Final Results - Year Ended 30 September 1999

Treatt PLC 6 December 1999 TREATT PLC PRELIMINARY STATEMENT For the year ended 30 September 1999 TREATT PLC PRELIMINARY STATEMENT For the year ended 30 September 1999 Treatt PLC, the manufacturer and supplier of flavour and fragrance ingredients, primarily essential oils, announced today their preliminary results for the year ended 30 September 1999. SUMMARY - Profit before tax increased by 19% to £2.57m (1998: £2.17m) - Earnings per share increased by 19% to 18.5p (1998: 15.6p) - Total dividend increased by 11% to 7.1p (1998: 6.4p) - Net assets per share increased to £1.36 (1998: £1.25) For further information please contact: Treatt PLC 01284 702500 Hugo Bovill, Managing Director Stephen Ashton, Finance Director GCI Focus 0171 398 0800 Margaret Jervoise/Richard Sunderland The full text of the Chairman's Statement, Operating and Financial reviews, Preliminary figures and a background note are attached. CHAIRMAN'S STATEMENT 1999 proved to be another year of encouraging progress for Treatt. Profit before tax increased by 19 per cent to £2.57 million (1998: £2.17 million). Pre tax profit for the second six months of the year increased by 13 per cent to £1.58 million (1998: £1.40 million). Earnings per share for the year at 18.5 pence has increased by 19 per cent on 1998. The Board is recommending a final dividend of 4.9 pence (1998: 4.4 pence), giving an 11 per cent increase in the total dividend for the year to 7.1 pence (1998: 6.4 pence). The increase in profit has been due to increased sales of value added essential oil products as well as continuing growth in sales of both the Group's Treattarome TM product range and distributed aromatic chemicals. Growth in sales of value added essential oils has been particularly strong to a number of the Group's largest customers. Although at the start of the financial year some countries to which the Group exports were still recovering from currency devaluation and economic turmoil by the end of the year demand from these markets returned, such that sales are now back to the levels that existed prior to their economic difficulties. The Group has increased capital investment this year to allow primarily for the efficient expansion of our aromatic chemical distribution operations. Additional warehousing and distribution facilities became available adjacent to our Bury St. Edmunds complex. The opportunity to acquire this site was taken as it gives us capacity for several years further growth. Investment in information technology to underpin efficient growth has also continued. This investment supports our strategy of developing Treatt as a value added global supplier of flavour and fragrance ingredients. Prospects Current year trading has started better than last year. Our order books are running ahead of last year but it will not be clear until the New Year how much of this increase is due to underlying demand. We are conscious of the possible 'millennium' effect on our order book and sales as our customers require delivery in 1999 of product they would normally take in the New Year. The increased level of capital investment seen in 1999 is planned to continue in 2000 with further investment in distribution, information technology and our United States facilities. Inevitably, with this level of investment, operating costs are set to rise. In the short term, at least, these costs will impact on profitability until the full benefits are realised. For the long term, whilst the larger players in our industry continue to consolidate there is ample evidence that there remain opportunities for an independent ingredients supplier. Consolidation in itself presents opportunities. Treatt can remove complexity from our customers business by supplying a wide range of ingredients, whilst also retaining world class technical expertise in the sourcing, development and manufacture of innovative natural ingredients. With the communication technologies now available size is not the barrier it once was to being a global business. Our plans are in place to build a business that can prosper in this environment and we look forward to the future with confidence. People Michael Benson retired in July after serving as a non-executive director of the Group since we became a quoted company in 1989. Over those 10 years Michael, with his 40 years of industry experience, has been a committed, knowledgeable and enthusiastic Board member. On behalf of myself, the rest of the Board and our shareholders I would like to thank Michael for his service and we wish him well for the future. Following Michael's retirement we were delighted to secure the services of Ron Fenn as a non-executive director. Ron was formerly a Vice President of International Flavors and Fragrances Inc., one of the largest businesses in our industry. He has a wealth of experience from which we will benefit. Finally I would like to thank all of our employees, in England, Florida and Singapore for their continued commitment and skill. Delivering increased profits whilst implementing the changes required by our capital investment programme demands both of these qualities. We are fortunate to have such an experienced and dedicated team. GEOFFREY BOVILL Chairman 3 December 1999 OPERATING REVIEW 1999 has seen the Group's operations not only deliver increased profits but also work very hard on starting to implement the changes that will be necessary to take the Group forward over the next few years. Trading R.C. Treatt 1999 has been a year of further organic growth at our U.K. subsidiary RC Treatt. Sales increased as the volume of orders rose by 5 per cent and profits increased by 18 per cent as the sales mix once again moved towards higher value added products. Underlying the increase in profits was a particularly strong recovery in sales of value added essential oil products. In the first half of the year we saw a continuation in customers reluctance to commit forward on ingredient purchases, benefiting R.C. Treatt's margins as they had the confidence to continue to buy stocks at what were still historically low prices. Wise buying is still a critical part of the operation, not only due to the long lead times on some raw materials, but also as this ensures competitive sales pricing on our manufactured products. RC Treatt's order book in the second six months has run consistently ahead of the previous year as confidence returned to its global customer base. The ever increasing number of orders RC Treatt handles has pushed some parts of the business close to maximum efficiency. Six day a week working with substantial overtime in some areas has led to exceptional levels of overhead recovery. This has also helped maintain high margins, but is not seen as sustainable for the long term. Florida Treatt After a record year in 1998 this year has been mildly disappointing for Florida Treatt. Some new business opportunities that were developing at the end of 1998 have not fulfilled their initial promise. However since then we understand that Treatt ingredients are being included in market trials for several new consumer products. As usual it is too early to tell what the outcome will be. On the positive side Florida Treatt's customer base has continued to widen, in line with our plans for them to be a manufacturer and supplier of innovative natural ingredients. Their reliance on a few specific customers is reducing. Singapore Treatt Continuing political and economic uncertainty led to very low levels of activity for our Singapore Treatt sales office in the first half of the financial year. However, by the year end there was considerable cause for optimism as these uncertainties were progressively removed. Order levels over the second half of the year almost doubled compared to the first half. Investment for the future R.C. Treatt To ensure customer service levels are maintained the decision was taken in July to acquire a further 23,000 square foot facility adjacent to RC Treatt's existing premises. These premises will give RC Treatt the scope to hold many more stock lines on a pre- packed basis, in a more appropriate environment, and to fundamentally reorganise the flow and handling of distributed aroma chemicals and other products. Work is now underway to carry out this reorganisation and this should be completed in the current financial year. This should bring both efficiency and customer service benefits, as well as allowing RC Treatt to even more actively market itself to customers as an 'inventory manager'. Many of our customers use hundreds if not thousands of flavour and fragrance ingredients. In value terms perhaps only a few of these materials are significant in the context of their overall buying requirements. However, in terms of logistics these hundreds of ingredients can be a problem and add significant cost. Our stock holding of aroma chemicals not only gives us the ability to contract manufacture to customers' formulae, but also to supply in small quantities, thus meeting our customers needs whilst ensuring an acceptable return for ourselves. We intend building further on this ability in the future. Investment in Information Technology has continued with a new Customer Relationship Management system being purchased and the general infrastructure being upgraded to provide a much more resilient environment for future expansion. The Customer Relationship Management system is expected to be commissioned in the first half of this current financial year. Florida Treatt As indicated in our May interim statement the major expenditure on upgrading our Florida facilities will now fall into the current financial year. Great care is being taken to ensure the Group invests in the most cost effective fashion so as to underpin future growth in the vital U.S. market. Research and Development The Group has for many years been committed to investing for growth with new products. From this commitment have come Treatt's natural specialties derived from essential oils as well as the Treattarome TM product range. 1999 has seen the Group launch a further 5 Treattaromes TM as well as several new natural specialties. Investment in research and development in 1999 was in excess of £200,000. Markets Sales in the United Kingdom were static, despite increased volumes, as lower price levels continued to be experienced. In the rest of Europe sales were up 5 per cent as an increase in orders was seen from most countries. In the Americas sales were also up 5 per cent, particularly due to growth in Latin America. Indeed, contribution from Latin America was up over 20 per cent year on year as the sales mix improved. At the start of the year political and economic uncertainty depressed demand from East Asia, Eastern Europe and Latin America. However all of these markets were consistently displaying a return to growth by the year end. This return came too late however for sales to the rest of the world to show growth year on year. Sales to the rest of the world actually fell 4 per cent. Products Cold pressed orange oil, an orange juice by-product, is the Group's main raw material by weight. In 1999 orange oil continued to make up well over half of the Group's raw materials by weight, but only 13 per cent of sales value. After aggressively seeking business in 1998 volumes fell by 10 per cent in 1999 as the Group did not try and repeat this strategy. This had only ever been a short term defensive plan whilst orange oil remained at very low price levels. Sales and contribution from the Group's range of aroma chemicals, where we act as distributors, have continued to grow. Sales grew by 7 per cent as we took on more distributorships and won market share. Within our aroma chemical product range there was strong growth in high impact flavour chemicals. Sales of the Treattarome TM range of natural distillates, manufactured in Florida, again grew strongly. We now have 15 products in the range and customers enthusiasm for these products is undiminished. The recently released tea Treattarome TM has been very well received as have guava and passion fruit. Raw Materials 1999 has again seen nearly all the raw materials the Group buys in volume remain at historically low price levels. As we reported at the time of our interim results the Brazilian orange processors have been finding more cost effective uses for orange oil. This has tightened the market and prices from Brazil have moved up to slightly over the historically expected U.S. $1 per kilo. This upward movement should overall be positive for the Group. Irrespective of raw material price levels we continue to pursue our long term aim of building a business that can grow profitably whatever the price level. FINANCIAL REVIEW Performance Analysis Profit and Loss account Financially 1999 was another solid year for Treatt. Profit before tax increased 19 per cent in addition to Group turnover increasing by 2 per cent to £22.4 million (1998: £22.1 million). Inside the small rise in turnover were offsetting factors: - The underlying number of orders handled by the Group increased by 5 per cent. - Average order values however fell as the costs of raw materials underlying some of the Group's lower value added essential oil products, outside of orange oil, continued to fall. The Group had to reflect these price reductions in selling prices and average selling prices fell. The favourable movement in sales mix achieved in 1998, leading to increased gross margins, has been sustained in 1999. This has been particularly true for higher value added essential oil products. Gross margins have been further enhanced this year to 32.7 per cent(1998: 30.4 per cent) for specific reasons: - As referred to in the Operating Review some of RC Treatt's operations have run close to capacity increasing the recovery of overheads and benefiting margins. - Due to RC Treatt purchasing most of its major raw materials in U.S. dollars, if the dollar strengthens between the time materials are purchased and then sold on to customers, inflated margins in sterling terms result. This has been the case in 1999. However, when RC Treatt replace those raw materials the cost in sterling terms increases. The Group's Operating Costs rose by 6.7 per cent or £297,000. Within this payroll costs have risen £200,000 whilst the remaining increase is due to higher depreciation, increased promotional activity and overseas travel. Interest receivable increased due to higher average cash balances through the year. Interest payable fell as the balance outstanding on the Group's long term fixed rate loans fell. Overall net interest payable fell to an almost negligible £14,000. The Group's effective tax rate has remained broadly at the same level as 1998 as the Group continues to utilise U.S. tax losses. The effective rate this year has fallen marginally to 27.5 per cent from 27.6 per cent. Expectations for the future effective rate are discussed below. Earnings per share have risen to 18.5 pence per share, an increase of 19 per cent on 1998. This leaves dividends for the year of 7.1 pence per share covered 2.6 times(1998: 2.4 times). Cash Flow For the first time since 1995 the Group has seen a reduction in its net cash position. Despite the increase in operating profit, cash inflow from operating activities fell by nearly £600,000, as working capital increased by over £1 million. This increase was in direct response to contracts placed with us by customers and taking advantage of sensible purchasing opportunities. The cost of servicing the Group's finances fell to an almost negligible £26,000 whilst tax payments exceeded the 1998 liability as RC Treatt moved on to the new U.K. quarterly payment schedule. The Group's capital expenditure totalled £1,384,000 and has continued to be funded out of operating cash flows as long term projections did not anticipate the Group needing long term funding. At £1,384,000 capital expenditure was at its highest level for 4 years. Over half of this investment was in land and buildings, as referred to in the Operating Review. During the year the Group repaid its fixed rate long term loan due in 2003 as lower interest rate levels made it beneficial to do so. Post the year end the one remaining long term fixed rate loan due in 2005 was also repaid. The repayment during the year has given rise to the £499,000 reduction in net debt leaving the Group's net cash position down by £664,000 and standing at £979,000, 7 per cent of net assets at the year end. Balance Sheet and Treasury activity Over the year Group shareholders funds have risen to £13,758,000 or £1.36 per share. 63 per cent of shareholders funds are in the form of liquid assets and the Group's land and buildings are all freehold or very long leaseholds, held at historical cost. The outstanding portion of the long term loan due in 2005, repaid post the year end has been disclosed as a creditor due within one year on the face of the balance sheet. Group Tax Charge The Group's tax charge for the year represents an effective rate of 27.5 per cent (1998: 27.6 per cent). The rate has remained at this level due to the losses brought forward in the United States, from several years ago. Based on current expectations the Group rate will remain at this level in the year to 30 September 2000 and start rising thereafter. Millennium Compliance With independent external advice all the Group's operations have been through the process of identifying business critical systems and confirming that those systems meet the British Standard on millennium compliance. Responses have been received from all suppliers of business critical equipment and to date no critical compliance issues have been raised. Further internal testing was conducted on business critical equipment through the year and no issues arose. The costs of this exercise have not been significant. The Group is now completing its contingency planning and believes that all critical operations are millennium ready. Treasury Policies The Group operates a conservative set of treasury policies to ensure no unnecessary risks are taken with the Group's assets. No investments other than cash and other short term deposits are currently permitted. Where appropriate these balances are held in foreign currencies, but only as part of the Groups' overall hedging activity. Treatt is potentially vulnerable to a number of different foreign exchange risks, but these can be broken down into two main categories. Firstly the value of the foreign currency net assets of Florida Treatt and Singapore Treatt can fluctuate with Sterling. These are currently not hedged, as the risks are considered less than the cost of putting the hedge in place. Secondly, with R.C. Treatt exporting to over 80 countries, fluctuations in Sterling's value can affect both the gross margin and operating costs. Sales are principally made in four currencies in addition to Sterling, with the United States Dollar being by far the most significant. Raw materials are also mainly purchased in United States Dollars and so a United States Dollar bank account is operated to allow Dollar denominated sales and purchases to flow through this account. The R.C. Treatt cash flows are such that over a period of time United States Dollar inflows and outflows net out, but if there is a mismatch in any one accounting period and the Sterling to United States Dollar exchange rate changes, an exchange difference will arise. Hence it is Sterling's relative strength against the US Dollar that is of prime importance. A policy to reduce the United States Dollar exposures, where possible, is in place. Currency accounts are also run for the other main currencies to which R.C. Treatt is exposed. Based on estimated future cash flows for each currency a conservative position is taken with forward contracts in order to protect the Group's asset base. This policy will protect the Group against the worst of any short- term swings in currencies, but like any exporter there are inherent risks if there is a substantial movement in currencies. GROUP PROFIT AND LOSS ACCOUNT Notes 1999 1998 £'000 £'000 Turnover - continuing operations 1 22,443 22,058 Cost of sales (15,097) (15,353) _______ _______ Gross profit 7,346 6,705 Distribution costs (1,459) (1,286) Administrative expenses (3,290) (3,166) _______ _______ Operating profit 2,597 2,253 Interest receivable 70 61 Interest payable (96) (148) _______ _______ Profit on ordinary activities before taxation 2,571 2,166 Tax on profit on ordinary activities 2 (707) (597) _______ _______ Profit on ordinary activities after taxation 1,864 1,569 Dividends 3 (716) (645) _______ _______ Retained profit for the year 1,148 924 _______ _______ Earnings per share - Basic 4 18.5p 15.6p - Fully Diluted 18.4p 15.5p There was no material difference between the historical cost profit before taxation and the profit on ordinary activities before taxation in either 1999 or 1998. The figures for the years ended 30 September 1999 and 1998 are an abridged version of the Group's audited financial statements. The figures for the years ended 30 September 1998 have been delivered to the Registrar of Companies. These statements received an unqualified audit opinion and the auditors' report contained no statement under section 237(2) or 237(3) of the Companies Act 1985. GROUP CASH FLOW STATEMENT Notes 1999 1998 £'000 £'000 £'000 £'000 Cash inflow from operating activities 5 2,044 2,629 Returns on investments and servicing of finance (26) (87) Taxation (679) (417) Capital expenditure (1,361) (500) Equity dividends paid (646) (602) _______ _______ Cash(outflow) /inflow before financing (668) 1,023 Financing - reduction in net debt (499) (173) _______ _______ (Decrease)/increase in funds in the year (1,167) 850 _______ _______ Reconciliation of net cash flow to (decrease)/increase in funds (Decrease)/increase in funds in the year (1,167) 850 Cash outflow from decrease in debt and lease financing 499 173 _______ _______ (Decrease)/increase in net funds resulting from cash flows (668) 1,023 Translation difference 4 (25) _______ _______ (Decrease)/increase in net funds in the year (664) 998 Net funds at 1 October 1998 1,643 645 _______ _______ Net funds at 30 September 1999 979 1,643 _______ _______ GROUP BALANCE SHEET 1999 1998 £'000 £'000 £'000 £'000 FIXED ASSETS Tangible assets 5,117 4,238 CURRENT ASSETS Stocks 8,211 6,727 Debtors 3,692 3,641 Cash at bank 1,689 2,852 _______ ______ 13,592 13,220 CREDITORS: amounts falling due within one year (4,914) (3,806) _______ ______ Net Current Assets 8,678 9,414 _______ _______ Total Assets less Current 13,795 13,652 Liabilities CREDITORS: amounts falling due after more than one year - (1,051) Deferred Tax (37) - _______ _______ Net Assets 13,758 12,601 _______ _______ CAPITAL AND RESERVES Called up share capital 1,008 1,008 Share premium account 1,929 1,929 Profit and loss account 10,821 9,664 _______ _______ SHAREHOLDERS'FUNDS - Equity interest 13,758 12,601 _______ _______ GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 1999 1998 £'000 £'000 Profit for the financial year before dividends 1,864 1,569 Currency translation differences on foreign currency net investments 9 (81) _______ _______ Total recognised gains and losses 1,873 1,488 _______ _______ NOTES 1999 1998 £'000 £'000 1. Turnover by destination United Kingdom 5,620 5,590 Rest of Europe 6,298 5,983 The Americas 5,383 5,150 Rest of the World 5,142 5,335 _______ _______ 22,443 22,058 2. Tax Charge UK current year taxation UK Corporation tax 718 603 Deferred taxation 37 (17) _______ _______ 755 586 Prior years UK Corporation tax (7) 11 Deferred taxation (41) - _______ _______ Tax on profit on ordinary activities 707 597 3. Dividends Interim declared of 2.2p per share (1998:2.0p per share) 222 202 Final proposed of 4.9p per share (1998:4.4p per share) 494 443 _______ _______ 716 645 Subject to approval at the Annual General Meeting on the 31 January 2000, the final dividend for the year ended 30 September 1999 will be payable on the 11 April 2000 to those Shareholders on the Register at the close of business on the 10 March 2000 (Ex dividend date 6 March 2000). 4. Earnings per share (1) Basic earnings per share Basic earnings per share is based on the weighted average number of ordinary shares in issue and ranking for dividend during the year of 10,077,749 (1999 and 1998); and earnings of £1,864,000 (1998: £1,569,000), being the profit on ordinary activities after taxation. (2) Fully diluted earnings per share Fully diluted earnings per share is based on the weighted average number of ordinary shares in issue and ranking for dividend during the year, adjusted for the effect of all dilutive potential ordinary shares, of 10,120,885 (1998: 10,107,407) and the same earnings as above. 5. Reconciliation of operating profit to operating cash flows: Operating profit 2,597 2,253 Depreciation charge 491 437 Loss on disposals 14 5 Increase in stocks (1,484) (624) (Increase)/decrease in debtors (182) 242 Increase in creditors 626 328 Exchange loss on translation of foreign investments (18) (12) _______ _______ Net cash inflow from operating activities 2,044 2,629 BACKGROUND NOTE Price: 150p (3rd December) No. of Shares in issue:10,077,749 Market Cap: £15.1m The business Treatt is a supplier of ingredients to the flavour and fragrance industry. These ingredients are included by Treatt's customers as part of a flavour or fragrance which may then be manufactured from a concentrated mixture of hundreds of different ingredients. The ingredients Treatt supply are mainly based on essential oils which are distilled or blended. There is an infinite number of potential variations of each of these as a result of different origins and production techniques. Aromatic chemicals, and a range of Treattarome TM natural distillates manufactured from the named food, are also supplied. Typical products including a Treatt ingredient could range from air fresheners, cosmetics, shampoos and soaps to soft drinks, confectionery and basic pharmaceutical products. Treatt is a world leader in the supply of essential oils for these uses. Customers range from small companies to large multinationals, including flavour and fragrance creators as well as consumer products manufacturers. There are hundreds of different essential oils extracted from many different organic materials. Some examples of common oils are peppermint, lime, lavender, orange and eucalyptus. Essential oils have been used as flavour and fragrance ingredients for centuries and their use for this purpose far outweighs other uses such as aromatherapy. Raw materials are imported from over 70 countries and are refined and blended to meet customers' requirements. The vast majority of turnover from the Group's U.K. subsidiary R.C. Treatt consists of export sales. The Florida Treatt subsidiary sells primarily into the U.S. market. Strengths - Industry-leading new product development and service is maintained through the Company's on-going investment in R&D. - Treatt is able to source rare and exotic essential oils from around the world in over 70 countries. - The finest quality raw materials are obtained and the highest standards of production are maintained through direct working relationships with growers and producers. - Customers demands, large and small, can be met at extremely short notice through Treatt's extensive stockholding of flavour and fragrance raw materials. - Consistent product quality, regardless of variations resulting from source, climate or production technique, is ensured through Treatt's expertise in blending and distilling essential oils. Key financial highlights (year end = 30 September) 1999 1998 1997 1996 1995 Pre tax profit (£m) 2.57 2.17 1.56 1.46 3.54 Turnover(£m) 22.4 22.1 22.6 29.4 28.8 EPS (p) 18.5 15.6 10.5 10.7 23.6

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