Why Croda has the right for­mula for suc­cess

The chem­i­cals firm is bounc­ing back as it fo­cuses on re­cov­ery in its big­gest divi­sion

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The out­look for chem­i­cals firm Croda (CRDA) is look­ing more pos­i­tive as its big­gest divi­sion Per­sonal Care con­tin­ues to re­cover.

Last year, spe­cial­ity prod­ucts in this divi­sion strug­gled due to slower ex­port mar­kets and weaker cus­tomer de­mand.

Con­tin­ued weak­ness in con­sumer spend­ing in Latin Amer­ica and Croda’s dis­trib­u­tor exit pro­gramme also con­trib­uted, tem­po­rar­ily re­duc­ing the inventory pipeline.

Since the start of 2017, Croda has ral­lied nearly 18% to £38.66 (8 Sep 2017).

WHAT DOES CRODA DO? Croda cre­ates and sells spe­cial­ity chem­i­cals for a range of prod­ucts. Its core busi­nesses are Per­sonal Care, Life Sciences and Per­for­mance Tech­nolo­gies.

In Per­sonal Care, Croda pro­duces nat­u­ral spe­cial­ity oleo­chem­i­cal raw ma­te­ri­als for health and beauty prod­ucts such as mois­turis­ers, sun cream, de­odor­ants and colour cos­metic prod­ucts.

The 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.

Croda de­liv­ers in­no­va­tive in­gre­di­ents for lu­bri­cants, coat­ings, poly­mers, poly­mer ad­di­tives, geo tech­nolo­gies and home care through its Per­for­mance Tech­nolo­gies busi­ness.

WHY IS PER­SONAL CARE BOUNC­ING BACK?

Per­sonal Care ex­pe­ri­enced en­cour­ag­ing progress as sales rose 2.3% in con­stant cur­rency in the six months to 30 June 2017 as spe­cial­ity prod­ucts and trad­ing in North Amer­ica im­proved.

Mor­gan Stan­ley & Co’s Paul Walsh says the out­look for Per­sonal Care has im­proved with man­age­ment ex­pect­ing 2% to 3% or­ganic growth in the sec­ond half of the year.

One of the key sell­ing points for Croda is that it ap­peals to com­pa­nies that want to be sus­tain­able, which is ex­pected to ben­e­fit its Per­sonal Care divi­sion.

Ac­cord­ing to Croda, over a quar­ter of cus­tomer prod­uct launches now make a sus­tain­abil­ity claim. The chem­i­cals firm is in a strong po­si­tion to sup­port this grow­ing trend as ap­prox­i­mately 60% of its raw ma­te­ri­als come from nat­u­ral sources.

WEAKER POUND TO BOOST PER­FOR­MANCE

UBS an­a­lyst An­drew Stott is re­as­sured by the con­tin­ued re­cov­ery in Per­for­mance Tech­nolo­gies as the 9.1% sales in­crease in the first half beat his fore­cast 7%.

He also high­lights the ben­e­fi­cial im­pact of cur­rency move­ments, which boosted sales by 12.4%.

Stott is con­fi­dent that the weaker pound could help mar­gins and mar­ket share, par­tic­u­larly in Per­for­mance Tech­nolo­gies as nearly a fifth of its sales are ex­ports from the

UK pro­duc­tion base.

‘HIGH BAR­RI­ERS TO EN­TRY’

Croda has the ad­van­tage of work­ing in an in­dus­try with high bar­ri­ers to en­try be­cause it in­vests sig­nif­i­cantly in re­search and de­vel­op­ment and in­fra­struc­ture.

The com­pany has con­structed a $175m bio-sur­fac­tant plant in North Amer­ica that is due to be com­mis­sioned in the sec­ond half of this year. Once it is up and run­ning, the fa­cil­ity will re­place petro­chem­i­cal feed­stocks with a new range of 100% sus­tain­able prod­ucts.

A di­ver­si­fied cus­tomer base also bodes well for Croda, with its top 10 cus­tomers only ac­count­ing for 20% of over­all sales. The lack of de­pen­dency on key con­tracts means the chem­i­cal firm can fo­cus on in­no­vat­ing thou­sands of prod­ucts for var­i­ous cus­tomers.

Th­ese cus­tomers include big firms such as L’Oreal and Head

& Shoul­ders seller Proc­ter & Gam­ble, as well as Swiss agri­chem­i­cals pro­ducer Syn­genta.

IM­PROV­ING SALES TRENDS

Over the last few years, Croda has ex­pe­ri­enced more sub­dued top line growth due to the broader eco­nomic en­vi­ron­ment, which has im­pacted the un­der­ly­ing sales per­for­mance.

The com­pany is mak­ing good progress in re­turn­ing to growth thanks to im­prov­ing sales trends at the end of 2016, which have con­tin­ued through­out the first half of the year.

In the six months to 30 June, Croda in­creased sales by 16% to £707.3m, driven by or­ganic growth across the core busi­nesses and pos­i­tive cur­rency move­ments.

Ad­justed pre-tax profit in con­stant cur­rency rose 4.4% to £169.7m, which is ex­pected to in­crease to £330m in the year to 31 De­cem­ber 2018.

The group ac­tu­ally has a his­tory of pri­ori­tis­ing profit over mar­ket share gains and vol­ume growth. That’s why past re­sults have of­ten shown solid prof­its de­spite weak sales.

Ac­cord­ing to Croda, in­no­va­tion is the key to its or­ganic growth and in­vest­ment in faster growth niches to boost suc­cess in emerg­ing mar­kets such as Asia.

An ex­am­ple of this is the re­cent launch of Solaveil Clarus trans­par­ent sun­screen for ‘Asian­led trends’ and an ex­pan­sion in bio-tech­nol­ogy in­gre­di­ents.

While or­ganic growth is key to Croda’s fu­ture, there is po­ten­tial for M&A ac­tiv­ity as the com­pany con­tin­ues to eval­u­ate op­por­tu­ni­ties, par­tic­u­larly from small tech­nol­ogy busi­nesses.

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