.”

The stock fell as much as 9.5 percent, the biggest intraday decline since August 2011. The shares were down 8.2 percent at 2,208 pence as of 9:32 a.m. in London, taking the drop to 10 percent this year and giving the company a market value of 3 billion pounds ($5.1 billion).

Croda predicted second-quarter pretax profit will be 8 percent lower than in the first three months of the year, instead of holding steady as previously forecast.

Mid-Price Competition

“Costs are very tightly under control, it’s about sales being softer in weak markets,” Finance Director Sean Christie said on a call with analysts.

The U.K. company, which competes with No. 1 cosmetic-ingredient supplier BASF SE, said it remains confident in the long-term strategy of the group and medium-term targets are unchanged. Foots is expanding operations in Asia and other emerging markets to offset weakened European and U.S. demand.

The pound has climbed about 1.5 percent against the dollar this month, and its strength is hurting Croda’s personal-care division, which exports from Europe to the U.S., competing with local companies whose manufacturing costs are in dollars. That’s affected mid-price products, where competition is tougher, Christie said. Croda’s U.S. competitors include Ashland Inc.

“The key for us is to put a lot of effort into Asia and we’re scoring some goals there,” Christie said. While sales growth can be “frustratingly slow” at times, the quality of the orders is high, he added.

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