REG - Treatt PLC - Full Year Results
29/11/2022 07:16
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RNS Number : 9018H Treatt PLC 29 November 2022
Contents
3 Highlights
5 Chairman's Statement
7 Chief Executive's Review
9 Financial Review
16 Group Income Statement
17 Group Statement of Comprehensive Income
18 Group Statement of Changes in Equity
19 Group Balance Sheet
21 Group Statement of Cash Flows
23 Group Reconciliation of Net Cash Flow to Movement in Net Debt
24 Notes to the Full Year Results
TREATT PLC
FULL YEAR RESULTS
YEAR ENDED 30 SEPTEMBER 2022
Strong platform for growth
Treatt, the manufacturer and supplier of a diverse and sustainable portfolio
of natural extracts and ingredients for the beverage, flavour and fragrance
industries, announces today its results for the year ended 30 September 2022.
FINANCIAL HIGHLIGHTS(1):
Financial Financial Change
year ended
year ended
30 September 2022
30 September 2021
Revenue £140.2m £124.3m +12.8%
Gross profit £39.1m £42.2m -7.4%
Gross profit margin 27.9% 34.0% -610 bps
Profit before tax and exceptional items £15.3m £20.9m -27.1%
Profit before tax £16.2m £19.6m -17.5%
Adjusted basic earnings per share(2) 19.80p 27.05p -26.8%
Basic earnings per share 22.04p 25.19p -12.5%
Final dividend per share 5.35p 5.50p -2.7%
Total dividend per share 7.85p 7.50p +4.7%
Net debt £22.4m £9.1m +146.2%
Net debt to adjusted EBITDA(3) ratio 1.21x 0.39x -208.3%
Net debt to EBITDA ratio 1.16x 0.42x -177.1%
Adjusted return on average capital employed4 11.6% 20.9% -930 bps
Return on average capital employed 11.9% 19.2% -730 bps
(1) All measures based on continuing operations.
(2) Adjusted earnings per share measures exclude exceptional items and the
related tax effect, details of which are given in note 7.
(3) EBITDA is calculated as operating profit plus depreciation and
amortisation. The adjusted measure excludes exceptional items
(4) Return on average capital employed is calculated by dividing operating
profit before exceptional items (as shown in the Group income statement) by
the average capital employed in the business, which is calculated as total
equity (as shown in the Group balance sheet) plus net debt or minus net cash
(as shown in the Group reconciliation of net cash flow to movement in net
debt), averaged over the opening, interim and closing amounts. The adjusted
measure excludes exceptional items.
HIGHLIGHTS(1):
· Strong revenue growth of 13% (9% in constant currency) with sales
growth across all product categories, except hard tea
· Coffee now reported as a separate category with sales of £1.1m
and encouraging pipeline
· Profit before tax and exceptional items of £15.3m in line with
revised Board expectations
· Progressive dividend policy maintained, with proposed total
dividend for the year of 7.85p per share, an increase of 4.7%
· Year-end net debt of £22.4m (1.21x closing net debt to adjusted
EBITDA(3)) reflects capital investment in the UK relocation and investment in
prudent inventory levels to mitigate supply chain risks (statutory measure:
1.16x closing net debt to EBITDA)
· Vast majority of UK production has transitioned to the new UK
facility and UK production capacity will at least double once process is fully
completed (anticipated in FY23)
· Improved processes around sales pricing and cost recovery, with
new FX management systems implemented
Commenting on the results, CEO Daemmon Reeve said:
"It's been a mixed year for the business, with a very encouraging sales
performance across all product categories, except hard tea, and significant
progress building our infrastructure for future growth. We announced some
short-term profitability headwinds in August, particularly in hard tea, but
have finished the year in line with revised guidance. We have learnt from the
disappointments and my belief in our growth potential and determination to
succeed is undimmed, driven by the teamwork and commitment to our customers
that lies at the heart of Treatt's culture.
We remain as excited as ever about the pipeline of opportunities for Treatt,
with the business now well-invested to fulfil our medium term ambitions.
Coffee is an emerging category in its own right, for which we now have a
dedicated team in place and high hopes for growth.
In the face of macro challenges, there is a wave of positive change across the
business. On the back of a resilient market in natural and healthy products,
which plays to our expertise, we are looking forward to the future with
optimism."
Analyst and investor conference call
A conference call for analysts and investors will be held at 09.30 a.m. today,
29 November 2022. For dial-in details, please contact MHP at
treatt@mhpgroup.com.
Enquiries:
Treatt plc +44 (0)1284 702500
Daemmon Reeve Chief Executive Officer
Ryan Govender Chief Financial Officer
Joint Broker
Investec Bank plc +44 (0)20 7597 5970
Patrick Robb
David Anderson
Joint Broker
Peel Hunt Plc +44 (0)20 7418 8900
George Sellar
Andrew Clark
Financial PR
MHP +44 (0)20 3128
8339
Tim Rowntree
Simon Hockridge
Catherine Chapman
About the Group
Treatt is a global, independent manufacturer and supplier of a diverse and
sustainable portfolio of natural extracts and ingredients for the flavour,
fragrance and multinational consumer product industries, particularly in the
beverage sector. Renowned for its technical expertise and knowledge of
ingredients, their origins and market conditions, Treatt is recognised as a
leader in its field.
The Group employs approximately 400 staff in Europe, North America and Asia
and has manufacturing facilities in the UK and US. Its international
footprint enables the Group to deliver powerful and integrated solutions for
the food, beverage and fragrance industries across the globe.
For further information about the Group, visit www.treatt.com
(http://www.treatt.com) .
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This announcement contains forward-looking statements that are subject to risk
factors associated with, among other things, the economic and business
circumstances occurring from time to time in the countries, sectors and
markets in which the Group operates. It is believed that the expectations
reflected in these statements are reasonable, but they may be affected by a
wide range of variables which could cause actual results to differ materially
from those currently anticipated. No assurances can be given that the
forward-looking statements in this announcement will be realised. The
forward-looking statements reflect the knowledge and information available at
the date of preparation of this announcement and the Group undertakes no
obligation to update these forward-looking statements. Nothing in this
announcement should be construed as a profit forecast.
Chairman's statement
A year of progress
As I step down as Chair after 11 years, I believe the Company has made
significant progress this year, notwithstanding some disappointment around
profitability. We have completed a period of substantial transition and
consolidation, which enables us to expand our production capacity, launch new
products, attract new customers and develop new markets and territories for
years to come.
Many years of planning have come to fruition this year as we transferred
operations to our new UK premises, grew our revenues, enhanced our Board and
finalised our new global executive leadership team. The new UK site offers
many benefits, from increased capacity and efficiency to more advanced
systems, technology and sustainability benefits. Moving operations into
Skyliner Way was a challenge, but our teams rallied to keep our customers on
board and came together to get goods out of the door. The strength of our
culture was evident as we overcame the teething issues and ensured we
delivered on our substantial order book, with a record month in August.
To make the most of our investments in both the UK and US sites, we knew that
we needed to enhance and expand our people infrastructure. We needed to build
a global leadership team of senior people to work with Daemmon and I am
delighted with the talent we have brought in.
These infrastructure updates and changes to the team are undoubtedly vital to
our ability to deliver on the exciting market opportunities we have long
perceived and are the reason I have remained as Chair to see them through.
Performance
In many ways, the performance of the Group has been strong. We have seen good
growth across all categories, aside from hard tea. That such growth has not
been fully reflected in the bottom line is frustrating, and caused by a number
of factors including the margin impact in hard tea, the impact of foreign
exchange, input cost increases and lockdowns in Shanghai - the home of our
China facility. I am confident that learnings are being taken forward in all
of these areas.
The new executive leadership team is firmly focused on optimising our
increased capacity and sales through to the bottom line over coming years.
With sales volumes going up, strong existing customer relationships, new
customer wins, expanded market presences and vibrant new categories like
coffee, there are, in my view, many reasons to be optimistic about Treatt's
performance and potential.
Board Changes
We have enhanced the Board over the year, with the addition of Christine
Sisler and Philip O'Connor.
Christine brings direct beverage experience from one of our key clients. She
understands the business and our markets, particularly in the US, and brings
key skills in development and commercialisation amongst many others.
Philip brings substantial experience, having been a CEO and Finance Director
within the food industry. He founded two successful start-up businesses and
has expertise in high growth businesses and in M&A.
I am also delighted that Vijay Thakrar will be my successor. Vijay has
developed an extensive knowledge of Treatt which will complement his
significant experience from a broad business and non-executive career covering
a number of large international organisations.
Dividend
The Directors are pleased to propose a final dividend of 5.35p per share
(2021: 5.50p), which represents an increase in the total dividend for the year
of 4.7% to 7.85p (2021: 7.50p). If approved by shareholders at the Annual
General Meeting, the final dividend will be payable on 16 March 2023 to all
shareholders on the register at the close of business on 3 February 2023.
Outlook
The foundations of the Group are stronger than ever. Following the significant
work completed over the last couple of years, Treatt is well placed to
maximise the opportunities presented by its new premises in Skyliner Way, and
take the business to the next level in terms of customer attraction,
innovation and growth across our markets.
On a personal level, to see the business grow and develop into what it is
today over the 11 years I have spent with Treatt has been a career highlight.
The difference in premises, infrastructure, capacity, people, culture and
strategy from then to now is extraordinary. Treatt has made huge leaps in so
many aspects of what we do and is now perfectly poised for bigger things. I am
enormously proud of what the business has accomplished across the last decade
and wish Daemmon, Vijay, everyone at Treatt and all my fellow shareholders
good fortune for the future.
Tim Jones
Chairman
29 November 2022
Chief Executive's review
It's been a mixed year for the business, with very encouraging performance
across many categories and significant infrastructure progress, dampened by
short-term profitability headwinds.
There have been many positives this year, including strong top line growth and
the successful transition of almost all UK operations to our new site at
Skyliner Way. However, we have also faced a number of challenges that have
affected our profitability; we are, however, determined to take learnings from
these challenges and ensure we have greater resilience moving forwards.
Fundamentally, we remain optimistic and encouraged by the performance of the
Group, our enhanced capabilities and the significant opportunities across our
markets. We feel that the business is strategically sound and we're determined
to reinvigorate the growth path we've been on for the past nine years.
Performance
As reported in August 2022, we saw a disappointing performance from our higher
margin tea category this year. In the first half of 2021, we were involved in
a large and very profitable hard tea product launch that did not repeat to
anywhere near the level we had anticipated. It was a niche product and an
unusually sized win for the category, meaning its subsequent lack of success
had a disproportionate effect on our margins. The vast majority of our tea
business remains stable and reliable, reflecting the diversified nature of our
wider portfolio, which sells a multitude of ingredients that go into a wide
variety of brands, meaning we're typically not highly exposed to such
volatility in margins.
We have also reported on the adverse impact of increasing volatility in FX
movements during the second half of the year. In response to this situation,
we have taken measures to improve controls and ensure this is not an issue we
face again. For more information on measures taken around FX, see the
Financial review below.
Finally, our China subsidiary has been heavily impacted by extended Covid-19
related restrictions which have led to the loss of some higher margin revenue
in the year. Though it's unfortunate to still be faced with such restrictions,
we have built high quality relationships with a number of significantly sized
customers in China and remain very optimistic about the potential of the
region.
These challenges have been in stark contrast to much of our performance. We've
seen a strong top line performance across the portfolio, with double digit
growth in almost every category apart from hard tea, with a particularly good
performance across citrus, synthetic aroma and health & wellness. Some of
that growth has come from new product and customer wins across multiple
categories and geographies, and some of it has come from growing existing
customers whilst passing on selected input cost increases. Coffee is a
particularly exciting category for us at the moment, and one we have high
hopes for with our new team now in place.
Skyliner Way
Undoubtedly, the highlight of the year is that manufacturing is up and running
at Skyliner Way. As a result, within several months of the move, we achieved
record levels of sales from the UK in August 2022. It is very gratifying that
we are already seeing the potential for efficiencies from the site and this
speaks well to our ambition for the future.
On top of the obvious short and long-term efficiency and capacity benefits of
the new site, it's also a game changer for us when it comes to customer
attraction. We've been able to onboard a number of significant target
customers already and are confident we are changing the way the market sees
the business. Initial customer feedback is positive on the new modern site,
facilitating greater collaboration on developing flavours and fragrance
solutions for end consumers.
We're proud of how everyone at Treatt came together to make the transition a
success. During a time of great change for the business, including the biggest
move for the business in 50 years, I'm hugely grateful to the team for their
flexibility and dedication. It's been a real testament to the strength of our
culture of collaboration and agility.
Strategy
As presented at our Capital Markets Day in May 2022, we have finessed how we
communicate our strategy though, as before, we remain very much focused on
delivering long-term sustainable growth.
People
Following substantial investment in our people in the past two years, we
believe we now have the right team in place to seize the multiple growth
opportunities available. We have created a new executive leadership team to
help us reach the next level, and I'm very pleased with the strength of the
individuals we have brought in. Our new CFO Ryan Govender has also brought a
lot of relevant experience to the role and has very quickly bedded into the
business.
Board changes are often bittersweet as we lose trusted voices but gain fresh
thinking and challenge. As Tim Jones retires, it feels like another sign that
we're at the end of a chapter for Treatt. He has been a great mentor to me for
the last 11 years and he will be greatly missed by all as an enthusiastic and
passionate supporter of the business. I would like to personally thank him for
the immense role he has played in Treatt's development over the past decade.
We have an excellent replacement for our next chapter in Vijay Thakrar, who
has already built a great understanding of the business and will bring new
entrepreneurial thinking to the role of Chair.
Sustainability
We are seeing significant benefits of having appointed a dedicated in-house
Global Sustainability Manager who is driving and embedding our sustainability
strategy throughout our business and collaborating closely with our customers.
During 2022, we have conducted energy audits at our facilities in the US and
the UK and have committed investment to ensure we optimise energy efficiency
and reduce our emissions; we have collected our Scope 3 emissions for the
first time in order to gain better visibility of our total carbon footprint
and we have considered the possible physical and transitional impacts of
climate change on our business. We have also launched our responsible sourcing
policy and are working with our suppliers to ensure that our supply chain is
resilient. I am proud of how the business is adapting in support of both
people and planet.
Outlook
Looking ahead, we are greatly encouraged by the growth opportunities from new
and existing customers, particularly in the US and China, and our ongoing
progress in coffee.
The key challenges for the year will be macroeconomic driven. We are very
cognisant that there are pressures from multiple angles, whether it's interest
rates, inflation or the cost of living crisis. However, as demonstrated most
recently during the pandemic, beverages are seen as affordable luxuries and
provide great resilience in difficult economic times, and the market trends
towards healthier, natural products continue to support our strategy.
Having taken learnings from the challenges which impacted the business over
the past 12 months, we feel we can look forward with optimism. We know our
markets well and the premium quality and authenticity we bring to the table
are still in high demand by consumers. As such, I'm confident we have the
right people and infrastructure in place to reach more customers and consumers
than ever before.
Daemmon Reeve
Chief Executive Officer
29 November 2022
Financial review
Strong sales growth, with margin decline impacting profitability
Overview
The Group performance reflects a difficult set of financial results for the
year ended 30 September 2022. Revenue grew 12.8% to £140.2m (9.1% in constant
currency) with growth across all categories except tea, however gross margins
declined to 27.9% mainly due to lower hard tea sales and FX losses. As a
result, profit before tax and exceptional items reduced by 27.1% to £15.3m.
The Group has reviewed how it can better limit FX exposure in light of
increasing volatility. This resulted in the correction of previously
over-hedged FX contracts during the financial year and the implementation of
new FX management systems which will provide greater controls for the Group in
this area.
The year saw continued investment of £12.8m in capital projects, including
£5.0m on the new UK facility with the majority of production now transitioned
and operational from the new site. Due to the ongoing high levels of
investment in capital projects and strategic inventory holding, we ended the
year with net debt of £22.4m (2021: £9.1m) and net debt to adjusted
EBITDA(1) of 1.21x which is well within our target leverage range (statutory
measure: 1.16x net debt to EBITDA).
Income statement
Revenue
Revenue for the year increased by 12.8% to £140.2m (2021: £124.3m). In
constant currency terms, revenue increased by 9.1% as the Pound Sterling was
weaker against the US Dollar in 2022, as compared to 2021.
Revenue growth was broad-based, across all of our categories, with the
exception of tea where sales declined on the back of an exceptional 2021
performance and lower than expected demand in hard tea (ready-to-drink canned
cocktail market) in the US, which also materially impacted margins for the
year. Our overall revenue performance was driven in particular by our citrus,
synthetic aroma and health & wellness categories, reporting combined
growth of 19.8%.
Citrus, which contributed 47.6% of Group revenue (2021: 43.6%), grew by 23.2%,
while margins remained broadly in line. During the year we implemented
selected price increases to mostly offset higher commodity prices, with our
expertise in citrus procurement and our robust supply chain ensuring we
mitigated our exposure as much as possible to the rising market.
Whilst approximately 80.0% of the Group's revenue now comes from our natural
and clean-label product ranges, our synthetic aroma sales increased by 13.6%
(2021: 8.9%) with growth in products used to flavour alternative proteins and
savoury snack foods.
Product category % share of sales - 2022 v 2021:
% of revenue Citrus Tea Health & wellness Fruit & vegetables Herbs, spices & florals Synthetic aroma Coffee
2022 48% 6% 8% 10% 9% 18% 1%
2021 44% 11% 8% 10% 9% 18% -
Health & wellness, including sugar reduction, had another strong year,
growing by 15.3% (2021: 28.7%) with sustained consumer demand for 'better for
you' products driving sales in our specialist solutions, such as the reduction
of calorific content in beverages. This reflects the important IP, know-how
and technical expertise which Treatt possesses in this field.
Despite a very strong prior year, fruit & vegetables continued to grow by
8.3% (2021: 59.6%) with mango, pineapple, strawberry and kiwi natural extracts
leading contributors to growth.
The Group's traditional range of herbs, spices & florals, many of which
are traded, grew by 10.4% (2021: 0.5%) in large part because of improved
on-trade consumption post-pandemic.
Coffee sales of £1.1m are reported separately for the first time in our full
year results as we continued our investment in coffee innovation resources in
the fiscal year.
Geographical % share of sales - 2022 v 2021:
% of revenue UK Germany Ireland Rest of Europe USA Rest of the Americas China Rest of the world
2022 7% 6% 8% 10% 38% 9% 6% 16%
2021 8% 5% 6% 11% 43% 8% 6% 13%
Geographical analysis of revenues shows that the UK, mainland Europe and The
Americas maintained performance despite a number of challenges. The
well-documented global supply chain issues and site relocation created
logistical challenges which our very experienced supply chain teams across the
Group did a remarkable job in overcoming in order to maintain customer service
levels.
In the UK, revenues performed well in both citrus and coffee, with revenue
ending the year up by 2.9% at £9.8m.
Sales to mainland Europe, which represented 24.3% of Group revenue (2021:
21.9%), performed well reporting a 25.0% increase in revenue to £34.0m (2021:
£27.2m) driven by particularly strong performance from both citrus and
synthetic aroma.
Revenue in the Group's largest market, the US, grew by a more modest 0.7% to
£53.7m (2021: £53.4m) representing 38.3% of the Group total (2021: 42.9%).
Within the US, the Group benefitted from particularly strong growth in orange
products where successful navigation of supply chain challenges during the
year enabled the business to compete against those not so well positioned,
however this market also endured the significant downturn in tea demand.
The Group continued to focus on opportunities in China, with our local
subsidiary completing its first full year of trading in 2022. Despite the well
documented extended Covid-19 related restrictions in large parts of China,
reported revenue to the country increased by 6.2% to £7.9m (2021: £7.4m). We
remain optimistic about the opportunities in this market with a large
proportion of growth representing new business for Treatt.
The Rest of the World (excluding China) grew by 26.8% to £21.8m (2021:
£17.2m) with a number of customers and markets now recovering from the
prolonged effects of COVID-19 that continued to impact 2021.
Profit
Gross profit declined by 7.4% with gross profit margins reducing from 34.0% to
27.9%. The decrease in margins resulted from three factors; firstly the change
in mix as a result of the growth in lower margin citrus sales and the decline
in higher margin hard tea sales; secondly the Group experienced significant
input cost inflation and whilst, in a number of cases, the business has been
able to pass this onto its customers, some longer-term contracts have not yet
allowed this to be achieved across the full portfolio. Lastly, margins were
adversely affected by increasing FX losses on over-hedged FX contracts,
following the rapid devaluation of Sterling against the US Dollar during the
second half of the year.
Administrative expenses (excluding exceptional items) grew by 11.7% in the
year to £23.3m (2021: £20.9m), driven by an increase in administrative
headcount, including investment in our new coffee team, overhead inflation and
increased travel post pandemic. Average headcount numbers across the Group
have increased by 12.5%. A significant number of open vacancies in 2021 were
filled in the current year leading to the increase in headcount in 2022. After
substantial investment in our people and production facilities to support the
Group's next phase of expansion, we do not anticipate any significant increase
in administrative expenses in the short to medium-term, above the normal rate
of inflation.
Adjusted net operating margin(2) decreased in the year to 11.3% (2021: 17.2%),
whilst net operating margin decreased in the year to 11.9% (2021: 16.1%), both
impacted by the decline in gross profit, with administrative expenses
(excluding exceptional items) remaining consistent as a proportion of revenue.
Consequently, operating profit excluding exceptional items decreased 26.1% to
£15.8m (2021: £21.3m) whilst statutory operating profit decreased 16.7% to
£16.7m (2021: £20.0m). Over the last five years average adjusted net
operating margins have been 13.3%, whilst our medium-term target range is
15-20%.
Adjusted return on average capital employed(3) (ROACE) decreased to 11.6%
(2021: 20.9%) as a consequence of the decrease in operating profits during the
year whilst capital employed increased (return on average capital employed
decreased from 19.2% (2021) to 11.9% over the year). As well as growth in
adjusted basic earnings per share, ROACE has been included as a performance
metric for LTIPs. Our medium-term target for ROACE is to deliver a range of
20-25%.
Exceptional items (see note 7) include the gain on the sale of the previous UK
facility of £3.3m offset by one-off non-recurring costs of £2.4m (2021:
£1.3m). These comprised relocation expenses (£1.8m) including project
consultants, manufacturing plant and machinery design and installation
specialists and commissioning costs together with restructuring costs (£0.6m)
incurred as a result of a significant change to the executive leadership
structure.
Adjusted earnings before interest, tax, depreciation and amortisation
(adjusted EBITDA(1)) for the year decreased by 20.2% to £18.5m (2021:
£23.1m) whereas statutory EBITDA reports an 11.2% decline to £19.4m (2021:
£21.8m). Profit before tax and exceptional items from continuing operations
declined by 27.1% to £15.3m (2021: £20.9m). Reported profit after tax for
the year of £13.3m represents a decrease of 12.1% on the prior year.
Foreign exchange gains and losses
Whilst the Group's functional currency is the British Pound (Sterling), the
majority of the Group's business is transacted in other currencies which
creates a foreign exchange exposure, particularly in the US Dollar and, to a
lesser extent, the Euro.
During the year Sterling weakened against the US Dollar, ending the year 17.2%
weaker at £1=$1.12 (2021: £1=$1.35); the average Sterling/US Dollar exchange
rate for the year was 6.5% weaker as compared with the prior year.
The Group's FX risk management policy is to minimise its foreign exchange risk
at our UK business through the use of forward currency contracts and options,
as well as through managing its US Dollar borrowings. This can result in
timing differences in the short-term, giving rise to re-translation gains or
losses in the income statement. More detail on the implementation of this
policy and changes made during the year can be found in the foreign exchange
risk management section below.
The impact of foreign exchange gains and losses in 2022 was a total loss on
foreign exchange contracts of £2.3m (2021: £1.4m gain), the net gain and
loss on the re-translation of other currency denominated balances, in
aggregate, was £nil (2021: £0.4m loss). During the second half of the year,
the Group corrected over-hedged FX contracts and implemented new FX management
systems, including an internal FX Committee and the use of third party FX
advisors.
There was a foreign exchange gain of £11.5m (2021: £1.8m loss) in the
'Statement of Comprehensive Income' in relation to the Group's investment in
Treatt USA.
Finance costs
The Group's net finance costs increased to £0.5m (2021: £0.4m) as net debt
increased by £13.3m to a closing position of £22.4m. In the year investment
in the UK facility was £5.0m and related capitalised interest cost of £0.2m.
As well as interest costs there were a number of fixed costs for maintaining
facilities for future use which were funded from operating cash flows. Whilst
still healthy, following the decline in profits, interest cover for the year
before exceptional items decreased to 30.5 times (2021: 50.0 times).
Group tax charge
After providing for deferred tax, the Group tax charge decreased by £1.6m to
£2.9m (2021: £4.5m); an effective tax rate (after exceptional items) of
17.7% (2021: 22.8%). The decrease in effective tax rate is driven largely by
the tax treatment on the disposal of Northern Way premises.
The sale of the Group's former UK premises at Northern Way in February 2022 is
not expected to be taxable as indexation allowances are available which fully
offset the taxable gain. The deferred tax rate applicable in the UK has
remained at 25.0%, in the US the rate of corporation tax remains at 21.0%.
Earnings per share
Basic earnings per share (as set out in note 10) decreased by 12.5% to 22.04p
(2021: 25.19p). Adjusted basic earnings per share(4) for the year declined by
26.8% to 19.80p (2021: 27.05p). The calculation of earnings per share excludes
those shares which are held by the Treatt Employee Benefit Trust (EBT) and
Treatt SIP Trust (SIP), which are not beneficially owned by employees since
they do not rank for dividend and is based upon profit after tax.
Dividends
The proposed final dividend of 5.35p per share (2021: 5.50p) increases the
total dividend per share for the year to 7.85p, a 4.7% increase on the prior
year (2021: 7.50p), representing dividend cover of 2.5 times pre-exceptional
earnings for the year and a rolling three-year cover after exceptional items
of 3.0 times. The Board considers this to be appropriate at this stage of the
Group's development.
Balance sheet
Shareholders' funds grew in the year by £27.6m to £133.9m (2021: £106.3m),
with net assets per share increasing by 25.0% to £2.20 (2021: £1.76). Over
the last five years net assets per share have grown by 150.0%. The Board has
chosen not to avail itself of the option under IFRS to revalue land and
buildings annually and, therefore, all the Group's land and buildings are held
at historical cost, net of depreciation, on the balance sheet.
Inventory held at the year-end was £68.4m (2021: £47.3m), an increase of
£21.1m. This increase was driven by three main factors; firstly higher
average raw material costs due to inflationary increases (notably orange oil
which remains the largest volume material held in inventory); secondly the
overall growth in sales and thirdly proactive purchasing by our procurement
team to protect our customers from the effect of global supply chain issues.
One factor in the success of the business is our management of risks, such as
geographic, political and climatic, to ensure continuity of supply for our
customers. Consequently, the overall level of inventory held by the Group is
highly significant in cash terms.
Net debt
At the year-end date the Group's net debt position was £22.4m (2021: £9.1m)
including leases of £0.4m (2021: £1.1m), with available unused facilities of
£8.4m.
In order to support the Group's growth plans for the foreseeable future, the
Group retains a mix of secured and unsecured borrowing facilities totalling
£30.8m, of which £13.4m expires in one year or less.
During the year the Group increased its UK overdraft limit by £2.7m and
increased its US line of credit by $2.0m in order to provide further headroom
on its existing facilities. Furthermore, the Group still retains with HSBC a
£6.5m accordion (pre-approved facility) and has access to an uncommitted
asset-backed credit facility of up to $7.0m with Bank of America. Borrowing
facilities are undertaken to match some of the Group's borrowings to the
assets which they have been used to finance and working capital.
All the Group's borrowing facilities are held with HSBC and Bank of America
and are typically held on three to five-year terms with expiry dates staggered
to fall in different financial years. The Group continues to enjoy positive
relationships with its banks and expects all facilities to be renewed or
refinanced when they fall due.
Cash flow
Net cash outflow for the year was £4.1m (2021: £5.0m outflow) reflecting the
ongoing investment in production and technical capabilities together with a
strategic build of specific inventory to maintain supply and protect margins.
During the year the Group invested £12.8m (2021: £14.4m) on capital
projects, of which £5.0m was incurred on the UK relocation project (more
details of which are set out on page 13). Total investments in the Group's US
operations were £5.8m, this includes £2.4m on a significant new still and
£2.2m on other new processing equipment and technologies to further support
the Group's growth plans and ambition to increase the proportion of
value-added products. Capital spend was partially offset by the sale of the
Group's former premises at Northern Way for £5.8m in February 2022.
There was an overall working capital outflow in the year of £18.5m (2021:
outflow £10.0m), principally as a result of an outflow of £14.4m in relation
to a tactical decision to build inventory levels in response to increasing
lead times and inflationary pricing pressures. There was a net increase in
receivables of £8.5m as a result of the strong sales performance in the final
two months of the year, partially compensated by an increase of £4.4m in
payables.
Capital investment programme
UK relocation
The Group acquired a ten-acre greenfield site on the new Suffolk Park in Bury
St. Edmunds in mid-2017 to relocate our UK business from its previous site in
Bury St. Edmunds, to a brand-new purpose-built facility. Construction of the
new facility was completed during 2021. In addition to delivering operational
efficiencies and advanced capabilities, the aim of the new facility was to
bring together all our UK-based staff into a single premises.
During 2022 the first phase of installation and commissioning of plant and
machinery was completed, inventory was physically transferred to be managed by
the new warehouse management system and production began from the new facility
as equipment was successfully brought online. All science and technical
colleagues have now transitioned to the new site where state-of-the-art
laboratories both support and promote product innovation whilst also providing
a truly exceptional customer collaboration environment.
Following the sale of Northern Way premises in February 2022, the Group agreed
a leaseback of our main manufacturing building for a period of 19 months, with
a break-clause at 12 months, to maintain the continuity of its manufacturing
capability during the transition. In 2023 we will commence phase two, which
involves the transfer and upgrade of highly complex manufacturing equipment
from our old site. We expect phase two to be completed by the end of 2023 and
we will continue to manufacture some products at the old site until the lease
expires. Whilst there is a risk of cost overruns, we have programmed a gradual
transfer from our old site to our new facility and included approximately
£0.5m of contingency (approximately 10.0% of the remaining spend) in order to
mitigate that risk as far as practicable.
The respective total costs of each phase of the relocation are broken down as
follows:
£'000 Phase Phase Total
one two
Capital expenditure 41,277 3,070 44,347
Previous site disposal (5,592) - (5,592)
Exceptional items 4,820 2,290 7,110
Total costs 40,505 5,360 45,865
The total capital project costs, including proceeds from the sale of the
previous site, are expected to be approximately £38.8m with exceptional costs
totalling £7.1m expected to be incurred. As the relocation project moves into
the final phase, we expect a further net cash outflow of £5.0m over the next
year. The cash outflows for the project are expected to result in the rolling
Group net debt to EBITDA ratio remaining below 1.0x during FY23.
It should be noted that in accordance with IAS 23 'Borrowing costs', and in
addition to the above, the interest charges incurred on funds utilised on the
relocation project prior to its completion fall to be capitalised. In the year
ended 30 September 2022 £187,000 was capitalised and a further £230,000 is
expected to be capitalised in the year ending 30 September 2023.
Treatt Employee Benefit Trust and Treatt SIP Trust
The Group has an HMRC-approved Share Incentive Plan (SIP) for its UK
employees, and as far as practicable, also offers a similar scheme to its US
staff. All UK staff with a year's service were awarded £700 (2021: £650) of
'Free Shares' during the year as part of the Group's employee incentive and
engagement programme as the Board is firmly of the view that increased
employee share ownership is an important tool for driving positive employee
engagement in the business. A similar scheme exists for US staff who were
awarded $1,000 (2021: $950) of Restricted Stock Units during the year. These
shares are forfeited by employees who leave within three years from the date
of grant.
Under the SIP, UK employees are offered the opportunity each year to purchase
up to £1,800 (or 10.0% of salary, whichever is lower) of Treatt shares out of
gross income, which the Group continues to match on a one and a half for one
basis. In the year, a total of 24,000 (2021: 30,000) matching shares were
granted.
The SIP currently holds 438,000 shares (2021: 477,000) and is administered by
Link Asset Services Trustees. All shares are allocated to participants under
the SIP. It is anticipated that going forward the obligations under the SIP
will continue to be satisfied through the issue of new shares.
In addition, the Group continued its annual programme of offering share option
saving schemes to staff in the UK and US. Under US tax legislation, staff at
Treatt USA are able to exercise options annually, whilst the UK schemes
provide for three-year saving plans.
Under the Long-Term Incentive Plan, which was approved by shareholders at the
2019 Annual General Meeting, Executive Directors and certain key employees
were granted 72,000 (2021: 127,000) nil cost share options during the year
which will vest after three years on a sliding scale, subject to performance
conditions. In total, options were granted over 205,000 (2021: 197,000) shares
during the year, whilst 278,000 (2021: 117,000) were exercised from options
awarded in prior years which have now vested. During the year 400,000 (2021:
100,000) shares were issued to the Employee Benefit Trust (EBT) at par (2
pence per share). The EBT currently holds 270,000 shares (2021: 166,000) in
order to satisfy future option schemes. It is anticipated that going forward,
all-employee savings-related share schemes will continue to be satisfied by
shares held within the EBT, to which further shares will be issued as
necessary.
Final salary pension scheme
The R C Treatt final salary pension scheme (the 'scheme') has not been subject
to any further accruals since 31 December 2012 and instead members of the
scheme were offered membership of the UK defined contribution pension plan
with effect from 1 January 2013. This means that the defined benefit scheme
has been de-risked as far as it is practicable and reasonable to do so.
The last three-year actuarial review of the scheme was carried out as at 1
January 2021, the result of which was that the scheme had an actuarial deficit
of £4.9m (1 January 2018: surplus £0.5m) and a funding level of 82.0%.
Consequently, the Company has agreed with the trustees to make contributions
of £0.5m (2021: £0.5m) per annum until the next actuarial review date of 1
January 2024.
Under IAS 19, 'Employee Benefits' a valuation of the scheme is conducted at
the year-end date based on updating the valuation calculations from the most
recent actuarial valuation. In accordance with this valuation, and having
sought legal advice as to the appropriateness of recognising a scheme surplus,
there is a pension surplus recognised on the balance sheet, net of tax, of
£1.3m (2021: £5.1m liability). The decrease in the deficit is driven by an
actuarial gain on changes to financial assumptions of £11.7m, due to
significantly higher discount rate assumptions than prior years as a result of
higher government bond yields.
Foreign exchange risk management
The nature of Treatt's activities is such that the Group could be affected by
movements in certain exchange rates, principally between Sterling and the US
Dollar, but other currencies such as the Euro can also have a material effect.
This risk manifests itself in a number of ways.
Firstly, the value of the foreign currency net assets of Treatt USA (the
Group's main overseas subsidiary) can fluctuate with Sterling.
Secondly, with R C Treatt (the Group's main UK subsidiary) exporting
throughout the world, fluctuations in the value of Sterling can affect both
the gross margin and operating costs. In addition to Sterling, sales are
principally made in US Dollar and Euro, with the US Dollar being the most
significant, typically accounting for around half of the UK business's sales.
Even if a sale is made in Sterling, its price may be set by reference to its
US Dollar denominated raw material price which therefore can have an impact on
the Sterling gross margin. Raw materials are also mainly purchased in US
Dollars and bank accounts are operated through which US Dollar denominated
sales and purchases flow. Hence it is the relative strength or weakness of
Sterling against the US Dollar that is of prime importance. As well as
affecting the cash value of sales, US Dollar exchange movements can also have
a significant effect on the replacement cost of stocks, which affects future
profitability and competitive advantage.
The Group's FX risk management policy is to minimise its foreign exchange risk
at our UK business through managing its US Dollar cash and borrowings and the
use of forward currency contracts and options. Foreign exchange contracts are
used to provide a hedge on the Group's margin exposure where purchases and
sale are made in the same currency. The value of these contracts is determined
through forward-looking forecasts of expected sales and net margins in foreign
currencies.
An FX committee was formed in August 2022 in order to monitor foreign exchange
risks within the business, work on refinements to the existing FX risk policy
and provide a forum to challenge and approve strategic actions such as
hedging. The committee meets monthly and there is an ongoing focus to manage
foreign currency debt balances, ensure the ongoing effectiveness of hedges and
remove avoidable foreign exchange risk from the business.
The Group now, as part of its FX risk management, actively minimises its
foreign currency debt and cash balances where there is no immediate expected
offset. In regard to foreign exchange contracts used for hedging, the Group
regularly reforecasts its exposure and amends its positions according to any
surpluses or shortfalls.
Summary
Sales grew strongly by 12.8% to £140.2m during the year, albeit the profit
performance of the Group has been disappointing, following nine years of
continuous growth in profit before tax and exceptional items. The strength of
our sales growth across almost every category gives us the confidence to
continue our focus on healthier value-added categories and we saw a recovery
of our on-trade channels and the consequential demand for our products,
reflecting the underlying strength and resilience of our business.
As we near the end of our capital investment programme, manufacturing capacity
is in place to support organic growth over the next few years, with the
capability now to add further capacity in a more modular and cost-efficient
way. After substantial investment in our people to support the Group's next
phase of expansion, we do not anticipate any significant increase in
administrative expenses in the short to medium-term, above the normal rate of
inflation.
I believe the top line growth in healthier value-added categories, whilst
maintaining efficient operations and a stable cost base, will allow
improvement in operating margins over the next few years.
Ryan Govender
Chief Financial Officer
29 November 2022
1. EBITDA is calculated as operating profit plus depreciation and
amortisation. The adjusted measure excludes exceptional items.
2. Operating margin is calculated by dividing operating profit by revenue
from continuing operations. The adjusted measure excludes exceptional items.
3. Return on average capital employed is calculated by dividing operating
profit (as shown in the Group income statement) by the average capital
employed in the business, which is calculated as total equity (as shown in the
Group balance sheet) plus net debt or minus net cash (as shown in the Group
reconciliation of net cash flow to movement in net debt), averaged over the
opening, interim and closing amounts. The adjusted measure excludes
exceptional items.
4. Adjusted earnings per share measures exclude exceptional items and the
related tax effect, details of which are given in note 7.
GROUP INCOME STATEMENT
for the year ended 30 September 2022
2022 2021
Notes Before exceptional items Before exceptional items
£'000 Exceptional items £'000 Exceptional items
£'000 Total £'000 Total
£'000 £'000
Revenue 6 140,185 - 140,185 124,326 - 124,326
Cost of sales (101,101) - (101,101) (82,103) - (82,103)
Gross profit 39,084 - 39,084 42,223 - 42,223
Administrative expenses 7 (23,311) (601) (23,912) (20,877) - (20,877)
Gain on disposal of land and buildings 7 - 3,324 3,324 - - -
Relocation expenses 7 - (1,800) (1,800) - (1,302) -
Operating profit(1) 15,773 923 16,696 21,346 (1,302) 20,044
Finance income 8 - 8 12 - 12
Finance costs (525) - (525) (439) - (439)
Profit before taxation 15,256 923 16,179 20,919 (1,302) 19,617
Taxation 8 (3,295) 431 (2,864) (4,655) 186 (4,469)
Profit for the year attributable to owners of the Parent Company 11,961 1,354 13,315 16,264 (1,116) 15,148
Earnings per share Adjusted(2) Statutory Adjusted(2) Statutory
Basic 10 19.80p 22.04p 27.05p 25.19p
Diluted 10 19.60p 21.82p 26.74p 24.91p
1 Operating profit is calculated as profit before net finance
costs and taxation.
2 All adjusted earnings per share measures exclude exceptional
items and the related tax effect, details of which are given in note 7.
All financial information presented relates to continuing operations.
Notes 1 to 12 form part of these financial statements.
GROUP STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September 2022
Notes 2022 2021
£'000 £'000
Profit for the year attributable to owners of the Parent Company 13,315 15,148
Items that may be reclassified subsequently to profit or loss:
Currency translation differences on foreign currency net investments 11,461 (1,752)
Current tax on foreign currency translation differences 8 102 18
Fair value movement on cash flow hedges (23) (508)
Deferred tax on fair value movement 8 4 93
11,544 (2,149)
Items that will not be reclassified subsequently to profit or loss:
Actuarial gain on defined benefit pension scheme 8,273 2,952
Deferred tax on actuarial gain 8 (2,068) (135)
6,205 2,817
Other comprehensive income for the year 17,749 668
15,816 15,816
Total comprehensive income for the year attributable to owners 31,064 15,816
of the Parent Company
All financial information presented relates to continuing operations.
Notes 1 to 12 form part of these financial statements.
GROUP STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2022
Share Share premium account Own shares in share trusts Hedging reserve Foreign exchange reserve Retained earnings Total
capital
equity
£'000 £'000 £'000 £'000 £'000
£'000 £'000
1 October 2020 1,205 23,484 (5) 123 3,554 62,759 91,120
Profit for the year - - - - - 15,148 15,148
Other comprehensive income:
Exchange differences - - - - (1,752) - (1,752)
Fair value movement on cash flow hedges - - - (508) - - (508)
Actuarial gain on defined benefit pension scheme - - - - - 2,952 2,952
Taxation relating to items above - - - 93 18 (135) (24)
Total comprehensive (expense) / income - - - (415) (1,734) 17,965 15,816
Transactions with owners:
Dividends - - - - - (3,704) (3,704)
Share-based payments - - - - - 1,732 1,732
Movement in own shares in share trusts - - 4 - - - 4
Gain on release of shares in share trusts - - - - - 629 629
Issue of share capital 3 - (3) - - - -
Taxation relating to items recognised directly in equity - - - - - 702 702
Total transactions with owners 3 - 1 - - (641) (637)
30 September 2021 1,208 23,484 (4) (292) 1,820 80,083 106,299
Profit for the year - - - - - 13,315 13,315
Other comprehensive income:
Exchange differences - - - - 11,461 - 11,461
Fair value movement on cash flow hedges - - - (23) - - (23)
Actuarial gain on defined benefit pension scheme - - - - - 8,273 8,273
Taxation relating to items above - - - 4 102 (2,068) (1,962)
Total comprehensive (expense) / income - - - (19) 11,563 19,520 31,064
Transactions with owners:
Dividends - - - - - (4,834) (4,834)
Share-based payments - - - - - 1,115 1,115
Movement in own shares in share trusts - - 8 - - - 8
Gain on release of shares in share trusts - - - - - 622 622
Issue of share capital 9 - (9) - - - -
Taxation relating to items recognised directly in equity - - - - - (424) (424)
Total transactions with owners 9 - (1) - - (3,521) (3,513)
30 September 2022 1,217 23,484 (5) (311) 13,383 96,082 133,850
Notes 1 to 12 form part of these financial statements.
GROUP BALANCE SHEET
as at 30 September 2022
Registered Number: 01568937
2022 2021
£'000 £'000
ASSETS
Non-current assets
Intangible assets 3,206 2,424
Property, plant and equipment 74,281 61,039
Right-of-use assets 375 1,556
Post-employment benefits 1,782 -
Deferred tax assets - 792
79,644 65,811
Current assets
Inventories 68,351 47,263
Trade and other receivables 37,113 26,371
Current tax assets 719 2,701
Derivative financial instruments - 11
Cash and bank balances 2,354 7,260
108,537 83,606
Total assets 188,181 149,417
LIABILITIES
Current liabilities
Bank overdrafts (6,174) (7,013)
Borrowings (15,861) (5,684)
Provisions (397) (143)
Trade and other payables (22,903) (17,027)
Lease liabilities (105) (96)
Derivative financial instruments (666) (593)
Current tax liabilities (223) -
(46,329) (30,556)
Net current assets 62,208 53,050
Non-current liabilities
Borrowings (2,342) (2,624)
Lease liabilities (291) (957)
Post-employment benefits - (6,806)
Deferred tax liabilities (5,369) (2,175)
(8,002) (12,562)
Total liabilities (54,331) (43,118)
Net assets 133,850 106,299
GROUP BALANCE SHEET (continued)
Notes 2022 2021
£'000 £'000
EQUITY
Share capital 11 1,217 1,208
Share premium account 23,484 23,484
Own shares in share trusts (5) (4)
Hedging reserve (311) (292)
Foreign exchange reserve 13,383 1,820
Retained earnings 96,082 80,083
Total equity attributable to owners of the Parent Company 106,299
133,850
Notes 1 to 12 form part of these financial statements.
GROUP STATEMENT OF CASH FLOWS
for the year ended 30 September 2022
Notes 2022 2021
£'000 £'000
Cash flow from operating activities
Profit before taxation 16,179 19,617
Adjusted for:
Depreciation of property, plant and equipment and right-of-use assets 2,476 1,705
Amortisation of intangible assets 215 93
Gain on disposal of land and buildings (3,324) -
Net finance costs excluding post-employment benefit expense 382 270
Share-based payments 1,039 1,733
Increase in fair value of derivatives 61 365
Employer contributions to defined benefit pension scheme (450) (450)
Post-employment benefit expense 135 157
Operating cash flow before movements in working capital 16,713 23,490
Movements in working capital:
Increase in inventories (14,396) (11,851)
Increase in receivables (8,502) (2,680)
Increase in payables 4,355 4,483
Cash (used in)/generated from operations (1,830) 13,442
Taxation received/(paid) 443 (4,874)
Net cash (used in)/generated from operating activities (1,387) 8,568
Cash flow from investing activities
Proceeds on disposal of property, plant and equipment 5,597 -
Purchase of property, plant and equipment (11,849) (13,195)
Purchase of intangible assets (925) (1,178)
Interest received 8 12
Net cash flow used in investing activities (7,169) (14,361)
GROUP STATEMENT OF CASH FLOWS (continued)
Notes 2022 2021
£'000 £'000
Cash flow from financing activities
Repayment of bank loans (360) (674)
Increase of bank loans 9,412 5,000
Repayment of lease liabilities (80) (10)
Interest paid (390) (282)
Dividends paid 9 (4,834) (3,704)
Proceeds on issue of shares 11 9 3
Net sale of own shares by share trusts 621 630
Net cash flow from financing activities 4,378 963
Net decrease in cash and cash equivalents (4,178) (4,830)
Effect of foreign exchange rates 111 (173)
Movement in cash and cash equivalents in the year (4,067) (5,003)
Cash and cash equivalents at beginning of year 247 5,250
Cash and cash equivalents at end of year (3,820) 247
Cash and cash equivalents comprise:
Cash and bank balances 2,354 7,260
Bank overdrafts (6,174) (7,013)
(3,820) 247
Notes 1 to 12 form part of these financial statements.
GROUP RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
for the year ended 30 September 2022
2022 2021
£'000 £'000
Movement in cash and cash equivalents in the year (4,067) (5,003)
Repayment of bank loans 360 674
Increase of bank loans (9,412) (5,000)
Reduction in/(increase of) lease liabilities 657 (394)
Cash outflow from changes in net debt in the year (12,462) (9,723)
Effect of foreign exchange rates (843) 182
Movement in net debt in the year (13,305) (9,541)
Net (debt)/cash at beginning of year (9,114) 427
Net debt at end of year (22,419) (9,114)
Analysis of movement in net debt during the year:
At Cash flow Foreign exchange movements £'000 At 30 September
1 October £'000 2022
2021 £'000
£'000
Cash and bank balances 7,260 (5,017) 111 2,354
Bank overdrafts (7,013) 839 - (6,174)
Cash and cash equivalents 247 (4,178) 111 (3,820)
Bank loans (8,308) (9,052) (843) (18,203)
Lease liabilities (1,053) 666 (9) (396)
Net debt (9,114) (12,564) 741 (22,419)
At Cash flow Foreign exchange movements At 30 September
1 October
£'000
£'000
2021
2020
£'000
£'000
Cash and bank balances 7,739 (306) (173) 7,260
Bank overdrafts (2,489) (4,524) - (7,013)
Cash and cash equivalents 5,250 (4,830) (173) 247
Bank loans (4,164) (4,326) 182 (8,308)
Lease liabilities (659) (396) 2 (1,053)
Net cash/(debt) 427 (9,552) 11 (9,114)
This statement of reconciliation of net cash flow to movement in net debt
above does not form part of the primary statements. Notes 1 to 12 form part of
these financial statements.
NOTES TO THE FULL YEAR RESULTS
1. BASIS OF PREPARATION
In accordance with Section 435 of the Companies Act 2006, the Group confirms
that the financial information for the years ended 30 September 2022 and 2021
are derived from the Group's audited financial statements and that these are
not statutory accounts and, as such, do not contain all information required
to be disclosed in the financial statements prepared in accordance with
UK-adopted international financial reporting standards. The statutory accounts
for the year ended 30 September 2021 have been delivered to the Registrar of
Companies. The statutory accounts for the year ended 30 September 2022 have
been audited and approved but have not yet been filed.
The Group's audited financial statements for the year ended 30 September 2022
received an unqualified audit opinion and the auditor's report contained no
statement under section 498(2) or 498(3) of the Companies Act 2006.
The financial information contained within this full year results statement
was approved and authorised for issue by the Board on 29 November 2022.
2. ACCOUNTING POLICIES
These financial statements have been prepared in accordance with the
accounting policies set out in the audited Group financial statements as at,
and for the year ended 30 September 2021.
There were no new standards and amendments to standards which are mandatory
and relevant to the Group for the first time for the financial year ended 30
September 2022 which had a material effect on this full year results
announcement.
3. ACCOUNTING ESTIMATES
The preparation of this statement requires management to make judgements,
estimates and assumptions that affect the application of accounting policies
and the reported amounts of assets, liabilities, income and expenses. In
preparing this preliminary statement, the significant judgements made by
management in applying the Group's accounting policies and the key sources of
estimation uncertainty were the same as those applied to the audited Group
financial statements as at, and for the year ended 30 September 2021.
4. GOING CONCERN
The Directors have concluded that it is reasonable to adopt the going concern
basis in preparing these financial statements based on the expectation that
the Group has adequate resources to continue as a going concern for a period
of 12 months from the date of these financial statements.
The process adopted to assess the viability of the Group involved the
modelling of a series of theoretical 'stress test' scenarios linked to the
Group's principal risks, most significantly severe business interruption like
that which was experienced during the pandemic, or that could arise through
the impact of climate change.
The current Global economic environment post-pandemic is still uncertain in
both domestic and international markets. We have seen supply-side challenges
and economic slowdown due to China's lockdowns, together with
higher-than-expected inflationary pressures, especially on raw material prices
and energy from Russia's invasion of Ukraine, all alongside a challenging
labour market.
Considering this, the Directors have modelled scenarios representing varying
degrees of severity and have considered the impact of changes in working
capital, foreign exchange rates, revenues and margins. These assumptions are
those that would arise from the aforementioned uncertainties and that would
adversely impact cash generation and profitability. Using these assumptions,
headroom and covenant compliance have been assessed throughout the going
concern (12-month) and viability (three-year) periods. The modelling indicated
that the Group would comply with its covenants throughout the tested periods.
A further 'reverse stress test' scenario was modelled to find a sustained
reduction in revenue that would give rise to a breach of the Group's covenant
conditions within the next 24 months. This scenario was then stress-tested
further by overlaying the adverse impact of a decline in profit margins.
At the year-end date, the Group had net debt of £22.4m, headroom on
facilities of £8.8m and was comfortably within its net debt to EBITDA ratio
covenant limit of 2.5x and interest cover limit of 4.0x. The Group has an
accordion facility of £6.5m and access to an uncommitted asset-backed
financing line should further funding be required. Facilities of £13.4m come
for renewal in April 2023, and for the purpose of the review these were
assumed not to be renewed.
Under the reverse-engineered scenario, it was determined that a continuous
decline in sales of greater than 12.5% per annum, or 8.0% per annum alongside
a 300bps decline in margin for two consecutive years, with no change to the
forecast operating costs and no mitigating measures put in place, would lead
to a breach in banking covenants around 22 months from the date of this report
and a breach in headroom in May 2023 if the Group fails to refinance any of
its facilities that fall for renewal, does not draw upon its uncommitted
facilities and does not implement any of the cash-saving measures it has at
its disposal. The Directors believe that the financial position of the Group
is sufficiently robust that it could renew or extend its facilities should it
wish to and consider it implausible that the Group would not act swiftly and
decisively to activate the cash generative mitigations it has at its disposal
should they be required.
Having considered the range of stress-test scenarios and the Group's proven
ability to adapt to and manage adversity, the Directors have not identified
any material uncertainties which would affect the Group's ability to continue
as a going concern for a period of at least 12 months from the date of this
announcement. Accordingly, they continue to adopt the going concern basis of
accounting in preparing these financial statements.
5. RISKS AND UNCERTAINTIES
The operation of a public company involves a series of risks and uncertainties
across a range of strategic, commercial, operational and financial areas. The
principal risks and uncertainties that could have a material impact on the
Group's performance over the next twelve months (for example, causing actual
results to differ materially from expected results or from those experienced
previously) are the same in all material respects as those detailed on pages
54 to 59 of the audited 2021 Annual Report and Financial Statements.
6. SEGMENTAL INFORMATION
Group
Business segments
IFRS 8 requires operating segments to be identified on the basis of internal
financial information reported to the Chief Operating Decision Maker ('CODM').
The Group's CODM has been identified as the Board of Directors who are
primarily responsible for the allocation of resources to the segments and for
assessing their performance. The disclosure in the Group accounts of segmental
information is consistent with the information used by the CODM in order to
assess profit performance from the Group's operations.
The Group operates one global business segment engaging in the manufacture and
supply of innovative ingredient solutions for the beverage, flavour, fragrance
and consumer product industries with manufacturing sites in the UK and the US.
Many of the Group's activities, including sales, manufacturing, technical, IT
and finance, are managed globally on a Group basis.
Geographical segments
The following table provides an analysis of the Group's revenue by
geographical market:
Revenue by destination 2022 2021
Total £'000
£'000 Total
United Kingdom 9,777 9,502
Rest of Europe - Germany 7,907 5,970
- Ireland 11,527 7,313
- Other 14,596 13,931
The Americas - USA 53,731 53,356
- Other 12,919 9,595
Rest of the World - China 7,901 7,440
- Other 21,827 17,219
140,185 124,326
All Group revenue is in respect of the sale of goods, other than property
rental income of £1,000 (2021: £18,000). No country included within 'Other'
contributes more than 5.0% of the Group's total revenue. The Group revenue
from the largest customer was £15,226,000 (2021: £10,331,000).
Non-current assets by geographical location, excluding deferred tax and
post-employment benefit surplus, were as follows:
Continuing operations 2022 2021
£'000 £'000
United Kingdom 44,952 41,622
United States 32,910 23,397
77,862 65,019
7. EXCEPTIONAL ITEMS
The exceptional items referred to in the income statement can be categorised
as follows:
2022 2021
£'000 £'000
Disposal of Northern Way premises
Gain on disposal of land and buildings 3,324 -
Less: tax effect of disposal - -
UK relocation project
Relocation expenses (1,800) (1,302)
Less: tax effect of relocation expenses 317 186
Restructuring costs
Restructuring costs (601) -
Less: tax effect of restructuring costs 114 -
1,354 (1,116)
The exceptional items all relate to non-recurring items.
On 28 February 2022, the Group successfully disposed of its former UK premises
at Northern Way, Bury St. Edmunds. The proceeds of the sale, net of selling
costs, were £5,597,000 and the associated gain on disposal was £3,324,000.
The gain on the sale of property is not expected to be taxable as indexation
allowances are available which fully offset the taxable gain.
Relocation expenses relate to one-off costs incurred in connection with the
relocation of the Group's UK operations that do not fall to be capitalised.
Restructuring costs relate to a significant change to the management and
executive leadership structure of the global business, which was announced in
May 2022. The restructuring costs consist of employment and termination costs
for those employees impacted. Payments to employees are those which are
contractually due under their existing terms and conditions and are therefore
considered to be fully allowable expenses for tax purposes. During the
financial year, payments totalling £387,000 had been made, with the cash flow
impact of the remaining costs expected to be settled in the following
financial year.
8. TAXATION
Analysis of tax charge in income statement:
2022 2021
£'000 £'000
Total Total
Current tax:
UK corporation tax on profits for the year 153 157
Adjustments to UK tax in respect of previous periods (231) (131)
Overseas corporation tax on profits for the year 2,069 3,882
Adjustments to overseas tax in respect of previous periods (52) (534)
Total current tax 1,939 3,374
Deferred tax:
Origination and reversal of temporary differences 726 945
Effect of change of tax rate on opening deferred tax (45) 183
Adjustments in respect of previous periods 244 (33)
Total deferred tax 925 1,095
Tax on profit on ordinary activities 2,864 4,469
Analysis of tax charge/(credit) in other comprehensive income:
2022 2021
£'000 £'000
Current tax:
Foreign currency translation differences (102) (18)
Total current tax (102) (18)
Deferred tax:
Cash flow hedges (4) (93)
Defined benefit pension scheme 2,068 135
Total deferred tax 2,064 42
Total tax charge recognised in other comprehensive income 1,962 24
8. TAXATION (continued)
Analysis of tax credit in equity:
2022 2021
£'000 £'000
Current tax:
Share-based payments (20) (116)
Deferred tax:
Share-based payments 444 (586)
Total tax credit recognised in equity 424 (702)
Factors affecting tax charge for the year:
The tax assessed for the year is different from that calculated at the
standard rate of corporation tax in the UK of 19.0% (2021: 19.0%). The
differences are explained below:
2022 2021
£'000 £'000
Total Total
Profit before tax multiplied by standard rate of UK corporation tax at 19.0% 3,074 3,727
(2021: 19.0%)
Effects of:
Expenses not deductible in determining taxable profit 268 660
Income not taxable in determining taxable profit (694) -
Research and development tax credits (243) (52)
Difference in tax rates on overseas earnings 678 479
Adjustments to tax charge in respect of prior years (39) (699)
Effect of change of tax rate on opening deferred tax (38) 354
Deferred tax not recognised (142) -
Total tax charge for the year 2,864 4,469
The Group's effective UK corporation tax rate for the year was 17.7% (2021:
22.8%). The effective tax rate of US-based earnings is 21.5% (2021: 21.9%).
The adjustments in respect of prior years relate to the finalisation of
previous year's tax computations.
9. DIVIDENDS
Equity dividends on ordinary shares:
Dividend per share for years
ended 30 September
2022 2021 2020 2022 2021
Pence Pence Pence £'000 £'000
Interim dividend 2.50p(3) 2.00p(2) 1.84p(1) 1,512 1,203
Final dividend 5.35p(4) 5.50p(3) 4.16p(2) 3,322 2,501
7.85p 7.50p 6.00p 4,834 3,704
1 Accounted for in the year ended 30 September 2020.
2 Accounted for in the year ended 30 September 2021.
3 Accounted for in the year ended 30 September 2022.
4 The proposed final dividend for the year ended 30 September 2022
of 5.35p pence will be voted on at the Annual General Meeting on 31 January
2023 and will therefore be accounted for in the financial statements for the
year ending 30 September 2023.
10. EARNINGS PER SHARE
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. The weighted average number of shares excludes
shares held by the Treatt Employee Benefit Trust, together with shares held by
the SIP Trust, which do not rank for dividend.
2022 2021
Profit after taxation attributable to owners of the Parent Company (£'000) 13,315 15,148
Weighted average number of ordinary shares in issue (No: '000) 60,400 60,125
Basic earnings per share (pence) 22.04p 25.19p
Diluted earnings per share
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.
The number of shares used to calculate earnings per share ('EPS') have been
derived as follows:
2022 2021
No ('000) No ('000)
Weighted average number of shares 60,578 60,310
Weighted average number of shares held in the EBT and SIP (178) (185)
Weighted average number of shares used for calculating basic EPS 60,400 60,125
Executive share option schemes 487 486
All-employee share options 148 210
Weighted average number of shares used for calculating diluted EPS 61,035 60,821
Diluted earnings per share (pence) 21.82p 24.91p
10. EARNINGS PER SHARE (continued)
Adjusted earnings per share
Adjusted earnings per share measures are calculated based on profits for the
year attributable to owners of the Parent Company before exceptional items as
follows:
2022 2021
£'000 £'000
Profit after taxation attributable to owners of the Parent Company 13,315 15,148
Adjusted for:
Exceptional items - gain on disposal of land and buildings (see note 7) (3,324) -
Exceptional items - relocation expenses (see note 7) 1,800 1,302
Exceptional items - restructuring costs (see note 7) 601 -
Taxation thereon (431) (186)
Adjusted earnings 11,961 16,264
Adjusted basic earnings per share (pence) 19.80p 27.05p
Adjusted diluted earnings per share (pence) 19.60p 26.74p
11. SHARE CAPITAL
Called up, allotted and fully paid 2022 2022 2021 2021
£'000 Number £'000 Number
At start of year 1,208 60,411,933 1,205 60,270,670
Issued in year 9 452,631 3 141,263
At end of year 1,217 60,864,564 1,208 60,411,933
The Parent Company has one class of ordinary shares with a nominal value of 2p
each, which carry no right to fixed income.
During the year the Parent Company issued 400,000 (2021: 100,000) ordinary
shares to the Employee Benefit Trust, and 52,631 (2021: 41,263) ordinary
shares to the SIP Trust, at nominal value of 2p per share, for the purpose of
meeting obligations under employee share option schemes.
12. ALTERNATIVE PERFORMANCE MEASURES
The Group has defined certain measures that it uses to understand and manage
performance. These non-GAAP measures are not defined under IFRS and are not
intended to be a substitute for any IFRS measures of performance. They have
been included to provide stakeholders with additional helpful information on
the performance of the business.
Return on average capital employed
Adjusted return on average capital employed (ROACE) is considered to be a key
performance indicator
(KPI), and is an APM which enables stakeholders to see the profitability of
the business as a function of
how much capital has been invested in the business.
The derivation of this measure, along with its statutory equivalent is shown
below:
ROACE - APM measure
Group 2022 2021
£'000 £'000
Total Equity 133,850 106,299
Net debt/(cash) 22,419 9,114
Capital employed 156,269 115,413
Interim total equity¹ 114,988 95,369
Interim net debt/(cash)¹ 19,787 4,468
Interim capital employed¹ 134,775 99,837
Average capital employed² 135,486 101,981
Adjusted operating profit³ 15,773 21,346
ROACE % 11.6% 20.9%
ROACE - statutory measure
Group 2022 2021
£'000 £'000
Average capital employed² 135,486 101,981
Profit before taxation 16,179 19,617
ROACE % 11.9% 19.2%
1 Interim total equity and interim net debt/(cash) for a given year are taken
from the unaudited half year condensed financial statements made out to 31
March, which can be found on www.treatt.com.
2 Average capital employed for a given year is calculated as the average of
the opening, interim and closing capital employed. Capital employed at 30
September 2020 was £90,693,000.
3 Adjusted operating profit for ROACE and ROCE purposes is operating profit
before exceptional items as defined in the Group income statement.
12. ALTERNATIVE PERFORMANCE MEASURES (continued)
Net debt/(cash) to adjusted EBITDA
The net debt/(cash) to adjusted EBITDA ratio is useful to ensure that the
level of borrowings in the
business can be supported by the cashflow in the business, and as it is
measured by reference to adjusted
EBITDA, is considered to be an APM.
The derivation of this ratio, along with its statutory equivalent measure is
shown below:
APM Measure
Group 2022 2021
£'000 £'000
Profit before taxation 16,179 19,617
Exceptional items (923) 1,302
Profit before taxation and exceptional items 15,256 20,919
Interest receivable (8) (12)
Interest payable 525 439
Depreciation of property, plant and equipment and right-of-use assets 2,476 1,705
Amortisation of intangible assets 215 93
Adjusted EBITDA 18,464 23,144
Net debt 22,419 9,114
Net debt to adjusted EBITDA 1.21 0.39
Statutory measure
Group 2022 2021
£'000 £'000
Profit before taxation 16,179 19,617
Interest receivable (8) (12)
Interest payable 525 439
Depreciation of property, plant and equipment and right-of-use assets 2,476 1,705
Amortisation of intangible assets 215 93
EBITDA 19,387 21,842
Net debt 22,419 9,114
Net debt to EBITDA 1.16 0.42
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