Strength of the pound weighs heavy on Croda as profits slip

Natural chemicals firm Croda International warned that its annual profits will be lower than last year as the group battles with the strength of the pound.

Croda chief executive Steve Foots

Croda, whose customers include Unilever, L’Oreal, Estee Lauder and Procter & Gamble, said that currency translation knocked £38.3m off its half-year sales for the six months to June 30.

The pound’s strength, mainly against the dollar, has forced the Snaith-based company to issue a number of profit warnings this year.

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Chief executive Steve Foots said he expects the adverse currency effect to continue in the third quarter.

However, the firm, which makes chemicals used in cosmetics, pesticides and detergents, said it expects to make progress in its underlying profit.

Croda’s adjusted pre-tax profit fell six per cent to £125.3m in the six months to June 30, down from £133.1m in the first six months of 2013.

The group said that currency translation and transaction costs reduced half-year operating profit by £11.4m.

Sales fell 4.5 per cent to £537.4m as revenue fell in all three of its divisions – consumer care, performance technologies and industrial chemicals.

The group said that its performance in the first half was below initial expectations as weak consumer demand in Europe hit the business, particularly in personal care.

But it said it has made good progress in a number of growth markets, especially Asia which reported underlying sales growth of eight per cent.

Mr Foots said: “Geographically, the picture was mixed.

“Consumer demand remained very weak in Western Europe, leading to a 1.9 per cent decline in constant currency sales in that region.

“Encouragingly, we saw North America return to growth with a 1.9 per cent uplift in constant currency sales.”

He said that trading in some South American economies remains difficult and constant currency sales declined 1.7 per cent in the region.

However, they returned to growth in the second quarter after a difficult start.

JPMorgan Cazenove analyst Martin Evans said: “We believe Croda now needs some currency relief and a return to underlying growth in consumer care.”

Analysts at Liberum said in a note: “We have a sell rating on the shares arguing that structural factors have weighed on top line development in consumer care over the last six quarters not just ephemeral factors such as the weather, weak Europe and foreign exchange.

“These structural challenges are not going away quickly and suggest that the group’s 2014 PE of nearly 18 times remains unwarranted.”

Croda, which raised its interim dividend to 29.5p per share from 29p a year earlier, reported a pre-tax profit of £250.1m in 2013.

The group’s chairman Martin Flower said he expects the new organisational structure will deliver sustained sales growth in future.