23rd Feb 2005 07:00
Croda International PLC23 February 2005 Date: Wednesday, 23 February 2005 Croda International Plc Preliminary Results Announcement 2004 Croda today announces its preliminary results for the year ended 31 December 2004: Highlights • Pre-tax profit on continuing operations up 16% to £45.2m • Pre-tax profit post-exceptionals of £41.7m (2003 : £43m) • Oleochemicals record trading margin of 17.9% (2003 : 16.8%) • Pre-exceptional earnings per share up 16% to 22.2 pence • Basic earnings per share of 20.1 pence (2003 : 22.5 pence) • Dividend increased 5.5% to 12.5 pence • Net debt reduced to £14.8m (2003 : £29m) Commenting on the results, Chairman, Antony Beevor, said: "In 2004, sales in sterling terms were 4.0 per cent up on 2003 and pre-taxprofits improved by over 16 per cent for our continuing businesses. This growthwas entirely organic, capitalising on the inherent strengths of our corebusiness. Against the trend of recent years, the second half of 2004 was as strong as thefirst in both sales and profits. Our momentum has continued into the new year.We believe the opportunities in our business enable us to look forward withconfidence." For further information, please contact: Mike Humphrey, Chief Executive Tel: 020 7831 3113 then 01405 860551Barbara Richmond, Group Finance Director Andrew Dowler, Financial Dynamics Tel: 020 7831 3113 Or visit our web site at: www.croda.com where the presentation to analysts willbe available by midday today. Chairman's Statement 2004 Pre-tax profits on continuing operations before exceptional items in 2004 were£45.2 million, compared with £38.9 million the previous year, on sales of £291.1million (2003 £279.8 million). A small loss on discontinued businesses' tradingand an exceptional loss arising on the disposal of the same non-core operationsleaves Group pre-tax profits at £41.7 million, compared to £43.0 million theyear before. In 2004, sales in sterling terms were 4.0 per cent up on 2003 and pre-taxprofits improved by over 16 per cent for our continuing businesses. In constantcurrency terms, sales would have been up by 10 per cent and the increase inpre-tax profits would have been significantly higher. Pre-exceptional earningsper share amounted to 22.2 pence, after a tax charge of 35.3 per cent, anincrease of over 15 per cent on 2003 (basic earnings per share were 20.1 pencecompared to 22.5 pence in 2003). Therefore, your Board is recommending a 7 percent increase in the final dividend to 8.4p, making a total for the year of12.5p, covered 1.8 times before exceptional items (1.6 times after exceptionalitems). After spending a net £4.9 million on buying back shares, net debt atthe year end was £14.8 million, equivalent to 8.7 per cent of net assets. The growth we have achieved in sales and profits in 2004 was entirely organic,capitalising on the inherent strengths of our core business. Our performance isthe product of hard work over a period of years by our technical sales forcesaround the world, and the scientists behind them, in winning the confidence ofour multinational customers in our talent for innovation, in our ability todeliver what we promise and in our commitment to continuing development toimprove their products still further. Good growth last year came again from our actives businesses, and from a widecross section of group businesses, sometimes under difficult conditions. The UKmanufacturing businesses coped well with the sharply appreciating sterling/dollar exchange rate. North America performed well after a difficult secondhalf in 2003 and sales ended the year on a high note. Our remaining Otherbusinesses also had a much improved year. Strategy Considerable emphasis is being put on driving the organic growth of thebusiness. From January 2005, a member of the Executive Committee is leading amajor initiative to bring new technologies to the Company. We believe thiscould contribute significantly to our business in the future. However, we willnot ignore opportunities for acquisitions in areas of business where we haveexpertise and which bring real and ongoing synergies. Such targets are few innumber and only rarely become available, but the strength of our balance sheetwill be of great assistance when they do. At the same time, we recognise theimportance of using our balance sheet efficiently and we are continuing to buyin shares as the opportunity arises. Culture Our Leadership Development Group, a group of present and future senior managerswhich meets regularly to discuss strategic matters, this year set out to definethe corporate values of Croda. Under the leadership of the Chief Executive,they did so in a way which I believe will ensure that we remain a place wheretalented people want to work and that we conduct ourselves to the higheststandards and in a way which will also ensure the future reputation andsustainability of the business. The time and effort we put into the areas of safety, health and the environmentis part of this culture. This is born from the belief that high standards inthese areas are fundamental to the long term health of our business. Thedetailed report included in our Annual Report, to be published next month willshow that, having been successful in meeting our previous targets, we are makinggood progress towards the more demanding set of objectives we have now setourselves. People The group referred to above is just one of the steps we take to ensure that wehave the talent to continuously drive the growth of the business. Whereverpossible, we feel there is merit in filling vacancies internally. I believethat our internally generated performance in 2004 is evidence that we have agood resource of such talent available. I would like to thank them for theirefforts last year as well as for the contribution they will undoubtedly make inthe future. We will be submitting to the Annual General Meeting proposals for aCo-Investment Scheme and an LTIP which will align the interest of senioremployees with shareholders and enable them to build equity interests in theGroup. Prospects Against the trend of recent years, the second half of 2004 was as strong as thefirst in both sales and profits. Our momentum has continued into the new year.World economic prospects are difficult to read at present but we believe theopportunities in our business enable us to look forward with confidence. Operating Review 40 years ago, in 1964, a small Yorkshire company floated on the London StockExchange. In its first year as a public limited company, it had sales of £2.5mand pre-tax profits of £232,000. It was a niche manufacturer of ingredientsbased on renewable natural resources, sold globally, mainly to the Personal andHealth Care markets. Its lifeblood was innovation and dynamic marketing. Itwas called the Croda Organisation Ltd. It is now much bigger, much more successful and has a slightly different name -Croda International Plc. In 1964 Croda was a UK manufacturer with large exports and a nascent overseasnetwork. Today, we are still heavily committed to the UK but half our employeeswork overseas and the global technical sales and marketing network is the envyof our competitors. Then, we were a small player in many markets, selling arange of oleochemical based products. Now, we are a large player in a fewmarkets, selling a range of truly differentiated specialities based mainly onoleochemicals. This strong progress up the value chain has produced theexcellent results for 2004. Sales on continuing operations were up by 4% (10% in constant currency) andpre-tax profits by over 16%. In spite of a plethora of raw material costincreases, we maintained the strong margin performance of recent years. We werealso affected by the weakness of the US dollar, which reduced our reportedprofits. We continued to focus the innovation skills of the Company on ourchosen markets and launched a record number of new products. Products which addvalue for our many customers worldwide. We also continued our drive for cashgeneration, in parallel with ongoing investment in new plants and processeswhich will contribute to our future success. Sales in the UK from continuing businesses were up by almost 3%, with sales inthe rest of Europe effectively flat compared to 2003. It was a mixedperformance, with very good progress in France and Poland, offset by weakermarkets in Germany, Italy and Spain. This is not wholly surprising after theexcellent growth in our total European sales in 2003. After a relatively poor 2003, sales in the Americas bounced back with avengeance. Sales in the USA were up 7% in Sterling; in US dollars they were upa creditable 19%. In the rest of the Americas growth was even higher, withsales up by nearly 14% in Sterling terms. All countries grew, with more notableincreases in Brazil, Mexico, Colombia and Venezuela. In Asia we saw a more heterogeneous picture. Sales from continuing businesseswere up by over 10% in Sterling and there was especially strong growth in Japan,China and Thailand. Sales in the Middle East were flat, mainly due to theongoing conflict in the region. Sales in Africa and Australasia were alsorelatively disappointing. Once again there was good growth in Personal Care. Our sales into Health Caregrew very strongly. In Plastics Additives, we saw reduced sales volumes but awelcome return of margin, as a series of price increases reversed the dismaltrend of recent years. The process of restructuring the portfolio is almost complete. During 2004, wesold our small rock anchor business in Australia, which left Croda businessesoutside the UK entirely focussed on speciality oleochemicals for the first timein nearly 40 years. I am delighted to report that once again our SAP rollout programme was aresounding success. Our Singapore operations went live in quarter two, Crodaromwent live in quarter four and our large and complex operations in North Americafollowed suit in January 2005. It is a credit to all involved that they wereall virtually problem free. This bodes well for our remaining manufacturingunits, Sederma and Japan, who go live in 2005 and 2006 respectively. We maintained our strong emphasis on cash generation and finished the year withgearing below 10% even after buying over £6m of shares into treasury. We also increased our emphasis on R & D and our global sales and marketingnetwork. We grew the teams in our chosen areas of focus, launched many newproducts and gained excellent new business in all areas. We increased our capital expenditure around the globe. We successfullycommissioned a substantial expansion of our lipids plant at Leek. We brought onstream an exciting new plant at Rawcliffe Bridge to improve both quality andcapacity for high value lanolin derivatives. We expanded capacity in Brazil,de-bottlenecked parts of our Singapore plant and continued the radical rebuildand expansion of our Mill Hall facility in the USA. Sederma successfullycompleted a substantial expansion of its operating facilities near Paris. Wehave more plans for upgrades and capacity additions across nearly all our unitsin 2005. Oleochemicals 2004 2003Turnover £m 274.0 261.6Trading Profit £m 49.0 44.0 Margin % 17.9 16.8Capital Employed £m 188.4 187.1ROC % 26.0 23.5 The core oleochemical specialities business performed strongly in 2004. On acontinuing operations basis, it now represents 94% of Group turnover and tradingprofit. The continuing focus on value over volume produced a trading profitincrease of over 11% on a sales increase of just under 5%. The record margin of17.9% proves that it is a true speciality business with pricing power. Thismargin was achieved despite a number of raw material and utilities costincreases, together with a particularly unfavourable currency environment. We continue to outperform in our major market, Personal Care. The Activesbusinesses, especially Sederma, achieved significant progress across the world,with sales of new functional products growing strongly. Important new productlaunches in all areas of Personal Care from all of our operating companiesshould help to underpin future growth. Health Care sales grew strongly once again and, with new capacity available,this business has a strong platform for progress. None of the majorpharmaceutical projects has yet contributed, but further steps towards launchhave been made by a number of our customers, especially Tillotts, where PhaseIII clinical trials are well underway on the treatment for Crohn's disease. Wealso see some excellent longer term opportunities for Medilan in woundtreatment. The Home Care business grew strongly. The demand for innovation by ourcustomers in this area is increasing rapidly. This was an historicallyconservative customer base, but margin pressure from the major supermarkets hastriggered a step change. Many more new functional products are being launched,highlighting perceivable benefits. A good example is the increase in sales ofthe Coltide range of proteins for fabric conditioning. It is also pleasing to report a stronger performance in Plastics Additives in afirmer global pricing environment. Croda Food Services had a record year forboth sales and profits. The European operations coped well with flat macroeconomic conditions in majormarkets and a difficult currency situation, especially in relation to the USdollar. We increased output at all our European sites. R & D was focussed andsuccessful, and the sales operation delivered. The USA really bounced back from the disappointments of 2003 and producedexcellent growth. The rest of the Americas were even better. Again, new plantin Brazil and the USA, combined with a new North American headquarters andtechnical centre in Edison, New Jersey, gave impetus to our performance in theseexciting markets. In Asia, we expanded strongly and improved both the number and quality of ourtechnical marketing and sales people. Output increased again from the Singaporeplant and new product development accelerated at our plant in Shiga in Japan.China continues to be the engine of growth for the region and our sales intothis important country are more than keeping pace. Our customer base continues to change and grow. However, in spite of furthermajor merger activity amongst our clients, no one customer globally representsmore than 3% of our total turnover. In fact, our top ten customers representless than 15% of turnover. Other 2004 2003Turnover £m 17.1 18.2Trading Profit £m 3.1 2.2Margin % 18.1 12.1Capital Employed £m 13.3 13.2ROC % 23.3 16.7 Results in this sector were mixed, but on the whole it was a very goodperformance from these smaller businesses. The margin is a little misleading,as it is flattered by the inclusion of our share of the excellent profits fromour associate, Baxenden Chemicals. The fall in sales was due to the continued withdrawal of Seatons from lowmargin, commodity business. Seatons had an excellent year and is now a verysuccessful and profitable unit. Croda Application Chemicals did well in verydifficult markets, showing a welcome move forward in profit on a slight fall insales. During the year we sold Celtite, our rock anchor business in Australia andcompleted the sale of our Fire Fighting Chemicals business in Europe. Theirresults are reported under discontinued operations. Summary This was a year of good progress for all our teams across the globe. Croda isrobust, dynamic and full of optimism that we can deal with the challenges of thefuture as well as we have dealt with the challenges of the recent past. Ourpeople and our products are terrific and our corporate intellectual capital issecond to none in our markets. Although we will maintain our focus on suitableacquisitions, we are confident in our ability to grow organically. Toaccelerate this process, we have allocated substantial funds to a new internalventure - Enterprise Technologies. Dr Keith Layden is leading this bold move tobring in new technology to the Group. We can and we will strive to delivervalue to all our stakeholders. I mentioned it was 40 years since Croda became a public company. I would liketo quote from Sir Frederick Wood's operating review from the first Annual Reportfollowing that event:- "It has been in many ways a difficult year and the successful outcome is,therefore, all the more pleasing. Many of our markets have been morecompetitive and our raw material supplies have been subject to price variations. Costs, particularly wages and salaries, continued to rise steadily. Muchvaluable time, which could be better spent on constructive tasks, has been takenup in grappling with new regulations and laws. Growth has been achieved bycarefully planned capital expenditure, constant attention to costing, theefforts of an aggressive sales force and a rise in the productivity of ourworks." Some things never change. Financial Review Trading We continued to make good progress in 2004, with reported sales from continuingoperations up 4% at £291.1m. It is important to note, however, that the weakdollar had a significant negative impact on our sales. This is due to the factthat, not only do we have a large business in the USA, but also a number of ourproducts are priced worldwide in US dollars. In constant currency terms oursales from continuing operations would have been up by 10% on the previous year. Sales volumes in the Oleochemicals business were up 3% year on year. With ourcontinued shift to higher added value products and away from commodities in ourOther businesses, volumes fell in that sector. Overall for the Group, volumeswere up 1%. Operating margins reached a record high of 17.9% in the Oleochemicals sector,due to a combination of product mix changes and price increases, combined withthe higher sales volumes. Profits in the Other sector also rose, due primarilyto price increases and improved product mix, along with the benefits of lastyear's restructuring. The discontinued operations shows the results up to disposal of our FireFighting Chemicals business, sold in January 2004, and our Australian rockanchor business, sold in July 2004 and the exceptional items represent the netloss on disposal of these discontinued operations. Interest Our net interest expense appears high, given our gearing level. This is due tothe fact that our US dollar private placement debt is at a fixed rate of 7.37%.Also, because of the wide geographical spread of our business, it is not alwayspossible to match positive and negative cash balances between many countries. Taxation The tax charge of 35.3% on pre-exceptional profits reflects the geographicalspread of our businesses and no significant change in the charge is expected inthe current year. The actual tax charge is slightly higher at 36.5% as no taxrelief is available on some of the exceptional losses. Dividends With strong growth in earnings and good cash generation, we are able to increasethe total dividend payment by more than inflation, whilst at the same timeincreasing dividend cover on a pre-exceptional basis. Accordingly, it is proposed the final dividend is increased by 7% to 8.4p,making a total of 12.5p (2003 : 11.85p). At this level, dividend cover israised to 1.8 times from 1.6 times in 2003. Cash With the good trading performance I mentioned earlier and control of workingcapital, we generated £12.9m of cash in 2004. Capital expenditure rose to £14.9m (2003 : £12.3m) which was approximately inline with depreciation of £14.4m (2003 : £14.6m). We began buying shares back into treasury towards the end of 2004. We believethis is a flexible and efficient way for us to improve our cost of capital,whilst at the same time maintaining our financial capacity to undertakeappropriate acquisitions which will deliver shareholder value. Treasury Policy The Group's treasury policies are approved by the Board and subject to regularreporting and review. The main financial risks faced by the Group relate to currency, interest ratesand the availability of capital. As far as currency risk is concerned, transaction risk is hedged up to threemonths forward by the use of foreign currency bank balances and forward currencycontracts. Translation currency exposure is not hedged but the risk is reducedby matching interest expense to foreign currency earnings where it is efficientto do so. In terms of interest rate risk, the policy is to maintain at least half of theGroup's gross borrowings at floating interest rates, with interest rate swapsbeing used where appropriate. On 1 December 2003 the UK regulations on the market purchase and holding of acompany's own shares (Treasury Shares) were amended to enable companies toachieve more flexibility on their levels of debt and equity and thus their costof capital. These changes give us an additional means of managing our BalanceSheet, if and when considered appropriate by your Board. IFRS As many of you will already be aware, we will be required to produce ouraccounts in accordance with International Accountancy Standards (IAS and IFRS)from 2005. The first set of results reported under these standards will be theinterim results for the six months to 30 June 2005. However, in order forshareholders and other readers of the accounts to become familiar with theimpact of this change, we intend to publish on our website (www.croda.com),during the course of the second quarter of 2005, a profit and loss account andbalance sheet for 2004, restated to international standards, together with anexplanation of the main differences from the reported results in these accounts. Along with many companies, the adoption of international standards willprincipally impact our accounts in three areas: • Pensions• Goodwill• Share based payments There will also be some impact from the standards on financial instruments anddeferred tax but these are expected to be small. Overall, we estimate the principal effect of the new standards will be on thebalance sheet. This is due to the major change caused by the switch from SSAP24 to IAS 19, which is similar to FRS 17. The effect of this on our UK pensionscheme, as in previous reports, is detailed below. Pensions The table below summarises the UK pension position of the Group at 31 December2004 under the current Standard, SSAP 24, under FRS 17 (IAS 19) and ascalculated at the latest actuarial valuation. 2002 2004 2004 2003 2003 Actuarial SSAP 24 FRS 17 SSAP 24 FRS 17 £m £m £m £m £m Asset/(liability) (35.1) 35.6 (94.6) 33.1 (91.8)Deferred tax 10.5 (10.7) 28.4 (10.0) 27.6Net asset/(liability) (24.6) 24.9 (66.2) 23.1 (64.2) The net pension balances under both standards have changed only marginally from2003. This is because, whilst there has been some further recovery in equitymarkets, the rate at which liabilities are discounted has also fallen. As Ihave reported previously, it is the actuarial position which forms the basis ofour long term funding decisions and not the accounting year end snapshot. Below is a table showing the charge to the Profit and Loss Account for our UKschemes under the two Accounting Standards, together with an estimate of the2005 expense. As you can see, our profit would have increased by £0.3m if wehad applied FRS 17 in 2004 in respect of our UK schemes. 2005 Estimated 2004 FRS 17 SSAP 24 FRS 17 £m £m £mBefore operating profit 4.8 4.4 4.6Financing (0.8) - (0.5)Net cost 4.0 4.4 4.1 Croda International Plc Preliminary announcement of trading results for the year ended 31 December 2004 Group profit and loss account Continuing Discontinued 2004 Continuing Discontinued 2003 operations operations Total operations operations Total £m £m £m £m £m £m Turnover 291.1 3.3 294.4 279.8 23.6 303.4 _______ _____ ______ _______ _____ ______ Operating profit Group operating profit 44.7 (0.2) 44.5 39.6 (0.2) 39.4Share of associates' 2.6 - 2.6 2.2 - 2.2 operating profit profit ______ _____ _____ _______ _____ _____Total operating profit 47.3 (0.2) 47.1 41.8 (0.2) 41.6 Exceptional items - (3.3) (3.3) - 4.3 4.3 Net interest payable (2.1) - (2.1) (2.9) - (2.9) ______ _____ _____ _______ _____ _____Profit before taxation 45.2 (3.5) 41.7 38.9 4.1 43.0 ______ _____ _______ _____ UK taxation (3.6) (2.9)Overseas taxation (12.3) (10.8)Tax on exceptional items 0.7 - _____ _____Profit after taxation 26.5 29.3 Minority interests and preference dividends (0.2) - _____ _____Profit attributable to ordinary shareholders 26.3 29.3 Ordinary dividends (16.3) (15.5) _____ _____ Reserves transfer 10.0 13.8 _____ _____ Earnings per share Pence per Pence per share Share Basic 20.1 22.5Basic before exceptional items 22.2 19.2 Ordinary dividends Interim 4.10 4.02Final 8.40 7.83 Summarised balance sheet At 31 December At 31 December 2004 2003 £m £m Fixed assets 144.1 150.3Stock 52.0 51.8Debtors 90.5 90.4Cash at bank and in hand 32.4 27.8Creditors falling due within one year (81.5) (86.9)Creditors falling due after one year (32.6) (37.6)Provisions for liabilities and charges (34.0) (32.2) ______ ______ 170.9 163.6 ______ ______ Shareholders' funds 170.1 162.4Minority interests 0.8 1.2 ______ ______ 170.9 163.6 ______ ______ Movement in shareholders' funds Profit attributable to ordinary shareholders 26.3 29.3Ordinary dividends (16.3) (15.5)Goodwill written back on disposal 3.4 -Currency translation differences (0.8) 1.4Transactions in own shares (4.9) (0.2) ______ ______ Net movement in shareholders' funds 7.7 15.0Opening shareholders' funds 162.4 147.4 ______ ______Closing shareholders' funds 170.1 162.4 ______ ______ NoteThere were no other recognised gains or losses except for those detailed above. Summarised cash flow 2004 2003 £m £m Group operating profit 44.5 39.4Depreciation 14.4 14.6Amortisation 0.4 0.5Working capital (1.2) 3.6Other (2.4) 0.8 ______ ______ Operating cash flow 55.7 58.9 Interest (2.3) (2.8)Dividends paid (15.6) (15.1)Taxation (12.5) (12.2)Fixed assets purchased (14.9) (12.3)Sale of fixed assets 1.3 4.9Net purchase of own shares (4.9) (0.2)Disposals 8.0 -Other (1.9) (1.1) ______ ______ Movement in net debt from cash flows 12.9 20.1New finance lease contracts (0.1) (0.1)Exchange differences 1.4 3.1 ______ ______ Movement in net debt in the period 14.2 23.1 Net debt brought forward (29.0) (52.1) ______ ______ Net debt carried forward (14.8) (29.0) ______ ______ Notes to the preliminary announcement 1. Segmental analysis of continuing operations 2004 2003 £m £m Turnover Oleochemicals 274.0 261.6 Other 17.1 18.2 ______ ______ 291.1 279.8 ______ ______ Trading profit Oleochemicals 49.0 44.0 Other 3.1 2.2 ______ ______ 52.1 46.2 Central costs (4.8) (4.4) ______ ______ Operating profit 47.3 41.8 ______ ______ Turnover by geographical destination United Kingdom 44.9 43.7 Rest of Europe 87.8 88.0 Americas 97.4 89.3 Asia 41.0 37.1 Rest of World 20.0 21.7 ______ ______ 291.1 279.8 ______ ______ Turnover by market Personal and Health Care 178.2 164.5 Home Care and Plastics Additives 40.5 39.9 Industrial Specialities 55.3 57.2 Other 17.1 18.2 ______ ______ 291.1 279.8 ______ ______ 2. Exceptional items Disposal and closure of discontinued operations Profit/(loss) on disposal (0.5) 1.2 Goodwill written back (3.4) - ______ ______ (3.9) 1.2 Profit on disposal of fixed assets 0.6 3.1 in discontinued operations ______ ______ (3.3) 4.3 ______ ______ 3. Shareholders' funds Throughout this announcement shareholders' funds include non-equity interests of £1.1m. 4. Additional matters a. The financial information above is derived from the Group's full statutory accounts on which the auditors have reported; their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. Statutory accounts for 2003 have been filed with the Registrar of Companies and those for 2004 will be delivered following the Annual General Meeting. b. The proposed final dividend of 8.4p will be paid on 7 July 2005 to shareholders registered on 3 June 2005. c The above financial information has been prepared on the basis of the accounting policies which are to be set out in the Group's 2004 statutory accounts, and in accordance with all applicable UK accounting standards and the Companies Act 1985. The accounting policies are consistent with those applied in previous years as set out in the Group's 2003 statutory accounts. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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