Outlook: Profits warning sours ICI's sweet smell of success

Rates turnaround; easy money Â

Try as he might, ICI's chief executive Brendan O'Neill could not come up smelling of Jean Paul Gaultier yesterday. The company is supposed to have transformed itself from a bulk chemicals producer (bad) to a purveyor of fine fragrances (good). But all the market smelt was a rat and punished the shares accordingly.

It is now five years since ICI ushered in a new dawn by splashing out £5bn for the food flavourings and fragrances businesses of Unilever. In doing so, it waved goodbye to its heritage as a bellwether of the British economy and re-invented itself as a touchy-feely supplier of "the vital ingredient" – that certain something which makes the world look brighter, taste fresher, smell sweeter or feel smoother.

Alas, apart from a brief honeymoon period, during which the shares peaked at over £10, it has been pretty much downhill ever since. Along the way shareholders have had their senses shocked by an £800m rescue rights issue and a halving of the ICI dividend.

ICI's debt mountain is now more manageable, which is probably just as well for each time the sunlit uplands beckon for Mr O'Neill and his management team along comes another sickening piece of news to overshadow the business. First it was the emerging markets crisis, then a series of hitches in the sale of its unwanted commodity chemicals businesses. After that it was end of the US boom and then came 11 September.

Now we have another emerging markets meltdown and the unsettling news that the flavourings and fragrances business might not be quite so non-cyclical as we thought. ICI has come unstuck trying to introduce something called enterprise resource planning (don't ask) into one of its Quest food flavourings plants in Holland. The result is a £4m reduction in profits for the first six months and a £10m hit in the second half.

More worryingly, however, ICI has had to admit that the sale of fragrances fell 6 per cent in the second quarter. Mr O'Neill puts this down to the lumpy (please don't say cyclical) nature of the business. He also points out that this year's figures compare with record second-quarter fragrance sales last year. Others wonder whether ICI isn't simply losing market share.

ICI's second-half performance should tell us whether this was just a blip, part of a cycle or indicative of a deeper malaise. The good news is that sales of J'Adore and Angel look to be on the way up again as airline passengers rediscover the shopping habit. But it will take a bit more than that to make Mr O'Neill the flavour of the month again.

Rates turnaround

When the Bank of England held interest rates last month, the question was when it would start raising them. Just a month later and the question is whether the next move will be down – and rightly so.

Yesterday's decision to leave the base rate at 4 per cent was the right one. With perfect timing, no sooner had the Bank announced its decision than equity markets began to slide again. The latest US production figures suggest Dubya may have a double-dip on his hands. In light of such market weakness, an increase in rates would have been madness and a cut would have looked like panic.

But there is mounting evidence that the UK economy has taken a turn for the worse over the past few weeks. Admittedly much is tentative and the Bank's aim is to target inflation two years out. But both the surveys and anecdotal evidence indicate that the willingness of consumers and businesses to spend have wilted.

Lower demand for mortgages combined with reports from estate agents of a drop in inquiries, point very tentatively although certainly not conclusively to a slowdown in the housing market. This should be welcome news as the alternative of a further acceleration in annual house price inflation well above its current 21 per cent level would probably herald a return to the boom-bust of the early 1990s.

On the high street, meanwhile, retail sales volumes fell in May and June, and according to the CBI's survey, did not bounce back in July.

On the factory floor, the strong manufacturing recovery that helped deliver such strong GDP growth in the second quarter, came to a grinding halt in July. Meanwhile on the other side of the Atlantic, US manufacturers also reported a massive slowdown in new orders.

The slowdown in manufacturing is echoed by the advertising market, which seems to have fallen off a cliff again in recent weeks.

Meanwhile inflation is hovering just above the level at which the Bank of England's Governor, Sir Edward George, must write a grovelling letter of explanation for why he has missed his target.

In fact it is the threat of deflation rather than inflation that is taxing economists' brains. If firms could not raise prices when demand was recovering, there is little sign they will be able to when their order books are empty.

Sir Edward has repeatedly said he would raise rates unless the consumer economy slowed before the world economy picked up. That statement needs to be turned on its head – if the world recovery falters while the consumer economy has started to slow, will the Bank be prepared to cut rates? If the evidence is convincing then the MPC should stand ready to do just that next month.

easy money

How do you incentivise the donkey when he has got all the carrots he wants? It is an issue which has been exercising the mind of easyJet's Ray Webster since he announced the takeover of Go. Mr Webster would like to hang on to as much of the top talent from the two airlines as he can but how does he encourage it to stick around? Most of easyJet's senior brass are already optioned up to the eyeballs and their opposite numbers at Go are sitting pretty now that the cash from the deal has landed in their bank accounts.

In the event, Mr Webster has set aside a pot of £10m to be shared among 40 executives – 25 from easyJet and 15 from Go. The average payout works out at £250,000, which sounds like a lot but does not seem quite so much when you consider that Mr Webster alone is sitting on a £10m share option profit.

The milestones these top 40 must hit to earn the jackpot do not look that demanding – a single brand within 12 months, a unified air operator's licence within 18 and completion of the merger – however that is defined – inside 24 months. Mr Webster could have made the targets tougher but what is the point when he does not have the stick with which to beat his managers if they fail?

Mr Webster has big things planned for easyJet starting with a £3.5bn expansion of the fleet. He would like the Go crew to stay but being a highly paid employee is different from owning your own start-up business. For now, most of them remain on board, with the exception of the chief executive Barbara Cassani who has already parachuted out with her £10m pay-off. How much longer before more follow suit?

m.harrison@independent.co.uk