James Cropper shares fall 30% on profit warning

Shares of James Cropper plc, the Kendal-based advanced materials and paper & packaging firm, fell more than 30% after it warned in a trading update that its full-year adjusted profit before tax “is expected to be materially below prior management expectations.”

“As announced on 9 November 2023 in its interim results for the six months ended 30 September 2023, the group saw half-year revenue broadly in line with the board’s expectations, with strong gross margins and an improvement in the cost landscape leading to operating profit in line with expectations,” said Cropper.

“The final two months of 2023 have, however, presented trading challenges in the Paper and Packaging business and a slowdown in the pace at which customers expect their revenues to increase in the Future Energy hydrogen sector of the Advanced Material business.”

On its Advanced Materials business, the Kendal firm said: “At the time of the interim results, the group noted that it was scaling additional capacity for its Future Energy hydrogen offer and investing in the next phase of expansion in UK electrolyser manufacturing operations to position the Advanced Materials business to benefit from growing demand in these markets.

“However, since the announcement of the group’s interim results, the Advanced Materials business has seen expected projects in hydrogen being delayed, partly as a result of inflation and higher interest rates feeding through to higher project costs.

“In addition, funding decisions by governments have impacted end customer project plans and scheduling. As a result, customer expansion plans saw a noticeable change with major market growth now expected to be pushed back to calendar years 2026 to 2028.

“The Advanced Materials divisions’ revenue trajectory will be impacted in FY2024 as a result and the board now anticipates a slower ramp-up in demand than previously expected across calendar years 2024 and 2025.

“Nevertheless, the longer-term outlook for the hydrogen business remains strong, with the company continuing to acquire new customers and working on trials and specifications with proton exchange membrane (PEM) electrolyser OEMs.

“Pricing across the business has been resilient, underpinned by strong customer relationships which has protected margins.

“Growth in the aerospace and automotive sectors continues to underpin the core Advanced Materials business where we are executing against accelerated market growth opportunities.”

On its Paper Products business, James Cropper said: “As a direct result of ongoing high inflation impacting consumer confidence, compounded by supply chain destocking, demand in the Paper Products business continued to soften to an even greater extent during Q3.

“Despite volume pressures, customer retention has remained high, supported by strong relationships, and pricing has been resilient.

“Lower input costs (energy, carbon, pulp), mix improvements and productivity initiatives have protected margins and our restructuring activity is now complete, with continuous running in production and a reduction in assets since January 2024 allowing headcount to be reduced by 15%.

“Whilst near-term revenues have been affected, the future project pipeline remains strong and in the meantime the group will aim to keep efficiency high through tactical use of free capacity.

“The final quarter of the year is expected to show some recovery in volumes in Paper & Packaging and demand is expected to further recover throughout FY2025.”

On the whole group’s fortunes, the firm said: “As a result of the above trends, the group now expects full year FY2024 revenues to be not lower than £103m.

“FY2024 adjusted PBT is expected to be materially below prior management expectations, with the board now expecting to report a small adjusted profit before tax for the year.

“Working capital has been well controlled and the group’s capital expenditure plans reflect the slower revenue trajectory in Advanced Materials.

“As a result, net debt at the year-end is anticipated to be slightly better than previously expected notwithstanding the reduced PBT outlook.

“Investment in new capacity for hydrogen electrolysers is continuing at our Launceston site as we gain more specification work and accelerate trials with a growing number of PEM electrolyser OEMs.”

James Cropper CEO Steve Adams said: “The pressure on volume from inflation and global uncertainty has, regrettably, resulted in us revising our profit expectations, despite us continuing to have a strong future growth plan in place.

“The Advanced Materials business saw higher revenues for the first half but now faces a clear hiatus in the hydrogen sector as investment decisions are deferred or delayed beyond FY2025.

“The Paper & Packaging business division has been hit the hardest by the drop in demand but continues to focus on mitigating activities whilst driving productivity and efficiency savings in line with our restructuring plan.

“Overall, despite the setback in profitability, we remain steadfast in focusing on our strategy for accelerated growth and the Board is confident that the growth prospects of the group as a whole remain significant in the coming years.”