Shares in chemical giant Croda International (CRDA) dropped 4.3% to £47.08 as it missed annual profit expectations after being hit by the US-China trade war.

In its full year results to 31 December 2019, Croda reported adjusted pre-tax profit of £322.1m, down 2.8% from the year before and less than the £327.4m the market had been expecting.

Adjusted sales dipped 0.2% to £1.265bn, basic earnings per share dropped 2.7% to 185p and its return on sales, a measure of how efficiently a company turns sales into profits, remained flat at 24.7%.

In addition, going forward Croda said growth in 2020 will be ‘second half weighted’. The market never likes this as it effectively indicates that things aren’t currently going as well as expected, but should be okay in the end. It’s often a precursor for a profit warning.

CORONAVIRUS IMPACT

Analysts at UBS said that ‘given currency headwinds, impacts from the coronavirus and the weak performance of Life Sciences, 2H recovery will need to be material’ if Croda is to meet expectations in 2020.

Commenting on the coronavirus, Croda said ‘to the best of our knowledge, no Croda employees have been infected by the virus.’

It added, ‘Our sales offices have reopened, as have our two production units, albeit with more limited operations than usual…. However, there is potential for some disruption to customer and consumer demand. We will continue to monitor the impact.’

The firm said China represents 6% of its core business sales, 2% of group production and a ‘limited component’ of its raw material supply chain.

TRADE WAR HITS PERSONAL CARE

Sales in the firm’s biggest division Personal Care – which provides raw materials for things like deodorants, shower gels, cosmetics, skin and hair care products – were down 3% as demand slowed.

The company put this down to the trade war between the US and China, which it said ‘significantly impacted demand for Croda products’.

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It added that sales were also adversely impacted by ‘significant ingredient destocking in the summer months as customers adjusted inventory to the lower than expected demand.’

Though it said by the end of 2019 the division had returned to ‘modest growth’ globally.

LIFE SCIENCES DISAPPOINTS DESPITE ‘EXCELLENT PERFORMANCE’

Croda hailed an ‘excellent’ performance in its high-growth Life Sciences division, with sales up 5.9% in constant currency and margins in the division continuing to grow with its return on sales up 1.1% to 30.6%.

However, this was still below the 6.3% the market had been expecting and analysts at UBS said they would expect the market to react negatively to Croda’s results given the ‘weakness’ in the division.

Croda’s Life Sciences division focuses on products for the pharmaceutical and nutraceutical markets. It also develops products that help farmers achieve superior yields and improve seed performance.

The firm also reported a 7.3% drop in sales from its Performance Technologies division, but this wasn’t a surprise to investors given the weakness in the auto and coatings industries.

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Issue Date: 25 Feb 2020