Strength of pound to knock profits at Croda

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​NATURAL chemicals firm Croda International warned shareholders that its annual profits will be lower than last year’s as a result of the strong pound.

Shares in the Snaith-based company, which supplies chemicals to Unilever, L’Oreal and Procter & Gamble, fell nine per cent to £21.88 on the news, making it one of the biggest losers in the FTSE 250.

The group said it took a greater than expected £6.5m hit on second-quarter pre-tax profits following further strengthening of the pound in recent months.

The UK accounts for just five per cent of Croda’s revenues and its exports have been hit hard by the strength of sterling.

​Croda’s CEO Steve Foots said: “Whilst we still expect to achieve underlying profit progress in 2014, pre-tax profits are now expected to come in below those attained in 2013.”​

Analyst Martin Evans, at JPMorgan Cazenove, said: “Croda has published a negative pre-close trading update highlighting the pressure the strong sterling is exerting on earnings.”

He cut his target price on the stock to £22.50 from £23.80.

​​​Croda, which makes chemicals used in cosmetics, pesticides and detergents, expects pre-tax profit in the second quarter to be eight per cent lower than the first quarter.

​​Croda said that £1.5m of the difference between quarters is due to the increase in the strength of sterling.

​I​t said margins in the second quarter will be lower because of greater transactional currency costs and a slightly less favourable product mix in its core consumer care business. ​​​

Analyst Adam Collins, at Liberum, said: “Having previously guided to a similar second quarter pre-tax profit to the first quarter – £65m – it now says it expects a result eight per cent below this – £60m.

“There are three reasons given: weakening sales in industrial chemicals, the most cyclical and volatile part of Croda, accounting for 13 per cent of group sales; greater transactional foreign exchange effects than previously anticipated and softer consumer care division margins due to poorer mix.”​

Croda said the modestly improving underlying sales trend seen in its consumer care and performance technologies divisions have continued, although market conditions remain subdued, especially in Europe.

However, sales were weaker in industrial chemicals.

​“In our view structural factors have weighed on top line development in consumer care over the last six quarters not just ephemeral factors such as the weather and weak Europe,” said Mr Collins.

“For example anti-wrinkle skincare peptides have been on the market for a decade and are now mass market, in Olay from around 2006 and Boots products from 2007.

“Mineral sunscreens (zinc/titanium oxide) have not substituted for chemical sunscreens as hoped due to continued drawbacks over whiteness and thickness – there are no such products in Boots.”​