Treatt plc (5TT.F) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining us today. For those that don't know me, I'm Daemmon Reeve, I'm the CEO of treatment, and I'm joined today by, as usual, by Richard Hope. You have all seen the numbers by now, and I'd like to pass my thanks to all of my colleagues at Treatt for their incredibly hard work in delivering this set of numbers for our first half of the year. Clearly, what you've seen from the numbers is our very strong revenue growth in the period. And the important part for me to explain and you understand is the reversion to very much an H2 weighted year for the business, which is typical. Last year was a much more atypical first half, where we had strong growth in retail channels, which was disturbed due to COVID-impacted factors. But this year, we're back to a much more normal seasonal pattern of demand in the business, which is H2 weighted for good reasons. And that reason is the build by the beverage companies, typically around the spring, for ultimate consumption of beverages in the Northern Hemisphere summer. Last year, we did see some rather atypical retail behavior and launches in the first half, which gave an unusual higher-margin mix in the first half of last year compared with the period that we've just reported on. H2 is typically a stronger half for us, both in revenue and margin. But during lockdown and COVID-impacted times, demand channels were disturbed, but we're back to the more normal seasonal Treatt pattern now, which we've experienced across the last decade. So this is the output of what I've just said, with 9% growth in revenue, leading us to upgrade revenue guidance for the year, which Richard will come on to talk more about. We do expect H2 margins to be materially higher. And as the product mix swings around towards the higher margin healthier living categories, which we typically see in the second half of the year. Clearly, as I said, the margin mix and the product mix did impact the numbers in the first half, but we are confident in the outlook for the second half and the increase in dividend that you see there, I think, attest to our confidence in the second half outlook for the business. 5 of our 6 categories performed very well, with only 2, which I have flagged, seeing any weakness in the period. All of our other categories delivered between 7.7% and 22.5% growth. As you can see, the citrus category performed really well. As we transition our citrus category towards a more added value mix of products, this category continues to be an important one for the business. And it's also a category which we expect to deliver an accelerated performance in the second half. The synthetic aroma category benefited from increased partnering with key customers and also, importantly, the provision of molecules that go into flavors that flavor alternative protein. So meat-free alternatives, which has seen some very solid growth in the last year or 2, and we expect this rate of growth to continue to support the second half numbers. Herb, spice and florals had a very good first half, and that was benefited from some geographical reopening, Japan being an important example of that. But also within that category, there are some very important ingredients also for beverage. Fruit and vegetables has seen a positive growth for more than a decade now, and that growth continues. A lot of this category feeds into growth opportunities in premium beverage. And again, we expect this category to accelerate during the second half as the traditional beverage seasonality swings into the business. The same story is true of health and wellness, which, again, had a very impressive set of results in the first half. And again, we expect that category to continue to deliver an accelerated performance across the second half, again, as beverage demand picks up due to the seasonality. Which leaves only tea, which benefited, as I mentioned earlier, from very strong retail launches in the corresponding period last year, where the mix is now transitioning back to more on-trade driven demand as we move out of COVID impacted channels.

Good morning, everyone, and thank you for joining us this morning on what is my last results announcement after an incredible 19 years at Treatt. And I'm proud to be leaving the business in very good health, and it is very well positioned for growth for many years to come. So this slide shows our revenue performance over the last decade. And it is notable that the first 6 months of this financial year delivered a record H1 revenue growth and demonstrates the underlying strength of the overall growth in our business today. This graph particularly shows the progressive revenue growth over the last 10 years. And with H2 seasonality in the business driven by spring and summer beverage consumption in the Northern Hemisphere, as Daemmon mentioned, and order book is up by more than 25%, we now expect our full year revenue to be up by more than 15% on the prior year. So I now turn to our profit performance over the last decade. And as the dotted line shows, we remain on track to deliver consensus profit before tax and exceptionals for the full financial year. This would be the 10th consecutive year of growth in profits, demonstrating how we have transitioned the business from a traded to very much an added value business. The H1 revenue growth, which Daemmon was talking about, that was driven by our 3 largest categories of citrus, herb, spices & florals and synthetic aroma, reflected the fact that the growth in H1 came from our categories that have slightly lower margins than the faster-growing healthier living categories, which we expect to dominate H2. And therefore, the product mix impacted margins, and that is why the profit proportions are as you see on the screen there. So as you can see, over the last 10 years, we've maintained a consistent progressive dividend policy. And our policy for the interim dividend is to pay 1/3 of the previous year's dividend. And I'm pleased to confirm that we've maintained that policy with a 25% increase in the interim dividend, which really does demonstrate our confidence in the outlook for the rest of the financial year and beyond. So looking at the income statement in more detail, we've covered the revenue growth in the period, which was a very encouraging 9% against a strong comparator. And as expected, gross margins reflected on more traditional product mix, but it was still improved from those in H1 2020. In terms of administration costs, given the growth over the last 12 months, these grew by a relatively modest 9%, and this was very much driven by growth in employee numbers, which were up 15% on 12 months earlier as we invest strongly in skills across the group. But as I will come on to shortly, global inflationary pressures are of less significance to Treatt. And finally, we made a GBP 3.3 million gain on the disposal of our old U.K. site and have incurred exceptional costs in relation to the U.K. relocation as shown on the side. So now looking at the cash flow statement. We had an operating cash flow inflow of GBP 7.7 million for the period. And whilst working capital increased by GBP 15 million, this was very much driven by the positive factors of inventory build to support our strong order book; and receivables, which were reflective of a strong end to the half year. Following the receipt of GBP 5.6 million for the sale of our old site, closing net debt of GBP 19.8 million represents about 0.85x EBITDA. And we would expect cash flow, however, to be much stronger in the second half and to end the year with net debt much nearer to GBP 10 million. So to summarize the guidance we are giving today. We now expect full year revenue to be up by at least 15% on the prior year, and we confirm that we are maintaining our guidance for profit before tax and exceptional items to be in line with market consensus of GBP 21.7 million for the full financial year. Looking more widely factors affecting the Treatt business, Much more important than general inflation is a wide range of fluctuations in raw material prices, which we experience every year. And here, Treatt has many decades of experience in managing this risk for our customers. Equally, in terms of supply chain, we are very experienced in managing global logistics, and it is a clear part of our business model to hold high levels of inventory in order to maintain exceptional customer service. And finally, in terms of general inflation, this only impacts approximately 5% of cost of goods sold. And we are, in fact, a relatively low energy user as our manufacturing processes use lower temperature extraction in order to maintain the characteristics of the input raw materials.

I want to talk to you about our future and our optimism about revenue growth within that future. There is much more to come from Treatt, not least all the upside of our new Skyliner Way facility in Bury St Edmunds. Customer reaction to our new facility has been, frankly, spectacular. This week, we are pleased to say that we begin manufacturing from the new site, which is an important landmark in our history. An important part of our business model is the co-creation work we do where our scientists work on the bench with our customer scientists, and our new facility brings a much more enhanced environment to do just that. Our addressable market is growing, from opportunities in developing low and no-sugar beverages to ready-to-drink cold brew coffee and the premiumizing world of beverage, authenticity is really important, and our extracts enable the true taste of the input material to be experienced in the beverage. The growth we have seen in the provision of molecules for alternative proteins is expected to continue. And as trends around health and planet-positive food drive consumer behavior, we feel that we've got the business in a very positive state and a very relevant position for the market that we serve. And we certainly look forward to explaining more to investors at our Capital Markets Day on the 27th of May, more about the long-term upside that we see coming from the business and our new headquarters in Bury St Edmunds. Our business model is usefully defensive in challenging economic times. Premium branded beverages are seen as affordable luxuries, and they are experiencing growing demand. COVID-impacted channels and the important on-trade are returning to pre-pandemic levels of demand. This is important for our business as we feel volume demand returning. Health trends are certainly driving further growth and opportunities. And after experiencing an important period of growth, we feel there is much more to come from Treatt. What we always say about ESG is that we have been running the business along positive ESG principles before ESG became an acronym in the investment community. We have very good momentum on sustainability, with a new ESG framework being finalized with clear vision, objectives and KPIs being set out. There's some very exciting work going on in our supply chain, for example, and we'll talk more about this at our full year results in 6 months' time. So in terms of outlook, we are already seeing the expected customer behavior as we begin H2 with the increased demand for our healthier living categories and increased demand in all the other categories continued. We're very pleased to say that manufacturing is underway at our new U.K. facility. This is an important step for the business. And our coffee category is also progressing well. And we are confident about the long-term opportunity that coffee will bring an incremental advantage to our business. We will enjoy all the benefits to come from our new U.K. headquarters, which is not just about staff and customer attraction, but a plethora of efficiency gains, productivity benefits and so forth. There is certainly much more to come from that. And the team are busily working at realizing those gains over the next few months. So we're confident in the outlook and our long-term prospects for the business. Last but not least, I would like to pass my thanks to Richard Hope, our CFO, who retires at the end of June. Richard has been a -- always a sound adviser for me as CEO. We've -- I've very much enjoyed working with Richard on road shows and within the business for these last 10 years of my term as CEO and Richard's near 10 years before I became CEO. His contribution for the business has been incredible, and I thank him sincerely for the work that he's done for Treatt over the years. Thank you.

[Operator Instructions] And we've got a question from Charles Hall at Peel Hunt.

Can I just asked about the regional mix and the trends you're seeing in China and the states in China. Obviously, a lot of difficulties operating at the moment with lockdown restrictions. Just to get a feel for how that market is moving. And the U.S., obviously, you saw a decline in the first half. Is that just down to seasonality? Or is it product launches? And what gives the confidence behind the second half outlook?

Thanks for the question. I think, certainly, China has been impacted by various lockdowns in key cities such as Shanghai. We remain very confident about the upside potential of China for the Treatt business. In fact, we're very close to a number of quite significant wins and new product launches in that key market. Certainly, in the longer term, we expect China to emerge as an important second geography for us behind North America. And it will be no surprise at all to me if in 5 years' time, China is not somewhere between 12% and 15% of revenue for the business. But we do have some near-term opportunities that are beginning to be unlocked, and we certainly look forward to restrictions in key cities being unlocked to enable those to move forward. In the U.S., it was an interesting period for the business in the U.S., but I think it's the comparator really from last year that's distorted the figures for this year, because actually, in absolute terms the figures for this year in North America were good. Last year, we had some very large new product launches that didn't really repeat in the second half. But the pipe fills from some of those launches were quite significant. And demand is much more evenly spread now, but we are confident about the second half outlook, particularly for the North American market. We're already seeing demand come through strongly. We actually finished the first half very strongly. March was an impressive month for the business, and that demand has continued through April and now into May. So it's the normal sort of seasonality swing of beverage demand in the spring for ultimate consumption in the summer. I mean the order book gives us a lot of confidence about the -- not just the second half but the longer term upside for the business. And I think the teams are certainly performing very well in the North American market, where there's still a lot of opportunities in our pipeline to realize.

And then one more question. The Wolf and this team have now been in place for a few months. Can I just get a feel for the changes you've been making in R&D? And any feel for where you can go with a stronger team?

Yes. Thanks, Charles. Yes, Wolf has been in place now for 4 or 5 months. He's currently this week, again, in the U.S. with the team there. He's -- I mean, he's making some very important, I would say, changes around the goal setting agenda, understanding our capabilities as a business, and Wolf is still very much in discovery phase. But in terms of getting the global team together to start thinking about metrics and opportunities where we can serve our customers better, improving our offering and accelerating our offering in cold brew coffee, I think Wolf and his team are bringing some important thinking and work in that respect. And I certainly look forward to seeing what we can realize over the next months and years.

And we'll go to Nicola Mallard from Investec.

A couple of questions from me. Daemmon, you mentioned the customer reaction to the new site has been, I think spectacular was the word. I just wondered if there's any examples of wins that you can share with us that you feel have come out of that sort of new site. Secondly, on the order book. I'm just wondering whether you could give us a guide on how big the order book is in pounds millions. What's the length of the order book? How far has it run? And also perhaps what amount of that falls in the second half given your sort of confident outlook? And then finally, on your volume or your revenue guidance up at least 15%. Could you give us an idea of what is price and volume perhaps behind that? Because I know citrus prices are still high, aren't they?

Thanks, Nicola. Yes, I mean I am delighted, first of all, with customer reaction to the new site. And more importantly, my reaction is the reaction of our sales team at Treatt who have experienced, obviously, this firsthand from customers. I mean there are some already some new relationships that we're building. And I think what the new site has done has really sort of cemented our sort of strategic transition over the last decade. I mean 10 years ago, we were much more of a trading company with some manufacturing and some sites. And progressively, we have, of course, flipped that business model around to become a science-led manufacturer of natural extracts for the business. But what our old premises did not do was really support that sort of look and feel of the business that we've become. The new premises very much reflects the business that we've become. We put sites literally right at the front end of the new building. So on arrival, visitors see clever, white-coated chemists doing important work in laboratories. And that really does reflect the sort of business that we've become. So the whole look and feel of the business, not just from the scientific side but also now from the manufacturing side and also the culture that we have within the business, the feel of the business. I mean customers typically have lunch amongst our colleagues in our hub, and there's such a positive vibe around the business. Customers enjoy the experience of visiting Treatt. And importantly, we've got a sales team who are now very proud of our facility that we work from and are very keen to bring customers in. And that's an important part of our development, which gives us a lot of confidence not just about the next few months but also the longer term.

Nicola, just on the order book, the gross order book is approximately GBP 60 million. And in terms of length, the vast majority of customers contract up to 12 months. We have a small number of large customers who have 1 or 2 contracts that are longer than that. So we make our own internal estimates as to when we think the customers are going to call off. But yes, there is no direct linear relationship between growth in the order book and revenue. But obviously, we then map out the order book to get to our internal forecast, which then gives us the confidence to raise the revenue guidance that you've got. In terms of price and volume, again, you're absolutely right to call out citrus. Orange oil prices are at an all-time high. And this has not anything to do with global inflation. This is pure supply and demand. We've had a number of small crops recently which has caused the price to go up. Lemon oil, on the other hand, is down. So there is a mix. And the more added value of the product becomes, the less linked to the underlying raw material price it is. But approximately, I would say, GBP 3 million of our growth in H2 is likely to have been price rather than volume.

And we'll go to Sara Welford from Edison Group.

Firstly, can I ask, can you talk a little bit more about coffee in terms of what you're seeing? Will your products allow entirely new innovation? Or do you think that they will allow sort of advanced or better applications, but I guess, remaining within sort of the existing capabilities of what is in the market? And secondly, just going back to China. Can I ask, are you working mainly with the multinationals here at the moment? Or do you tend to work more with the local businesses? Or is it a mix of both?

Thanks, Sara. I think in terms of coffee, we are very excited about the prospects for our coffee platform. The ready-to-drink cold brew coffee market has -- is growing, it's starting to keep growing at double digits. There's a lot of brands in the marketplace. And a lot of those brands -- some of the brand owners are talking to us about improvements they'd like to make in terms of the quality of coffee. The reason that we've got into coffee in the first place is that coffee is very technically challenging to produce high-quality extracts. So there's a very good reason why barista's freshly grind coffee beans in a good quality coffee shop, and that's because the flavor molecules start to degrade as soon as you start meddling with the beans. And industrial coffee extracts work in very much the same way. And in fact, our team feel a lot of the cold brew coffee extracts in the market actually contain a lot of instant coffee. And so the premiumization of that category is -- offers some very good potential. And we are developing and have some technology already that we feel that can bring some high-quality value into that space. At our Capital Markets Day, one of our coffee customers will be on site that day. And we'll be talking more about our abilities in coffee, I'm sure, and indeed the market potential. But we see coffee as probably the biggest wildcard opportunity for treat for the long term that we've had for several years in terms of being an incremental category for the business. But coffee could be quite an important category for us over the medium to long term. But we're building now. And it's very much in line with the rest of our portfolio where we bring great relevance to the market, where we can overcome some technical challenges to bring authenticity into beverage. And coffee is certainly something that's occupying a lot of our time and thinking and a lot about R&D efforts. And in terms of China, the opportunity that we see in China is -- really, it's largely centered around national beverage companies. Some of which are, of course, of quite significant scale. I think there's a growing interest within that important geography around health awareness, around calories. I think there's demand for something new and refreshing, authentic in terms of beverage, and we're certainly quite excited about the opportunities that, that market presents itself. And it seems -- when I look at the opportunity pipeline of all the projects that we have in-house, even with the COVID-impacted situation in China, China certainly weighs in with a heavy load in terms of that opportunity pipeline. So we are certainly encouraged by the prospects for our business in China.

And we'll now go to Charles Hall from Peel Hunt.

Daemmon, can you just give an update on the hard seltzer cocktail market? Obviously, it was very hot, low last year, a lot of excitement around it, then it cooled off materially. How are you seeing that market in terms of both the main brands, which have obviously now been -- experiencing much greater competition and your ability to have multiple customers in that market?

I think the hard seltzer market and its sort of wider family, the canned cocktail market, presents a lot of opportunity for our business. I mean for us, it's not just about hard seltzers, it is very much about canned cocktails. For example, a gin and tonic with a twist of lemon or lime, we could be the lemon or lime in that gin and tonic. And it's very interesting in the U.K. market, which is an important market for us. to see what consumers are now drinking on trains on a Friday and Saturday evening. They're typically drinking canned cocktails, and it's unflavored beer that seems to be left on the shelf in -- certainly in my experience. And it's also very interesting to what people are taking to parties. It tends to be now packs of sort of canned cocktails rather than bottles of wine and different products. So I think this trend for us is a good example of how our addressable market continues to grow. I mean, the hard seltzer market itself, and I was actually -- took our incoming CFO, Ryan, to a supermarket or 2 in Florida a few weekends ago, and we were discussing the sort of hard seltzer to market and the canned cocktail market. And the food space available for this category in sort of some of the leading supermarkets is still very significant. And so we're still very optimistic about the upside potential of this category. As I think consumers are moving towards an increasing awareness around calories, I think this could be an important factor. I mean 100 calories or less seems to be the sweet spot in terms of younger consumers wanting an alcoholic drink but with lower calories. And I think there's a number of factors here that speak very strongly to Treatt's strength. But certainly, we can play in that market and appear in that market where we've got some opportunity in canned cocktails, which we don't have in unflavored beer. And so the addressable market continues to excite us and a number of our customers, and it's becoming much more than just a North American thing. We're seeing many more opportunities emerge within the European market, for example.

And we'll go to Cathal Kenny from Davy.

A couple of questions from my side. Firstly, on the order book, do you delineate between the indirect and direct channel? Second question relates to admin costs for Richard, just in terms of what should we expect in terms of the second half. I know you've onboarded quite a number of new people into the organization. Another one for Richard, just on the inventory position, how we should think of that through the remainder of this year? And finally, just on the citrus part of the business in terms of margin into the second half, should we expect margins there to move upward as you push more value add in that category?

So in terms of the indirect and direct, our order book, obviously within it, we know who the customers are. So therefore, we know what is going direct and indirectly. The -- a lot of the larger, longer-term contracts tend to come from the brand owners, with 1 or 2 notable exceptions. But we don't publicly give the split between indirect and direct. But typically, it would be slightly biased, skewed towards the direct. In terms of administrative costs for the rest of this financial year, we would expect the full year admin costs to continue to show sort of low double-digit growth on the prior year. We do have the depreciation cost from the beginning of manufacturing at our new U.K. facility coming into admin costs in H2 and continuing full year effect of headcount increases. Looking further ahead on administration costs, wage inflation will have some impact on FY '23 and presumably beyond. Our wage cycle begins first October, in line with our financial year. So that is yet to impact the business. However, we do have significant efficiencies that we're building into the business as well over the next couple of years. And so we've obviously built that into our own financial models looking further ahead. H2 margins, I couldn't quite catch the full question, Cathal. But basically, we do expect the healthier living categories to have a significant positive uplift to margins as the healthier living categories have grown over the last few years, that kind of seasonality has gotten even bigger. So we do expect that to have an impact in H2.

Great. And just the working -- the inventory position within working capital, Richard, for H2?

Yes. So the inventory position, the assumption to make on inventory is that we would expect the receivables element of the working capital outflow in H1 to unwind. But in these times, the supply chain difficulties, orange oil prices are record highs, et cetera, I would expect inventory levels to remain at similar levels to where they are at the half year.

That's very clear. And congrats on your retirement.

Thank you, Cathal.

And that's the end of questions. Daemmon, do you have any closing remarks?

Only to say thank you, everybody, for your time and interest in Treatt. Certainly, if you've got any further questions you'd like to ask us, we'd be very happy to take those. But sincere thanks for your interest in Treatt today, and look forward to speaking to you soon. Thank you.

Thank you.