ii view: chemical company Croda still waiting for demand upturn

Full-year results to 31 December

• Sales down 19% to £1.7 billion
• Adjusted pre-tax profit down 38% to £309 million
• Total dividend for the year up 0.9% to 109p per share
• Net debt up 82% to £538 million fuelled by an acquisition

Guidance:

• Expect 2024 adjusted profit margin to be 2% to 3% lower than 2023
• Expects full year 2024 adjusted profit before tax to be between £260-and £300 million

Chief executive Steve Foots said:

 "Our performance this year reflects the prolonged destocking and weaker macro environment that has followed two record years post the pandemic. Despite the financial impact of this ongoing uncertainty, the technology trends that will drive our future growth have not changed with a continued transition to sustainable ingredients and biologics. 

"With our strong balance sheet, improving cash flow and consistent investment in our refocused portfolio, Croda is well positioned to take advantage of the demand recovery when it occurs. We expect the Group's performance to accelerate from 2025, generating continued increasing returns for our shareholders."

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ii round-up:

Speciality chemicals maker Croda International (LSE:CRDA) today pointed to lower profit margins for the year ahead after posting reduced 2023 profits given both customer destocking and a weak economic environment.

No ingredient sales for Pfizer’s Covid-19 vaccine and depressed crop protection chemical demand are expected to reduce full-year 2024 adjusted profit margin by up to 3%, potentially taking adjusted pre-tax profit to as little as £260 million versus £309 million in 2023. 

Shares in the FTSE 100 company fell 5% in UK trading having come into this latest news down by almost a third over the last year. That's similar to catalytic converter firm Johnson Matthey (LSE:JMAT), but far better than a near 90% fall for latex glove company Synthomer (LSE:SYNT). 

Croda makes ingredient chemicals for industries including beauty care product makers and life science drug and farming chemical manufacturers. 

Accompanying management outlook comments regarding Life Sciences pointed to expected growth for pharma sales when excluding Covid related revenues, but with ongoing destocking impacting crop protection demand.

Demand for its Consumer Care related chemical ingredients has started the year well, with management cautiously optimistic about the improving demand trend seen in January.

A first-quarter trading update is due 24 April. 

ii view:

Started in 1925, Croda is today headquartered in Snaith East Yorkshire. The Consumer Care division generated its biggest slug of revenues over this latest financial year at 52%, with Life Sciences coming in at 36% and the remaining Industrial Specialities business following a previous part sale the balance of 12%. Geographically, Europe, the Middle East and Africa accounted for 41% of revenues, Asia 25%, North America 23%, and Latin America 11%.  

For investors, the influence of the pandemic in fuelling customer demand continues to wash through as customer stockpiles are being used at the expensive of new sales. The challenging economic backdrop is also creating uncertainty for its customers, hindering its own sales. Costs for businesses generally remain elevated, while the broader issue of chemicals and their impact on the environment also warrant consideration.   

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On the upside, diversity in both business type and geographical region exists. Management actions including focusing on costs are being taken. Bolt-on acquisitions for both Life Sciences and Consumer Care have previously been made, while a record of more than 20 years of consecutive annual dividend increases should not be forgotten.

For now, and while exposure to expected areas of growth such as life science drugs persists, current pressures on customer demand are likely to leave many investors awaiting more evidence of a recovery before considering investing.  

Positives: 

• A diverse product and customer base
• A progressive dividend policy 

Negatives:

• Uncertain economic outlook
• Subject to currency movements

The average rating of stock market analysts:

Strong hold