For the year ended 30 September 2003
“Earnings before interest, tax, depreciation and amortisation increased to £2.8 million (2002: £2.7m)”
We can report that earnings before interest, tax, depreciation and amortisation increased to £2.83 million (2002: £2.68 million) but owing to increased borrowing and depreciation charges, profit before tax and exceptional items for the year was £2.09 million (2002: £2.77 million). Group turnover for the year showed steady growth, increasing by 3.1% to £31.68 million (2002: £30.74 million). Earnings per share before exceptional items fell to 14.6 pence (2002: 19.7 pence) whilst the level of the Group’s net debt/equity ratio ended the year at 26%. This was a reduction on the half year position of 32% and in line with last year’s level of 25%.
The Board is recommending a final dividend of 5.7 pence (2002: 5.7 pence), leaving the total dividend for the year unchanged at 8.4 pence per share.
As forecast last year, 2003 was a year of continuing change and modernisation for Treatt in an increasingly challenging market place. Therefore, the results reflect our increased level of capital investment, both in the UK and the USA, leading to higher depreciation charges. Similarly, the additional cost of borrowing at fixed interest rates to finance Treatt USA’s move to a new site in Lakeland, Florida, has had a significant effect.
During the year R. C. Treatt, our UK operating company, incurred exceptional reorganisation costs totalling £139,000 spread across various departments, where measures have been taken to ensure staffing levels are more closely aligned to our business needs in the current competitive economic environment. The benefits of these cost savings will be experienced in the current financial year.
Orange oil based products continued as the most significant component of sales, representing approximately 20% of Group sales although gross profits in 2003 were lower in the absence of last year’s significant stock profits. Sales of distributed aroma chemicals out of the UK were maintained at last year’s levels despite strong competitive pressures.
Treatt USA began the year at its new purpose-built 65,000 square foot facility in Lakeland and in spite of the increased operational pressures caused by the move, Treatt USA’s sales and gross contribution were maintained, thus creating an excellent platform from which to develop its future potential. Sales of TreattaromeTM (‘From The Named Food’) products continued to perform well throughout the year. The Group’s investment in Treatt USA over the last two years has been an essential part of the Group’s strategy for developing a strong market presence in the United States, with the previous premises being unsuitable for future expansion. Consequently, the future growth potential of the Group has been significantly enhanced.
Having successfully carried out a partial implementation of the JD Edwards Enterprise Resource Planning (ERP) system at Treatt USA last year, the full UK implementation is due to go live in 2003/4, with 95% of the investment now complete. This is an important and challenging development for the Group as all systems throughout R. C. Treatt will become fully integrated, including sales order processing, purchasing, manufacturing, quality control, shipping and finance. This will result in efficiency savings over time as well as enabling the business to expand without a substantial increase in general overhead costs. Indeed, the existing systems have been restrictive as they no longer satisfy the requirements of the Group.
Pension and Healthcare Costs
Following the closure of the R. C. Treatt final salary pension scheme to new entrants in 2001, a further review of the scheme was carried out in 2003 following the latest triennial valuation. As a consequence, further action was taken to reduce the scheme’s funding deficit which, as explained in the Financial Review, was reduced by £1.2 million. Steps have also been taken to restrict the increase in Treatt USA’s healthcare costs.
Post Balance Sheet Events
Since the year end we have negotiated the potential disposal of the former site in Florida through a lease-purchase arrangement. Treatt USA will receive lease rentals for eleven months, with the tenant obliged to purchase the property at a pre-agreed price in September 2004, subject to environmental clearance and satisfactory bank valuation. Should the tenant not proceed with the purchase, the deposit will be forfeited. See the Financial Review for further information.
Prospects
R. C. Treatt’s order book at the year end was at a similar level to last year and at Treatt USA order books are now significantly higher than last year. Whilst we are optimistic for sales growth, the results for 2004 will continue to reflect increased depreciation and borrowing costs following the higher level of capital investment over the last two years both in the UK and the USA. The Board believe this investment was essential in order to increase the Group’s profitability in the United States and operate more efficiently worldwide.
The orange oil market remains the area of greatest uncertainty for the coming year as it continues to trade at a higher price than normal. However, we do expect orange oil prices to return to more historically normal levels in the latter half of 2004. The Group’s stock holdings of orange oil will be managed pro-actively in order to minimise the potential impact of falling prices.
Sales so far at Treatt USA in the first quarter have increased year on year, particularly because TreattaromeTM sales are performing well as production begins by a customer for a national product launch expected in the New Year.
We firmly believe that, with the continued consolidation within the industry, together with increasing trends towards globalisation, there are few independent flavour and fragrance ingredient companies as well placed as Treatt PLC to service existing and potential new customers from both sides of the Atlantic.
People
On behalf of our Shareholders, the Board would like to place on record its thanks to all our employees in England and the United States for their support and dedication throughout the year. Implementing the Group’s capital and IT investment programmes in today’s challenging economic climate requires a loyal and committed work force and we are proud of the fact that we have a healthy balance between new employees with fresh ideas and long serving, experienced colleagues.
We are also pleased to welcome Richard Hope as Finance Director, who joined the Group in May 2003. Having qualified as a Chartered Accountant in 1990 with PriceWaterhouseCoopers, Richard has been Head of Finance at Hampshire Cosmetics Limited for the last seven years.
EDWARD DAWNAY
Chairman
5 December 2003