11th Dec 2006 07:01
Treatt PLC11 December 2006 TREATT PLC PRELIMINARY STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2006 Treatt PLC, the manufacturer and supplier of flavour and fragrance ingredients,primarily natural essential oils and natural extracts, announces today itspreliminary results for the year ended 30 September 2006. Summary Group revenue increased by 8.9% to £35.4 million (2005: £32.5 million)Despite the absence of last year's substantial one-off stock profits: Profit before tax only down 3.5% to £3.3 million (2005: £3.4* million)EBITDA only down 3.3% to £4.4m (2005: £4.5*m)Dividends increased 10.5% to 10.5p per share (2005: 9.5p)Earnings per share unchanged 23.3p (2005: 23.3*p) * Restated in accordance with International Financial Reporting Standards. Edward Dawnay, Chairman commented: "The Group had a good underlying performance with sales increasing by 9% to£35.4m. R.C. Treatt, the Group's UK operating company continued to perform welland has gained significant benefits from the implementation and development ofthe Group's Enterprise Resource Planning (ERP) system, with sales of aromaticchemicals having risen by 15%. Treatt USA experienced a difficult year but alsosaw some sales growth. The outlook for 2007 is one of continuing revenue growthbut we expect margins to remain under pressure." Enquiries:Treatt plc Tel: 01284 702500Hugo Bovill Managing DirectorRichard Hope Finance Director (Mobile on 11 December 2006: 07881 508437) CHAIRMAN'S STATEMENT________________________________________________________________________________ "The Group had a good underlying performance with sales increasing by 9% to£35.4m" 2006 saw Group revenue for the year rise by 8.9% to £35.41m (2005: £32.52m).Group earnings before interest, tax, depreciation and amortisation decreased by3.3% to £4.36m (2005 restated*: £4.51m) with profit before tax for the yearreducing by 3.5% to £3.29m (2005 restated: £3.41m). Earnings per share remainedunchanged at 23.3 pence (2005 restated: 23.3 pence). The level of the Group'snet debt/equity ratio ended the year at 26% (2005 restated: 12%). The Board is recommending a final dividend of 7.1 pence (2005: 6.4 pence),increasing the total dividend for the year by 10.5% to 10.5 pence (2005: 9.5pence) per share. The final dividend will be payable on 9 March 2007 to allshareholders on the register at close of business on 2 February 2007. The underlying performance of the Group as a whole was good because, despite theabsence of last year's substantial one-off stock gains on orange and grapefruitoil products, Group profit before tax has only reduced by £0.12m. In otherwords, what was a short term profit in 2005 has become underlying long termprofitability in 2006. The highlight of the year has been the continued strong performance of R.C.Treatt, the Group's UK operating subsidiary. Turnover has increased by 10% to£27.5m, with profits also increasing by 9%, again despite the absence of lastyear's one-off stock gains. Over the last two years, R.C. Treatt's profit beforetax has increased by 64%. This growth has been broadly spread, but the profitsfrom sales of aroma and speciality chemicals has been particularly strong,underpinned by a higher petroleum price and generally increasing prices for mostcommodity raw materials. However, most of the growth in sales and profit fromaromatic chemicals has arisen from an increase in the volume of orders received,resulting in sales growth of 15%. This activity has particularly prospered onthe back of the Enterprise Resource Planning (ERP) computer system which wasinstalled almost three years ago. Over the course of the year, orange priceshave been relatively stable and remained at around $2/kg, but margins havetightened resulting in a £0.4m reduction in orange oil profits. Treatt USA, on the other hand, have experienced a difficult year in the absenceof last year's profits from grapefruit oil. Although turnover increased by 4%,profits fell as high margin grapefruit business was replaced with much lowermargin commodity sales. However, the underlying growth potential of Treatt USAremains very strong with sales of our innovative TreattaromeTM ('From The NamedFood') distillate products continuing to perform well. In particular we aredelighted by the launch of a wide range of new TreattaromeTM products includingCocoa, Raspberry, Blueberry and Strawberry. During the year we were also pleased to announce the opening of a sales office,Treatt China, in Shanghai, where we saw sales in China & Hong Kong increase by18% over the previous year. Treatt has traded extensively with China for manyyears and we believe that the creation of Treatt China will enable the Group toincrease substantially its activity in the region over the coming years. Treatt is proud that it continues to enhance its reputation as a world leader inagricultural food science and analysis, whilst continuing to be a leadingindependent manufacturer of natural ingredients for the flavour and fragranceindustry, with a presence in Europe, the United States and China. International Financial Reporting Standards (IFRS) As previously announced, these results are the first set of results to bepublished in accordance with IFRS. Following the publication of restated resultsfor the year ended 30 September 2005, these results confirm that IFRS have nothad a material impact on the Group's Income Statement and that, as expected, themost significant impact flows from recognising a pension liability (net ofdeferred tax) of £2.2m (2005: £2.3m) which has been offset by a reduction individends payable of £1.05m (2005: £0.95m). See the Financial Review for furtherdetails. Pension Deficit The triennial actuarial valuation of R.C. Treatt's final salary pension scheme,which took place as at 1 January 2006, resulted in an increase in the actuarialdeficit from (£2.7m) to (£3.0m). This is despite the scheme having been closedto new entrants in 2001, pensionable salaries frozen in real terms in 2003 andinvestment returns exceeding expectations over the period by £1.8m. As a result,the company decided to make additional one-off contributions totalling £1.5m, ofwhich £0.5m was paid in July 2006, and a further £1m was paid after the year endin October 2006, thereby halving the deficit. For further information on thisplease see the Financial Review. Prospects Following the last few difficult years, the flavour and fragrance industry isnow beginning to see a return to growth. However, the industry continues to beaffected by significant mergers and acquisitions. Whilst the new financial yearhas got off to a disappointingly slow start, Group sales are expected tocontinue to increase over the coming year although, yet again, margins couldtighten further. After a number of difficult years in the UK and Europe, we arenow seeing positive signs of growth in the domestic and continental Europeanmarkets and we believe this growth is set to continue over the coming year. Aswell as continuing growth in China, we are also looking forward to a continuedstrong performance in the Middle East. We believe that the ERP computer system will continue to unlock furtherpotential for improvements in service delivery, sales growth and improvedmargins, especially at R.C. Treatt. We are also continuing to develop our newlyinstalled bar coding system which will further enhance the Group's capabilities.Having significantly expanded its TreattaromeTM range, Treatt USA are lookingforward to some sales growth in 2007 both from Treattaromes and also from itsbroad portfolio of citrus products, with margins remaining steady. Generally, we are expecting essential oil prices to remain firm with orange oilcontinuing within a relatively narrow pricing band whilst petroleum pricesremain high. People During the year we were deeply saddened by the death of Geoffrey Bovill whoserved as Chairman and as a Director of Treatt for 57 years, retiring from theBoard last year. Geoffrey made a highly significant contribution to the Groupand we all miss him, his experience and his wisdom very much indeed. Last, and certainly not least, the Board would like to place on record itsthanks for the tremendous efforts made by colleagues throughout the world.Without their dedication, commitment and hard work over the past twelve months,Treatt would not be as well placed as it is today to achieve further successesin the future. Edward DawnayChairman8 December 2006 * '2005 restated' means that the prior year's results have been restated inaccordance with International Financial Reporting Standards. OPERATING REVIEW 2006________________________________________________________________________________ "The £1.2m Enterprise Resource Planning (ERP) system continues to deliversignificant operational improvements" 2006 was another year of operational improvement throughout the Treatt Group. Asa result of continuing development of the ERP system, which was first installedin the UK in January 2004, R.C. Treatt has continued to go from strength tostrength through continuous operational and efficiency improvements to itsmanufacturing and planning processes. Similarly, the integration of Treatt USA into the main ERP system in mid 2005has provided the Group with a global platform from which to develop and enhanceoperational activities. The Group's investment in ERP of £1.2m is being depreciated over four years forhardware and seven years for software and will be fully depreciated in 2010.Ongoing enhancements to the system, such as the integration of bar coding andthe creation of a sophisticated stock level management system has enabled R.C.Treatt, in particular, to be able to estimate, with a high degree of accuracy,the likely demand and order profiles for a significant proportion of theCompany's products. This, in turn, enables customers to receive a quick,reliable and high quality service. Following the acquisition last year of a further 6.5 acres of land together with9,000 sq. ft. of warehousing and 2,500 sq. ft. of office space adjacent to ourexisting facilities in Lakeland, Florida, the Group now owns the freehold on 23acres of land and property in the UK and USA. Consequently, we are extremelyfocussed on maximising the potential from our properties and are constantlyseeking ways of improving our use of the resources available to us. As changes in legislation and regulation are becoming more rapid and ever morecomplex, Treatt are committed to playing an active role in debating, lobbyingand implementing change. Specifically, the new European REACH (Registration,Evaluation and Authorisation of Chemicals) legislation will have a major impacton the industry over the next few years and we have already taken early steps toensure that we are well placed to implement the requirements of this highlycomplex and costly legislation as and when required. Treatt continues to play anactive role in trade organisations throughout the industry, with the Group'sManaging Director currently holding the position of President of theInternational Federation of Essential Oils and Aroma Trades (IFEAT). Treatt continues to trade with almost one hundred countries around the world andit is, therefore, especially well placed to meet the needs of major multinational businesses that look to Treatt to address seamlessly the manycomplexities of importing and exporting goods to or from any corner of theworld. Trading Group After many years of cyclical volatility, the price of orange oil, an orangejuice by-product, has been relatively stable over the last year, remainingwithin a narrow range of $1.80 - $2.20 per kilo. The high price of petroleum hasresulted in a significantly higher 'floor' to orange oil prices regardless ofcrop and weather forecasts. Sales of orange oil products continue to represent15% (2005: 15%) of Group sales and as a result of some long term fixed pricecontracts which were negotiated when the market price was lower, orange oilprofits fell by £0.7m compared to the previous year. R.C. Treatt Revenue increased by 10% with sales to the top ten customers again representingjust over one third of turnover. In terms of activity levels, there was a 4%increase in the number of orders. The strong global customer base of R.C. Treattremains widely spread both in terms of size and location, thereby providing awell balanced risk profile. As expected, however, gross margins for the yearfell back due to the absence of the one-off stock gains referred to in theChairman's Statement. The Company is now well placed to focus and target itsstrategic growth in specific areas, of which sales of mint oil products andsales to confectionery customers are proving a particular success. Treatt USA 2006 was a disappointing year with US Dollar sales growth of just 4%. The weakerthan expected revenue, combined with a significant fall in citrus oil profitsfollowing the one-off gains the previous year, resulted in much lower profitsthan in 2005, although profitability does remain healthy. TreattaromeTM productscontinue to provide exciting and innovative opportunities for growth. Treatt China During the year, the Board decided that the time was right to build on theGroup's existing trading activities and relationships by opening arepresentative office in Shanghai. Sales to China (& Hong Kong) increased by 18%compared to 2005 and further double digit growth is expected year on year overthe next three years. Investment for the Future R.C. Treatt The level of capital expenditure in 2006 of £0.6m (2005: £0.4m) was, asexpected, in line with historic levels. This included a number of value-addedinitiatives in the distillation area which will increase capacity with a payback of less than twelve months. In addition, the new bar coding systemcontinued to be extended to new operational activities within the Company whichwill further enhance the Company's efficiencies and customer service. Over thecoming year, the Company is intending to increase significantly its investmentin the distillation area where the majority of high value added products areproduced. In addition, ongoing changes to legislation and regulations willrequire further plant and machinery investment throughout the site. As ever, theCompany will keep under constant review the facilities and logistical set up atits plant in England and will make appropriate investments as and when required. Treatt USA Over the coming year, Treatt USA will be expanding its laboratories andrelocating a number of administration functions to the new building acquiredlast year. In addition, they will continue to invest in the TreattaromeTMbusiness and are planning to install a new pilot plant for Research andDevelopment into new essential oil distillation products. In addition, there maybe some purely "business driven" capital expenditure which may arise in relationto new business. Research and Development (R&D) As well as the investment referred to above, during the year R.C. Treattinvested in a new, multi-functional pilot plant which is being used primarilyfor R&D. The new pilot plant at Treatt USA (referred to above) will also enablethe technical team in the US to develop and test new techniques and processes.In addition to the on-going strengthening of our R&D capabilities, the Groupwill continue to invest in high calibre technical personnel in order to enhancethe Group's service offering to its customers. The Group also carries out asignificant amount of global research into new and changing raw materials fromaround the world and continues to develop close partnerships with companies inproducing countries in order to develop new sources of raw materials on afinancially sustainable basis. Personnel As previously announced, at the start of the year new flexible contracts wereintroduced for operational and technical personnel at R.C. Treatt. These newcontracts have modernised working practices in the UK and enables the Group torespond competitively to short term fluctuations in demand. Over the past year,Treatt USA have implemented a job evaluation and career progression programmeenabling employees to progress within the organisation when they reach skilllevels which are required by the business. FINANCIAL REVIEW 2006_______________________________________________________________________ "Dividends increased by 10% following strong underlying performance" Performance Analysis Income Statement Group revenue increased by 8.9% during the year to £35.41m (2005 restated:£32.52m). R.C. Treatt's sales rose by 9.6% whilst in constant currency, sales atour USA subsidiary, Treatt USA, increased in US Dollars by 3.7%. Earnings beforeinterest, tax, depreciation and amortisation for the year fell by 3.3% to £4.36m(2005 restated: £4.51m) and Group profit before tax similarly fell by 3.5% to£3.29m (2005 restated: £3.41m). These results were achieved despite the absence of last year's substantialone-off stock gains. In view of this the Board believe that the underlyingperformance of the Group was strong and are, consequently, able to increase thetotal dividend for the year by 10.5% to 10.5 pence per share, resulting individend cover remaining at more than twice earnings. Whilst, as expected, there was a substantial reduction in profits from orangeand grapefruit oil products, overall profitability held up better than expected,principally as a result of strong growth from sales of aromatic chemicals whichincreased by 15% year on year. Gross margins of 28.6% were achieved this year (2005: 32.5%) despite the absenceof last year's increased margins which had arisen on orange and grapefruit oilproducts. Over the last year, Aroma Chemical margins have remained firm despitefierce competition as customers look to Treatt not just for competitive pricing,but excellent service too. Over the year the US Dollar (being Treatt's mostsignificant currency) weakened from $1.77 to $1.87, a movement of 5.6% whichcreated a natural downward pressure on margins. The Group's administrative expenses fell by a satisfactory 5.7% to £6.6m (2005:£7.0m). This decrease reflects a 'levelling out' of the Group's overhead basefollowing a stepped change in the infrastructure at Treatt USA over the lastthree years. The 2006 administrative expenses of £6.6m are 10% higher than in2004. Staff numbers across the Group increased to 180 employees, having grown by4% on the previous year. This increase in headcount included some keyappointments in sales, operations and technical laboratory staff in the UK inorder to further enhance R.C. Treatt's innovative capabilities for the future. The Group's net finance costs increased by 47% to £210,000 (2005 restated:£143,000) reversing a declining trend for the last few years. This is largely aconsequence of the sharply increased US base rates over the last two yearstogether with an increase in base rates in the UK. As explained below, totalborrowings were also increased. Interest cover for the year was still acomfortable 17 times (2005 restated: 25 times). Earnings per share for the year remained constant at 23.3 pence per share (2005restated: 23.3 pence). The calculation of earnings per share excludes thoseshares which are held by the Treatt Employee Benefit Trust (EBT) since they donot rank for dividend. During the year the Group continued its programme of offering share savingschemes on an annual basis for staff in the UK and USA. Under US taxlegislation, staff at Treatt USA are able to exercise options annually, whilstthe UK schemes provide for three-year savings plans. As part of this programme,options were granted over a further 51,000 shares during the year. Following itsestablishment in 2004, the EBT currently holds 262,000 shares (2005: 300,000)acquired in the market in order to satisfy future option schemes without causingany shareholder dilution. Cash Flow During the year, total borrowings of the Group increased by £2.6m to £4.6m(2005: £2.0m). However, the underlying cash performance of the Group remainsstrong since the increased borrowings can be entirely attributed to increasedinventory balances and additional pension contributions. The Group remainscommitted to holding appropriate levels of inventory in order to secure supplyand maintain long term delivery commitments to customers. Capital expenditure for the year remained steady at £0.8m (2005: £0.9m), detailsof which are provided in the Operating Review. Balance Sheet Over the year Group shareholders' funds have grown to £18,141,000 (2005restated: £17,220,000), with net assets per share increasing to £1.76 (2005restated: £1.67). Net current assets represent 75% (2005 restated: 74%) ofshareholders' funds and the Group's land and buildings are all held athistorical cost. It should be noted, however, that net assets have been reducedby £546,000 (2005: £625,000) as a result of shares held by the EBT due to theaccounting requirements for employee trusts. This impact will be reversed whenthese shares are used to satisfy employee share saving schemes. Treasury Policies The Group operates a conservative set of treasury policies to ensure that nounnecessary risks are taken with the Group's assets. No investments other than cash and other short-term deposits are currentlypermitted. Where appropriate these balances are held in foreign currencies, butonly 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 bymovements in certain exchange rates, principally between Sterling and the USDollar. This risk manifests itself in a number of ways. Firstly, the value of the foreign currency net assets of Treatt USA canfluctuate with Sterling. Currently these are not hedged, as the risks are notconsidered to justify the cost of putting the hedge in place. Secondly, with R.C. Treatt exporting to over 80 countries, fluctuations inSterling's value can affect both the gross margin and operating costs. Sales areprincipally made in three currencies in addition to Sterling, with the US Dollarbeing by far the most significant. Even if a sale is made in Sterling, its pricemay be set by reference to its US Dollar denominated commodity price andtherefore have an impact on the Sterling gross margin. Raw materials are alsomainly purchased in US Dollars and therefore a US Dollar bank account isoperated, through which Dollar denominated sales and purchases flow. If there isa mismatch in any one accounting period and the Sterling to US Dollar exchangerate changes, an exchange difference will arise. Hence it is Sterling's relativestrength against the US Dollar that is of prime importance. As well as affecting the cash value of sales, US Dollar exchange movements canalso have a significant effect on the replacement cost of stocks, which affectsfuture 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 mostcost effective means of providing a natural hedge against movements in the USDollar/Sterling exchange rate. Currency accounts are also run for the other maincurrencies to which R.C. Treatt is exposed. This policy will protect the Groupagainst 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 toimplement International Financial Reporting Standards (IFRS) with effect fromaccounting periods beginning on or after 1 January 2005. Therefore these are thefirst set of full financial statements which have been published using IFRS. Themost significant effect of IFRS flows from IAS 19: Employee Benefits whichrequires the surplus or deficit in the defined benefit pension scheme operatedby R.C. Treatt to be brought on to the balance sheet using similar calculationsas previously prescribed by FRS 17. The only other material impact of IFRSrelates to the treatment of dividends which are now only accounted for when theyare paid (interim dividends) or approved at the Annual General Meeting (finaldividends). This has had the positive effect of reducing the Company'sliabilities by approximately £1m. The remaining impact of IFRS has resulted in asignificant increase in the level of detail and complexity contained withinthese financial statements which have consequently increased in volume by over25% to 54 pages. Final Salary Pension Scheme Every three years the pension scheme actuary carries out a full actuarial reviewof the final salary pension scheme to assess the extent to which R.C. Treatt'scurrent contribution rates to the scheme are expected to meet the futureliabilities of the scheme. In addition, the trustees of the scheme are requiredto discuss with the Company the latest guidance from the Pension Regulator thatcontribution rates should be set to clear any deficit within 10 years. The scheme has been closed to new entrants since 2001 and 'final salaries' werefrozen in real terms in 2003. The scheme has also enjoyed excellent investmentreturns over the last three years. Despite these factors, the 2006 actuarialreview reported an increase in the actuarial deficit (which should not beconfused with the IAS 19 deficit referred to above). The movement in thisdeficit can be explained as follows: Analysis of Actuarial Deficit £'000Original deficit at 1 January 2003 (2,736)Effect of capping pensionable salary increases to RPI 896Revised deficit at 1 January 2003 (1,840)Interest on deficit (421)Investment return higher than expected 1,813Company contributions in excess of benefits accruing over 375three yearsChange of actuarial assumptions (3,092)Miscellaneous items 143 Deficit at 1 January 2006 (3,022) The main explanation as to why the deficit has increased is that the actuarialassumptions, largely in relation to life expectancy, increased the liabilitiesof the scheme by more than £3m. Following the actuarial review, the Company metwith the trustees of the scheme and agreed to take the following actions: (1) To make two additional special contributions in July andOctober 2006 totalling £1.5m; and (2) To increase on-going contributions to £630,000 per annum(previously £445,000 per annum) increasing by RPI. As a result of these actions, the deficit in the pension scheme is currentlyexpected to be eliminated by 2017, assuming actuarial assumptions remainunchanged. Group Tax Charge The Group's current year tax charge of £788,000 (2005: £1,159,000) represents aneffective tax rate of 24% (2005 restated: 34%). This is significantly lower thanthe standard rate of UK corporation tax of 30% as a result of tax reliefreceived in relation to cash contributions to the final salary pension schemeduring the year including a one-off payment of £465,000. Similarly, in 2007 theGroup expect to receive additional tax relief of £300,000 in relation to aone-off payment of £1m made to the pension scheme in October 2006 (see postbalance sheet events note in the Directors' Report). The overall tax charge of£956,000 (2005 restated: £1,070,000) has fallen in line with profits. Lastyear's estimated Florida state tax of $102,000 was reduced to $49,000 when thereturns were finalised, resulting in the prior year tax adjustment disclosed innote 4. GROUP INCOME STATEMENT Notes 2006 2005 £'000 £'000 (Restated) Revenue 3 35,411 32,521 Cost of sales (25,292) (21,952) Gross profit 10,119 10,569 Administrative expenses (6,621) (7,020) Operating profit 3,498 3,549 Finance revenue 243 176Finance costs (453) (319) Profit before taxation 3,288 3,406 Taxation 4 (956) (1,070) Profit for the year attributable to 2,332 2,336equity shareholders Earnings per share: Basic 6 23.3p 23.3pDiluted 6 23.2p 23.2p All amounts relate to continuing operations GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE 2006 2005 £'000 £'000 (Restated) Profit for the period 2,332 2,336 Currency translation differences on (293) 123foreign currency net investmentActuarial loss on defined benefit pension (389) (257)schemeDeferred taxation on actuarial loss 117 77 Total recognised net income for the 1,767 2,279period GROUP BALANCE SHEET 2006 2005 £'000 £'000 (Restated) ASSETS Non-current assets Property, plant and equipment 8,484 8,650 Intangible assets 581 724 Deferred taxation 457 521 9,522 9,895 Current assets Inventories 13,958 11,395 Trade and other receivables 6,389 5,718 Cash and cash equivalents - 297 20,347 17,410 Total assets 29,869 27,305 LIABILITIES Current liabilities Bank loans and overdrafts (2,710) (144) Trade and other payables (3,790) (3,934) Corporation tax payable (211) (589) (6,711) (4,667) Net current assets 13,636 12,743 Non-current liabilities Bank loans (1,927) (2,179) Post-employment benefits (3,090) (3,239) (5,017) (5,418) Total liabilities (11,728) (10,085) Net assets 18,141 17,220 SHAREHOLDERS' EQUITY Called up share capital 1,029 1,029 Share premium account 2,143 2,143 Own shares in share trust (546) (625) Employee share option reserve 34 14 Foreign exchange reserve (992) (699) Profit & loss account 16,473 15,358 Shareholders' Equity 18,141 17,220 GROUP STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 2006 2005 £'000 £'000 (Restated)Total recognised net income for the period 1,767 2,279 Dividends (949) (881) Share-based payments 23 12 Movement in own shares in share trust 79 (347) Gain on release of shares in share trust 1 - Increase in shareholders' equity 921 1,063 Opening shareholders' equity 17,220 16,157 Closing shareholders' equity 18,141 17,220 GROUP CASH FLOW STATEMENT 2006 2005 £'000 £'000 (Restated)Cash flow from operating activitiesProfit before taxation 3,288 3,406Adjusted for: Foreign exchange (gain)/loss (210) 104 Depreciation of property, plant and 685 738 equipment Amortisation of intangible assets 182 225 Loss on disposal of property, plant and 52 135 equipment Loss on disposal of intangible assets 2 - Net interest payable 235 90 Share-based payments 23 12 (Decrease)/increase in post-employment (73) 38 benefit obligation excluding special pension contributionOperating cash flow before movements in 4,184 4,748working capital and special post-employment benefitcontribution Special post-employment benefit (465) - contribution Changes in working capital: Increase in inventories (2,563) (3,040) (Increase)/Decrease in trade and other (671) 288 receivables (Decrease)/increase in trade and other (144) 642 payablesCash generated from operations 341 2,638 Taxation paid (1,153) (812) Net cash from operating activities (812) 1,826 Cash flow from investing activities Purchase of property, plant and (775) (804) equipment Purchase of intangible assets (41) (58) Interest receivable 218 176 (598) (686) Cash flow from financing activities Repayment of bank loans (137) (144) Interest payable (453) (266) Dividends paid (949) (895) Net sales/(purchase) of own shares by 79 (347) share trust (1,460) (1,652) Net decrease in cash and cash equivalents (2,870) (512) Cash and cash equivalents at beginning of 297 809period Cash and cash equivalents at end of period (2,573) 297 Cash and cash equivalents comprise:Cash and cash equivalents - 297Bank overdrafts (2,573) - (2,573) 297 GROUP RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 2006 2005 £000's £000's (Restated) Decrease in cash and cash equivalents (2,870) (512)Repayment of borrowings 137 144 Cash outflow from change in net debt in the (2,733) (368)year Effect of foreign exchange rates 122 (55) Movement in net debt in the year (2,611) (423)Net debt at start of the year (2,026) (1,603) Net debt at end of the year (4,637) (2,026) 1. Basis of preparation In accordance with Section 240 of the Companies Act 1985, the Company confirmsthat the financial information for the years ended 30 September 2006 and 2005are derived from the Group's audited financial statements, these are notstatutory accounts. The financial information for the year ended 30 September2005 has been restated in accordance with International Financial ReportingStandards and therefore differs from those delivered to the Registrar ofCompanies. These statements received an unqualified audit opinion and theauditor's report contained no statement under section 237(2) or 237(3) of theCompanies Act 1985. Prior to 2006 the Group prepared its audited financial statements under UnitedKingdom Generally Accepted Accounting Practice (UK GAAP). For the year ended 30September 2006 the Group is required to prepare its annual consolidatedfinancial statements in accordance with International Financial ReportingStandards (IFRS) adopted by the European Union. These financial statements havebeen prepared in accordance with the accounting policies set out in the fullfinancial statements, taking into account the requirements and options in IFRS 1'First-time adoption of International Financial Reporting Standards'. The Grouphas not adopted the reporting requirements of IAS 34 'Interim FinancialReporting'. The transition date for the Group's application of IFRS is 1 October2004 and the comparative figures for 30 September 2005 have been restatedaccordingly. Reconciliations of the income statement (previously profit and lossaccount), balance sheet and cash flow statement from previously reported UK GAAPto IFRS are shown in note 7. The financial information contained within this preliminary statement wasapproved by the Board on 8 December 2006. 2. Accounting policies - explanation of transition to IFRS This is the first year that the company has presented its financial statementsunder IFRS. The following disclosures are required in the year of transition.The last financial statements under UK GAAP were for the year ended 30 September2005 and the date of transition to IFRS was therefore 1 October 2004. The effects of implementing IFRS can be summarised as follows: (a) Defined Benefit Pension Scheme In accordance with IAS 19, "Employee Benefits", the deficit in the definedbenefit pension scheme for certain UK employees is recognised as a liability ofthe Group under non-current liabilities. This was previously disclosed as a note to the financial statements under the transitional arrangements under FRS17in accordance with UK GAAP. The resultant deferred tax asset is netted againstexisting deferred tax liabilities, to create an overall deferred tax asset. In addition, the service cost and expected return on assets net of interest onscheme liabilities is reflected in the income statement for the period, inplace of the actual cash contribution made. All experience gains or losses onthe assets and liabilities of the scheme, together with the effect of changesin assumptions is reflected as a gain or loss in the Statement of RecognisedIncome and Expense. (b) Share-based Payments IFRS 2, "Share-based Payments" requires that an expense for equity instrumentsgranted be recognised in the financial statements based on their fair value atthe date of grant. This expense, which is in relation to employee share option schemes for staff in the UK and US, is recognised over the vesting period of thescheme. IFRS 2 has been applied to all options granted after 7 November 2002 and notfully vested by 1 January 2005. The Group has adopted the Black-Scholes modelfor the purposes of computing the fair value of options under IFRS. (c) Post Balance Sheet Events and Dividends IAS 10, "Events after the Balance Sheet Date" requires that final dividendsdeclared after the balance sheet date should not be recognised as a liabilityat that balance sheet date as the liability does not represent a present obligation as defined by IAS 37, "Provisions, Contingent Liabilities andContingent Assets". Instead, final dividends for the Group should only berecognised as a liability once formally approved at the Annual General Meeting. Furthermore, interim dividends, in accordance with ICAEW Technical Release57/05, are no longer recognised as a liability until paid. The interim and final dividends in relation to the financial year 30 September2005 totalling £949,000 have therefore been reversed in the respective balancesheet. (d) Effect of Changes in Foreign Exchange Rates Under IAS 21, "The Effects of Changes in Foreign Exchange Rates", cumulativetranslation differences which are recognised in the Statement of RecognisedIncome and Expense are separately accounted for within reserves and are transferred from equity to the income statement in the event of the disposal ofa foreign operation. All such foreign exchange differences arising in relationto the Group's US subsidiary, Treatt USA, since its formation in 1990, have been transferred from the 'Profit and Loss Reserve' to this newly created'Foreign Exchange Reserve'. (e) Computer Software In accordance with IAS 38 "Intangible Assets", computer software is now requiredto be disclosed as a class of intangible assets rather than be included as partof tangible fixed assets as was the case under UK GAAP. (f) Cash flow The cash flow statement has been restated to explain the movement in short termcash and cash equivalents, instead of the movement in total short and long termcash. (g) IFRS Comparatives For a reconciliation from UK GAAP to IFRS for prior period comparatives see note7. 3. Segmental information Geographical Segments The following table provides an analysis of the group's revenue by geographicalmarket, irrespective of the origin of the goods or services: 2006 2005 £'000 £'000 Revenue by destination United Kingdom 6,460 6,314 Rest of Europe 10,542 9,331 The Americas 10,142 8,816 Rest of the World 8,267 8,060 35,411 32,521 4. Taxation 2006 2005 £'000 £'000 (Restated) UK Corporation tax 655 784 Overseas tax 133 375 Transfer (from)/ to deferred tax 194 (64) UK prior year corporation tax 10 (8) Overseas prior year tax (36) (1) Prior year deferred tax - (16) 956 1,070 5. Dividends 2006 2005 £'000 £'000 (Restated)Equity dividends on ordinary shares:Interim dividend for year ended 30 September 2005 310- 3.1p per shareFinal dividend for year ended 30 September 2005 - 6396.4p per shareInterim dividend for year ended 30 September 2004 278- 2.7p per shareFinal dividend for year ended 30 September 2004 - 6156.1p per shareOver accrual from previous year (12) 949 881 The declared interim dividend for the year ended 30 September 2006 of 3.4 pencewas approved by the Board on 19 May 2006 and was paid on 2 October 2006.Accordingly it has not been included as a deduction from equity at 30 September2006. The proposed final dividend for the year ended 30 September 2006 of 7.1pence will be voted on at the Annual General Meeting on 26 February 2007. Bothdividends will therefore be accounted for in the results for the year ended 30September 2007 6. Earnings per Ordinary Share (1) Basic earnings per share Basic earnings per share is based on the weighted average number of ordinaryshares in issue and ranking for dividend during the year of 9,998,572 (2005:10,024,533) and earnings of: £2,332,000 (2005 restated: £2,336,000), being theprofit on ordinary activities after taxation. The weighted average number of shares excludes shares held by the "TreattEmployee Benefit Trust". (2) Diluted earnings per share Diluted earnings per share is based on the weighted average number of ordinaryshares in issue and ranking for dividend during the year, adjusted for theeffect of all dilutive potential ordinary shares, of 10,049,544 (2005:10,050,258); and the same earnings as above. 7. Explanation of transition to IFRS Reconciliation of the Group Income Statement for the year ended 30 September2005 UK GAAP IFRS IFRS 30/09/2005 Adjustments 30/09/2005 £'000 £'000 £'000 Revenue 32,521 32,521 Cost of sales (21,952) (21,952) Gross profit 10,569 - 10,569 Administrative expenses (7,023) 3 (7,020) Operating profit 3,546 3 3,549 Finance revenue 176 176 Finance costs (266) (53) (319) Profit before tax 3,456 (50) 3,406 Taxation (1,082) 12 (1,070) Profit for the period attributable 2,374 (38) 2,336 to equity Shareholders Earnings per share - basic 23.7p 23.3p Earnings per share - diluted 23.6p 23.2p Reconciliation of the Group Statement of Recognised Income and Expense for theyear ended 30 September 2005 UK GAAP IFRS IFRS 30/09/2005 Adjustments 30/09/2005 £'000 £'000 £'000 Profit for the financial period 2,374 (38) 2,336 Currency translation on foreign 123 123 currency net Investment Actuarial loss on defined benefit - (257) (257) pension scheme Deferred tax on actuarial loss - 77 77 Total recognised net income for the 2,497 (218) 2,279 period 7. Explanation of transition to IFRS (continued) Reconciliation of the Group Balance Sheet for the year ended 30 September 2005 UK GAAP IFRS IFRS 30/09/2005 Adjustments 30/09/2005 £'000 £'000 £'000 ASSETS Non-current assets Property, plant and equipment 9,374 (724) 8,650 Intangible assets - 724 724 Deferred tax - 521 521 9,374 521 9,895 Current assets Inventories 11,395 11,395 Trade and other receivables 5,718 5,718 Cash and cash equivalents 297 297 17,410 - 17,410 LIABILITIES Current liabilities Bank loans and overdrafts (144) (144) Trade and other payables (4,883) 949 (3,934) Corporation tax payable (589) (589) (5,616) 949 (4,667) Net current assets 11,794 949 12,743 Non-current liabilities Bank loans (2,179) (2,179) Post-employment benefits - (3,239) (3,239) Deferred tax liabilities (451) 451 - (2,630) (2,788) (5,418) Net assets 18,538 (1,318) 17,220 SHAREHOLDERS' EQUITY Called up share capital 1,029 1,029 Share premium account 2,143 2,143 Own shares in share trust (625) (625) Employee share option reserve - 14 14 Foreign exchange reserve - (699) (699) Retained earnings 15,991 (633) 15,358 Total Shareholders' Equity 18,538 (1,318) 17,220 7. Explanation of transition to IFRS (continued) Reconciliation of the Group Cash Flow Statement for the yearended 30 September 2005 UK GAAP IFRS IFRS 30/09/2005 Adjustments 30/09/2005 £'000 £'000 £'000 Cash flow from operating activitiesProfit before taxation 3,456 (50) 3,406Adjusted for:Foreign exchange loss 49 55 104Depreciation of property, plant and 963 (181) 782equipmentAmortisation of intangible assets - 181 181Loss on disposal of property, plant and 135 135equipmentNet interest payable 90 90Share option charge - 12 12Pension funding - 38 38 4,693 55 4,748Changes in working capital:Increase in inventories (3,040) (3,040)Decrease in trade and other receivables 288 288Increase in trade and other payables 642 642 Cash generated from operations 2,583 55 2,638Tax paid (812) (812) Net cash from operating activities 1,771 55 1,826 Cash flow from investing activitiesPurchase of property, plant and (862) 58 (804)equipmentPurchase of intangible assets - (58) (58)Interest receivable 176 176 (686) - (686) Cash flow from financing activitiesRepayment of bank loans - (144) (144)Interest payable (266) (266)Dividends paid (895) (895)Net acquisition of own shares by share (347) (347)trust (1,508) (144) (1,652) Net decrease in cash and cash (423) (89) (512)equivalentsCash and cash equivalents at beginning (1,603) 2,412 809of period Cash and cash equivalents at end of (2,026) 2,323 297period This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Treatt