Quest slices into ICI

Disappointing figures from flavours company Quest pulled an already less than dazzling set of third quarter results down further for UK chemical group ICI, hit by a continuing malaise in US and European sales.

National Starch figures crept up but underlying performance for the starch firm saw earnings still slipping below figures for 2002.

Profit before tax for the UK-based chemicals group Imperial Chemical Industries (ICI) fell £105 million for the third quarter ended 30 September 2003 on the back of a 4 per cent drop in sales compared to the same period in 2002. This left earnings slipping to 5.7p for the quarter, down from 6.9p in 2002, and 13.9p for the nine-month period, falling from 19.1p for the same period last year.

Despite a 3 per cent lead on sales for the same quarter in 2002 from £453 million to £467 million due to price increases and strong growth in Asia and Latin America, higher raw material costs continue to eat into margins for National Starch, the starch ingredients arm of ICI.

Financial performance at National Starch took third quarter trading profit for the company down by 6 per cent to £52 million from £56 million for the same period in 2003. Profit for the nine month period dropped by 10 per cent from £166 million in 2002 to £145 million.

Figures for ICI's​ flavours and fragrance company Quest continue to struggle with a drop in European sales hitting the firm particularly hard. Overall growth in Latin America and Asia only made a slight impact on sales at Quest for the third quarter which, at £173 million, came in 5 per cent lower than the previous year's figures of £181 million.

Trading profit at Quest for the quarter fell a damaging 31 per cent from last year's figures to £13 million, down from £21 million in 2002. The fall is even sharper when comparing nine month figures with profit in 2003 coming in at £34 million, representing a massive 44 per cent drop from a £69 million profit for 2002.

While sales in Europe dropped 17 per cent, ICI said that gross margin percentages at Quest had improved from the second quarter and were in line with last year, and fixed costs were below 2002.

Earlier this year Quest Japan wasrequired to recall flavours containing an ingredient known as WS3. According to ICI's statement on Thursday, one of the three customers affected by this has now served a legal claim, looking for costs and damages as a result of the recalled products.

"Quest intends to contest the claim vigorously,"​ the company told shareholders confirming that no claims have so far been received from the two other customers.

So how has the chemical maker sought to reassure the shareholders? ICI's chief executive John McAdam announced a series of arguably modest targets on Thursday to improve performance.

The group is aiming for average sales growth at, or better than, the growth in real GDP over the four-year period 2004 to 2007.

In addition, an increase in group trading profit margins, before goodwill amortisation and exceptional items, by an average of 0.5 per cent per annum over the next four years. If achieved, this will raise trading margins from around 7 per cent, as delivered in the first nine months of 2003, to about 9 per cent in 2007.

But the outlook for the company remains bearish. "While recent indications of an improving US economy provide some encouragement, the outlook for Q4 remains uncertain,"​ said McAdam.