Performance Analysis

Profit and Loss account

Group turnover increased by 2.2% during the year to £32.52 million (2004: £31.81 million). In constant currency, sales at our USA subsidiary, Treatt USA, increased in US Dollars by 2%, whilst R C Treatt’s sales rose by 3.7%. Earnings before interest, tax, depreciation and amortisation for the year grew by 36.1% to £4.51 million (2004: £3.31 million) and Group profit before tax, before exceptional items, rose by 49.8% to £3.46 million (2004: £2.31 million).

The total dividend for the year has been increased by 8.0% to 9.5 pence per share, resulting in dividend cover of 2.5 times earnings.

The increase in profitability came from both R C Treatt and Treatt USA who both benefited from the increase in prices for both orange and grapefruit oil based products. This was further supported by continued strong growth in the TreattaromeTM  product  range  in the US whilst sales of aroma  chemicals  by R C Treatt held up well despite stiff international competition.

Gross margins of 32.5% were achieved this year (2004: 26.6%) largely due to the increased margins which arose on orange and grapefruit oil products. Over the year there was a very small strengthening of the US Dollar/Sterling exchange rate although there was a 13% range of $1.73 to $1.95 during the year. Assisted by the ERP system, aroma chemical margins were maintained through improved control of the purchasing and selling of thousands of chemicals.

The Group’s operating costs increased by 16.6% to £7.0 million (2004: £6.0 million). This increase was expected as Treatt USA had reached a level of activity which required a stepped increase in its overhead costs in order to support the growth which had taken place and to ensure it was well placed to manage the expected growth of the next few years. As a result total staff numbers across the Group increased to 173 employees, having grown by 5.5% on the previous year. This increase in headcount was predominately a consequence of the growth at Treatt USA. (See Operating Review for further explanation).

The Group’s net interest payable fell by 27% to £90,000 (2004: £123,000) having fallen by 41% the year before as a consequence of the elimination of any short term debt. This leaves an outstanding balance of £2.3 million relating to the 20 year Industrial Development Loan which was used to finance the purchase of the Lakeland facilities for Treatt USA.

Earnings per share before exceptional items increased by 48.1% to 23.7 pence per share (2004: 16.0 pence). The earnings per share after exceptional items increased by 42.8%. Both measures have been shown in order to provide a consistent measure of performance over time and excludes those shares which are held by the Treatt Employee Benefit Trust (EBT) since they do not rank for dividend.

2005 was the second year of the Group’s new programme of offering share saving schemes on an annual basis for staff in the UK and USA. This was the first year in which Treatt USA staff were able to exercise their options, whilst the UK schemes provide for three-year savings plans. As part of this programme, options were granted over a further 42,000 shares during the year. Following its establishment in 2004, the EBT acquired a further 200,000 shares during the year in order to satisfy future option schemes without causing any shareholder dilution.

Cashflow

The cash position for the year was strong with a net outflow of £0.5m in spite of an increase in stock investment of £3m and capital expenditure of £0.9m. Cash inflow from operating activities was £2.6 million (2004: £5.0 million) with the reduction being attributable to significant stock increases. This investment in stock followed the reduction in 2004 when orange oil prices fell sharply and was more in line with the levels seen in 2003.

Capital expenditure for the year increased to £0.9m (2004: £0.6m) due to the acquisition of the second site in Lakeland, Florida, details of which are provided in the Operating Review.

Balance Sheet

Over the year Group shareholders’ funds have grown to £18,538,000 (2004: £17,325,000), with net assets per share increasing to £1.80 (2004: £1.68). This represents an increase of 19% over the last five years. Net current assets represent 64% of shareholders’ funds and the Group’s land and buildings are all held at historical cost. It should be noted, however, that net assets have been reduced by £625,000 as a result of the purchase of shares by the EBT due to the accounting requirements of UITF Abstract 38. This impact will be reversed when these shares are used to satisfy employee share saving schemes.

Group Tax Charge

The Group’s current year tax charge of £1,107,000 represents an effective tax rate of 32% (2004: 29%). The overall tax charge of £1,082,000 has increased faster than the increase in profits as more of the Group’s profit is being subject to USA state and federal taxes at a combined marginal rate of approximately 38%. The US tax charges have also increased disproportionately due to the expiry of certain capital tax relief in relation to the Lakeland property.

Treasury Policies

The Group operates a conservative set of treasury policies to ensure that 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 Group’s overall hedging activity as explained below.

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. This risk manifests itself in a number of ways.

Firstly, the value of the foreign currency net assets of Treatt USA can fluctuate with Sterling. Currently these are not hedged, as the risks are not considered to justify 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 three currencies in addition to Sterling, with the US Dollar being by far the most significant. Even if a sale is made in Sterling, its price may be set by reference to its US Dollar denominated commodity price and therefore have an impact on the Sterling gross margin. Raw materials are also mainly purchased in US Dollars and therefore a US Dollar bank account is operated, through which Dollar denominated sales and purchases flow. If there is a mismatch in any one accounting period and the Sterling to US 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.

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 competitiveness.

The Group therefore has a policy of maintaining the majority of cash balances, including the main Group overdraft facilities, in US Dollars as this is the most cost effective means of providing a natural hedge against movements in the US Dollar/Sterling exchange rate. Currency accounts are also run for the other main currencies to which R C Treatt is exposed. This policy will protect the Group against the worst of any short-term swings in currencies.

International Financial Reporting Standards

As a company listed on the London Stock Exchange, Treatt is required to implement International Financial Reporting Standards (IFRS) with effect from accounting periods beginning on or after 1 January 2005. Therefore the next set of full financial statements for the year ended 30 September 2006 will be the first time the Group’s results will be published using IFRS. Preliminary work has been completed to assess the full impact of IFRS on the Group’s balance sheet and profit and loss account, the result of which is that the Board believe that the most significant effect will flow from IAS19:Employee Benefits which will require the surplus or deficit in the defined benefit pension scheme operated by R C Treatt to be brought on to the balance sheet using similar calculations as prescribed by FRS17 (see note 21). The deficit of the scheme as at 30 September 2005 was £2.3 million (net of deferred tax).