ANNUAL REPORT &
FINANCIAL STATEMENTS
2017
We are a leading independent ingredients
manufacturer and solutions provider to
the global flavour, fragrance and consumer
goods markets from our bases in the UK,
US, China and Kenya.
We have been making the world taste better since our foundation in 1886,
but this is just the beginning. Committed to continuous improvement, we have
deeply established roots and a clear strategic path that drives us forward.
Our people are creative, technically excellent and dedicated, allowing us
to develop and supply a range of ready-made or bespoke systems to suit
even the most adventurous needs.
“Collaborating at the crossroads of science and art,
we make the ordinary extraordinary.”
Annual Report & Financial Statements
2017
2017 REVIEW
FINANCIAL PERFORMANCE
REVENUE
£109.6M
KEY PERFORMANCE INDICATORS
NET OPERATING MARGIN
12.6%
Revenue represents the total sales of all businesses in the Group,
and reflects both underlying business growth as well as the impact
of movements in raw material prices and foreign exchange rates.
Net operating margin reflects the overall profitability of the business
before financing costs.
2013
2014
2015
2016
2017
£74.1m
£79.2m
£85.9m
£88.0m
£109.6m
2013
2014
2015
2016
2017
ADJUSTED PROFIT BEFORE TAX*
£12.9M
Adjusted profit before tax shows the trend in profits before tax
(but ignoring exceptional items).
RETURN ON CAPITAL EMPLOYED
24.3%
Return on capital employed is a measure of the Group’s
profitability relative to the assets invested in the business.
2013
2014
2015
2016
2017
£6.2m
£6.9m
£8.0m
£8.8m
£12.9m
2013
2014
2015
2016
2017
9.4%
9.6%
10.1%
10.8%
12.6%
19.4%
19.9%
22.1%
24.6%
24.3%
DIVIDENDS PER SHARE** (PENCE)
4.80P
Dividends per share shows the total dividend (interim plus final)
per share relating to each financial year.
AVERAGE NET DEBT TO EBITDA***
0.39
Average net debt to EBITDA measures the debt of the Group
relative to its profitability. The lower the ratio is, the more
manageable the level of debt.
2013
2014
2015
2016
2017
3.70p
3.84p
4.04p
4.35p
4.80p
2013
2014
2015
2016
2017
1.28
0.99
0.78
0.35
0.39
*All adjusted figures exclude exceptional items, details of which are given in note 8.
**The dividend per share relates to the interim dividend declared and final dividend
proposed in relation to the corresponding financial year.
***EBITDA is calculated as profit before interest, tax, depreciation, amortisation
and exceptional items. Average net debt is calculated as the average of the opening
and closing net debt for the financial year.
WHAT’S INSIDE
WHAT STANDS US APART
Understand what is driving the sustainable growth across the Group
HOW WE’RE GROWING
Learn how we continue to deliver impressive results
WHERE WE’RE HEADING
Discover what our future holds and how we’re going to achieve
continued success
OVERVIEW
Group Five Year Trading Record
Chairman’s Statement
Chief Executive Officer’s Report
Financial Review
Directors’ Report
The Board
Statement of Directors’ Responsibilities
Strategic Report
CORPORATE GOVERNANCE
Corporate Governance Statement
Directors’ Remuneration Report
FINANCIAL STATEMENTS
Independent Auditor’s Report to the Members of Treatt plc
Group Income Statement
Group Statement of Comprehensive Income
Group and Parent Company Statements of Changes in Equity
Group and Parent Company Balance Sheets
Group and Parent Company Statements of Cash Flows
Group Reconciliation of Net Cash Flow to Movement in Net Debt
Notes to the Financial Statements
OTHER INFORMATION
Notice of Annual General Meeting
Parent Company Information and Advisers
Financial Calendar
02
05
06
09
10
12
16
21
22
26
27
38
44
56
59
60
61
63
64
65
66
97
102
103
1
WHAT STANDS
US APART
We partner with the world’s largest flavour and
fragrance companies and the most well-known
consumer beverage brands to deliver innovative
solutions that excite and inspire. Competing at the
highest level every day, we have engineered our
business to consistently bring its best to exceed
our customers’ expectations. Our empowering,
energetic and performance-driven culture fuels
the growing success of the Group and is how
we’re different.
TEAMWORK
A global network of over 370 talented colleagues work and grow together to
deliver against our business strategy. We work as high-performing teams, whether
in our own departments or as cross-functional groups collaborating on a project.
Customers recognise the momentum we create together in each interaction with us.
Everyone from the global management team to the chemists in the lab and the forklift
truck drivers in our warehouses understand where our business is going and take
responsibility for their part in helping to get us there. By sharing common goals,
we are efficient and highly focused, championing the importance of great communication
at every turn.
We happily share our knowledge with colleagues and customers alike, allowing us
to become part of their organisations too. Our people get a kick out of helping others
and believe in their shared ability to effect real change.
CHALLENGE
You will never find our people resting on their laurels. We believe in our ability to improve
and are ‘always on’ when it comes to opportunities to develop and evolve.
We are proactive problem solvers who look for a better way. Whether it’s a process
improvement, an innovative way of supply chain mapping or new product development;
our teams are inventing ways to increase efficiency and deliver excellence for
our customers.
This attitude is not restricted by role, experience or department. Our innovation culture
ensures this responsibility is shared by the whole Group. We now have almost 100
people in the UK working on a range of projects, each with the sole objective of finding
a better way at its heart.
2
Treatt plc – Annual Report & Financial Statements 2017 INTEGRITY
Our people define and maintain the highest standards across the business as well
as the industries in which we operate. Our reputation has been earned over the last
130 years by delivering consistently high-quality results. Customers have peace of
mind that they’re working with people and products they can empirically trust.
Travelling the world and building personal relationships with our processors and
farmers gives us first-hand detailed knowledge of our supply chain, which is
invaluable to our customers. We share this information with our customers via
market intelligence reports, presentations and workshops as part of our service.
We have earned their confidence in our rigorous quality assurance, composition and
containment analysis, together with appropriate labelling for smooth, safe transportation
across the globe.
This commitment to standards extends to the professional and personal development
of staff.
81%
of staff attended
developmental
training
4035
hours of training
36%
of staff attended four
or more courses
>70
courses available
through company
Leadership &
Development
programme
PRIDE AND PASSION
We have come a long way and the discretionary effort of our engaged people is the fuel
that continually drives us forward. We love what we do and feel enormous satisfaction
for our work, which is recognised and appreciated by our customers. They want to
work with us because of our approach, which brings an authentic credibility to what
we do every day.
Our people are truly switched on across every aspect of the business and with
approximately 75% of staff owning shares in the company, we have a collective interest
in our shared success.
We believe in our direction of travel and know that by working together, to the best
of our abilities, we will absolutely get there.
3
4
Treatt plc – Annual Report & Financial Statements 2017 HOW WE’RE
GROWING
We continue to deliver sustainable results by
increasing our market share across key product
categories in growing markets.
CREATING TRENDS OF THE FUTURE
By operating at the cutting edge of sensory innovation, the market insights we share
help shape our customers’ new product development. Whether we’re hosting innovation
workshops for flavourists and perfumers, providing market data or delivering reports
on what’s going to be the next big hit on the supermarket shelves – customers rely
on the intel we provide.
SUSTAINABLE GLOBAL SOURCING
We work hard to develop and maintain a transparent and stable supply chain across
our product portfolio, mitigating risk and providing maximum traceability throughout
every stage of the process.
DELIVERING QUALITY
We are governed by the highest set of industry standards which gives our customers
peace of mind that they’re working with people and products they can trust.
Customers have confidence in our rigorous quality assurance, composition and
containment analysis, partnering with our people at every stage of their project.
INNOVATION YOU CAN TASTE
We have an established heritage that grounds us, but also gives us foundations from
which we can confidently launch ourselves into what’s ahead. We are committed to
identifying and understanding market trends driven by complex global socio-economic
factors and see innovation as a responsibility of every department across the Group.
PROTECTING OUR CUSTOMERS AND THEIR CONSUMERS
Our regulatory knowledge, dedication and attention to detail enable us to deliver
end-to-end quality that our customers can trust. We know we’re getting it right when
customers rely on our people for on-going support or come to us with a problem they
need solving quickly and efficiently.
5
WHERE WE’RE
HEADING
Having met our 2020 financial targets this year,
our revised strategic pathway illustrates how we
will continue to build on this success.
OUR BUSINESS
We are a company that means business, and this has never been more apparent.
As a Group, we continue to improve our focus and efficiency to better our position
in the value chain. This approach is bringing us closer to our customers, strategically
expanding our footprint across their organisations.
By fostering a culture of innovation, we are seeing cross-departmental teams come
together and identify opportunities to drive us forward. Whether it’s a matter of
improving processing techniques, reducing waste and maximising training to developing
new ways of working, consolidating existing resources and getting the most out of our
existing site – our people are delivering sustainable growth.
Our UK relocation plans continue to move forward on schedule following submission of
our planning application at the end of September. An internal steering group has been
appointed to support the project as it enters the next phase of development, made up
of representatives from across the organisation.
The move will be the single most significant development for the Group to date and
will revolutionise almost every area of the business. Our flagship site will attract the
best talent in the industry and will position us as the leading, science-led, business
that we are.
Expansion work has begun at our site in Lakeland, Florida, giving us increased office,
lab and manufacturing space to serve our growing customer base.
OUR PEOPLE
Our people are our biggest and most important strategic asset and their happiness
is integral to the success of the business. We have a culture that attracts and retains
the brightest minds and once part of our growing team, we continue to cultivate
our talent with a tailored training and development program that will help them
reach their potential.
6
OUR INDUSTRY
There has never been a more exciting time to
work in our industry as it continues to shift
and evolve. The global beverage industry
is expected to reach an estimated value of
$1.9 trillion by 2021 as compound growth
of 3% is forecast over the next three years.
Established and emerging trends continue
to have an impact on the dynamics of this
sector as the use of natural flavours,
sugar reduction solutions and tea blends
all gain momentum.
Millennials the world over are increasingly
aware of their collective buying power and
are having a transformative impact on every
aspect of the beverage market. New product
development pipelines are shortening as
competition heightens, giving rise to more
opportunities for innovation.
We look to increase our market share by
working with customers in regions where
we can add real value.
3%
Compound annual
growth forecast
over the next
three years
Treatt plc – Annual Report & Financial Statements 2017 CITRUS
Within the beverage industry, the taste for citrus flavours remains strong
and will continue to grow as the familiarity of these ingredients becomes
a ‘gateway’ for consumers trying new flavours when paired with a more
traditional orange, lemon or lime. The citrus category is helping brands
to revitalise and capture the imagination of consumers in new ways,
while leaning on the naturalness of flavours and the provenance of their
origins. As they work well in almost every beverage category, we will
see more and more citrus flavours appearing in everything from juices
and flavoured waters to sparkling drinks and teas.
Citrus has been a core part of our business for many decades and will
continue to be as we move forward. Our Global Citrus Strategy focuses
our efforts to ensure we’re best placed to lead the market as it evolves.
We have the best people in place from procurement, sales and purchasing
to distillation, manufacturing and bulking. We take pride in working
together to grow this profitable category for the business through new
product development wins and matching opportunities.
SUGAR REDUCTION
Reducing sugar levels without compromising on flavour, mouth-feel,
brand identity or cost will continue to become an increasingly significant
concern for beverage brands across the world in the years to come.
Now central to business strategy, sugar reduction is of paramount
importance. Everyone from independently owned start-ups to global
household names are reformulating their product ranges as sugar
reduction concerns drive new product development across almost
every beverage category.
As this is a core part of our growth strategy, we continue to invest in
our resources, skills and equipment. A growing team of R&D chemists
across the UK and the USA work in partnership with our customers to
ensure their needs are met – delivering industry leading products that
reduce sugar levels without sacrificing on the consumer experience.
Our global presence allows us to take advantage of established
opportunities in the West as well as the emerging landscape in the East.
TEA
Tea is the second most widely consumed beverage worldwide, following
water. It is globally popular in different forms, with ready-to-drink iced
tea and cold brew tea blends growing market share in North America,
while exotic Chinese and Japanese varieties like Matcha gain huge
momentum across Europe. As consumers move towards low-sugar,
natural beverages that may have additional health benefits, tea has
a broad appeal. It can be niche and premium, as well as suitable for
every day, making it an exciting place to play.
Our team supports a growing customer base in the creation and
production of some of the most exciting tea products in this fast-
expanding market. Whether customers are looking for a fresh brewed
flavour in their ready-to-drink iced tea or a delicate top note in a
blended beverage, we supply the perfect tailored solution across
a range of applications.
7
8
Treatt plc – Annual Report & Financial Statements 2017
GROUP FIVE YEAR TRADING RECORD
Income Statement
Revenue
EBITDA1
Operating profit
Adjusted2 profit before taxation
Growth in adjusted2 profit before taxation
Exceptional items
PROFIT BEFORE TAXATION
Taxation
Profit for the year attributable to owners of the Parent Company
Balance Sheet
Goodwill
Other intangible assets
Property, plant and equipment
Net deferred tax (liability)/asset
Non-current trade and other receivables
Current assets
Current liabilities
Non-current trade and other payables
Non-current bank loans
Post-employment benefits
Non-current derivative financial instruments
Non-current redeemable loan notes (net)
Total equity
Cash Flow
Cash generated from operations
Taxation paid
Net interest paid
Dividends paid
Additions to non-current assets net of proceeds
Acquisition of interests in joint ventures or subsidiaries
Purchase of redeemable loan notes
Net sale of own shares by share trust
Other
Movement in net debt
Total net debt
Ratios
Net operating margin3
Return on capital employed4
Average net debt to EBITDA5
Adjusted2 basic earnings per share
Growth in adjusted 2 basic earnings per share
Dividend per share6
Dividend cover (adjusted to exclude exceptionals)6
Net assets per share
Notes:
2013
£’000
74,097
8,278
6,938
6,227
23.1%
(1,093)
5,134
(1,655)
3,479
1,075
684
11,718
(723)
586
38,340
(12,484)
(23)
(8,889)
(1,589)
(577)
(675)
27,443
9,250
(649)
(714)
(1,585)
(1,578)
(9)
—
91
(151)
4,655
2014
£’000
79,189
9,022
7,928
6,904
10.9%
(1,402)
5,502
(1,553)
3,949
1,075
726
10,994
(611)
586
43,590
(16,005)
(23)
(7,857)
(2,529)
(511)
(675)
28,760
3,528
(1,552)
(724)
(1,899)
(746)
—
—
91
12
(1,290)
2015
£’000
85,934
10,109
8,690
7,950
15.2%
(174)
7,776
(1,786)
5,990
1,075
661
10,998
(390)
—
45,045
(13,481)
—
(7,065)
(2,959)
(699)
—
33,185
8,667
(1,469)
(740)
(1,978)
(1,027)
—
—
180
(204)
3,429
2016
£’000
88,040
11,038
9,549
8,846
11.3%
(553)
8,293
(2,144)
6,149
2,727
637
11,361
325
—
54,435
(16,388)
—
(7,755)
(7,401)
(754)
—
37,187
10,804
(2,022)
(703)
(2,095)
(788)
(752)
—
265
(208)
4,501
2017
£’000
109,627
15,341
13,805
12,892
45.7%
—
12,892
(3,347)
9,545
2,727
604
14,821
619
—
68,228
(27,003)
—
(7,293)
(5,822)
(403)
—
46,478
4,683
(2,822)
(913)
(3,025)
(5,203)
(900)
(675)
355
(71)
(8,571)
(8,294)
(9,584)
(6,155)
(1,654)
(10,225)
9.4%
19.4%
1.28
8.64p
25.6%
3.70p
2.33
52.4p
9.6%
19.9%
0.99
9.95p
15.2%
3.84p
2.58
55.0p
10.1%
22.1%
0.78
11.94p
20.0%
4.04p
2.94
63.0p
10.8%
24.6%
0.35
12.84p
7.5%
4.35p
2.94
71.0p
12.6%
24.3%
0.39
18.29p
42.4%
4.80p
3.79
87.9p
1 EBITDA is calculated as profit before interest, tax, depreciation, amortisation and exceptional items.
2 All adjusted measures exclude exceptional items – see note 8.
3 Operating profit divided by revenue.
4 Operating profit divided by total equity plus net debt.
5 Average of net debt at start and end of financial year divided by EBITDA1.
6 The dividend per share shown relates to the interim dividend declared and final dividend proposed
for the corresponding financial year.
Overview
9
CHAIRMAN’S STATEMENT
“This has been an outstanding year
for Treatt, with adjusted* profit before
tax up by 46%”
Strategic overview
Over the last five years we have reshaped our business and our
clear strategic direction has resulted in a consistently strong financial
performance. The Group’s focus on the key growth drivers in the
beverage sector including innovative citrus, tea and sugar reduction
solutions, as well as growth markets such as China and North America,
is showing clear signs of success.
As previously reported, 2017 saw the delivery of the financial objectives
in our 2020 strategic plan some three years early. The Board has
now approved a new five-year strategy which is evolutionary by nature
and builds on the success and focus of the business over the past
five years.
Notwithstanding our strong growth and market position, we operate in
a highly competitive global market and to build on our success we must
continue to invest in our capabilities. As such, and to support the new
growth strategy, the Board consider that appropriate levels of capital
investment will be required to modernise the Group’s operations.
Accordingly, the Group plans, as previously announced, to undertake a
capital investment programme to expand the Group’s US operations
and to invest in the Group’s UK relocation and expansion plan.
10%
Increase in
dividends
Results
Dividends
2017 was an outstanding year for Treatt with significant milestones
achieved in both sales and profits. For the first time in our history sales
exceeded £100m at £109.6m with profit before tax reaching double
figures at £12.9m.
Revenue increased in the year by 24.5% to £109.6m (2016: £88.0m)
whilst gross profit margin improved by 130bps from 23.2% to 24.5%
as our product mix continued to move towards higher value products
and services. In constant currency, revenue increased by 18.5% and
adjusted* profit before tax grew by 31.5% on a like-for-like basis.
The Directors propose to pay a final dividend of 3.35p per share
(2016: 3.00p), increasing the total dividend for the year by 10.3% to
4.80p (2016: 4.35p). If approved by shareholders at the forthcoming
AGM, the final dividend will be payable on 22 March 2018 to all
shareholders on the register at the close of business on 9 February
2018. Shareholders who wish to participate in the dividend
re-investment plan for this and future dividends should elect to do
so by 1 March 2018.
UK site relocation
Adjusted profit before tax* of £12.9m grew by 45.7% compared with
£8.8m last year, resulting in adjusted basic earnings per share* growth
of 42.4% at 18.29p (2016: 12.84p).
Outline planning permission for the new ten-acre site at the Suffolk
Business Park, Bury St. Edmunds, has been granted, the land acquired,
and the detailed planning application submitted with approval expected
10
Treatt plc – Annual Report & Financial Statements 2017 TIM JONES
Chairman
in early 2018. Once the tendering process has taken place, work is
expected to commence on the build of the new site in summer 2018
with completion in late 2019.
as the longer, term. Significant risks, which are identified by their size
of impact and probability of occurrence, are detailed on the Group
risk register, which is regularly reviewed by the Board.
The site will be a purpose-built, science-led, facility designed to drive
further growth with domestic and international fast-moving consumer
goods companies, as well as to increase our production capacity,
thereby creating a scalable business for the longer term.
US site development
Due to its success in recent years, Treatt USA is reaching the limits
of its current production capacity. We last expanded capacity at this
site in 2011/2012. The Board has now approved further investment
in the existing site in Lakeland, Florida which will involve an extension
to the manufacturing facilities to accommodate the installation of
additional speciality stills. These will allow us to meet customer
demand, particularly for two of our fastest growing product categories
– tea and sugar reduction. We are also expanding our technical and
office facilities to create a more efficient and technical workplace.
Construction is underway, with completion scheduled for late 2018.
People – our strength
We believe adapting to change is essential for the continued growth
of our Group which is why our culture sits firmly at the heart of our
strategy. Over time our people continue to adapt to an ever-evolving
landscape, whilst never losing sight of our core values. I would like
to take this opportunity to thank them for all their hard work and
enthusiasm without which I would not be able to report this truly
exceptional year for Treatt.
Prospects
The Group has had an encouraging start so far to the new financial
year ending 30 September 2018 with both the UK and US tracking
on plan. Furthermore, with order books up compared with the same
time last year, the Group continues to perform in line with the Board’s
expectations for the full year.
Placing
To part fund this investment programme, we have separately announced
an equity placing to raise approximately £21.6m with new and existing
institutional investors which is subject to shareholder approval at a
general meeting on 18 December 2017.
TIM JONES
Chairman
28 November 2017
Corporate governance
We believe strongly in the principles of good corporate governance
and regularly undertake reviews to ensure that these are embedded
throughout the organisation. This includes making sure that the
Board has the breadth of skills and experience needed to optimise the
Group’s prospects and our responsibilities to all our shareholders, staff,
the communities with which we work, the environment, society at large
and all stakeholders. A key area of the Board’s focus includes defining
and communicating our risk appetite and conducting a broad
assessment in respect of our business risks in the shorter, as well
*All adjusted measures exclude exceptional items in the prior year, details of which are given in note 8.
Overview
11
CHIEF EXECUTIVE OFFICER’S REPORT
“A remarkable year for the Group as our
efforts and performance delivered exciting
new customer wins and give us further
confidence for the future”
Review of FY17
It has been a year of strong growth for the Group with important new
business wins with fast-moving consumer goods (FMCG) customers.
The dedication, patience and skill of colleagues throughout the Group
have achieved some notable successes and I want to thank my teams
for everything they do and are achieving for the business.
We started our financial year with strong momentum from the end of
the prior year and that momentum continued across the Group
throughout 2017. Material new business wins in our three core
areas of citrus, tea and sugar reduction have delivered growth
for the business in the year.
Our progress over the last five years has been very encouraging.
As Treatt transitions from its trading house roots to a more science-led,
partnership approach with its customers, the collective confidence
and energy of the business is growing. I am particularly encouraged
that after five years of progress we have today more momentum and
a greater hunger to push the business than ever before. This progress
is reflected in our financial performance. In the last five years,
we have more than doubled adjusted* profit before tax to £12.9m
this year, having grown sales to over £100m for the first time in the
Group’s history.
It is worth noting that the sales cycle for some of our customer projects
can, on occasions, be measured in years from initial conversations
regarding a specialist ingredient solution to the final contract with a
customer. Multiple rounds of stability trials, consumer acceptance
testing and considerations on suitable product launch timing by our
customers all have an impact. Treatt’s teams have been working with
customers on some of these more meaningful opportunities for some
considerable time and it is pleasing to see this patience rewarded
with contribution from a number of these new wins in the year.
Citrus
Citrus, which is present in a large and growing number of beverages
and an area where Treatt has had strong capabilities for many years,
has provided solid growth in the year and our focused strategy is
12
25%
Increase
in revenue
delivering notable wins. Citrus is also a good example of where we
have strategically applied our deep knowledge of raw material markets
to the benefit of our customer base, adding value and bringing them
success. Getting our flavour solutions “designed in” at the inception
stage of new beverage formulations is a key development in enabling
us to achieve our objective of sustainable, profitable growth.
Tea
Through our proprietary distillation, we supply a range of natural
distillates with an authentic fresh-brewed tea flavour. This has been
a key driver of our success in the tea market, which is built around
growth in the consumption of iced tea principally, but not exclusively,
in the North American market as consumer preference moves from
carbonated soft drinks.
Treatt plc – Annual Report & Financial Statements 2017 DAEMMON REEVE
Chief Executive Officer
Sugar reduction
Update on strategy
Sugar reduction remains a key focus for the entire drinks industry and
our volumes and customer breadth have grown. Beverage formulators
continue to find important and authentic flavour nuances from our
offerings, as well as seeing the benefits of our ability to maintain flavour
profiles, in the technically complex world of reducing sugar content.
Sugar reduction is a strongly developing trend as political pressure
and consumer awareness drive demand for lower sugar levels.
Consequently, sugar reduction remains a hot topic for the beverage
industry. Manufacturers are looking to achieve reduction without
sacrificing the pleasing taste experience on the palate and importantly,
flavour, which is much more complex than just the notion of sweetness.
It is the latter vital nuance which Treatt has focused on, and our
offerings into this market play to our strengths of authentic taste, but
critically without the carbohydrates and associated calories of sugar.
Other product categories and markets
While the key growth drivers of citrus, tea and sugar reduction delivered
strongly during the year, it was pleasing that the wider business
also performed well. Notable growth in high-impact synthetic aroma
chemicals, working with our partner Endeavour Specialty Chemicals,
was achieved, and a new five-year agreement signed with them during
the year. Earthoil, the Group’s niche fair trade and organic cosmetic
ingredients business, has continued to maintain its progress of recent
years. It is managed as a stand-alone business and is not considered
core to the Group’s operations.
Looking geographically, both the traditionally important markets of
North America and Europe performed strongly. Pleasingly our newer
strategic efforts in China and India are also showing encouraging
progress since we have committed more locally-based sales and
technical resources to cover these markets, supported by greater
product focus.
As detailed in the Strategic Report on page 27, in September 2017 the
Board approved the latest iteration of our Group strategy. This new
strategy is an evolution of the previous strategy which saw us hit internal
five-year financial targets some three years early. Our focus remains
on the Group’s core growth areas of citrus, tea and sugar reduction,
whilst ensuring sustainable growth in the Group’s wider business.
Capital investment programme
To support this growth strategy, and to create a scalable business for
the longer term, the Directors consider that appropriate levels of capital
investment will be required to modernise the Group’s operations. This
will include developing an environment to promote its partnership-
based client approach, and enhancing its technical capabilities to drive
product innovation, margin expansion and operational efficiencies.
Investment will also be required to increase capacity at the Group’s
facilities to meet expected customer demand.
Accordingly, as previously announced, the Group plans to undertake
a capital investment programme to further expand the Group’s US
production and operational capacity as well as to invest in the Group’s
UK relocation and expansion plan.
UK site relocation and expansion
In the UK, we look forward to our site relocation with excitement and
a great sense of opportunity. Our new environment will provide a
fundamentally improved customer experience, enabling us to showcase
our expertise and extending our capabilities. We will have an appropriate
technical-led facility aligned to meet our customers’ requirements,
at the same time as bringing all the operational benefits of being within
one coherent facility, as opposed to the six sub-optimal buildings we
currently occupy.
It has not been appropriate to commit to expenditure on new capital
equipment in our current location but as part of the move more modern
equipment will be purchased to optimise our manufacturing capabilities
in the beverage space, and deliver process improvements which will
greatly improve operational efficiencies such as automated warehousing.
*All adjusted measures exclude exceptional items in the prior year, details of which are given in note 8.
Overview
13
CHIEF EXECUTIVE OFFICER’S REPORT (CONTINUED)
We will also be able to build deeper relationships with customers
through collaborative working in our laboratories, to make final
refinements to formulations which will speed up the product approval
process and improve acceptance rates.
Much of our success in the last few years has been achieved
by building a collaborative culture for our work colleagues and to
have achieved so much is gratifying, particularly considering our
currently constrained physical environment. The new facility will be
transformational in this regard and will enable us to more than meet
customer expectations of a technical-led solutions provider.
This project is estimated to cost a net £35m, details of which can
be found in the Financial Review on page 19.
US expansion
Significant growth in tea and sugar reduction solutions during the
year and a commensurate order book and opportunity pipeline has
accelerated our plan to increase production capacity and supporting
infrastructure around the manufacturing of those products at our
Florida facility.
We can build on land we already own and at the time of writing
construction is underway on this $14m project, with completion and
commissioning estimated by the end of 2018. This enhancement will
provide a platform for the next phase of our strategy as we increase
our focus on the areas of consumer growth in the markets we serve.
This investment will deliver additional manufacturing capacity as well
as efficiency and process improvements. It will also provide important
physical expansion for our research and development teams, which are
critical partners to our commercial team within key and target accounts.
In addition, the expansion will provide important customer experience
improvements and, as in the UK, we will be able to welcome more of
our customer scientists to work in our laboratories with our own teams.
Funding
The Group capital investment programme is expected to be funded
as follows:
• a new five-year revolving credit facility totalling £15m, for
which the Group has already received a commitment letter
from HSBC (UK);
• a new ten-year construction loan totalling US$11m, for
which the Group has already received a commitment letter
from Bank of America; and
•
the placing of new ordinary shares separately announced
raising approximately £21.6m, subject to a general meeting
on 18 December 2017.
People
We believe our strategy is right for our business but the power behind
its delivery is the energy our fantastic teams give every day. We work
tirelessly to ensure they are aligned and that Treatt is an attractive
company to work for. We take care of our colleagues and ensure they
are given opportunities to develop. Attraction and retention are of
paramount importance to the business and our staff turnover remains
pleasingly very low. We have increased our Global HR team in the last
year which has been a crucial step in delivering our engagement
strategy, with greater investments being made in bespoke training
and support for staff.
We have deepened relationships with key schools and colleges
in the local area as well as partner universities. As we move closer
to our site relocation in the UK we are turning our focus to building
relationships with our prospective near neighbours in education
to ensure our talent pipeline remains robust.
As has been the case for the last five years, a core focus will be
on our colleagues throughout the Treatt Group as we strive for even
higher levels of engagement, passion and determination. The power of
14
Treatt plc – Annual Report & Financial Statements 2017 our colleagues’ efforts for the business has been clearly evident in the
success of the last five years and through investment in bespoke
training programs, and promoting a happy, vibrant culture where the
company looks after our colleagues and engages with the community,
we intend to make Treatt an even better environment in which to work,
learn and drive success. The majority of our colleagues are also
shareholders in the business and that connection provides tangible
alignment to motivation and pride in working for Treatt.
Health and safety is of prime importance
Our culture underpins our positive work around health and safety
across the Treatt Group. Health and safety is owned by all colleagues
and we continue to challenge ourselves to find ways to continually
improve, manage risks and develop in this critical area.
Community
Our values of teamwork, pride and passion, integrity and challenge,
as well as enjoying our work, are central to how we deliver continued
business success.
Supporting the communities in which we work has always been
important to us; we regularly seek opportunities for staff to be involved
in our communities in the UK, US and across the globe and I never fail to
be impressed by our team’s commitment and support for these causes.
In August, to support mental health charity Mind, colleagues
demonstrated true grit and determination when they cycled 880 miles
in just 104 hours in atrocious weather conditions, raising over £8,000,
with the support of staff across all our global offices. Staff in the UK
joined the local council’s waste department on a spring cleaning
project, whilst in Lakeland, Florida, the Treatt team donned their hi-vis
vests and cleaned up a two-mile stretch of their local highway,
collecting over 19 bags of rubbish to help their local community keep
clean. The US team also provided huge support for the second year
running to KidsPack, a charity that supports disadvantaged children
with food packages and clothing with groups helping consistently
every week.
We also welcomed the NSPCC to our UK offices to talk about keeping
children safe online with further support for the charity with a ‘walk
a mile at lunchtime’ challenge, donating £1 per mile walked by staff
taking part.
We have also been shortlisted for several awards, and I was extremely
proud that one of our apprentices was a finalist in the West Suffolk
Trainee of the Year Awards, and that we won the Chamber of Commerce
(East of England) Regional High Growth Business Award, thereby
becoming a finalist in the British Chambers of Commerce Annual
Business Awards. Other awards where Treatt has been shortlisted as
a finalist included the Lloyds Bank Mid-Market Business of the Year
Award, West Suffolk Sport in the Workplace Award and Best Brand
Evolution for our re-brand in the Marketing New Thinking Awards.
Summary
The Treatt journey continues and our financial year has started
positively in what can be a seasonally quieter period. We are encouraged
by our order books which are up year-on-year.
Colleagues throughout the Group are working to deliver on business
opportunities in our pipeline and bring to that pipeline new and exciting
projects. Our two key infrastructure projects in the UK and US are
moving forward and our teams are driven to deliver these projects
while maintaining our excellent level of customer service. As we
sharpen our focus on our three strategic growth areas of citrus, tea and
sugar reduction, we are finding more opportunities to improve processes
and derive value for the mutual benefit of our stakeholders.
DAEMMON REEVE
Chief Executive Officer
28 November 2017
*All adjusted measures exclude exceptional items in the prior year, details of which are given in note 8.
Overview
15
FINANCIAL REVIEW
“Strong revenue growth of 25%,
resulting in adjusted* earnings
per share up by 42%”
Financial overview
Key performance indicators
Net operating margin*
Return on capital employed*
Average net debt to EBITDA*
2017
12.6%
24.3%
0.39
2016
10.8%
24.6%
0.35
*All measures are adjusted to exclude exceptional items in the prior year.
Income Statement
25%
£109.6m
Revenue
46%
£12.9m
Adjusted*
profit
before tax
10%
4.80p
Dividend
42%
18.29p
Adjusted*
earnings
per share
Revenue and profit
Revenue for the year grew by 24.5% to £109.6m (2016: £88.0m) with
strong growth across all of the Group’s main product categories as
a result of, inter alia, a number of new global FMCG business wins.
In constant currency terms, revenue grew by 18.5%, with 6% of the
revenue growth being reflective of a stronger US Dollar in 2017 as
compared to 2016.
Strong revenue growth in Germany (+30%) to £7.2m, South America
(+97%) to £8.2m, China (+27%) to £5.8m and in our largest market
of North America (+26%) to £42.6m demonstrate the global nature
of our market and broadly-based success being achieved by Treatt.
Gross profit grew significantly by 31.4% with gross profit margins
increasing from 23.2% to 24.5%. Over the last three years, gross profit
margins have grown by 240bps as the business has transitioned
to a more added-value, solution-based offering. Alongside this,
process improvement efficiencies and the removal of intermediate
agency commissions has played an important part in driving the gross
margin improvement.
Administrative expenses grew by 19.8% in the year to £13.0m
(2016: £10.9m), although on a constant currency basis the increase
was a less marked 14.1%. The £2.1m increase in administrative
expenses was driven predominantly by increases in base wages and
salaries of £0.9m, with headcount numbers increased across the Group;
up by 6% in the UK and by 4% in the US. The exceptionally strong
financial performance in the year also resulted in higher share-based
payments (up by £0.4m) and bonuses which were up by £0.8m.
Over the last five years net operating margin has grown steadily
from 7.6% in 2012 to 12.6% in 2017 as the business has focused its
strategy on growing revenue, replacing traded commodity business
with bespoke, innovative products, whilst maintaining a tight control
of costs. The success of this strategy has resulted in a 44.6% increase
in operating profit* to £13.8m (2016: £9.5m).
Capital employed increased in the year from £38.8m to £56.7m as a
result of the increased profits being generated, and the increased
investment in inventory of £12.9m. As a consequence, return on capital
employed* remained broadly unchanged at 24.3% (2016: 24.6%).
Revenue
11.2% pa
Earnings
per share
16.4% pa
COMPOUND
10 YEAR
GROWTH*
Profit before tax
16.4% pa
EBITDA
13.9% pa
16
*All measures exclude exceptional items.
Treatt plc – Annual Report & Financial Statements 2017 RICHARD HOPE
Chief Financial Officer
The Group looks to mitigate its foreign exchange risk. The impact
of movements in foreign exchange rates on profit before tax is the
net of retranslating overseas profits, retranslating foreign currency
transactions in UK businesses and the gains or losses on foreign
exchange hedging instruments such as forward and option contracts.
When taken together the net impact on profit before tax for the year
was a gain of £1.4m (2016: loss of £0.5m).
There were no exceptional costs in the year (2016: £0.6m). On an
adjusted basis, which excludes last year’s exceptional costs, earnings
before interest, tax, depreciation and amortisation for the year increased
by 39% to £15.3m (2016: £11.0m). Profit before tax after exceptional
items rose by 55% to £12.9m (2016: £8.3m). Further information on
the previous year’s exceptional items is given in note 8.
Foreign exchange gains and losses
Whilst the Group’s functional currency is the British Pound (‘Sterling’),
the amount of business which is transacted in other currencies creates
foreign exchange exposure, particularly the US Dollar and, to a more
limited extent, the Euro. The US Dollar ended the year 3% weaker
against GBP at £1 = $1.34 (2016: £1 = $1.30). As explained further
under ‘Financial Risk Management’ set out below, the Group hedges its
foreign exchange risk at R C Treatt by holding and managing US Dollar
borrowings and taking out forward currency contracts and options.
This can result in timing differences in the short term, giving rise to
re-translation gains or losses in the income statement. This has
resulted in a small loss on trading transactions of £0.5m in 2017
(2016: £Nil) and a loss on foreign exchange contracts of £0.1m
(2016: £2.2m loss) which has been netted off the revenue line in the
income statement. As part of the Group’s hedge accounting, a foreign
exchange gain of £0.3m was taken to reserves through the Statement
of Other Comprehensive Income (2016: £0.2m gain).
There was a substantial currency impact, a loss of £1.1m (2016: £2.6m
gain), in the ‘Statement of Comprehensive Income’ in relation to the Group’s
investment in overseas subsidiaries, principally in respect of Treatt USA.
Finance costs
The Group’s net finance costs for the year increased by 30% to £0.91m
(2016: £0.70m) as a result of the higher debt levels in the year, resulting
from increased investment in inventory and the acquisition of land
for the UK site relocation. Although debt levels have risen, the cost
of funding the higher debt has been partly mitigated by an interest
rate swap (as set out in more detail below). The Board continues to
be of the view that whilst a significant proportion of current banking
facilities remain unutilised, the current level of these facilities remains
appropriate in order to manage working capital volatility during the year
and also in light of significant capital expenditure requirements over
the next few years. Despite the increase in net finance costs, interest
cover for the year increased to 15.1 times (2016: 13.6 times).
As part of the Group’s risk management processes, R C Treatt fixed
$9m of US Dollar borrowings at 5.68% for ten years by way of an
interest rate swap in 2011. This swap has been designated as a ‘hedge’
in accordance with IFRS and consequently any movements in the
mark-to-market of the swap are taken directly to equity. At the balance
sheet date, the fair value liability, net of deferred tax, of the swap was
£0.4m (2016: £0.8m).
Group Tax Charge
The current tax charge of £3.4m (2016: £2.4m) represents an effective
rate (based on profit before tax and exceptional items) of 26.7%
(2016: 27.0%). After providing for deferred tax, the overall tax charge
increased by £1.2m to £3.3m (2016: £2.1m); an overall effective tax
rate (after exceptional items) of 26% (2016: 26%). There were no
significant adjustments required to the previous year’s tax estimates.
With corporation tax rates continuing to fall in the UK until they reach
an expected 17% in 2020, the Group’s overall effective rate of tax is
expected to fall over the course of the next three years assuming the
profit mix between tax jurisdictions remains broadly unchanged.
Overview
17
FINANCIAL REVIEW (CONTINUED)
Earnings per share
Basic earnings per share (adjusted to exclude exceptional items, as set
out in note 11 for the year increased by 42.4% to 18.29p (2016: 12.84p).
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 adjusted profit after tax.
Dividends
The proposed final dividend of 3.35p per share (2016: 3.00p) increases
the total dividend per share for the year by 10.3% to 4.80p, representing
dividend cover of 3.8 times earnings for the year and a rolling three-
year cover after exceptional items of 3.6 times. The Board’s policy has
been to maintain dividend growth on a consistent basis at between 2.0
and 2.5 times three-year rolling cover. However, in light of the Group’s
capital investment programme, this year’s dividend increase has been
set with a more prudent level of dividend cover. The Board considers
this to be appropriate given the forthcoming cash requirements of the
business in order to fund the UK site relocation and expansion and the
US expansion. Nevertheless, this represents an increase in the dividend
of 55% over the last five years.
Inventory held at the year end was £42.9m (2016: £30.0m), an increase
of £12.9m. This was due to a combination of the growth in the business
over the last year, higher order books and higher prices for certain key
raw materials. The level of inventory, which is highly significant in cash
terms, arises because as an ingredients specialist, Treatt takes many
annual, and in some cases longer-term, contracts with customers as
well as servicing the immediate spot needs of its diverse customer
base. The success of the business has been built upon managing
geographic, political and climatic risk of supply for our customers by
judicious purchasing and inventory management to ensure continuity
of supply and availability. Therefore, it is part of the Group’s business
model to hold significant levels of inventory.
Whilst short-term working capital swings are affected by the factors
referred to in the previous paragraph, and the free cash flow in the year
was an outflow of £3.3m, the net free cash flow generated over the
last five years totals £19.1m.
The net cash outflow in the year was also impacted by the final
Earthoil settlement and related loan note redemption, totalling £1.5m,
and a one-off change to the dividend timetable of £0.8m. These
combined with the land of £3.7m, total £6m of non-recurring cash
flow items in the year.
Balance Sheet
Net Debt
Group shareholders’ funds grew by £9.3m (2016: £4.0m) in the year to
£46.5m (2016: £37.2m), with net assets per share increasing by 24%
to 88p (2016: 71p). Over the last five years, net assets per share have
grown by 77%. 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,
in the balance sheet. It should be noted that net assets have been
reduced by £0.2m (2016: £0.3m) as a result of shares held by the
EBT and SIP, due to the accounting requirements for employee trusts.
This impact will be reversed when these shares are used to satisfy the
exercise of employee share options.
Cash Flow
The level of capital expenditure in the year was £5.2m compared with
£0.8m in 2016, and included £3.7m for the purchase of the land for the
new UK site. No major projects in the UK were commenced in the year,
with the UK site relocation being at the planning stage with capital
expenditure tending to be related to on-going routine renewal and
maintenance whilst plans progress towards the intended relocation.
Preliminary work for the US site expansion commenced, but the
project is at the early stages. The cash flow benefit of delaying certain
capital projects in the UK in anticipation of the new site will inevitably
reverse (as explained below) as both delayed projects, and brought
forward capital expenditure, will occur as part of the site relocation.
Of the £13m of planned capex at the new UK site, approximately £6m
relates to projects which would have been undertaken at the current
site in the last four years, had the impending site move not been on the
horizon. This includes rationalising tanks, implementing clean-in-place
technology and computer-controlled stills.
As a result of the movement in cash, as described above, the Group’s
net debt rose by £8.6m to £10.2m (2016: £1.7m) with a corresponding
increase in the level of gearing from 4% to 22%.
At the balance sheet date the Group had a mix of secured and
unsecured borrowing facilities totalling £25.9m, of which £14.0m
expire in one year or less. Since the balance sheet date, all UK working
capital facilities have been renewed and expiry dates extended, such
that all but $3m with HSBC and £2m with Lloyds (£4.3m approx.)
of the facilities across the Group now expire more than 12 months
after the balance sheet date. The Group’s borrowing facilities are held
with HSBC, Bank of America and Lloyds Banking Group with the
majority of facilities now held on three to five-year terms with expiry
dates staggered to fall in different years. The Group continues to enjoy
positive relationships with its banks and expects all facilities to be
renewed when they fall due.
UK Site Relocation
As explained in the Chairman’s Statement and Chief Executive Officer’s
Report, we continue to progress detailed plans for relocating our UK
business from its current site in Bury St. Edmunds, UK, to a brand new
purpose-built facility nearby. During the year we acquired a ten-acre
green field site on the new Suffolk Business Park in Bury St. Edmunds.
The project has outline planning permission, and a detailed reserved
matters planning application has been submitted, with approval
currently anticipated in early 2018. This is a project which the Board
believes is essential in order to deliver our growth objectives over the
medium to long term.
18
Treatt plc – Annual Report & Financial Statements 2017 We want to keep shareholders apprised of developments and the
following table breaks down the latest cost estimates for the project.
Note that these include costs to upgrade our plant and machinery and
new technologies. As a business we keep abreast of new technologies
which can add value to our operations and the move gives us the
opportunity to incorporate some of these in the design and build of the
new facility. The level of investment in this area is still subject to final
review but current estimates are in the order of £13m, of which
approximately half relates to projects held back from the current site,
with the balance being new and enhanced technologies.
The overall estimated costs of this move break down into four key
elements with the latest estimated costs (see below for further
information as to the basis of these estimates) as follows:
New site acquisition and build costs
Plant, machinery and technical capability enhancements
Relocation expenses
Disposal of current site following completion of move
Total net relocation budget (estimate)
£26m
£13m
£1m
(£5m)
£35m
We hope to be in a position to appoint the main contractor in the first
half of 2018, with construction expected to begin in mid-2018 and the
new site being up and running by late 2019.
Whilst the detailed costs for the project have been prepared in full
quantity surveyor detail in preparation for the tendering process,
benchmarked against industry standards, and tested by two
independent firms of architects, the Board recognises the risks
inherent in a project of this scale. The Board has reviewed the level
of contingency allowed for in the project, being 7.5%, and considered
the flexibility built into the plant and machinery spend. These factors,
combined with the level of headroom within the Group’s existing
banking facilities, and those currently being expected over the course
of the next three years, give the Board confidence that risks inherent
in the UK relocation project have been mitigated as far as practicable.
US Site Expansion
Treatt USA moved to its current site in Lakeland, Florida in 2002 where
it occupies a 15-acre site. Since then, the business has experienced
very strong growth, particularly in the last five years. The substantial
increase in demand for our tea and sugar reduction products, which
are manufactured in the US, means that we now need to increase
capacity again, having last done so five years ago.
We have, therefore, begun a second expansion project which will double
our capacity for these key product categories, with space for further
expansion, as well as expanding our laboratory and office facilities which
are now full to capacity. We expect the project to cost approximately $14m
and be completed by late 2018.
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 £550
(2016: £525) 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 $850 (2016: $825)
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 could also purchase up to £1,800
(or 10% of salary, whichever is lower) of Treatt shares out of gross
income at no cost to the company which the company matched
on a one for one basis. In the year a total of 28,000 (2016: 52,000)
matching shares were granted.
During the year, 150,000 (2016: 160,000) shares were issued to
the SIP at par (2 pence per share). The SIP currently holds 356,000
shares (2016: 241,000), of which 84,000 are beneficially owned by
the company and are available for future awards. It is anticipated
that going forward the obligations under the SIP will 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 USA. 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 Plans which were approved by
shareholders at the 2014 Annual General Meeting, Executive Directors
and certain key employees were granted 252,000 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
370,000 (2016: 806,000) shares during the year, whilst 323,000
(2016: 159,000) were exercised from options awarded in prior years
which have now vested.
During the year, 100,000 (2016: Nil) shares were issued to the Employee
Benefit Trust (EBT) at par (2 pence per share). The EBT currently holds
353,000 shares (2016: 577,000) 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,
but that when necessary further shares will be issued to the EBT.
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 final salary pension 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 2015, the result of which was that the scheme had
an actuarial surplus of £314,000. Consequently, the Group was able
to agree with the trustees that with effect from 1 October 2015 it did
not need to make any further contributions to the scheme. It was
further agreed that if the annual actuarial funding updates, before the
next full actuarial review in 2018, reveal that the funding level has fallen
to 95% or less of the scheme liabilities, then the company would
voluntarily resume contributions.
As required by The Pension Regulator, the actuarial review was
updated on a consistent basis as at 30 September 2017 and, in common
with most other final salary pension schemes, this revealed a reduced
actuarial deficit which, in the case of the scheme, was £0.3m
(2016: deficit of £1.7m), being a funding level of 98% (2016: 92%). The
improvement in the funding level largely resulted from an increase in
the discount rate used to measure the future liabilities of the scheme.
Having agreed to voluntarily resume contributions of £300k per annum
for the year ended 30 September 2017, the Group has agreed with
the trustees that it is not required to make contributions to the Scheme
for the year ending 30 September 2018.
Alongside this, the IAS 19, “Employee Benefits” pension liability in the
balance sheet, net of deferred tax, fell in the year from £6.1m to £4.8m.
The decrease in the deficit was largely the result of reduced scheme
liabilities caused by an increase in the discount rates applied, and an
increase in the value of scheme assets.
Overview
19
FINANCIAL REVIEW (CONTINUED)
Financial Risk Management
Summary
In 2012 we began a new journey for Treatt by establishing a focused
strategy of growing our profits in a sustainable manner in the flavour,
fragrance and consumer goods markets. By 2015 we had delivered
good progress and we therefore refreshed our strategy through to
2020 by setting ourselves new and challenging goals.
It is therefore enormously pleasing to report that in 2017 we have
delivered the financial objectives in our 2020 strategy three years
early. The growth in revenue and profits sets 2017 up as the most
successful year in Treatt’s history with the resultant entry into the
FTSE UK SmallCap index.
We now have new goals and targets to aim for with our new 2022
growth strategy. A major part of that strategy is the extensive capital
investment programme in both the UK and US, which the Board
believes will provide the scalable platform to drive the long-term
growth in the business.
RICHARD HOPE
Chief Financial Officer
28 November 2017
*All adjusted measures exclude exceptional items in the prior year, details of which are
given in note 8.
The Group operates conservative 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, but other currencies such as the Euro can have
a material effect as well. This risk manifests itself in a number of ways.
Firstly, the value of the foreign currency net assets of Treatt USA and
the overseas Earthoil companies can fluctuate with Sterling. Currently
these are not hedged as the risks are considered insufficient to justify
the cost of putting the hedge in place.
Secondly, with R C Treatt exporting throughout the world, fluctuations
in Sterling’s value can affect both the gross margin and operating
costs. Sales are principally made in two currencies in addition to
Sterling, with the US Dollar being the most significant. Even if a sale
is made in Sterling, its price may be set by reference to its US Dollar
denominated raw material price and therefore has an impact on the
Sterling gross margin. Raw materials are also mainly purchased
in US Dollars and therefore US Dollar bank accounts are operated,
through which US Dollar denominated sales and purchases flow.
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
and, to a lesser extent in Euros, as this is the most cost-effective means
of providing a natural hedge against movements in exchange rates.
Where it is more cost effective to do so, the Group will enter into
forward currency contracts and options as well. Consequently, during
the year forward currency contracts have been entered into which
hedge part of R C Treatt’s foreign exchange risk. These contracts
and options have been designated as formal ‘hedge’ arrangements,
with movements in mark-to-market valuations initially taken to equity
and re-cycled to the income statement to match with the appropriately
hedged currency receipts. Currency accounts are also run for the other
main currencies to which R C Treatt is exposed. This policy is expected
to protect the Group against short-term swings in currencies.
20
Treatt plc – Annual Report & Financial Statements 2017 DIRECTORS’ REPORT
Financial statements
The Directors present their report and the audited financial statements
for the Group for the year ended 30 September 2017.
Results and dividends
The results of the Group for the year are set out on page 59. Profit
before tax for the year excluding exceptional items was £12,892,000
(2016: £8,846,000).
The Directors recommend a final dividend of 3.35p (2016: 3.00p) per
ordinary share. This, when taken with the interim dividend of 1.45p
(2016: 1.35p) per share paid on 17 August 2017, gives a total dividend of
4.80p (2016: 4.35p) per share for the year ended 30 September 2017.
Corporate governance
The Corporate Governance Statement on pages 38 to 43 forms part
of this Directors’ Report.
Directors
Rights and Issues Investment Trust
Blackrock Investment Management
Miton Asset Management
Schroder Investment Management
Hargreave Hale
BMO Global Asset Management
James Sharp & Co
Hargreaves Lansdown Asset Management
Barclays Wealth
Conflicts of interest
Number
4,750,000
4,468,475
2,613,865
2,280,543
1,975,124
1,814,904
1,779,588
1,699,484
1,659,593
%
9.10
8.56
5.01
4.37
3.78
3.48
3.41
3.26
3.18
No Director had an interest in any contract of significance during
the year. The Group has procedures in place for managing conflicts
of interest. If a Director becomes aware that they, or a connected party,
have an interest in an existing or proposed transaction with the Group,
they should notify the Company Secretary as soon as possible.
Directors have a continuing obligation to update any changes
to conflicts and the Board formally reviews them annually.
The Directors of the Parent Company are shown on page 22.
Directors’ and officers’ liability insurance
The Group maintains Directors’ and Officers’ liability insurance which
is reviewed annually. The insurance covers the directors and officers of
the Parent Company and its subsidiaries against the costs of defending
themselves in civil proceedings taken against them in their capacity
as a director or officer of a group company and in respect of damages
or civil fines or penalties resulting from the unsuccessful defence
of any proceedings.
Appointment and replacement of directors
Rules about the appointment and replacement of directors are set
out in the Parent Company’s Articles of Association. Further details are
provided in the Corporate Governance Statement on page 39.
Details of the Executive Directors’ contracts and notice periods are
given in the Directors’ Remuneration Report on page 51. The Executive
Directors’ contracts are terminable by the Group giving the required
notice period of one year.
In accordance with the Parent Company’s Articles of Association
and as reported in the Corporate Governance Statement on page 39
(in recognition of Provision B.7.1 of the 2016 UK Corporate Governance
Code) Richard Hope and Tim Jones retire by rotation. Both Directors,
being eligible, offer themselves for re-election. The Nomination
Committee confirms that the individuals’ performances continue to
be effective and to demonstrate commitment to the role, including
commitment of time for Board and Committee meetings and any
other duties.
Directors’ interests in shares
The interests of Directors in shares of the Parent Company are shown
in the Directors’ Remuneration Report on page 54.
Substantial shareholders
In accordance with Rule 5 of the Disclosure and Transparency Rules
of the Financial Services Authority, the Parent Company has been
notified of the following holdings of 3% or more of the voting rights
at 23 November 2017 (the latest practicable reporting date prior
to publication of this document).
Overview
21
2
5
1
6
4
3
7
THE BOARD
TREATT plc is led by an experienced Board of Directors, which
comprises two Executive Directors, one Non-executive Chairman
and four Non-executive Directors. Together, the Executive Directors
bring a combined 54 years’ experience to the Group.
1
2
3
Daemmon Reeve
◆
Tim Jones
●
Richard Hope
4
5
6
Jeff Iliffe
◆●
Anita Haines
◆
Richard Illek
◆●
22
Treatt plc – Annual Report & Financial Statements 2017
7
David Johnston
◆
◆
●
Nomination Committee
Chairman
Remuneration Committee
Chairman
Audit Committee
Chairman
DAEMMON REEVE
Chief Executive Officer, first appointed 2012
JEFF ILIFFE
Non-executive Director, first appointed 2013
Daemmon joined R C Treatt & Co Ltd, the Group’s UK operating
subsidiary, in 1991 and gained extensive industry experience and
knowledge from his time in technical, operational, sales and purchasing
disciplines. In July 2010 he was appointed CEO of Treatt USA and
became Group CEO in August 2012. A key part of his role is to help
provide the cultural environment for the success of Treatt and its
fantastic team, making Treatt a fun place to work along the way. It is the
output of our engaged teams which is driving the success of Treatt.
Seeing our excellent team succeed is what excites Daemmon most
about Treatt.
Family, craft beer and travel fill the moments Daemmon is not thinking
about the business.
TIM JONES
Non-executive Chairman, first appointed 2012
Tim has led Treatt’s Board as its Chairman since 2012.
He began a career in financial services with Royal Insurance and
subsequently held posts in the Middle East, the US and Europe before
entering the beverage/water bottling sector in the early 1990s, including
a joint venture in the Balkans.
Tim is Deputy Chairman of Allia, a charitable organisation providing
resources to the third sector through Stock Exchange listed Bonds,
business mentoring and the provision of workspace. He is also non-
executive director of Retail Charity Bonds plc and serves on a number
of advisory and community interest boards. He remains actively
involved in the City of London where he is a Mansion House Scholarship
Scheme Mentor and a Court Assistant at the International Bankers
Company.
The Judge Business School at Cambridge University awarded him
its Certificate in Enterprise in May 2007, appointed him Entrepreneur
in Residence in 2012 and a Fellow in Entrepreneurship in 2016
Tim is a family man and admits to being an enthusiastic cook but
incompetent skier.
RICHARD HOPE
Chief Financial Officer, first appointed 2003
Richard qualified as a Chartered Accountant in 1990 at PWC and was
certified a Fellow of the Institute of Chartered Accountants in England
and Wales in 2010. He held a number of senior finance positions
for almost 20 years in value-added manufacturing businesses prior
to joining Treatt, including Hampshire Cosmetics Limited.
He was a finalist this year for the Shares Magazine prestigious Finance
Director of the Year award, part of the UK Stock Market Awards.
Richard is a passionate skier and massive Liverpool FC fan. He gets a
sense of pride walking into a supermarket with the knowledge that Treatt
has ingredients in a large number of well-known consumer products.
Jeff Iliffe BSc ACA has widespread experience of the City, industry and
internet-based businesses, including acquisitions, business integration
and investor relations.
He was CFO of Abcam plc from 2007 until 2016, as the company
delivered huge growth to become a world-leading life sciences
business. Previously he was a corporate financier at Panmure
Gordon & Co, during which time he advised Treatt, and has held senior
financial positions in environmental, biotechnology and internet-based
businesses. He is also a non-executive director of Cambridge
Nutraceuticals Limited and a trustee of the Cambridge Arts Theatre.
Jeff really enjoys working with such a talented, knowledgeable
and committed team at Treatt and has a passion for live music,
particularly jazz.
ANITA HAINES
Non-executive Director, first appointed 2002
Anita joined R C Treatt & Co Ltd as Company Secretary in 1988.
In 2000 she was appointed as Human Resource Manager and HR
Director for the Group in October 2002. She retired as an Executive
Director in February 2014 but remains on the Board as a Non-executive
Director. What excites Anita about Treatt is the people. When she joined
there were only 66 people on the payroll, all working out of Northern
Way, and while subsequently our numbers have grown and we have
become international, people are still at the heart of our businesses.
RICHARD ILLEK
Non-executive Director, first appointed 2016
Richard Illek was appointed to the Board as a Non-executive Director
with effect from 1 June 2016. Richard retired from PepsiCo effective 31
March 2016, following 28 years with the company, during which time
he served in various senior roles around the world including Plant
Manager, QA Manager and Technical Services Director, culminating in
his most recent role as Senior Director Manufacturing and Formulations.
Richard is an enthusiastic golfer, skier and gardener. He is a strong
Liverpool fan and loves rock music.
DAVID JOHNSTON
Non-executive Director, first appointed 2011
Senior Independent Director
David started his career working as a biochemist for the UK
government prior to transferring to Switzerland where he worked on
an international programme to enhance the resistance of plants to
pathogens. He then joined one of the leading flavour and fragrance
companies, Firmenich SA, in a variety of commercial and technical
roles over 13 years. He finished his career at Firmenich SA as head
of flavour innovation globally. He then started his own company,
Natural Taste Consulting SARL, focused on the development and sales
of taste modifying compounds.
David also serves as a non-executive director of James Finlay Ltd.
In his spare time David likes cycling and skiing.
Overview
23
DIRECTORS’ REPORT (CONTINUED)
Research and development
Product innovation and research and development are a critical part
of the Group’s strategy and business model as outlined in the Strategic
Report on pages 27 to 37. The main research and development activity
undertaken by the Group is in the area of new product development.
The Group utilises its strong technical capabilities to develop innovative
products that provide solutions for customers, particularly in the food
and beverage sectors. In this way it seeks to make itself indispensable
to a key group of major global multi-national companies. In the opinion
of the Directors, continuity of investment in this area is essential for
the maintenance of the Group’s market position and for future growth.
Financial instruments
Information on the Group’s financial risk management objectives and
policies and on the exposure of the Group to relevant risks in respect
of financial instruments is set out in note 29 of the financial statements.
Going concern and viability statement
The Group’s business activities, together with the factors likely to affect
its future development, performance and position are set out in the
Chairman’s Statement, Chief Executive Officer’s Report and Financial
Review on pages 18 to 19. Information on the principal risks and
uncertainties and how they are managed can be found in the Strategic
Report on pages 27 to 37.
In accordance with provision C.2.2 of the 2016 UK Corporate
Governance Code, the Directors have assessed the prospects of the
Group over a longer period than the 12 months required by the “Going
Concern” provision, C.1.3 of the 2016 UK Corporate Governance Code.
The Board conducted this review for a period of five years, which
is consistent with the longer-term financial plans for the Group.
24
Treatt plc – Annual Report & Financial Statements 2017
In determining the longer-term viability of the Group, the Directors
considered the Group’s business activities, together with the factors
likely to affect its future development, performance and position.
The review also included the financial position of the Group, its cash
flows, and available sources of finance.
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, which are shown on pages 29 to 33.
Consideration was also given to the impact of mitigating risk, as well
as their interdependencies. In assessing the Group’s prospects and
resilience, the Directors have done so with reference to its current
financial position and prospects, its recent and historical financial
performance and forecasts, the Board’s risk appetite and the principal
risks and mitigating factors described on pages 29 to 33.
The key factors considered by the Directors within the five-year
review were:
•
•
•
•
•
•
the implications of the challenging economic environment,
the likely potential outcome of Brexit and future uncertainties
on the Group’s revenues and profits;
the implications of fluctuating prices of the Group’s strategic
raw materials;
the implication of the proposed site relocation in the UK
and site expansion in the US;
the impact of the competitive environment within which
the Group’s businesses operate;
the potential actions that could be taken in the event that
revenues are worse than expected, to ensure that operating
profit and cash flows are protected;
the Group’s access to short, medium and long-term
borrowing facilities to meet day-to-day working capital
requirements and capital expenditure on the UK and US site
projects, as well as long-term investment requirements;
•
the Group’s ability to access equity as a source of finance;
and
• a sensitivity analysis which involves flexing a number of
the main assumptions underlying the five-year plan and
considering the implications of a number of risks
materialising during a short-term period.
The current expectations regarding the costs of the proposed UK site
relocation and US site expansion, and the funding of these projects are
set out in the Financial Review on page 16. Given the levels of debt
finance available to the Group to fund these investments and the
possibility of raising equity finance, as at the date of this report, the
Directors have not identified any material uncertainties which would
affect the Group and Parent Company’s ability to continue as a going
concern for a period of 12 months from the date of this annual report.
Furthermore, the Directors have a reasonable expectation that the Group
has adequate resources available to it to continue in business and meet
its liabilities over the five-year period of their viability assessment.
Accordingly, the Directors continue to adopt the going concern basis
in preparing these financial statements.
Health and safety
The Group’s on-going investment in health and safety continued during
the financial year and forms an integral part of the Group’s strategy,
remaining at the forefront of all our operations. Particular emphasis
is placed upon continuous improvement by way of a comprehensive
Safety Management System designed to monitor and measure over-
arching policies and procedures, and a range of key indicators are
maintained and reported at every Board meeting.
The UK manufacturing facility is designated as a top-tier site under the
Control of Major Accident Hazards Regulations 1999 (“COMAH”), which
is enforced by the Competent Authority, being the Health and Safety
Executive and the Environment Agency. The main aim of the regulations
is to prevent and mitigate the effects of major accidents involving
substances which can cause damage/harm to people and/or the
environment. Accordingly, Treatt is regulated under the stringent
COMAH regulations and works closely with the Health and Safety
Executive and the Environment Agency, ensuring that the safety and
environmental security of the site is paramount.
A top to bottom culture of safety awareness and responsibility is
actively promoted within the business. Appropriate health, safety and
environmental training and development is in place across the
workforce. All staff are engaged to help underpin the efforts of the
health and safety professionals employed within the Group. Across
the Group, members of staff hold additional responsibility as Safety,
Health and Environment Champions providing additional representation,
monitoring capability and support to staff on a day-to-day basis. These
additional responsibilities, for which the Champions receive payment,
ensure that safety remains a top priority of the business.
Employee health and well-being is monitored and dedicated, bespoke
support is provided where necessary.
Greenhouse gas emissions
The Group’s disclosures on greenhouse gas emissions have been
included within the Strategic Report on page 34.
Employees
information requested by it in accordance with Part 22 of the Companies
Act 2006 or (ii) where their holder is precluded from exercising voting
rights by the Financial Services Authority’s Listing Rules or the City
Code on Takeovers and Mergers.
Rights and obligations of ordinary shares
On a show of hands at a general meeting every holder of ordinary
shares present in person or by proxy and entitled to vote shall have
one vote and on a poll, every member present in person or by proxy and
entitled to vote shall have one vote for every ordinary share held.
Subject to the relevant statutory provisions and the Articles, holders of
ordinary shares are entitled to a dividend where declared or paid out
of profits available for such purposes.
Articles of Association
The powers of the Directors are conferred on them by UK legislation
and the Articles of Association. Changes to the Articles must be approved
by shareholders passing a special resolution at a general meeting.
Powers of the Directors and purchase of own shares
At the forthcoming Annual General Meeting in 2018, the Parent
Company will be seeking a renewal of the shareholder authority for the
Directors to purchase up to 10% of the Parent Company’s ordinary
shares, although at present the Directors have no plans to buy back
any shares. It is, however, considered prudent to have the authority
in place so that the Parent Company is able to act at short notice if
circumstances warrant.
A resolution will also be proposed at the 2018 Annual General Meeting,
to renew the power given to the Directors to issue new shares up to
an amount of 33% of the existing issued share capital, in line with
the latest institutional guidelines issued by the Association of British
Insurers (ABI), of which 5% of the existing issued share capital can be
issued by disapplying pre-emption rights.
It is the Parent Company’s intention to seek renewal of these general
authorities annually.
The Group’s disclosures on employees have been included in the
Strategic Report on page 36.
Treatt Employee Benefit Trust (the “EBT”)
Structure of share capital
The Parent Company’s share capital comprises 52,905,170 ordinary
shares with a nominal value of 2 pence each. All of the Parent
Company’s issued ordinary shares are fully paid up and rank equally in
all respects. The rights attached to them, in addition to those conferred
on their holders by law, are set out in the Articles, a copy of which can
be found on the Treatt website or obtained on request from the
Company Secretary.
Details of the issued ordinary share capital of the Parent Company and
movements during the year are set out in note 24 of the financial
statements. During the current period the Parent Company issued
150,000 shares to Treatt SIP Trustees Limited (2016: 160,000)
and 100,000 to the Employee Benefit Trust (2016: Nil).
Restrictions on transfer of securities
There are no restrictions on the transfer of ordinary shares or on the
exercise of voting rights attached to them, except (i) where the Parent
Company has exercised its right to suspend their voting rights or to
prohibit their transfer following the omission of their holder or any
person interested in them to provide the Parent Company with
The EBT holds ordinary shares in the Parent Company in order to
meet obligations under the Group’s employee share option schemes.
No shares (2016: Nil) were purchased by the EBT during the year
ended 30 September 2017. During the year 100,000 (2016: Nil) shares
were issued under a block listing application. The trustees have waived
their voting rights and their right to receive dividends in respect of the
ordinary shares held by the EBT.
Treatt SIP Trustees Limited (the “SIP Trust”)
The SIP Trust holds ordinary shares in the Parent Company in order
to meet the obligations under the Group’s Share Incentive Plan in the
UK which was approved at the 2014 Annual General Meeting. During
the year 150,000 (2016: 160,000) shares were issued under a block
listing application. Voting rights are waived on all shares held in the SIP
Trust whether or not allocated to participants under the rules of the
Share Incentive Plan. Dividends are only waived in respect of shares
which have not been allocated to participants; dividends received by
the SIP Trust on behalf of participants are reinvested in shares at
market value on the date of reinvestment.
Overview
25
DIRECTORS’ REPORT (CONTINUED)
Annual General Meeting and restrictions
on voting deadlines
The Annual General Meeting of the Parent Company will be held at
The Athenaeum, Angel Hill, Town Centre, Bury St. Edmunds, Suffolk,
IP33 1LU on 26 January 2018. The Notice of Meeting and explanatory
notes are given on pages 97 to 101. The notice of any general meeting
will specify the deadline for exercising voting rights and appointing
a proxy or proxies to vote in relation to resolutions to be proposed at a
general meeting. The number of proxy votes for, against or withheld in
respect of each resolution are announced and published on the Treatt
website after the meeting.
Auditors
RSM UK Audit LLP has indicated its willingness to continue in office.
On the recommendation of the Audit Committee, resolutions are to be
proposed at the Annual General Meeting for the re-appointment of RSM
UK Audit LLP as auditors of the Parent Company and its subsidiaries,
and to authorise the Board to fix their remuneration. The remuneration
of the auditors for the year ended 30 September 2017 is disclosed in
note 5 of the financial statements.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Directors’ Report,
the Strategic Report, the Directors’ Remuneration Report, the Corporate
Governance Statement and the financial statements in accordance with
applicable law and regulations.
• state whether they have been prepared in accordance with
IFRSs adopted by the EU;
• prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the Group
and the Parent Company will continue in business.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Group’s and the Parent
Company’s transactions and disclose with reasonable accuracy at any
time the financial position of the Group and the Parent Company and
enable them to ensure that the financial statements and the Directors’
Remuneration Report comply with the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the IAS Regulation.
They are also responsible for safeguarding the assets of the Group and
the Parent Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Treatt plc website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
Directors’ statement pursuant to the Disclosure
and Transparency Rules
Each of the Directors, whose names and functions are listed in the
Directors’ Report, confirms that, to the best of their knowledge:
Company law requires the Directors to prepare Group and Parent
Company financial statements for each financial year. The Directors
are required under the listing rules of the Financial Conduct Authority
to prepare Group financial statements in accordance with International
Financial Reporting Standards (“IFRS”) as adopted by the European
Union (“EU”) and have elected under company law to prepare the
Parent Company financial statements in accordance with IFRS as
adopted by the EU.
•
•
The Group financial statements are required by law, and IFRS adopted
by the EU, to present fairly the financial position of the Group and
the Parent Company and the financial performance of the Group.
The Companies Act 2006 provides, in relation to such financial
statements, that references in the relevant part of that Act to financial
statements giving a true and fair view are references to their achieving
a fair presentation.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Parent Company
and of the profit of the Group for that period.
In preparing each of the Group and Parent Company financial
statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and
prudent;
26
the financial statements, prepared in accordance with
IFRS as adopted by the EU, give a true and fair view
of the assets, liabilities, financial position and profit
of the Group and Parent Company and the undertakings
included in the consolidation taken as a whole; and
the Strategic Report contained in the Annual Report
includes a fair review of the development and performance
of the business and the position of the Group and the
undertakings included in the consolidation taken as a
whole, together with a description of the principal risks
and uncertainties that they face.
Statement as to Disclosure of Information to Auditors
The Directors who were in office on the date of approval of these
financial statements have confirmed, as far as they are aware, that
there is no relevant audit information of which the auditors are
unaware. Each of the Directors have confirmed that they have taken
all the steps that they ought to have taken as Directors in order to make
themselves aware of any relevant audit information and to establish
that it has been communicated to the auditors.
This report was approved by the Board on 28 November 2017.
Signed on behalf of the Board.
ANITA STEER
Secretary
Treatt plc – Annual Report & Financial Statements 2017 STRATEGIC REPORT
Overview
The Group is required to produce a strategic report complying with
the requirements of The Companies Act 2006 (Strategic Report and
Directors’ Report) Regulations 2013 (“the Regulations”).
An overview of the Group’s strategy and business model is set out
below, and together with the Chairman’s Statement, Chief Executive
Officer’s Report and Financial Review on pages 10 to 20, forms part of
this Group Strategic Report. This incorporates a review of the Group’s
activities, its business performance and developments during the year,
as well as an indication of likely future developments.
The Board approved an updated Group strategy in September 2017 and
this strategy, entitled ‘Strategy 1.2 – the pathway to 2022’ (‘Strategy
1.2’), was presented to all employees with management responsibility
in the UK and US by the Executive Directors at strategy communication
events held during October and November 2017. Our managers ensure
that the strategy is thoroughly communicated throughout the business
and that each member of their team understands how they can have
a positive impact on the overall Group strategy.
The main objective of the strategy remains as reported in the 2016
report and accounts; the focus is on the delivery of long-term and
consistent growth in profitability by focusing on those customers
and products which can bring Treatt long-term sustainable value.
The strategy is an evolution of our existing strategy, which has provided
significant growth and a strong platform for the future. It provided us
with direction and embedded behaviours that will continue to drive the
business but with the additional focus provided by the new strategy.
The strategy places significant importance on our colleagues and
culture, the important product growth categories of citrus, tea and
sugar reduction and looks ahead to our physical relocation and
expansion plans which will provide the platform for this and subsequent
strategies to manifest.
Our strategy has taken the winning elements of our existing strategy
and provides greater focus to the areas which are driving our success
in order to set the business up to achieve our future targets. As we
grow our business it is important we maintain focus on all product
categories but at the same time target increased resource on areas of
the business which have strongly delivered for Treatt as well as offering
growth potential in the future.
Health and Safety will always remain a key priority in the business.
Without a safe business the Group cannot exist. We continuously train
and re-train our staff to ensure that we operate best health and safety
practices throughout the organisation. Our culture is very important
in terms of health and safety as staff feel comfortable in speaking
up about concerns and with suggested improvements.
Culture
Our cultural strategy focuses on enhancing the engagement of our
workforce through a spectrum of methods from career development
and training to support and care of our staff. We will continue to develop
our employer brand to position Treatt as an employer of choice
attracting the best candidates to support our growth.
Our culture generates energy and enthusiasm from our teams and
importantly, continues to foster an environment which cares for, and
values, the strengths of diversity. An important part of our cultural
strategy is our engagement with our local communities where we are
making significant strides and as a result Treatt is being much more
widely recognised both as a desirable employer and a business which
takes its community responsibility seriously. We have several members
of staff who are engaged in local schools and colleges in STEM1 and
other initiatives which deepen our relationships as we consider our
long-term talent pipeline for the business. We have recently been
recognised by the Chamber of Commerce, winning regional High
Growth Business of The Year and one of our apprentices was a finalist
in the Bury Free Press Business Awards.
Citrus
Citrus flavours have long been at the core of our product portfolio and
Strategy 1.2 supports the formation of a dedicated, cross-functional
citrus team with operational, technical, commercial and other disciplines
to further develop this important growing category even further.
Our strategic location of Lakeland in central Florida is in the heart of a
much-reduced Florida citrus belt compared with its inception a quarter
of a century ago but nevertheless the importance of our long history
in citrus provides a sound starting point to push this important category
on further. Consumer appetite for citrus flavours remains very strong
and is globally appreciated by the consumer, with regional taste
nuances providing variations on the refreshing theme. Treatt has a
wealth of citrus knowledge and experience and the power of effectively
channelling the energy of our citrus team and those supporting it will
be an important and exciting element of the strategy.
Tea
The iced tea market continues to grow and innovate. Whilst iced tea
growth in North America has slowed in terms of consumption, the
market is growing and Treatt has achieved some notable success
with our tea portfolio which, much like sugar reduction, is centred
on authenticity of the flavour. Treatt’s tea solution might consist
of a large volume black tea for a legacy ready-to-drink tea beverage,
or the solution might take the form of an authentic matcha tea driven
by consumers’ desires for new tea experiences. Treatt works in an
intimate relationship with key clients, utilising in-house tea sommeliers
to ensure successful ‘concept to commercialisation’ across such a
wide array of solutions.
Sugar Reduction
Sugar reduction remains a hot topic in the beverage industry
and is technically complicated which suits Treatt’s technical solution
provision mindset. Sugar provides flavour, sweetness and mouthfeel.
It is principally in the niche of flavour that Treatt operates. Sweetness
is easier to replicate in a beverage if sugar is reduced or replaced
but the authentic and pleasing flavour of sugar is more difficult
to replicate. This is an area where Treatt has a growing reputation and
is recognised for bringing that important technical sugar authenticity
to the flavour profile of a beverage, coveted by consumers.
1 Science, Technology, Engineering and Mathematics.
Overview
27
STRATEGIC REPORT (CONTINUED)
Capital Investment
UK site relocation
Treatt’s existing UK facility has expanded significantly over the past 40
or so years. As the business expanded, more buildings were acquired at
the Northern Way location, resulting in widely dispersed staff occupancy
across six buildings, seven separate delivery points for materials and five
separate material storage sites. A public road cuts through the facility
which results in further dispersion and separation. The buildings and
infrastructure are now reaching the end of their useful lifespan and are
both environmentally and productively inefficient. Future business growth
cannot be successfully accommodated in the current business location.
The new facility has been carefully planned. The Suffolk Business Park
is just four miles from the current facility, which will result in the
all-important retention of Treatt’s highly skilled workforce. The buildings
have been designed with the future in mind and will provide an attractive
aspect from the outside and a great sense of arrival for both staff
and customers. Internally, there will be enough space to accommodate
medium-term growth and, through modular design, provide for longer-
term expansion. The layout will significantly enhance team-working,
communication and efficiency in all areas of the business. A significant
investment is being made in our distillation facilities to increase both
efficiency and processing capacity in line with projected business
growth. Manufacturing and blending will be located in a single building,
compared to four separate locations currently. Warehousing and
logistics will be accommodated adjacent to manufacturing to minimise
material movements and will benefit from intelligent storage systems.
A state of the art laboratory facility will provide both customer assurance
and a welcoming customer experience at Treatt. The overall facility design
and choice of materials meet all regulatory requirements, exceed
environmental standards and provide for future expansion and growth.
US site expansion
Our site expansion in Lakeland, Florida is capacity-driven. As demand
continues to grow for solutions primarily in tea and sugar reduction
we must introduce further manufacturing capacity. The 60,000 sq. ft.
expansion will allow for growth in key areas: Operations, Administration
and Technical. In designing this expansion we have also considered our
future needs and additional space has been allocated of approximately
40,000 sq. ft. to further increase capacity in the longer term. Also,
a critical design criterion was to keep all Lakeland-based staff under
one roof to further enhance the fantastic culture already in place.
The Operations footprint will grow by more than 80% providing
additional manufacturing and storage capacity. Additional space will
be allocated for future equipment that will be used to manufacture
new product lines in value-added categories.
Included in the expansion is a new 10,000 sq. ft. building to house the
administrative side of the business. To continue our tradition of excellent
customer service, and to manage our expanded capabilities effectively,
we are planning for growth in our Customer Services, IT and Regulatory
functions. The design criteria for this expansion focuses not only on
the customer experience, but also the staff working environment to
optimise employee engagement whilst controlling costs.
Key Performance Indicators (KPIs)1
KPIs have been set at Group level, having been devised to allow the Board and shareholders to monitor Group performance. The Group has financial
KPIs which it monitors on a regular basis at Board level and, where relevant, at operational executive management meetings. The key performance
indicators shown below cover a period of five years which is reflective of the Board’s long-term thinking.
Growth in adjusted1 profit before tax
Adjusted profit before tax is considered the most appropriate measure of the underlying performance of the Group.
45.7%
11.3%
15.2%
2017
2016
2015
2014
10.9%
Growth in adjusted1 basic earnings per share
Adjusted earnings per share is considered the most appropriate measure of performance which is aligned with shareholder value.
42.4%
20.0%
7.5%
15.2%
Net operating margin2
Net operating margin is considered an important measure of the profitability of the Group.
12.6%
10.8%
10.1%
9.6%
Return on capital employed3
Return on capital employed is an important measure used to assess the profitability of the Group relative to the capital being utilised.
24.3%
24.6%
22.1%
19.9%
Average net debt to EBITDA4
0.78
Average net debt is used to ensure that the level of debt is appropriate relative to the profits generated by the business.
0.39
0.35
0.99
2013
23.1%
25.6%
9.4%
19.4%
1.28
1 All KPIs are calculated excluding exceptional items.
2 Operating profit divided by revenue.
3 Return is defined as operating profit. Capital employed is defined as net assets plus net debt.
4 Average of net debt at start and end of financial year divided by EBITDA1 .
Commentary on the performance of the business with reference to the financial KPIs is given in the Chairman’s Statement, Chief Executive Officer’s
Report and Financial Review on pages 10 to 20.
In addition, the Board monitors a number of non-financial key performance indicators relating to health and safety and employee well-being
as follows:
Number of reportable accidents across the Group
Average number of sick days per employee
2017
3
3.06
2016
2
4.29
2015
5
3.66
2014
3
3.39
2013
3
3.45
28
Treatt plc – Annual Report & Financial Statements 2017 To further support the growth of our business, the quality control and
research and development areas will be tripled in size. The expansion
and renovation of the current office space, the first in 15 years, will
provide an inspiring, updated look to support our talented scientists. As
volumes grow and customer expectations for quality and new product
development continue to increase, the additional space will be a
highlight for customer visits and will provide collaboration opportunities
on our benches with peer customer scientists.
There continues to be focus on health and safety and encouragement
of the reporting of incidents. There has been one reportable accident at
R C Treatt, two at Treatt USA and none at Earthoil. Although reportable,
no accident resulted in serious injury to staff and appropriate actions
were taken in response to reduce the likelihood of further occurrences.
The overall number of sick days across the Group has decreased
significantly, which is especially encouraging as the number of
employees has increased. Accordingly, there has been a decline in
the average number of sick days per employee. Additional focus on
absence policies in recent years may have contributed to the reduction.
As the health and safety of our workforce continues to be a priority,
accident and sickness levels are reported to the Board at each meeting.
A process of continuous improvement ensures that action is taken to
improve the safety of the working environment at every opportunity.
Occupational Health is involved with employees at an early stage in
order to try and reduce long-term absence and reasonable adjustments
are made to working hours and duties to assist employees in returning
to work in a structured and safe manner. The Group has appropriate
insurance policies in place to assist those staff on long-term absence,
in order to ensure that they do not suffer financially.
Principal Risks and Uncertainties
Whilst the Board has overall responsibility for setting the risk appetite
within the business and for Group risk management, day-to-day risk
management responsibility is delegated to the Executive Directors
who work closely with the senior management teams in reviewing
and monitoring risk across the business. Risk appetite is an expression
of the type and amount of risk we are willing to accept to achieve our
strategic objectives. The Board sets the appetite for risk across the
business by reviewing and challenging the risk register, ensuring that
risks are considered and mitigated to an appropriate degree and that
they are consistent with the strategic objectives of the business.
The register inherently defines the level of risk the Board is content for
the business to be subjected to and is a key consideration in decision-
making across the Group. It also helps to define and monitor the actions
required to mitigate our risks. Effective risk management is inherent
in the culture of the Group and the way in which we do business.
An understanding of the risks within our business and their strategic,
commercial, financial and legal implications encourages clear decision-
making in respect of the risks which we will and will not take.
Our risk management framework provides a consistent and structured
process for identifying, assessing, responding to and monitoring risk.
The senior management teams compile Group risk registers considering
the effects of risks on the business and determining appropriate and
proportionate risk mitigation strategies. Responsibility for monitoring
and reviewing each risk is taken by a designated senior member of
staff, ensuring that there is appropriate accountability. The risk register
includes over 80 risks which are rated on their probability and impact
and re-rated after mitigation. Those responsible for each risk will
use a variety of tools to monitor their risk at a more granular level,
including more detailed sub-registers and pertinent Key Performance
Indicators (KPIs).
Where significant projects are undertaken, such as the pending site
expansion at Treatt USA and the site relocation in the UK, specific
project risk registers are established to record all risks that could
have a significant effect on the success of the project. This ensures
that there is accountability for the mitigation strategies that are put
in place and enables regular monitoring of risk identification and the
effectiveness of mitigating actions throughout the project.
Any risks that remain classified as high or medium post mitigation
form the Board risk register, providing details of those risks that may
impact upon the strategic direction of the Group. The Board reviews
this register twice a year and upon any material change, with any
amendments, control issues, accidents or commercial, financial,
regulatory or reputational issues being reported to the Board in
the meantime.
To monitor and review progress, during the year the Board selected
three particular risks within the Board risk register, and requested
a detailed, internally-led, review to determine that the mitigation
strategies committed to by management are in place and effective.
These were risks associated with product quality, procurement and IT
security. The Board received a comprehensive report detailing how
each of the risks are managed on a day-to-day basis, which provided
evidence of the systems and procedures in place, the scale of testing
and monitoring undertaken, and their effectiveness. The results
supported our view that risk mitigation is inherent in our policies and
procedures and that those responsible for risk explore ways of
continuously improving our internal systems to ensure that we work
within the risk appetite set by the Board. It is intended that the Board
will repeat this process in the coming year to review a number of other
identified risks.
The Board has also conducted a review of the effectiveness of the
Group’s system of internal controls. The Board reviewed and discussed
a paper detailing the effectiveness of the Group’s internal controls,
covering all material controls, including those which are financial,
operational and compliance related. The Board has monitored and
reviewed the effectiveness of the Group’s overall approach to risk
management and has solicited the views of a number of senior
managers relating to commercial and financial matters and the
management of those risks. The Board has concluded that the current
risk management procedures for identifying risks and considering risk
mitigation are appropriate.
Whilst foreign exchange is a risk to the business, the underlying impact
of the US dollar has had a lesser effect on profits in the financial year
than in the prior year. The majority of the Group’s raw material
purchases are made in US dollars as are the majority of the Group’s
sales. The Group has hedging policies in place which mitigate the
impact of movements in the US dollar exchange rate. Further
information on how the Group manages its foreign exchange risk
is given in the Financial Review on page 17.
Following the decision of the United Kingdom to leave the European
Union the Board and management team have continued to monitor the
impact that this may have on the business; and beyond the impact of
currency movements there remains no visible impact on the business
from Brexit to date. Whilst the UK government continues to negotiate
Britain’s exit from the EU, management believes that Treatt’s global
footprint gives it flexibility to face any challenges that may arise.
Overview
29
STRATEGIC REPORT (CONTINUED)
We do not currently foresee any regulatory changes as a result of Brexit
that we would expect to have a material impact on our business.
Nevertheless, we will continue to monitor the situation closely, including
the following areas of potential impact on our business:
• Short-term volatility in exchange rates. The continued
weakness of Sterling against the currencies in which
the Group trades, compared with pre-Brexit referendum
levels, would be positive for revenues and profitability.
With the increasing revenue flows from our US business,
which continues to grow, Treatt has benefitted from the
strengthening of the US Dollar in this respect and we
regard a stronger, but stable, Dollar as being beneficial for
our business. As Richard Hope reports in more detail in
his Financial Review, our foreign exchange (FX) hedging
model mitigates short-term volatilities and is designed to
unwind over a period of time depending on our prevailing
inventory turn. A large majority of our inventory is US
Dollar denominated. Our policy is to hedge a material
proportion of estimated net foreign currency cash flows,
on a rolling basis.
•
Increases or decreases to import or export tariffs both with
EU countries and globally, dependent upon the outcome
of future trade negotiations. As well as potential increases
to cost, new customs procedures and paperwork might
result in increased shipping times. However, having two
manufacturing locations in the UK and US gives us some
flexibility to respond to this.
• Restrictions on the free movement of labour, especially for
EU residents already working in the UK, has the potential to
cause us some short-term disruption, as R C Treatt has a
diverse workforce, having been able to benefit from some
talented and skilled individuals from within the EU.
In 2015, in light of the increased emphasis on risk in the 2014 Corporate
Governance Code, the Board reviewed the process of risk management
and whether risk should fall within the remit of the Audit Committee,
with the Board retaining overall responsibility. It was decided that due
to the size of the Group, risk management should remain with the full
Board but as the Group continues to grow, this will remain under review.
How we manage risks
The management of risk is embedded within the framework of the
Group, which includes:
•
the process of strategy setting;
• a clear understanding of market conditions and raw
material prices;
•
the quality of our people and culture;
• established policies, procedures and internal controls;
• processes for identification, review and monitoring of risk;
• regular dissemination of financial and non-financial
information and KPIs; and
• oversight of risk by the Board.
30
The Board has carried out a robust assessment of the principal risks
and uncertainties facing the business, including those that would
threaten the business model, future performance, solvency or liquidity.
The following list of principal risks and uncertainties are those which
individually or collectively might be expected to have the most significant
impact on the long-term performance of the business and its strategic
priorities. It is not intended to be an exhaustive list and additional
risks not presently known to management, or risks currently deemed to
be less material, may also have potential to cause an adverse impact
on the business.
As plans progress with the UK site relocation and the US site expansion
it is recognised that failure to deliver either project on time and to
specification and budget could have a material impact on the business.
Consequently, they have been added to the list of principal risks and
uncertainties.
The risk climate in respect of the commoditisation of existing Treatt
products has increased as customers continue to advise us that, whilst
new product development will remain important to their business, there
is particular focus on reducing the cost of existing products. Therefore,
Treatt is seeing some stiffer competition for existing business as our
competitors seek to reduce the cost of their ingredients in a bid to win
business. Additionally, some products that Treatt traditionally saw as
value-added are now seen as standard in the industry, with customers
able to put out to tender or manufacture themselves. Our response
is to capitalise on areas of the market where we are particularly
strong and to continue to drive process and efficiency improvements.
The planned investment in facilities will be instrumental in this and in
enhancing our ability to expand our value-added offering to customers.
Another risk which is deemed to have increased, is the supply of natural
products with fluctuations in supply being caused by climatic conditions
and natural disaster. The year has seen significant flooding and storm
damage in a number of regions, as well as wildfires and earthquakes,
all of which can impact the availability of natural raw materials.
The overall risk climate in respect of movements in raw material prices
has remained unchanged. In the short-term some products, orange oil
in particular, saw record high prices during the course of the year and
significant volatility from the potential impact of Hurricane Irma in
relation to next season’s orange crop. However, Treatt is particularly
experienced in this area of the business and strategic decisions are
regularly taken to mitigate price movements such as these which,
whilst not eliminating risk, have a history of being effective.
One of the principal risks identified for the business is from structural
damage to our facilities from adverse weather events, particularly
from hurricanes and storms in Florida, where our subsidiary Treatt
USA is based. The facility is in Lakeland, which is inland, meaning that
the main threat is wind rather than flood damage. We have detailed
hurricane plans for mitigating damage which were put into action in
2017 when we saw the worst hurricane in Florida since 2005.
There was no significant damage to the facility and only 36 hours of
production was impacted. Nevertheless, the weather in Florida remains
unpredictable and we must recognise this continued risk and ensure
that we are ready to respond to it. The forthcoming site expansion
project will include an upgrade to the existing buildings, and improve
their ability to withstand storm damage.
Consolidation within the flavour industry has been removed from the
list, since although it remains a risk, it is one which has been evident
for some time as organisations within our industry grow through
acquisition and it has not to date, nor is expected to, have a significant
impact on the long-term performance of the business.
Treatt plc – Annual Report & Financial Statements 2017 Strategic Objective and Priorities
Sustainable Growth (SG) Culture (C) Citrus (Cit) Sugar (S) Tea (T) Capital Investment (CI)
EFFECT
STRATEGIC IMPACT
RISK CLIMATE
MITIGATION
KEY DEVELOPMENTS
RISK
PEOPLE
Poaching of key
staff
FINANCIAL
Overspend
on UK site
relocation
and US site
expansion
C
SG
No change
SG
CI
Added for the
first time
As our highly
skilled and
experienced
staff become
increasingly
customer
facing the risk
of them being
headhunted
increases.
Increased costs
in borrowing,
reduction in
working capital
headroom and
a need to cut
costs in other
areas.
Movements in
commodity raw
material price
Impact on
contribution,
possible stock
shortages.
OPERATIONAL
Pressure on
infrastructure
for strategic
business
Loss of revenue,
damage to
reputation, loss
of key strategic
customer.
SG
Cit
S
T
SG
Cit
T
No change
No change
Ensure we secure an
emotional attachment
to the business, that
remuneration packages
are appropriate to the
position, that staff are
empowered and have
opportunities within
the business
Specify projects to
achievable budgets
before commencement
and ensure suitable
contingencies are
included. Specialist
Project Managers to
be appointed to run
the project. Robust
contracts to be put in
place with contractors.
Regular budget
meetings with Directors
to ensure project
remains on budget.
Regular stock meetings
and inventory control
with experienced
members of staff.
Monitoring and
communication of
market conditions,
long-term commodity
contracts.
Ensure correct
infrastructure in new
site in UK and expansion
in the US. Keep close
communication between
sales and operations to
determine likelihood of
large order and capacity
restraints to manage
customer expectations.
Manage sub-contractor
relationships.
Improved internal communication
with regular Town Hall style meetings.
Continuation of staff training, enabling
upskilling and providing career
development opportunities. Increase
in paternity pay. Increase in holiday
entitlement for new starters. Established
employee engagement groups providing
feedback to HR. Providing additional
opportunities for staff to work on
community and charity initiatives. Financial
contribution to the employee-run Social
Committee. Additional holiday purchase
opportunity for employees.
Significant work undertaken with
external support on building design,
specification and budget. Contract signed
with architects specifying in detail the
remit of their work. Project Managers
with Comah experience shortlisted.
Initial process conducted to shortlist
contractors to invite to tender a Design
and Build contract.
Maintaining close contact with suppliers,
particularly during Hurricane Irma and
continuing to gather and disseminate
market intelligence on key commodities,
assisting our customers with managing
price volatility as part of the Treatt
service. Continued evolution of the
internal Citrus Team to provide greater
management across the Group of Treatt’s
largest raw material. Appointment of
Citrus, Tea and Sugar Category Managers
to further focus the direction of these
key products.
Purchase of a new molecular still
which is transferable to the new site.
Appointment of a Process Development
Manager to investigate means of
improving process efficiency and yields
and new equipment and processes
capable of adding additional value.
Ensuring sufficient inventory to be
able to meet customer demands.
Overview
31
STRATEGIC REPORT (CONTINUED)
RISK
EFFECT
STRATEGIC IMPACT
RISK CLIMATE
MITIGATION
KEY DEVELOPMENTS
OPERATIONAL
Structural
damage to
production
facilities,
particularly
at Treatt USA,
which suffers
storms
Inadequate
documentation
of processes
and/or
adherence
to required
processes
IT Issues
including
network,
hardware, data
and security
COMMERCIAL
Product failure
Loss of use
of buildings,
danger to
staff, loss of
equipment and
product. Major
incident due to
type of products
stored.
Failure of BRC,
HACCP or
regulatory audits
and damage
to reputation
as problem-
free supplier.
Investment in
rectification
of any non-
compliances
noted.
Loss of IT
systems and/or
data, impacting
on the ability
of the business
to function
effectively.
Reputational
damage and
litigation in
respect of data
protection also
possible.
Potential
product recall
causing financial
and reputational
loss.
SG
Cit
CI
T
SG
No change
No change
Regularly inspect
and maintain building
components. Implement
hurricane action plan
when necessary.
Sufficient spread
of inventory between
production facilities
in UK and US.
Strong commitment
Group-wide to
disciplined compliance
to internal quality
programs. Commitment
to permit third-party
auditing.
Continued maintenance and upkeep of
buildings. Hurricane action plan tested
with Hurricane Irma to prevent damage
as far as possible, which was largely
successful. Repairs, which were not
material, undertaken in a timely manner
following Hurricane Irma.
Ten third-party certification and
regulatory audits facilitated and
any non-conformances rectified together
with 11 customer audits across
the Group undertaken by large multi-
national companies. Internal auditing
of systems and processes against
Standard Operating Procedures.
SG
No change
SG
No change
Well-constructed IT
infrastructure with
failover capabilities,
supported by a
comprehensive asset
management database
and best practice
maintenance processes.
Multi-layered security
protection system
in place. Security
Team continuously
searches for and fixes
vulnerabilities, including
those reported by
third-party security
consultants.
Strong supplier
qualification process
Intake testing/analysis.
Regular review of risk
matrix for every raw
material handled. Use
of barcode scanners
on all orders to avoid
mispicks. Range of
testing to detect
contamination. Obtain
up-to-date information
for all suppliers via SAQ
documentation. Supplier
risk assessment to
determine in-house
test schedule.
Innovation and
development of new
products. Broaden
into other associated
sectors.
Continual review of infrastructure
resilience and failover procedures
following best practice guidelines.
Continual review of protection required
against security threats and the raising
of staff awareness of cyber security.
Internal audit and report to the Board
on IT security mitigation in place.
Third-party security audit undertaken
by NCC and recommendations received.
Continuation of visits to suppliers.
Improvements to supplier qualification
process. Thorough investigation of errors
leading to appropriate action such as
retraining or amendment of procedures.
Report to the Board on product
failure mitigation strategies in place.
Review and renewal of recall insurance.
Annual desk top testing of product
recall procedure.
Focus on areas of strength. Investigate
process improvements and new
equipment to increase efficiency.
Increase value-added proposition.
Commoditisation
of established
Treatt products
Effect on
revenues and
margin attrition.
SG
Cit
S
T
Increased
32
Treatt plc – Annual Report & Financial Statements 2017 RISK
COMMERCIAL
Shortening value
chain and new
entrants in SCC
based aqueous
distillates
Single-sourced
for synthetic
speciality
chemicals, many
Treattarome
raw materials
and materials
for applications
work
Natural products
LEGAL/REGULATORY
Failure to
comply with
relevant
UK and US
environmental,
H&S and other
applicable
legislation
EFFECT
STRATEGIC IMPACT
RISK CLIMATE
MITIGATION
KEY DEVELOPMENTS
Customers
demonstrating
increased
competence to
fold, fractionate,
break bulk.
Increased
competition.
Potential loss
of primary
supply source.
The nature of
the materials
concerned
would indicate
individual
company IP
is involved.
Loss of supply,
increase in
market price
or impact
on quality
resulting from
fluctuations in
yields caused
by weather,
disease, etc.
Squeeze on
margins.
HSE/EA
investigation.
Probable
enforcement
action
involving fines,
enforcement
notices. Risk
of site closure.
SG
Cit
No change
SG
S
T
No change
Further rationalisation of the product
portfolio to remove low margin products.
Working with customers on make or buy
decisions where Treatt has the expertise
available, enabling customers to buy
rather than process in house.
Established relationships with alternate
supply sources and strengthened
relationships with incumbent suppliers
including the signing of a new five-year
agreement with Endeavour Speciality
Chemicals.
Continued value-added
in-house innovation.
Rationalisation of
product portfolio to
eradicate low margin
commoditised products.
Strengthen product
knowledge/sourcing.
Closer collaboration
with existing suppliers.
Identifying alternative
suppliers where
possible. Investigate
alternate sources of
supply of, if not identical,
similar materials.
Creation of an alternate
blend using substitutes.
Long-term supply
agreement put in place.
SG
Cit
Increased
Enhancing relationships
with competitors/
brokers and other supply
channels, combined
with forward purchasing
contracts for medium
to longer-term supply.
The series of hurricanes and natural
disasters in 2017 prompted uncertainty
in markets as potential supply issues are
feared. Market updates promptly sent
to customer base to report on market
fluctuations. Strategic buying of core
products.
SG
No change
Detailed understanding
of legislative
requirements with
internal involvement,
consultative support
and capital investment.
Pro-active role in
ensuring the Group’s
systems and procedures
are adapted to ensure
compliance.
Working closely with the Environment
Agency and relevant authorities in
respect of Comah. Submission of
Pre-construction Safety Report to the
EA in respect of the UK site relocation.
Continuation of relevant training and
assessment of employee skills across
the Group.
The Group regularly reviews its commercial insurance programme and maintains an appropriate and adequate portfolio of insurance policies in line
with the nature, size and complexity of the business.
The Group also continues to have in place a “Business Continuity” team whose on-going responsibility is to assess the issues which the Group
would face should it experience a major and unforeseen disaster and to put in place a clear action plan as to how the Group would continue
to operate successfully in such an event.
Overview
33
STRATEGIC REPORT (CONTINUED)
SUSTAINABILITY REPORT
Environment
The Group is committed to good environmental practice. It places
importance on the impact of its operations on the environment and
on ensuring that it operates and adopts responsible practices. Group
performance and risk reviews are undertaken and monitored on
a regular basis and reported to the Board.
Environmental Performance and Strategy
The Group has for a long time managed energy, fuel and waste disposal
costs with the aim of lessening the Group’s environmental impact
whilst reducing cost and improving efficiencies. In accordance with
The Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2013, the Group is required to report its greenhouse gas
emissions. The release of greenhouse gases, notably carbon dioxide
generated by burning fossil fuels, is understood to have an impact on
global temperatures, weather patterns and weather severity, which can
directly and indirectly affect the Group’s business. As a supplier of
natural ingredients, adverse weather conditions and disease often
have an effect on crop yields resulting in higher raw material prices
and limited supply. There continues to be a significant reduction in both
the production and yield of oranges world-wide due to the bacterial
disease Huanglongbing (also known as citrus greening). Hurricane
Irma has resulted in an increase in the price of orange oil and lowered
Florida’s production expectations by a minimum of 35%. Hurricanes
Franklin, Katia and Max hit different areas of Mexico and, coupled with
two major earthquakes, have increased prices of most citrus products
grown there. Another disease, Thrips, has also lowered the supply
of key limes in Mexico.
Environmental Improvements in 2017
The Group continuously evaluates ways of reducing its impact
on the environment and during the year has implemented a number
of improvements at each of its subsidiaries:
R C Treatt
• operates under the threshold limits of the Solvent Emissions
Directive 1999/13/EC for the industry at less than 2t,
threshold limit is 10t;
• no material sent to anaerobic digester;
• 54% hazardous waste recycled (2016 46%);
• 100% of used drums recycled (2016: 92%); and
• reduced laboratory waste by a further 14% on previous
year (wet, glass and liquid waste).
Treatt USA
•
installation of high efficiency vacuum pumps has reduced
Volatile Organic Compound (VOC) emissions by 8% in
blending processes and 7% in distillation processes;
• 53% reduction in waste shipped for disposal;
•
introduction of reusable totes for intermediates reducing
dependence on plastic drums;
34
• all non-explosion proof metal halide lights replaced with LED
lights reducing electricity usage for lighting by 70%; and
• blending tank lids modified to improve tank seal, reducing
energy to pull required vacuums and VOC emissions
in general.
Earthoil
•
formation of Energy Management Team and introduction
and roll-out of an energy management policy;
• environmental management lessons incorporated into
environmental, health and safety training;
• annual environmental audits introduced for compliance
with statutory regulations;
• staff sensitisation through posters and signage; and
•
the “Reuse & Reduce” initiative continues to encourage
staff to reuse envelopes, printing papers and double
sided printing.
Additionally, we have maintained the reduction in the number of printed
copies of the report and accounts required to be posted to shareholders
by giving them the option to receive the annual report electronically
through the Treatt website. The 75% reduction has not only saved
several thousand pounds per year, but it has reduced the environmental
impact of our financial reporting process.
Safety, Health and Environment Champions, representing all areas
of the business, provide additional focus on environmental issues and
encourage colleagues to adopt practices which take account of our
environmental impact as a business.
The intended site relocation of Treatt’s UK operation and site expansion
at Treatt USA will provide an opportunity to modernise facilities and
build in appropriate and cost-effective infrastructures to reduce the
environmental impact of the buildings as far as possible.
Greenhouse Gas Emissions
The Group has adopted a greenhouse gas reporting policy and
a management system based on the ISO 14064-1:2006 methodology,
which has been used to calculate the Group’s Scope 1 and 2 emissions
in 2017 for activities within the operational control of the Group. It is not
currently intended to report Scope 3 emissions.
In measuring the Group’s greenhouse gas emissions, the sales office
in China has been excluded on the basis that emissions from utility
consumption, which is included in the rent, is estimated to be less than a
materiality threshold of 5% of overall Group emissions. Data has been
accurately recorded from invoices, meter and mileage readings.
Scope 1 – Direct CO₂ emissions (tonnes CO₂e)
Scope 2 – Indirect CO₂ emissions (tonnes CO₂e)
Total tonnes CO₂e emissions
gCO₂e emissions per kg of product shipped
2017
1,394
1,549
2,943
390
2016
1,451
1,747
3,198
438
GHG emissions detailed in this table have been calculated using the
appropriate 2017 DEFRA conversion factors, except for overseas
electricity which used the 2014 and 2015 DEFRA conversion factor.
Treatt plc – Annual Report & Financial Statements 2017 Following the decrease in total emissions in 2016, by 14 tonnes of CO₂e,
there has been a more significant decrease in 2017 of 2,554 tonnes
of CO₂e; the decrease is across both Scope 1 and Scope 2 emissions.
Scope 2 electricity consumption reduced in the UK and US whilst
electricity consumption in Kenya increased due to resumption of
normal levels of production, following a reduction in the first quarter
of the 2016 financial year. A proportion of the decrease in electricity
emissions at R C Treatt was due to a change in the conversion factor
whilst Treatt USA installed LED lighting to help reduce electricity
usage. Decreases in Scope 1 emissions were seen at both Treatt
USA and R C Treatt primarily due to one-off emissions included in the
2016 calculations.
Water
The Group has decided to record water consumption data whilst
recording its greenhouse gas emissions in order to gain a greater
understanding of its environmental impact. The largest consumer of
water in the Group is Treatt USA, which uses large quantities in its
manufacturing processes and the cleaning of its specialist equipment.
Due to its high consumption, Treatt USA uses a closed loop cooling
water circuit with direct cooling from deep well water on all still
condensers. This well water is then recycled back into the aquifer via a
second deep well. The system provides significant local environmental
benefits as well as reduced energy usage.
The decrease of 230,000 kgs of product shipped during the year
reflects the continued strategic emphasis on manufactured value-
added products and movement away from lower margin traded
business, which absorb resources that can be more effectively
utilised elsewhere.
The Group’s own crop growing area in Kenya uses rain water harvested
in its own dam, a borehole and water pumped from a nearby river,
for which it pays a small annual fee. It does not purchase any water
from a water treatment company. Distillation waste water is re-used
as irrigation water on the farm vegetable garden.
Waste
Treatt USA aims to recycle as much of its waste as possible.
A consistent theme in the environmental improvements made during
the year, noted above, is the reduction of waste streams.
At R C Treatt all waste streams continue to work towards a zero land
fill waste strategy. In addition, R C Treatt’s waste oil with a calorific
value is sent for use as biomass, thereby further reducing the
Company’s carbon footprint and eliminating disposal costs.
In Kenya, distillation biomass waste is converted to biochar, mixed with
farm yard manure and composted for use on the farm. The biochar
reduces the carbon footprint by sequestering carbon into the soil.
Some of the waste is also used as mulch on the tea tree farm.
In recording water consumption for the Group, the sales office
in China has been excluded on the basis that water usage is included
in the rent. Data has been accurately recorded from invoice information
and meter readings.
Total water used (m³)
Water efficiency (litres per Kg of product shipped)
2017
36,946
4.90
2016
33,514
4.59
Overview
35
STRATEGIC REPORT (CONTINUED)
Employment Policies
The Group is committed to a policy of recruitment and promotion on
the basis of aptitude and ability without discrimination. Applications for
employment by disabled persons are given full and fair consideration
for suitable vacancies, having regard to their particular aptitudes
and abilities.
The focus on training continued in 2017 in order to continuously
improve the skills of our employees through both general and targeted
training programs provided by internal and external providers. Lunch-
and-learn style training provides the opportunity for knowledge sharing
across the Group on a variety of subjects relevant to our business,
whilst also providing the opportunity for staff to spend time together.
By improving communication between colleagues these initiatives are
vital to the sustainable growth of the business. The Group supports on-
going qualifications by providing funding and study time to employees
across the business from NVQs to professional qualifications in
Procurement and Supply Chain Management and Company Secretarial.
Additionally, the Group continues its commitment to students and
apprentices in both the UK and US in providing internships in sales
and technical departments. This provides valuable work experience to
students in their placement year, whilst strengthening the Group’s links
with universities and developing relationships with a future generation
of employees. The UK site currently has five apprentices, across the
business, providing them with a structured training and qualification
programme. There are also three interns providing additional resource
whilst assisting with their learning and continued development.
Employee Involvement
Meetings are held with employees to discuss the operations and
progress of the business. In particular, Executive Directors make half
yearly results presentations to all employees and encourage questions
and dialogue on any matters pertaining to the performance or activities
within the Group. In addition, the Information Exchange Committee
(IEC) at R C Treatt exists in order to encourage a further exchange
of ideas and information between the Company and its employees.
The IEC is chaired by the CEO and the members of the Committee are
all employees below management level who represent all departments
and areas of the business in the UK. The Executive Directors regularly
have lunch with small groups of staff in order to get to know them better
and to hear their views on the business from the employee perspective.
Treatt USA Vice Presidents regularly hold “town hall meetings” to
communicate with staff on a variety of subjects and provide them with
the opportunity to ask questions and challenge management. Board
members make a point of visiting all Group affiliates and regularly carry
out site visits and tours, thereby engaging in meaningful discussions
with employees at all levels within the organisation.
In preparation for the intended site relocation in the UK, eight design
teams, comprising staff from a variety of functions, were formed to
consider potential design features of different areas of the new site
in order to provide input into the project from an employee perspective.
Following several months of research, the teams presented their
design ideas to the UK Leadership Team and to the project architects,
who have taken on board the teams’ ideas and incorporated them into
the design, where appropriate. As the project progresses a relocation
steering group, taken from the design teams, will be responsible for
running the project and providing an information flow.
36
All-employee bonus schemes, based on the performance of the
business, remain in place and employees are encouraged to become
involved in the success of the Group through share-save schemes
and the Share Incentive Plan (see note 25).
The Share Incentive Plan is run for all UK employees, with a similar
plan having been introduced for US employees. Under these plans,
all eligible UK and US employees received free shares (or their US
equivalent) in December 2014, 2015 and 2016 and will do so in
December 2017; UK staff will also be able to buy additional partnership
shares, which Treatt will match on a 1:1.5 basis in accordance with the
rules of the plans. The Directors believe that encouraging greater
employee shareholding will further align the interests of employees
with those of shareholders. In order to maintain, encourage and support
high levels of employee ownership, the Company has a scheme that
enables those who wish to sell their shares to sell them at market
value to colleagues, without commission and with quicker settlement.
The scheme has proved popular, particularly with those members of
staff based in the US, who find it more problematic to sell shares in
a UK listed company.
Diversity
Appointments within the Group are made on merit according to the
balance of skills and experience offered by prospective candidates.
Whilst acknowledging the benefits of diversity, individual appointments
are made irrespective of personal characteristics such as race,
disability, gender, sexual orientation, religion or age.
As a manufacturing business, it is extremely rare for women to apply
for positions within the production and despatch areas, where manual
handling is a significant part of the role and there are currently none
employed in this capacity. The number of women in other areas of the
business remains at 37% (2016: 37%) of the Group workforce with a
slight increase in the number of women in Group senior management
positions at 47% (2016: 44%). The number of men and women
employed across the Group at 30 September 2017 was as follows:
Position
Group Directors
Senior Managers
Other Employees
Total Employees
Male
6
24
192
222
Female
1
21
111
133
Total
7
45
303
355
Diversity is a key aspect of our approach to resourcing the needs
of the business, developing our colleagues and recruiting new talent
but gender diversity is only part of the story. We aim to create
an inclusive environment that values all differences in people since
diverse teams are more likely to be innovative when drawing from
cultural differences and experiences.
We recognise that our employees have lives outside of work and we
aim to provide a flexible workplace that enables them to achieve a
balance between their role with Treatt and their responsibilities outside
of work. Our flexible working policy enables all employees, as far as
their roles permit, to work from home and provides general flexibility to
staff. Such policies are helpful in the recruitment of a diverse workforce.
Treatt plc – Annual Report & Financial Statements 2017 Community funds provide additional benefits to the farmers and
their families, such as scholarships and sanitary products to a local
primary school. Earthoil supports a virgin coconut oil project in Samoa,
which is run by a not-for-profit women’s foundation; a unique venture
aimed at rebuilding the economic independence of individual villages.
Earthoil’s Project Director visited the foundation this year to learn more
and share best practice in efficiency. By locating the production of
virgin coconut oil within the villages, the returns to the villages, and
to the individual family groups, are greatly increased by comparison
with the more highly industrialised process.
Ethical concerns and human rights issues have always played an
important role in Treatt’s company philosophy and the Group’s Supplier
Code of Conduct details the standards of behaviour which Treatt
regards as acceptable. Provision of a safe, clean working environment,
free from discrimination, coercion and the use of child or forced labour
is a basic right of all employees, which Treatt expects of its business
partners as a minimum standard. The Group is often audited by its
customers to assess compliance with minimum acceptable standards,
including ethical and human rights considerations. The Group is
committed to combatting the risk of modern slavery and human
trafficking in its supply chain and all parts of the business. The Modern
Slavery Statement is available on the Treatt website, www.treatt.com.
This Strategic Report was approved by the Board on 28 November 2017.
Signed on behalf of the Board
ANITA STEER
Secretary
Social, community and human rights issues
The Group endeavours to impact positively on the communities in
which it operates and over the last few years has significantly increased
its presence in the community. During the year the Group made
charitable donations of £23,000 (2016: £22,000) to local and national
causes. Support is provided through donations directly to charities and
through a matching scheme, whereby the Group donates a percentage
of funds raised by staff in sponsored events. This year staff have
undertaken a number of sponsored and fundraising events for a variety
of charities in which they have a particular interest including a charity
cricket match and cake sale. Grit and determination were demonstrated
when colleagues cycled 880 miles in 104 hours and raised over £8,000
for mental health charity ‘Mind’.
The UK site operates “Payroll Giving”, enabling staff to donate regularly
to their chosen charities directly from their gross pay; and staff also
raise money by entering a charity lottery directly through payroll.
The Treatt Community Spirit Initiative is going from strength to strength
and provides opportunities for employees to support local causes by
carrying out activities such as litter picks and providing assistance in a
charity’s warehouse both within work time and in their own time, as
well as supporting local fundraising events. During the year, employees
were able to nominate and vote for a preferred charity to which a
donation was made.
The local charities Treatt continually supports include: East Anglia’s
Children’s Hospice, My Wish Charity supporting West Suffolk Hospital,
UpBeat Heart Support, St. Nicholas Hospice Care and ‘KidsPack’
children’s charity in the US. Additionally, Treatt has continued to
sponsor local events providing support and prize money to the Bury
in Bloom Young and Senior Green Fingers initiatives, encouraging
gardening activities at both ends of the age spectrum.
As a means of rewarding staff, whilst supporting a charitable initiative,
boxed cream teas were provided to all UK staff during Wimbledon
tennis fortnight, bought from Action Medical Research.
Similar initiatives take place in the US, and a party of volunteers
regularly collects rubbish on local roads as part of the Florida
Department of Transportation’s “Adopt A Highway” scheme.
Earthoil is committed to purchasing oils directly from source at a fair and
sustainable price and works closely with growers in under-developed
countries through Fair for Life social and fair trade certification.
Long-term and trusted support and co-operation has also been a driver
for positive change which has led to Earthoil’s partner, the Kenyan
Organic Oil Farmers Association (KOOFA), increasing from its initial
90 members to now well over 700 producers. Earthoil has helped
deliver over 100 new 3,000 litre water tanks to members of KOOFA
to enable them to store valuable water, with the remaining farmers to
receive water tanks as part of this long-term project. Over 2,000 family
members will eventually utilise the new water tanks, hoping to free up
time that is usually spent fetching or buying water for other activities.
Additionally, through the donation of efficient gasifier stoves to Kenyan
farmers, Earthoil Africa EPZ continues to be certified carbon neutral;
all carbon dioxide emissions from Kenyan activities having been
neutralised. As a direct consequence, dozens of Kenyan farming
families are now living in healthier homes free from smoke and carbon
monoxide formerly produced from open fires.
Overview
37
CORPORATE GOVERNANCE STATEMENT
Introduction from the Chairman
Leadership
As Chairman, I am responsible for ensuring that the Board upholds
high standards of corporate governance and that it operates effectively
and efficiently. Good governance is about the quality of the processes
for making and implementing decisions, ensuring that there is
an appropriate level of oversight and challenge, a focus on risks,
a commitment to transparency and a culture of continuous improvement.
At Treatt there is a commitment to high standards of corporate
governance throughout the Group and this is reflected in our governance
principles, policies and practices. We believe that effective governance,
not only in the boardroom but right across the business, ultimately
produces a better business and supports long-term performance.
By virtue of its premium listing on the London Stock Exchange,
Treatt measures its corporate governance compliance against the
requirements of the 2016 UK Corporate Governance Code1 published
by the UK Financial Reporting Council (FRC). The FCA requires
each company with a premium listing to “comply or explain” its non
compliance against the Code. The Group monitors its compliance
with the Code, and in this corporate governance section and throughout
this annual report, areas of corporate governance compliance and
non-compliance are explained by reference to the 2016 Code.
TIM JONES
Compliance with the 2016 UK
Corporate Governance Code
The Board confirms that throughout the year ended 30 September
2017 the Group has complied with the provisions set out in the 2016
UK Corporate Governance Code1, except for provision D2.2, as explained
in the Directors’ Remuneration Report, since the remuneration of
Group senior managers is determined by the Executive Directors as
the Remuneration Committee believe that they are best placed to
make this decision. However, remuneration proposals in respect of
senior managers are reviewed by the Remuneration Committee.
The bonuses of all senior managers in the Group are approved by
the Remuneration Committee.
The Board is accountable to the Parent Company’s shareholders for
good governance and the statement set out below describes how the
principles identified in the 2016 UK Corporate Governance Code are
applied by the Group.
The Directors consider the annual report and financial statements,
taken as a whole, to be fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group’s
performance, business model and strategy.
The terms of reference of all the Committees can be found on the
Treatt website at www.treatt.com.
Details of the Directors who served during the year, the positions they
hold, and the Committees of which they are members are shown on
page 22. The Board consists of five Non-executive Directors, of which
Tim Jones is Chairman, and two Executive Directors, of which
Daemmon Reeve is Chief Executive Officer.
There is a clear division of responsibility between the Chief Executive
Officer, who is required to develop and lead business strategies and
processes to enable the Group’s business to meet the requirements of
its shareholders, and the Chairman who is responsible for leadership of
the Board and ensuring that appropriate conditions are created to
enable the Board to be effective in providing entrepreneurial leadership
to the Group. The key functions of the Chairman are to conduct board
meetings and meetings of shareholders as well as to ensure that all
Directors are properly briefed in order to take a full and constructive
part in Board discussions. The Chairman has regular contact with
the Non-executive Directors without the presence of the Executive
Directors. Concerns relating to the executive management of the Group
or the performance of the other Non-executive Directors may be raised
with David Johnston, who is the Senior Independent Director (“SID”).
The role of the SID is also to provide a sounding board for the Chairman,
to serve as an intermediary for the other Directors and to lead the
performance evaluation process for the Chairman.
Board Effectiveness
The Directors believe that the Board, having been refreshed in 2011,
2012, 2013 and 2016, has an appropriate balance of skills and
experience with financial, technical, industry-specific and general
business disciplines being represented. The structure of the Board
ensures that no one Director is dominant in the decision-making
process and that open debate and discussion is encouraged.
There is a suitable balance between the number of Executive and
Non-executive Directors.
The importance of board diversity, including gender diversity which has
been the subject of recent debate in respect of board composition, is
recognised and supported by the Directors of Treatt plc. The Board is
conscious of the benefits of diversity in the boardroom and management
positions within the Group. Our policy is to recruit the best possible
candidate for each individual role having regard to qualifications,
experience and personality, without prejudice to a candidate’s
characteristics. Further details on the Group approach to diversity
are given on page 36.
Upon appointment, Directors are provided with access to an appropriate
external training course and to advice from the Group’s solicitors
in respect of their role and duties as a public company director.
Where they have significant relevant experience for the role, training
may be felt to be unnecessary. In addition, all new Directors receive an
induction to acquaint them with the Group. This takes the form of site
tours, meetings with other Board members and senior management
and the provision of an induction pack, which contains general
information about the Group, its structure and key personnel, together
with copies of relevant policies and procedures, financial information
and briefings on Directors’ responsibilities and corporate governance.
38
1 A copy of the 2016 UK Corporate Governance Code
can be obtained from www.frc.org.uk
Treatt plc – Annual Report & Financial Statements 2017 The Board considers that, with the exception of Anita Haines, all the
Non-executive Directors are independent of management and free
of any relationship which could materially interfere with the exercise
of their independent judgement. Anita Haines is not regarded as
independent, as defined by the 2016 UK Corporate Governance Code,
having recently served as an Executive Director. Accordingly, Anita
Haines does not serve on either the Audit or Remuneration Committees.
All Non-executive Directors receive a fixed fee for their services.
However, in exceptional circumstances, where significant additional
time commitment is required, a Non-executive Director may, if approved
by the Board or Remuneration Committee as required, be paid an
additional fee in accordance with the Remuneration Policy. The Board
is satisfied that the Chairman’s other commitments do not detract
from the extent or the quality of the time which he is able to devote
to the Group.
The Board meets formally at least five times each year and more
frequently where business needs require, with attendance in person or
by video conference required at each meeting. In addition, regular
contact is maintained by email and telephone with written updates
provided in respect of on-going issues, enabling regular input from
all Board members. The Board recognises the importance of holding
a meeting in the US, previously on a biennial basis, and from 2018 has
committed to meet at Treatt USA annually. This is due to Treatt USA’s
increasing contribution to Group profits coupled with the current
expansion project. The visit will afford the Board the opportunity to
meet with the senior management team and view the site expansion
in person.
Day-to-day management of the Group is delegated to the Executive
Directors. However, the Board has a schedule of matters reserved to it
for decision and the requirement for Board approval on these matters
is communicated widely throughout the senior management of the
Group. These matters, which are reviewed periodically, include material
capital commitments, commencing or settling major litigation, business
acquisitions and disposals, appointments to subsidiary company boards
and dividend policy.
To enable the Board to function effectively and Directors to discharge
their responsibilities, full and timely access is given to all relevant
information. In the case of board meetings, this consists of a
comprehensive set of papers, including regular business progress
reports and discussion documents regarding specific matters. Board
meetings are of sufficient duration to enable debate and discussion,
ensuring adequate analysis of issues during the decision-making
process. Further opportunity for more informal and extended discussion
is provided at Board lunches which take place after every Board
meeting and also provide the Board with an opportunity to meet
members of staff, who are invited to attend.
If necessary, there is an agreed procedure for Directors to take
independent professional advice at the Group’s expense. This is
in addition to the access which every Director has to the Company
Secretary. The Secretary is charged by the Board with ensuring that
Board procedures are followed and that there are good information
flows within the Board and its Committees and between senior
management and Non-executive Directors.
Nomination Committee
Membership and Meetings
Members of the Nomination Committee throughout the year are shown
on page 22. The Nomination Committee has met once during the
course of the year. The Board worked extensively on succession
planning in 2016 and in the absence of the need to further refresh
the Board, 2017 resulted in a quieter year for the committee.
Role and Responsibilities
The main responsibilities of the Nomination Committee are:
•
to review regularly the structure, size and composition
(including the skills, knowledge, experience and diversity)
of the Board and its committees and make recommendations
to the Board with regard to any changes that are deemed
necessary;
•
to identify and nominate candidates for the approval of the
Board to fill Board and committee vacancies as and when
they arise;
• succession planning for Directors, in particular the
Chairman and CEO, taking into account the challenges
and opportunities facing the Group and the skills
and expertise needed on the Board for the future; and
• review the results of the Board and committee performance
evaluation process that relate to the composition of the
Board and committees and to assess whether the Non-
executive Directors are dedicating sufficient time to
fulfilment of their duties.
Activities since the last report
• review of the results of the Board evaluation process and
consideration of training needs;
• review of the performance of the Directors; and
• continuation of structured succession plans.
Appointments to the Board
Appointments to the Board of both Executive and Non-executive
Directors are considered by the Nomination Committee, which consults
with Executive Directors and ensures that a wide range of candidates
is considered. The Committee considers the skills mix of the serving
Directors to identify potential gaps or areas where increased strength
is required. In accordance with Treatt’s Board Diversity Policy, and
having recognised the benefit of having an appropriate level of diversity
on the Board to support the achievement of its strategic objectives,
the Committee also considers the benefits of all aspects of diversity,
including but not limited to, race, disability, gender, sexual orientation,
religion, belief, age and culture. The recommendations of the Nomination
Committee are ultimately made to the full Board which considers them
before any appointment is made.
Any Director appointed during the year is required, under the provisions
of the Articles of Association, to retire and seek election by shareholders
at the next Annual General Meeting. The Articles also require that one
third of the Directors retire by rotation each year and seek re-election
at the Annual General Meeting provided always that all Directors
must be subject to re-election at intervals of no more than three years.
Any Non-executive Director having been in post for nine years or more
is subject to annual re-election. The Directors required to retire are
those in office longest since their previous re-election.
Corporate Governance
39
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
Board and Committee Evaluation
The Nomination Committee is also responsible for the annual evaluation
of the Board, its committees and its Directors. During the year an
evaluation of the Board, its committees and each individual Director is
carried out internally, with the assistance of the Company Secretary,
as the Board believes it has the appropriate resources and experience
to undertake the reviews. The Board and committee reviews are
conducted under the supervision of the appropriate Chairman.
During the year the company invested in Evalu8, an online tool which
allows boards, committees and directors of quoted companies to
perform formal and rigorous self-assessment in a productive and
secure manner. It enables the evaluation process through a range
of comprehensive questionnaires, which can be tailored to meet a
board or committee’s needs, and provides an analysis of responses.
The committee evaluation process used Evalu8, with results compared
against the prior year’s evaluation.
The evaluation of the Board was conducted by the Chairman during the
course of the individual Director evaluation using a Quoted Companies
Alliance tool, which considers the effectiveness of the Board through
selected questions focusing on the principles of corporate governance
and the six characteristics of an effective board. In addition, the skills
matrix of each of the Directors was reviewed and the skills and
experience mix discussed in relation to performance of the Board.
The results were discussed by the Nomination Committee and
recommendations for continuous improvement made to the Board.
The performance of individual Directors is evaluated by the Chairman,
in conjunction with the Chief Executive Officer in the case of the other
Executive Director. The Chairman is evaluated by the Chief Executive
Officer and the Senior Independent Director. The process includes
individual performance meetings, at which past performance is
discussed and evaluated and future objectives established. Training
and development needs have been identified for the coming year.
The Board has spent time focusing on its objectives, which includes
further work in respect of risk management.
The results of the evaluation process demonstrated that the performance
of the Directors, the Board and the Committees is effective overall,
but action points have been agreed to further improve performance.
Succession Planning
Board succession planning for the Executive Directors and senior
executives is a priority of the Board. In some instances suitable internal
candidates have been identified as likely successors for both interim
and permanent positions. We will continue to invest in such talent
but for some positions external recruitment will also be necessary.
We recognise that having been through significant cultural change in
recent years (a process which continues) a cultural fit with the business
is essential. The Committee will continue to monitor progress with
succession planning for the Executive Directors and senior executives.
Audit Committee
Membership and Meetings
Members of the Audit Committee throughout the year are shown on
page 22, each of whom is deemed to be independent. Jeff Iliffe joined
the Committee as Chairman in February 2013 and is deemed by the
Board to have significant, recent and relevant financial experience.
He is a Chartered Accountant with over 20 years’ experience in the
financing and management of companies, both in the City of London
and in industry.
The Committee met three times during the year. The auditor
attended two of these meetings other than when their appointment
or performance was being reviewed. The Chief Executive Officer, Chief
Financial Officer and other senior finance staff were invited to attend
as appropriate. The Committee has discussions at least once a year
with the auditor without management being present. Furthermore,
the Committee Chairman meets informally with, and has access to,
the Chief Financial Officer to discuss matters considered relevant
to the Committee’s duties and maintains a regular dialogue with the
Audit Partner.
Role and Responsibilities
The main responsibilities of the Audit Committee during the year were:
•
•
•
•
•
to monitor the integrity of the annual report of the Group
and to review and report to the Board on significant
financial reporting issues and judgements which it contains,
having regard to matters communicated to it by the auditor;
to review the content of the annual report and advise the
Board on whether, taken as a whole, it is fair, balanced and
understandable, and provides the information necessary for
shareholders to assess the Group’s performance, business
model and strategy;
to oversee the relationship with the auditor and assess
the effectiveness of the external audit process, including
making recommendations to the Board on their appointment,
remuneration and terms of engagement. The Committee
also monitors their independence and objectivity;
to make recommendations to the Board on the requirement
for an internal audit function; and
to ensure that procedures are in place whereby staff of the
Group may, in confidence, raise concerns about possible
improprieties in matters of financial reporting or other
matters. The Committee has arrangements in place for
the proportionate and independent investigation of such
matters and for appropriate follow-up action.
40
Treatt plc – Annual Report & Financial Statements 2017 Activities since the last report
• meeting with the audit partner and manager to agree the
audit plan and identification of risk;
• reviewing the auditor’s findings, management’s response
and ensuring robust challenge;
• reviewing the auditor’s performance and the audit process
to ensure that they remain objective and independent, and
to assess the effectiveness of the audit;
• approval of the fees paid to the auditors for audit and
non-audit work;
• review of the Group’s annual report for 2017 to ensure that,
taken as a whole, it was fair, balanced and understandable.
This included consideration of a report from the auditor
on their audit and review of the financial statements and
confirmation from management;
• giving consideration to any whistleblowing reports (of
which there were none during the year);
• reviewing the potential requirement for an internal audit
function. Given the size and structure of the Group, and
the level of control exercised by the management team,
the establishment of a formal internal audit function
was not considered to be necessary at present. As the
Group develops, the need for such a function will be kept
under review;
• consultation with major shareholders on auditor rotation;
• a review of the performance of the Audit Committee;
• working with the Board to update the terms of reference
of the Audit Committee; and
• updating the policies on the provision of non-audit related
services by the auditors and the employment of former
employees of the external auditor.
Financial Reporting
During the year the Committee and the Board monitor the integrity
of any formal announcements relating to the Group’s financial
performance. Reports are requested from management on particular
matters, especially where a significant element of judgement is required.
Additionally, the Chairman of the Committee has regular contact with the
audit partner and the Committee meets with the audit partner without
the presence of the Executive Directors.
In respect of the annual report, the Chairman of the Committee reviews
early drafts to keep appraised of its key themes and to raise any issues
early in the process. The 2017 annual report was reviewed at a
Committee meeting in November 2017; after due challenge and debate
the Committee was content with the appropriateness of the accounting
policies adopted, and that the key judgements applied, which where
possible are supported by external advice or other corroborative
evidence, are reasonable and therefore agreed with management
recommendations.
The Committee advised the Board that the annual report and financial
statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for shareholders to assess the
Group’s position and performance, business model and strategy. The
Committee also reviewed compliance with the disclosure requirements
on Directors’ remuneration and the Strategic Report.
Having discussed the key judgements and risk areas monitored
by the auditors, the Board concluded that, as in prior years, the half year
results would not be subject to an external audit or a formal audit
review. In reaching that conclusion, regard was given to the matters
subject to judgement and the processes established for addressing and
supporting these, the output of the enhanced work undertaken on risk
identification and management, the consistent application of accounting
policies, and the practice of similarly-sized listed companies. The
review by the Board prior to approval of the half year report included
the receipt of a report from management on the key areas of judgement
made for the half year results and how the outputs were arrived at.
Risk Management
The Committee continues to consider the requirements of the 2016
UK Corporate Governance Code (“the Code”) and the FRC Guidance on
Audit Committees. Following a review in 2015, it was decided that due
to the size of the Group, risk management, internal controls, approval of
the going concern statement and the assessment of the long-term
viability statement should remain with the full Board, rather than being
delegated to the Audit Committee. As the Group continues to grow,
this will remain under review.
External Auditor Assessment
The Committee has oversight of the relationship with the external
auditor and is responsible for monitoring their independence, objectivity
and compliance with professional and regulatory requirements.
The Committee undertakes an annual assessment of the effectiveness
of the external auditor to facilitate continued improvement in the
external audit process. This assessment considers:
•
•
•
the delivery of an efficient, robust audit in compliance with
the agreed plan and timescale;
the provision of perceptive advice on key areas of
judgement, and technical issues;
the demonstration of a high level of professionalism and
technical expertise;
• continuity within the audit team; and
• adherence to independence policies and other regulatory
requirements.
During the year the Committee has monitored RSM’s performance and
were satisfied that the above requirements had been met and that they
demonstrated continued commitment to perform high-quality work.
Corporate Governance
41
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
External Auditor Independence and
Consideration of a Tendering Process
RSM has, in one form or another through various changes of name
and consolidation with other audit firms, been Treatt’s auditor for
almost 30 years. There has of course been a succession of different
personnel involved with Treatt through these years, although a small
number of RSM employees, who are no longer involved in the provision
of audit services, have been with the firm for a significant period during
this time and continue to be employed by RSM.
The continued engagement of RSM is compliant with legislative
and governance requirements and in accordance with the requirement
to rotate the audit partner every five years, a new audit partner, who
has no previous connection with Treatt, was appointed earlier this year.
He is assisted by an experienced audit manager, who is also new
to Treatt. The Board and the external auditor have arrangements to
safeguard the independence and objectivity of the external auditor,
which were reviewed and deemed satisfactory.
Treatt’s Audit Committee undertakes an annual assessment of the
effectiveness of RSM’s performance to facilitate continued improvement
in the external audit process. Following its 2017 review of their
performance and relationship with Treatt, the Committee was satisfied
that RSM continues to deliver a robust audit and remains independent
of Treatt.
The Committee considered “The Statutory Auditors and Third Country
Auditors Regulations 2016” which will result in the mandatory rotation
of auditors by 2020, and whether an audit tender process should be
undertaken prior to 2020. Subject to the annual review of RSM’s
performance and the Audit Committee remaining happy with their
continued independence, and having consulted with major shareholders
on this point during the year, it is not currently planned to rotate
auditors or tender the audit until 2020.
The Committee has therefore recommended to the Board that RSM
UK Audit LLP be reappointed in 2018.
The level of non-audit fees and their effect on the auditor’s independence
or objectivity is also considered on a regular basis. The split between
audit and non-audit fees for the year under review appears in note 5.
Following the publication of the FRC Revised Ethical Standard 2016,
RSM no longer provides tax compliance and other tax services to the
Group. The Committee has reviewed and revised the policy for the
provision of such services to ensure that objectivity and independence
are not compromised and that it is in line with the Standard. Under the
policy, all non-audit services to be contracted with the external auditor
will require the approval of the Committee. When considering the use
of the auditor to undertake such assignments, consideration will be
given at all times to the provisions of the FRC Guidance on Audit
Committees with regard to the preservation of independence.
Effectiveness of the Committee
The effectiveness of the Committee was considered as part of the
Board evaluation detailed on page 40 and reviewed as part of the
Committee’s own processes. The Committee received positive feedback
on the way it challenges the business and was seen as open, transparent
and effective.
Review of the 2017 Annual Report
and Financial Statements
Amongst the matters considered by the Committee were the key
accounting issues, matters and judgement in relation to the Group’s
2017 annual report and financial statements relating to:
•
•
the level of provisions against obsolete, slow moving and
defective inventory, and for onerous customer contracts
which are likely to result in a loss to the Group. This
involved discussions with management on the detailed
exercises undertaken to identify the relevant provision
levels, and with the auditors on their findings following
their review of the work done and the controls in place
over these processes; and
the assumptions used to calculate the Group’s pension
liability in accordance with IAS 19 arising from the final
salary pension scheme. This included confirming that they
are in accordance with advice received from the scheme
actuaries, Barnett Waddingham, and that these assumptions
had been critically reviewed by the auditors.
Remuneration Committee
The Remuneration Committee’s primary responsibility is to determine
the remuneration of the Executive Directors of the Group ensuring that
there is a sufficient balance between the levels of ordinary remuneration
and performance-related elements designed to promote the Group’s
long-term success.
Full details of the Directors’ remuneration and a statement of the
Group’s remuneration policy are set out in the Directors’ Remuneration
Report appearing on pages 44 to 55. Members of the Remuneration
Committee throughout the year are shown on page 22. The Chief
Executive Officer attends meetings of the Remuneration Committee
to discuss the performance of the Chief Financial Officer and make
proposals as necessary, but is not present when his own position is
being discussed.
Each Executive Director abstains from any discussion or voting at full
Board meetings on Remuneration Committee recommendations where
the recommendations have a direct bearing on their own remuneration
package. The details of each Executive Director’s individual package
are fixed by the Committee in line with the policy adopted by the
full Board.
Board Accountability
The Board is responsible for reviewing and approving the annual
report and financial statements, the half year results and other financial
statements to ensure they present a balanced assessment of the
Group’s position. Drafts of all financial releases are provided to the
Board in a timely manner and Directors’ feedback is discussed and
incorporated where appropriate, prior to publication.
42
Treatt plc – Annual Report & Financial Statements 2017 Attendance at Meetings
The members of the Board during the year and its Committees, together with their attendance, are shown below:
Number of meetings held in year
Daemmon Reeve, Chief Executive Officer
Richard Hope, Chief Financial Officer
Board
7
7
7
Tim Jones, Non-executive Director and Chairman
7, Chairman
Anita Haines, Non-executive Director
Jeff Iliffe, Non-executive Director
Richard Illek, Non-executive Director
David Johnston, Senior Independent Non-executive Director
7
7
5
7
Audit
Committee
Nomination
Committee
Remuneration
Committee
3
N/A
N/A
3
N/A
3, Chairman
N/A
3
1
1
N/A
1, Chairman
1
1
1
1
3
N/A
N/A
3
N/A
3
3
3, Chairman
As permitted by the Parent Company’s Articles of Association, Directors
may participate in the minuted decisions via telephone or video
communication where it is impractical for them to attend in person.
Financial and Internal Control
The Board confirms that a process for the on-going identification,
evaluation and management of significant risks faced by the Group has
been in place throughout the year and to the date of approval of this
report, which complies with the “Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting” issued
by the FRC in September 2014. The process is subject to regular
review by the Board and there were no significant internal control
issues identified during the year.
The Directors are responsible for the Group’s system of internal control,
the effectiveness of which is reviewed by them annually. This covers all
controls including those in relation to financial reporting processes
(including the preparation of consolidated accounts). In addition to
monitoring reports received via the Executive Directors they consider
the risks faced by the Group, whether the control systems are
appropriate and consult with internal and external experts on
environmental, insurance, legal and health and safety compliance.
However, such a system can only provide reasonable, but not absolute,
assurance against material misstatement or loss. The key procedures
that the Directors have established to provide effective internal controls
are as follows:
Financial Reporting
A detailed formal budgeting process for all Group businesses culminates
in an annual Group budget and a five-year forecast which is approved
by the Board. Results for the Group and its main constituent businesses
are reported monthly against the budget to the Board and revised
forecasts for the year are prepared through the year. The Group uses
a standardised consolidation system for the preparation of the Group’s
monthly management accounts, half year and annual consolidated
financial statements, which is subject to review by senior management
throughout the consolidation process.
The Board monitors the integrity of all financial announcements
released by the Group, ensuring that, among other things, appropriate
accounting standards and policies are applied consistently, that all
material information is presented and that the disclosures are accurate.
Information Technology
The Group operates on a common centrally managed computer
platform. This provides common reporting and control systems and
the ability to manage and interrogate businesses remotely. However,
there are associated risks with having the entire Group IT systems on
a common platform, such as IT security, access rights and business
continuity. These risks are mitigated by an on-going focus on IT security
through a process of continuous investment in IT facilities.
Capital Investment
The Group has clearly defined guidelines for capital expenditure.
These include annual budgets, appraisal and review procedures,
and levels of authority. Post-investment appraisals are performed
for major investments.
Risk Assessment and Information
Operational management, in conjunction with the Executive Directors
who report regularly to the Board, are responsible for identification and
evaluation of significant risks applicable to their area of the business
and the design and operation of suitable internal controls. Details of the
principal risks associated with the Group’s activities are given in the
Strategic Report on pages 29 to 33.
Relations with Shareholders
The Group places a great deal of importance on communication
with its shareholders. The Parent Company mails the full annual
report and financial statements to all shareholders who have elected
to receive it. This information, together with the half yearly statements
and other financial announcements, is also available on the Group’s
website and, upon request, to other parties who have an interest
in the Group’s performance.
There is regular dialogue with individual institutional and other major
shareholders as well as presentations after the half and full year
results. The views of major shareholders are communicated and
discussed at Board meetings and Non-executive Directors may request
meetings with major shareholders should they wish to do so and vice
versa. All shareholders have the opportunity to ask questions at the
Parent Company’s Annual General Meeting.
This report was approved by the Board on 28 November 2017.
Financial and Accounting Principles
Financial controls and accounting policies are set by the Board so as to
meet appropriate levels of effective financial control. Compliance with
accounting policies is reviewed where necessary by external auditors.
ANITA STEER
Secretary
Corporate Governance
43
DIRECTORS’ REMUNERATION REPORT
ANNUAL STATEMENT
Introduction
are subject to a further one-year holding period following vesting,
save that a proportion of the shares will be permitted to be sold in order
to satisfy any tax liability arising upon either vesting or exercise.
As Chairman of the Remuneration Committee, I am pleased to present
our report on Directors’ remuneration for 2017.
Looking ahead to 2018
This report has been prepared in accordance with the Companies Act
2006 (“the Act”) and Schedule 8 of the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008
(the “Regulations”), as amended. The report also meets the relevant
requirements of the Listing Rules of the Financial Conduct Authority
and describes how the Board has applied the principles of the 2016
UK Corporate Governance Code relating to Directors’ remuneration.
In accordance with the Act, the Remuneration Report is divided into
three sections, the Annual Statement, a Remuneration Policy Report,
which sets out our Directors’ remuneration policy, and an Implementation
Report, which details the remuneration paid to the Directors during the
financial year under review.
Despite our previous Remuneration Policy Report having been approved
by shareholders in 2017, we have taken note of the votes cast in relation
to this resolution at our 2017 AGM (approved by 75% of votes cast)
and of feedback received from some shareholders. We understand
that a number of shareholders objected to the flexibility which our
policy reserved to make payments beyond the scope of our policy in
exceptional circumstances and where it was considered appropriate to
do so. We had included this wording in 2017’s policy as a straightforward
carry-over from our original 2014 approved remuneration policy. As a
30 September year-end company, Treatt was one of the first companies
to draft and publish a Directors’ remuneration policy under the new
regime in Autumn 2013. We acknowledge that this wide-ranging
flexibility is no longer appropriate, and accordingly our revised 2018
policy will remove this wording. At the same time, we will make a
number of other changes to bring our revised policy more into line with
the policies operated by other FTSE SmallCap companies; in addition
to technical matters, this will involve extending the holding period
for our LTIP from one year to two years following the vesting of awards
for all LTIP grants made to Executive Directors from approval of
the new policy. Accordingly, the Remuneration Policy Report and
the Implementation Report will be put to binding and advisory votes
respectively at the Annual General Meeting on 26 January 2018.
Looking back at 2017
The Group’s results for the year to 30 September 2017 demonstrate
continued strong underlying financial and operational performance
and Treatt’s senior management, led by the Chief Executive Officer,
Daemmon Reeve, has been critical to this exceptional performance.
As such, the Remuneration Committee is very aware of the need to
ensure that the remuneration of our top talent, including our Executive
Directors, reflects the crucial role they play and their outstanding
performance.
Accordingly, at the end of the 2017 financial year the Committee
undertook a review of our Executive Directors’ remuneration, the
summary conclusions of which were that:
• The current policy structure had supported the Group’s
strategy well. In particular the current design of, and
opportunities available under, the Group’s Annual Bonus
and LTIP plans were appropriate and should remain
unchanged; however
•
In line with the extra-ordinary growth of both top line
and profitability performance over a sustained period,
the complexity and size of the role of many individuals
throughout the organisation, including the Executive
Directors, has increased significantly. The levels of base
salaries paid to our Executive Directors were significantly
below market levels, and taking account of the increased
complexity of their roles, it would be appropriate to move
base salaries closer to “at market” levels.
The Remuneration Committee has therefore instituted a process which
will result in the following increases in base salaries for our Executive
Directors:
Base salaries of
Executive Directors
FY 2017
(Actual)
FY2018
(Actual)
FY2019
(Proposed)
Daemmon Reeve
£282,000
£305,000
£330,000
Richard Hope
£185,000
£202,000
£220,000
As detailed elsewhere in this report, the Group performed extremely
well in 2017, with considerable growth in revenue, adjusted pre-tax profit
and earnings per share, far exceeding the average growth rate within
our industry, which historically rarely exceeds 2.5%. In accordance
with the rules of the Executive Directors’ Annual Bonus Scheme, the
Committee assessed that another record Group performance in the
year justified a bonus payment of 100% of salary for the Executive
Directors, being equal to the maximum bonus potential. Additionally, the
first grant of LTIPs made to the Executive Directors in 2014 will vest in
full in December 2017, following achievement of the EPS growth
performance target for year ending 2017 (average annual growth of
10% or more over three financial years for full vesting). These awards
Following shareholder consultation, our proposal to move to the base
salary levels shown above over two years allows the Remuneration
Committee to review both the performance of the Group and that of
the Executive Directors themselves before confirming the proposed
increases for FY 2019.
We recognise that these salary increases are above normal “pay-
inflation” levels, but we believe that when setting the levels of
remuneration for the Executive Directors it is important to take
particular care to ensure that the base salaries are commensurate
to the increased size and complexity of the tasks we require them
to undertake:
44
Treatt plc – Annual Report & Financial Statements 2017 • Treatt has developed materially since our CEO, Daemmon
Reeve, came into post in August 2012. In this period we
have seen the development and implementation of a new
strategy with its implications of new ways of working, new
product developments, new manufacturing, new territories,
new working practices and new risk management, as the
Group moves up the value chain from a commodities trader
to becoming a trusted science-led source of ingredient
solutions to some of the world’s leading FMCG, flavour and
fragrance businesses. In this period our total shareholder
return (TSR) has grown by almost 700%.
• Headcount has increased, particularly amongst technical
staff in research-led and customer-facing roles as well
as in the Group’s expansion into China. Specialty extraction
capacity in the Florida plant has been increased by 500%
and, while expansion in the US market remains a major
focus we are also extending our geographical footprint into
other high growth markets in China and South-East Asia.
The Group’s Kenyan acquisition has been transformed
from loss-making to a successful and profitable subsidiary
of the business.
•
In the UK we are required to comply with COMAH
regulations (Control of Major Accident Hazards) and are
ensuring that all necessary measures are taken to prevent
major accidents involving dangerous substances. Likewise,
new health and safety protocols have been adopted
organisation-wide so that health and safety is owned by all.
• Through all this, our sales volumes and our margins have
been consistently driven upwards. Building is under way
in Florida to increase production capacity to meet new
demand whilst a ten-acre site has been procured and plans
approved for new-build expansion in the UK.
• At the same time, we have been sensitive to the issue
of relativities with wider employee salaries. Whilst the
baseline 2017/18 salary increase for all Group staff in the
UK and US is 3%, around 30% of staff have received
increases above 3%, reflecting the increased complexity
of their roles, as well as strong individual and team
performance. Approximately 9% of staff received salary
increases above 8% in order to bring them in line with
the market rate for their role and to recognise their value to
the business. The increases to the base salaries of the
Executive Directors in 2018 (8.2% and 9.2% respectively)
are therefore in line with the salary increases made to
our employees who have seen a similar increase in the
complexity of their roles and who have had a significant
influence on the extraordinary results achieved over the
past five years.
• Within the wider workforce, the ratio of the CEO’s salary
to the average salary of UK employees is remaining
broadly stable at around 10 times and likewise, the ratio
of CEO salary to the average salary of our Group senior
management team is 2.76 times.
Stepping back from the detail, we believe that our CEO and CFO are
very important to the continued development of Treatt, particularly to
the fulfilment of our on-going growth plans. Accordingly, we believe
that the revised base salaries for our Executive Directors will have
a materially retentive impact and that the path which we are taking
is clearly in shareholders’ best interests.
For completeness, the Committee also decided in the year to review the
fees of the Chairman. The last full review of the Chairman’s fees was
in 2014. Having considered the performance of the Chairman and the
leadership which he has provided, it was determined to move the
Chairman’s fee to £80,000 from 1 October 2017 (from £60,000). This
fee broadly aligns to the positioning applied when setting the Executive
Directors’ base salaries, although the Committee may review this fee
again in coming financial years.
Whilst it is outside the remit of the Remuneration Committee, the Board
also reviewed the Non-executive Director fees, on a consistent basis
with the Executive Directors and Chairman, to ensure that they remain
competitive and to enable recruitment and retention of high-calibre
Non-executive Directors with the required skills and experience.
Engagement with our shareholders and our AGM
As I explained in the introduction to this Annual Statement, at our
January 2018 AGM we will be seeking shareholders’ support on two
resolutions related to remuneration matters:
•
•
to approve the Remuneration Policy Report; and
to approve the Implementation Report.
The Remuneration Committee consulted with the Parent Company’s
largest shareholders and with leading representative bodies before
proposing the changes which are detailed in this Annual Statement
and we are grateful for the constructive responses which we received
during this process.
The Committee is mindful of executive remuneration best practice
and believes that within this context the revised approach on Executive
Directors’ salaries and the updates which we have made to the
Remuneration Policy will strengthen the alignment between Executive
Directors and shareholders and help us retain (and if necessary recruit)
the talent needed as the business continues to grow.
We are happy to receive feedback from shareholders at any time in
relation to our remuneration policies and hope to receive your support
for the resolutions referred to above at the forthcoming AGM. I will
be available at the AGM to answer any questions you may have.
DAVID JOHNSTON
Chairman, Remuneration Committee
Members of the Committee are shown on page 22 and for full biographies
of the Committee members see page 23. The terms of reference of the
Committee can be found on the Treatt website at www.treatt.com.
Corporate Governance
45
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
Operation of Remuneration Committee in FY 2017
Decisions made during the year
In line with its terms of reference, the following key matters were
considered by the Committee during the year:
• approval of the 2016 Directors’ Remuneration Report;
• agreement of the bonuses payable for the 2016 financial
year;
POLICY SECTION
Remuneration Policy Report
The Committee’s policy is to ensure that remuneration structures are
simple, transparent and proportional to the size and complexity of the
business whilst ensuring that Executive Directors are fairly rewarded
for the role they undertake. The main principles of the remuneration
policy are:
• salaries should be competitive but not excessive when
• grant of options to Directors under the Treatt LTIP and the
compared to similar sized companies;
• remuneration packages should align the interests of
Directors with shareholders by using stretching
performance metrics that provide a strong link to the
creation of shareholder value;
•
there should be appropriate balance between fixed and
performance-related pay to ensure delivery of results over
the short, medium and longer-term;
• performance metrics should not encourage a culture of
excessive risk taking;
• Directors should invest in and retain shares in Treatt; and
• salaries should be reasonable compared with those offered
to others of the senior management team and the wider
workforce.
The Committee reviews its policy annually to determine whether it
remains effective, is aligned to the Group strategy and that it promotes
the long-term success of the Group. Emphasis will continue to be
placed on longer-term share-based incentives to more closely align
the interests of Directors with shareholders and provide stretching
longer-term targets to encourage strong performance.
The current intention is that the framework of this remuneration policy
will apply for future years from the date of the 2018 AGM.
setting of performance conditions;
• grant of options to senior management and key employees
and the setting of performance conditions;
• appointment of FIT Remuneration Consultants and
determination of the scope of their appointment and advice
required;
• review of the remuneration policy and the remuneration
arrangements for the Executive Directors and Chairman;
• review of salary levels for the Executive Directors and
agreement of salary increases for the 2018 financial year;
and
• consideration of the award of free and matching shares
to UK employees under the Share Incentive Plan and
equivalent awards of restricted stock units to US employees
under the Long-Term Incentive Plan.
External Advisors
In the latter stages of the year, the Committee decided to engage the
services of remuneration consultants. This is the first time in Treatt’s
history that remuneration consultants have been engaged but as Treatt
continues to grow it is essential to ensure that the Remuneration
Committee receives appropriate advice.
Following a selection process undertaken by the Chairman of the
Committee, which considered a variety of aspects, including the
experience of the consultants and the cost of their services, FIT
Remuneration Consultants were appointed. They are a founder member
of the Remuneration Consultants’ Group and adhere to its Code of
Conduct and do not provide any other services to Treatt. FIT
Remuneration Consultants LLP were paid fees totalling £15,000 during
the year for the provision of advice to the Committee on the remuneration
packages of Executive Directors, including consideration of the wider
impacts of any revisions on internal dynamics and views on shareholder
perspectives, and a review of the Chairman and Non-executive Director
fees. The consultant’s fees were charged on a fixed fee basis.
The Committee has reflected on the quality of the advice provided and
whether it properly addressed the issues under consideration and
is satisfied that the advice received during the year was objective
and independent.
46
Treatt plc – Annual Report & Financial Statements 2017 Executive Directors’ remuneration
The table below sets out a summary of each element of the Executive Directors’ remuneration, how it operates, the maximum opportunity available,
applicable performance metrics and changes to remuneration for the 2018 financial year:
ELEMENT: BASE SALARY
Purpose and link to strategy
Help recruit and retain high-calibre Executive Directors
To provide a competitive salary relative to the size of the Group
Reflects individual experience and the role
Operation
Reviewed annually by the Committee with changes taking effect from 1 October unless a change in responsibility
requires an interim review
Influenced by complexity of the role, personal performance and by the increase in salaries of other Group employees
Benchmarked against companies of similar size and complexity at appropriate intervals
Maximum Opportunity
Any basic salary increases are applied in line with the outcome of annual reviews
Annual increases should not normally exceed the average salary increase of employees within the Group. Exceptions
can be made when a review is required by a change in role or responsibility, or where there is a significant change in
the role and/or size, value or complexity of the Group which has resulted in material market misalignment
Performance Metrics
Not applicable
Changes for 2018
financial year
No changes have been made to the salary review process or to the over-arching policy
As set out above, the base salaries of the Executive Directors have been reviewed in light of the increased size and
complexity of the roles and the outstanding performance of the business
The base salary for Daemmon Reeve, CEO is £305,000 (2017: £282,000; an 8.2% increase)
The base salary for Richard Hope, CFO is £202,000 (2017: £185,000; a 9.2% increase)
ELEMENT: BENEFITS
Purpose and link to strategy
Help recruit and retain high-calibre Executive Directors
Operation
Entitlement to the following benefits on the same terms as employees in the country in which the Director is resident:
Private Healthcare – except that Daemmon Reeve also receives Family Cover; Life Assurance; Permanent Health
Insurance; Car Allowance; All-employee share schemes
Life Assurance for UK tax resident Directors will be provided by means of a Lifetime Plus Policy
Any new benefits introduced to staff generally shall be provided to Directors on equal or comparable terms
Maximum Opportunity
Except as otherwise stated these are on the same terms as the benefits received by other employees in the country
in which the Director is resident
Performance Metrics
Not applicable
Changes for 2018 financial year
Re-introduction of a market-level car allowance
ELEMENT: PENSION
Purpose and link to strategy
Help recruit and retain high-calibre Executive Directors and to provide a competitive package
Operation
Entitlement to receive employer contributions into a defined contribution pension scheme on the same terms as
employees in the country in which the Director is resident
Maximum Opportunity
UK employees 9% base salary contribution or 15% where previously a member of the defined benefit pension
scheme (no personal contribution required in either case)
Performance Metrics
Not applicable
Changes for 2018 financial year
No material changes
Corporate Governance
47
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
ELEMENT: ANNUAL BONUS – SEE NOTES
Purpose and link to strategy
Provides an element of at risk pay, which incentivises the achievement of good annual financial results
Aligns Directors’ interests with shareholders
Operation
The rules of the Executive Directors’ Bonus Scheme and the performance targets are reviewed annually
Annual bonuses are calculated by reference to the achievement of performance targets for the financial year and
each Director is entitled to a percentage of salary based upon this calculation, subject to the maximum opportunity
Bonuses are subject to determination by the Committee in accordance with scheme rules after year end and are paid
in cash in December
Maximum Opportunity
100% of salary per annum
Performance Metrics
Bonuses are based on the growth in adjusted Group profit before tax compared to the prior financial year, which
aligns with all employee bonus schemes across the Group
Bonus payments are based against financial performance on a sliding scale. No bonus is payable unless a minimum
level of financial performance is achieved
Different performance measures and/or weightings may be used for the annual bonus in future years to help drive
the strategy of the business during the period of this policy, although the Remuneration Committee would expect to
consult with leading shareholders before making material changes to the current performance measures applied
The Committee has discretion to reduce bonuses where circumstances have created a sufficiently significant impact
on the reputation of the Group to justify, in the view of the Committee, the operation of this discretion
Changes for 2018 financial year
No material changes
ELEMENT: LONG TERM INCENTIVE PLAN – SEE NOTES
Purpose and link to strategy
Incentivises Directors to achieve returns for shareholders over a longer time frame
Aligns Directors’ interests with shareholders
Operation
The Committee will consider awards of shares under the LTIP annually and will review the quantum of awards to
ensure that they are in line with market rates
Awards will be made at nil cost, with vesting, dependent on the achievement of performance conditions over a period
determined by the Committee, which shall be a minimum of three years
Awards will be subject to a two-year holding period following vesting, net of any tax liability arising on either vesting or exercise
The Committee may also exercise the specific discretions contained within the rules of the scheme, as approved by
shareholders
Maximum Opportunity
100% of salary per annum based on market value of shares at date of grant
Performance Metrics
The vesting of the awards will normally be based on growth in adjusted basic EPS exceeding a minimum level during
the period from date of grant to date of vesting
Targets are set by the Committee for each award on a sliding scale basis. No more than 25% of awards will vest for
threshold performance, with full vesting taking place for equalling or exceeding maximum performance conditions
Different performance measures and/or weightings may be used for future LTIP awards to help drive the strategy
of the business during the period of this policy, although the Remuneration Committee would expect to consult with
leading shareholders before making material changes to the current performance measures applied
Awards lapse if performance criteria are not met at the end of the three-year performance period
Changes for 2018 financial year
Increase in the holding period to two years
48
Treatt plc – Annual Report & Financial Statements 2017 ELEMENT: SHARE RETENTION POLICY
Purpose and link to strategy
Aligns Directors’ interests with shareholders
Operation
Holding requirements:
CEO – 200% of basic salary
CFO – 150% of basic salary
Directors are required to retain shares acquired under share-based incentive awards until the holding requirements
are met, save that they are permitted to sell sufficient shares to pay any exercise price and all applicable taxes due in
respect of that award
Maximum Opportunity
Not applicable
Performance Metrics
Not applicable
Changes for 2018 financial year
No material changes
ELEMENT: RECRUITMENT OF EXECUTIVE DIRECTORS
Purpose and link to strategy
Enable recruitment of high-calibre Executive Directors able to contribute to the success of the Group
Operation
Salary will be set to reflect skills and experience of incoming Director and market rate for the role to be undertaken
Existing benefits and incentives of the Group to be used with participation on the same basis as existing Directors
Payment of relocation expenses where relevant; each element will be detailed in the relevant remuneration report
In the event of an internal promotion any commitments made prior to promotion may continue to be honoured when
they would otherwise be inconsistent with this policy
Discretion may be exercised in exceptional circumstances and existing entitlements with a current employer, such
as bonus and share schemes, may be bought out on a like-for-like basis and subject to comparable performance
conditions and time vesting requirements where appropriate. Exceptionally, where necessary, this may include
making a guaranteed bonus payment in the year of joining
Maximum Opportunity
Buy-out awards are subject to the maximum value of any outstanding awards forgone by the recruit
Performance Metrics
Based on existing Treatt performance conditions when appropriate
Changes for 2018 financial year
No material changes
ELEMENT: CLAWBACK
Purpose and link to strategy
To ensure Executive Directors do not benefit from errors or misconduct
Operation
Provisions are included in performance-related remuneration to enable clawback of remuneration which has been
overpaid due to material misstatement of the Group’s accounts, errors made in calculation or a Director’s misconduct
Maximum Opportunity
Not applicable
Performance Metrics
Not applicable
Changes for 2018 financial year
No material changes
Notes:
1 The Committee considers that the forward-looking targets for the annual bonus are commercially sensitive and has, therefore, chosen not to disclose them in advance. Details
of the targets will be set out retrospectively in next year’s Remuneration Report. However, the Committee considers that the level of performance required for the annual bonus
is appropriately stretching.
The bonuses of staff and senior management are restricted to a maximum of between 12% and 60% of base salary depending on seniority, role and market conditions.
2 Performance targets for LTIP awards are set by the Committee at the date of grant of the options to ensure that they are appropriately stretching. The Committee considers adjusted basic
EPS to be a complete and appropriate measure of performance, capturing revenue growth and operating margin. EPS targets are aligned with the Board’s strategy.
3 Subject to the achievement of the applicable performance conditions, Executive Directors are eligible to receive payment from any award made prior to the approval and implementation
of the Directors’ remuneration policy detailed in this report.
4 For both annual bonus and LTIP, while performance conditions will generally remain unchanged once set, the Remuneration Committee has the ability to amend the measures, weightings
and targets in exceptional circumstances (such as a major transaction) where the original conditions would cease to operate as intended.
5 The Committee retains discretion, consistent with market practice in regard to the operation and administration of the annual bonus and LTIP, including:
• the timing and size of awards (within the overall limits of this policy);
• the determination of performance measures and targets and resultant vesting;
• when dealing with a change of control (e.g. the timing of testing performance conditions) or restructuring of the Group;
• determination of a good/bad leaver based on the rules of each plan and the appropriate treatment chosen; and
• adjustments in certain circumstances, such as rights issues, corporate restructuring events and special dividends.
Corporate Governance
49
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
Non-executive Directors’ remuneration
ELEMENT: FEES
Purpose and link to strategy
Operation
To recruit high-calibre Non-executive Directors
To reward additional responsibility by virtue of position as Chairman of the Board or Chairman of a Committee
Excluding the Chairman, subject to an aggregate limit within the Articles of Association, which was last approved
at £225,000 by shareholders at the AGM in February 2014
Reviewed annually for each Non-executive Director with changes taking effect from 1 October
The Chairman’s fees are reviewed by the Committee and the other Non-executives’ fees are reviewed by the Board
(excluding the Non-executives)
Influenced by the increase in salaries of other Group employees and by personal performance
Benchmarked against companies of similar size and complexity at appropriate intervals
Additional fees may be paid in respect of increased responsibility or time commitment required by the role
or in respect of invoiced consultancy fees, where relevant
Maximum Opportunity
Any fee increases are applied in line with the outcome of annual reviews
Changes for 2018 financial year
As set out above the fees of the Chairman and Non-executive Directors have been reviewed in light of the
outstanding performance of the business
The fee for Tim Jones, Chairman is £80,000 (2017: £60,000)
The base fee for Non-executive Directors is £40,000 (2017: £33,000)
Audit Committee Chair fee £7,500 (2017: c £4,000)
Remuneration Committee Chair fee £5,000 (2017: c £2,000)
Senior Independent Director £2,500 (2017: £Nil)
Illustration of remuneration policy
The graphs below provide estimates of the potential future reward
for each of the Executive Directors based on their current roles, the
remuneration policy outlined on pages 46 to 51 and base salaries as
at 1 October 2017.
The assumptions used in preparing this chart are as follows:
• minimum – basic salary, pension or cash in lieu of pension
and benefits, no bonus and no vesting of the
LTIP;
• on target – basic salary, pension or cash in lieu of pension,
benefits, and:
– a bonus of 50% and an LTIP of 100% of basic
salary (with notional vesting at 50%); and
)
0
0
0
£
(
’
1,000
900
800
700
600
500
400
300
200
100
0
Remuneration Policy Illustration
309
305
305
157
153
287
305
305
206
202
105
101
202
202
202
Minimum
On target
Maximum
Minimum
On target
Maximum
• maximum – basic salary, pension or cash in lieu of pension,
Chief Executive Officer – Daemmon Reeve
Chief Financial Officer – Richard Hope
benefits, and:
– a bonus of 100% and an LTIP of 100% of
basic salary (with notional vesting at 100%).
Salary
Benefits
Pension
Bonus
Share Options
Comparison of Directors’ remuneration policy
with arrangements for employees
This policy sets out the remuneration structure applicable to Directors
of the Group. Salary levels and incentive arrangements applicable
to other Group employees are determined by reference to local
employment conditions for comparative roles.
Budgeted salary increases for Group employees are taken into
consideration when determining increases for the Executive Directors.
50
Treatt plc – Annual Report & Financial Statements 2017
Employees are provided with a competitive benefits package including
healthcare, life assurance and pension. Consistent with Directors,
employees are eligible to participate in an annual bonus scheme with
conditions linked to the performance of their operating subsidiary and
the Group overall. Employee share ownership is encouraged across the
Group and participation, particularly in the UK, is strong. The Share
Incentive Plan is designed to further encourage employee share
ownership. Eligible employees, including Executive Directors, are able
to participate in the all-employee share schemes on equal terms.
Executive Directors and key employees with the greatest potential to
influence achievement of the Group’s strategic objectives are provided
with share options or long-term incentives designed to encourage
strong Group performance.
The Group does not consult with employees in respect of the Executive
Directors remuneration policy. However, the Committee receives
regular updates on salary and bonus levels across the Group and is
aware of how the remuneration of Directors compares to employees.
In a departure from provision D2.2 of the 2016 UK Corporate
Governance Code, the remuneration of Group senior management is
determined by the Executive Directors since the Board believes that the
Executive Directors are best placed to make this decision. However,
remuneration proposals in respect of senior managers are reviewed
and monitored by the Committee to ensure consistency and
proportionality. The bonuses of all senior managers in the Group are
approved by the Committee.
Directors’ Contracts
Executive Directors
The Committee reviews the contractual terms of new and existing
Executive Directors to ensure that they reflect best practice and are
designed to attract and retain suitable candidates. The Committee
considers that a rolling contract terminable on 12 months’ notice by
either party is appropriate.
Summary of Directors’ service contracts as at 30 September 2017:
Date of contract
Daemmon Reeve
6 April 2016
Richard Hope
1 October 2013
Notice period
12 months
12 months
Summary of the key elements of Directors’ service contracts:
Provision
Summary
Notice period
12 months by either party
Termination payment
Salary
Benefits
Daemmon Reeve – No provision for
payment in lieu of notice
Richard Hope – No provision for payment
in lieu of notice
Reviewed annually with effect from
1 October each year
Private healthcare, life assurance,
permanent health insurance, pension
Participation in discretionary incentive
arrangements determined by the Committee
The Directors’ contracts are available for inspection at the Parent
Company’s registered office during normal business hours.
Future contracts are to provide for remuneration obligations comparable
to those set out above taking into consideration role and responsibility.
Non-executive Directors
All Non-executive Directors are subject to the same terms and
conditions of appointment which provide for the payment of fees for
their services in connection with Board and Board Committee meetings.
In their Non-executive capacities they do not qualify for participation
in any of the Group’s bonus, share option or other incentive schemes,
and they are not eligible for pension scheme membership.
The terms and conditions of the appointment of Non-executive Directors
are available for inspection at the Parent Company’s registered office
during normal business hours.
Payments for loss of office
In accordance with the 2016 UK Corporate Governance Code, notice
periods shall not exceed a maximum of twelve months.
In normal circumstances it is expected that termination payments
for Executive Directors should not exceed current salary and benefits
for the notice period. When determining termination payments in the
event of early termination, the Committee will take into account a
variety of factors including length of service, personal and Group
performance, the Director’s obligation to mitigate his loss, statutory
compensation to which a Director may be entitled and legal fees and
other payments which may be payable under a settlement agreement.
A Director who has been given notice by the Group for any reason
other than on the grounds of injury, disability, redundancy or change of
control shall only be eligible to a payment under the bonus scheme
at the discretion of the Committee, which will take into account the
circumstances leading to the notice.
Directors have no entitlement to performance-related share-based
incentives, the unvested portion of which will generally lapse following
termination of employment. However, in certain circumstances, such
as injury, disability or redundancy, share options, which shall be pro-
rated by reference to the proportion of the performance period
completed and subject to performance conditions, may be exercised
within six months of termination. Where termination is for any other
reason, share options may only be exercised at the discretion of, and to
the extent permitted by the Committee, acting fairly and reasonably.
External Appointments
Whilst neither of the Executive Directors currently serve as Non-
executive Directors on the boards of other companies, it is recognised
that such appointments would provide an opportunity to gain broader
experience outside of Treatt which would benefit the Group. In the
event that the Directors are offered such positions and providing that
they are not likely to lead to a conflict of interest or significant constraints
on time, Executive Directors may, with the prior approval of the Board,
accept Non-executive appointments and retain the fees received.
Shareholder Views
The Remuneration Committee engaged pro-actively with the Group’s
major shareholders in respect of the Committee’s first remuneration
policy in 2013 and changes to the Executive Directors’ base salaries in
2017, as set out above. The views of these shareholders were taken
into consideration in adopting the share retention policy, clawback and
the two-year holding period for LTIPs. The Committee will also consult
with major shareholders prior to any further material changes to the
remuneration policy, which might be necessary in the future.
This Remuneration Policy, if approved at the 2018 Annual General
Meeting, shall be effective immediately and remain effective until it is
next required to be approved by shareholders.
Corporate Governance
51
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
IMPLEMENTATION REPORT
The following section of this report provides details of the implementation of the policy for the year ended 30 September 2017.
Directors’ Remuneration (audited)
The tables below report a single figure for total remuneration for each individual Executive and Non-executive Director respectively.
2016
£’000
182
–
160
16
14
372
2016
£’000
61
33
37
11
36
12
190
Executive Directors:
Salary
Taxable benefits (Note 1)
Annual bonus (Note 2)
Share options vesting in the financial year
Pension (Note 3)
Daemmon Reeve*
Richard Hope
2017
£’000
282
1
282
–
38
603
2016
£’000
287
–
252
–
41
580
2017
£’000
185
–
185
8
15
393
*Daemmon Reeve transferred to the UK with effect from 6 April 2016. Consequently, the reduction in Mr. Reeve’s base salary in 2017 was a consequence
of the effect of a different USD/GBP exchange rate being used to convert his US salary to GBP, than that which actually occurred.
Non-executive Directors:
Tim Jones
Anita Haines
Jeff Iliffe
Richard Illek (*from 1 June 2016)
David Johnston
Ian Neil (*until 29 January 2016)
Fees
2017
£’000
62
33
39
33
37
–
204
Note 1: Taxable benefits provided to Executive Directors only relate to private medical insurance.
Note 2: Details relating to the annual bonus are as follows: The annual bonus for Executive Directors is calculated based on the annual growth in profit before tax, adjusted
for exceptional and other items at the discretion of the Remuneration Committee. The annual bonus is capped at a maximum of 100% of annual basic salary. The annual
bonus, as a percentage of the maximum achievable, was as follows:
Daemmon Reeve
Richard Hope
2017
100%
100%
2016
88%
88%
The proportion of fixed and variable pay, exclusive of pension, benefits and share options, is shown below for the Executive Directors:
Daemmon Reeve
Richard Hope
Note 3: Pension contributions relate to pay in lieu of pension after deduction of employers’ NI.
Basic Salary
Annual Bonus
2017
50%
50%
2016
53%
53%
2017
50%
50%
2016
47%
47%
52
Treatt plc – Annual Report & Financial Statements 2017 Performance Graph
This performance graph shows Treatt plc’s performance, measured
by total shareholder return, compared with that of the FTSE All Share
Index, which has been selected by the Board as being the most
appropriate measure against which to benchmark its performance.
Total shareholder return 2012-2017
2
1
/
9
/
0
3
m
o
r
f
n
r
u
t
e
r
l
r
e
d
o
h
e
r
a
h
S
%
700.00
600.00
500.00
400.00
300.00
200.00
100.00
0.00
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Sep 17
Treatt plc
FTSE All Share
CEO Remuneration
The following table provides historical data on remuneration in respect of the Director(s) performing the role of Chief Executive Officer for each
of the years covered by the performance graph:
Total remuneration (£'000)
Annual bonus as % of maximum
Share options vesting as % of maximum
2017
603
100%
N/A2
2016
580
88%
N/A2
2015
470
92%
2014
436
95%
2013
405
85%
100%1
100%1
100%1
1 All share options vested in full as they were all-employee share options which were not subject to performance conditions.
2 There were no options which vested during the year.
The percentage change in remuneration for 2017 of the Director undertaking the role of CEO, compared to employees as a whole was as follows:
CEO
Employees1
Salaries2
-1.7%3
3.9%
Bonus2
11.9%
52.0%
1 The employees used for comparison are those UK and US employees who, for the salary comparison, were employed for the whole of the 2017 financial year, and for
bonuses, for the whole of both the 2016 and 2017 financial years.
2 The changes in salaries and bonuses have been calculated on a constant currency basis for USD payments, using the average exchange rate for 2017.
3 As explained above, the reduction of the CEO salary resulted from his transfer from the US to the UK and relates to the foreign exchange impact on his base salary.
Relative importance of spend on pay
Wages and salaries are the most significant overhead cost in the Group. The following table sets out, in a manner prescribed by the regulations, the
relative importance of employee remuneration, as compared to distributions to shareholders and other significant uses of profit, the most significant
of which, taxation, has therefore been selected:
Total remuneration1
Dividends2
Current tax3
1 Total remuneration includes wages, salaries and pension costs as disclosed in note 6.
2 Dividends paid in the financial year as disclosed in note 10.
3 Current tax charge in respect of the financial year as disclosed in note 9.
2017
£’000
13,131
3,025
3,444
2016
£’000
11,635
2,095
2,354
Movement
+13%
+44%
+46%
Corporate Governance
53
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
Directors’ Interests (audited)
The Directors who held office at 30 September 2017 had the following interests in the shares of the Parent Company:
Executive Directors
Daemmon Reeve
Richard Hope
Non-executive Directors
Tim Jones
Anita Haines
Richard Illek
Shares held outright or vested
Unvested share options with
performance conditions
Unvested all-employee
share options
2017
2016
2017
2016
2017
2016
163,080
211,226
120,751
50,680
55,000
159,001
199,520
120,751
50,680
–
565,346
307,470
460,992
245,868
13,043
14,719
13,043
13,238
–
–
–
–
–
–
–
–
–
–
–
–
Between 1 October 2017 and 23 November 2017, the latest date practicable to obtain the information prior to publication of this document, there
were no changes in the Directors’ interests.
The table below shows the value of Executive Directors’ interests in shares as at 30 September 2017 as a percentage of their base salary:
Daemmon Reeve
Richard Hope
Value of shares held
outright or vested
2017
£’000
752
974
2016
£’000
334
419
Base salary1
2016
£’000
287
182
2017
£’000
282
185
Value of Interest as
% of base salary
Target % of
base salary
2017
%
267%
526%
2016
%
116%
230%
200%
150%
1 Base salary is the average basic gross pay for the corresponding year.
Share Option Schemes (audited)
The following share options were granted to Executive Directors during the financial year:
Scheme
Basis
Date of Grant
Daemmon Reeve
LTIP 20161
Executive
12 Dec 16
Richard Hope
SAYE 20172
LTIP 20161
All-staff
Executive
19 Jul 17
12 Dec 16
1 Executive LTIPs are granted at Nil cost, subject to performance conditions.
Share Price at
date of grant
Face Value
£’000
£2.70
£4.76
£2.70
282
7
185
Min
Performance
Award
30%
N/A
30%
Performance
End date
30/9/19
N/A
30/9/19
2 SAYE (Save As You Earn) share options are offered to UK employees (subject to tax exempt limits) at a discount of 20% of the average share price for the three days
preceding the date of grant and are exercisable after three years.
The performance conditions for Executive LTIP options are as follows:
Average annual growth in adjusted basic earnings per share for the three financial years ending on the performance end date shown above.
The options shall vest on a linear sliding scale: 30% where average annual growth equals or exceeds 3%, increasing to 100% where average annual
growth equals or exceeds 10%. If the average annual growth in adjusted EPS is less than 3%, the options will lapse.
The share options of the Directors in office during the year are as set out below:
54
Treatt plc – Annual Report & Financial Statements 2017 Daemmon Reeve
Sep 2019 – Feb 2020
Exercise
Dates
Richard Hope
Dec 2017 – Dec 2022
Dec 2018 – Dec 2023
Dec 2017 – Mar 2018
Dec 2018 – Dec 2025
Dec 2019 – Dec 2026
Sep 2017 – Feb 2018
Sep 2018 – Feb 2019
Sep 2019 – Feb 2020
Sep 2020 – Feb 2021
Dec 2016 – Dec 2023
Dec 2017 – Dec 2024
Dec 2018 – Dec 2025
Dec 2019 – Dec 2026
Exercise
Price
138.0p
79.0p
147.2p
Nil
Nil
Nil
138.0p
132.0p
138.0p
413.0p
147.2p
Nil
Nil
Nil
At
1 Oct
2016
13,043
78,195
41,575
165,182
176,040
–
474,035
4,434
4,500
4,304
–
6,790
128,400
110,678
–
259,106
Granted
During the
Year
Exercised
During the
Year
Expired
During the
Year
–
–
–
–
–
104,354
104,354
–
–
1,481
–
–
–
68,392
69,873
–
–
–
–
–
–
–
–
–
–
–
(6,790)
–
–
–
(6,790)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At
30 Sep
2017
13,043
78,195
41,575
165,182
176,040
104,354
578,389
4,434
4,500
4,304
1,481
–
128,400
110,678
68,392
322,189
The aggregate amount of gains made by the Directors on the exercise of share options in the year was £8,000 (2016: £16,000).
There have been no further changes in the interests of the Directors to subscribe for or acquire shares between 1 October 2017 and 23 November
2017, the latest date practicable to obtain the information prior to publication of this document.
The market price of the shares at 30 September 2017 was £4.61 and the range during the financial year was £2.14 to £5.23. All market price figures
are derived from the Daily Official List of the London Stock Exchange.
Pensions (audited)
Statement of voting
The Chief Executive Officer is a deferred member of the R C Treatt
& Co Limited Pension & Assurance Scheme following its closure to
future accruals on 31 December 2012. The plan was a non-contributory,
H M Revenue & Customs approved, defined benefit occupational
pension scheme.
At the Annual General Meeting held on 27 January 2017, the votes cast
in respect of the resolution to approve the Directors’ Remuneration
Report, were as follows:
For: 89.46% Against: 10.54% Votes withheld: 67,221
The pension entitlement is as follows:
Audit notes
In accordance with Section 421 of the Companies Act 2006 and the
Regulations, where indicated, certain information contained within the
Implementation Section of this report has been audited. The remaining
sections are not subject to audit.
This report was approved by the Board and signed on its behalf
on 28 November 2017.
ANITA STEER
Secretary
Normal Retirement Date
Accrued Total Pension at
2017
£
2016
£
Daemmon Reeve
24 Sep 2036
13,339
20,988
The transfer values have been calculated on the basis of actuarial
advice in accordance with Statutory Instrument 2013 No 1981 –
The Large and Medium-Sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations 2013. Further details of the scheme
are included in note 26.
In addition, contributions to defined money purchase pension plans
were made as follows:
Daemmon Reeve
Richard Hope
2017
£’000
38
15
2016
£’000
41
14
Pension contributions include pay in lieu of pension after deduction
of employers’ NI in order to be cost neutral to the Group.
Corporate Governance
55
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF TREATT PLC
We have audited the financial statements of Treatt plc (the ‘Parent
Company’) and its subsidiaries (the ‘Group’) for the year ended 30
September 2017 which comprise the Group Income Statement, Group
Statement of Comprehensive Income, Group and Parent Company
Statements of Changes in Equity, Group and Parent Company Balance
Sheets, Group and Parent Company Statements of Cash Flows, Group
Reconciliation of Net Cash Flow to Movement in Net Debt and Notes to
the Financial Statements, including a summary of significant accounting
policies. The financial reporting framework that has been applied in
their preparation is applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union.
In our opinion the financial statements:
• give a true and fair view of the state of the Group’s and of
the Parent Company’s affairs as at 30 September 2017 and
of the Group’s profit for the year then ended;
the Group financial statements have been properly
prepared in accordance with IFRSs as adopted by the
European Union;
the Parent Company financial statements have been
properly prepared in accordance with IFRSs as adopted
by the European Union and as applied in accordance with
the Companies Act 2006; and
•
•
•
Conclusions relating to principal risks,
going concern and viability statement
We have nothing to report in respect of the following information in the
annual report, in relation to which the ISAs (UK) require us to report
to you whether we have anything material to add or draw attention to:
•
•
•
the disclosures in the Annual Report set out on pages
29 to 33 that describe the principal risks and explain how
they are being managed or mitigated;
the Directors’ confirmation set out on page 30 in the Annual
Report that they have carried out a robust assessment of
the principal risks facing the Group, including those that
would threaten its business model, future performance,
solvency or liquidity;
the Directors’ statement set out on page 24 in the financial
statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting
in preparing the financial statements and the Directors’
identification of any material uncertainties to the Group
and the Parent Company’s ability to continue to do so
over a period of at least twelve months from the date
of approval of the financial statements;
the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and,
as regards the Group financial statements, Article 4 of the
IAS Regulation.
• whether the Directors’ statement relating to going concern
required under the Listing Rules in accordance with
Listing Rule 9.8.6R(3) is materially inconsistent with our
knowledge obtained in the audit; or
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s
responsibilities for the audit of the financial statements section of our
report. We are independent of the Group in accordance with the ethical
requirements that are relevant to our audit of the financial statements
in the UK, including the FRC’s Ethical Standard as applied to listed
public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that
the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
•
the Directors’ explanation set out on page 24 in the Annual
Report as to how they have assessed the prospects of the
Group, over what period they have done so and why they
consider that period to be appropriate, and their statement
as to whether they have a reasonable expectation that
the Group will be able to continue in operation and meet
its liabilities as they fall due over the period of their
assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
56
Treatt plc – Annual Report & Financial Statements 2017 Key audit matters
Key audit matters are those matters that, in our professional judgement,
were of most significance in our audit of the financial statements
of the current period and include the most significant assessed risks
of material misstatement (whether or not due to fraud) that we
identified. These matters included those which had the greatest effect
on: the overall audit strategy, the allocation of resources in the audit;
and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements as
a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters.
•
Inventory provisions – we reconfirmed our understanding
of the basis for determining provisions against obsolete,
slow moving and defective inventory and against items
where expected net realisable value is lower than cost.
We considered the controls over this process, and whether
these continued to be appropriate and consistently applied.
We tested a sample of inventory provisions, considered their
appropriateness and reviewed post year end transactions
to assess whether these confirmed the provisions made
and their completeness. We also reviewed the outcome of
prior year provisions.
Our application of materiality
When establishing our overall audit strategy, we set certain thresholds
which help us to determine the nature, timing and extent of our audit
procedures and to evaluate the effects of misstatements, both
individually and on the financial statements as a whole. During planning
we determined a magnitude of uncorrected misstatements that we
judge would be material for the financial statements as a whole (FSM).
During planning FSM was calculated as £675,000, which was not
changed during the course of our audit.
We agreed with the Audit Committee that we would report to them all
unadjusted differences in excess of £30,000, as well as differences
below those thresholds that, in our view, warranted reporting on
qualitative grounds.
An overview of the scope of our audit
Our Group audit approach focused on the Parent Company and the
three key trading subsidiaries, two in the UK and one in the US. The UK
entities are subject to local statutory audit completed to the Group
reporting timetable. The US entity is not subject to local statutory
audit and has been subject to full scope audit to Group materiality.
The US entity audit was undertaken by the same team as the UK
statutory audits.
These audits covered 99% of Group revenue, 99% of Group profit
before tax, and 97% of Group total assets.
Other information
The other information comprises the information included in the Annual
Report other than the financial statements and our auditor’s report
thereon. The Directors are responsible for the other information.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit
or otherwise appears to be materially misstated. If we identify such
material inconsistencies or apparent material misstatements, we are
required to determine whether there is a material misstatement in the
financial statements or a material misstatement of the other information.
If, based on the work we have performed, we conclude that there
is a material misstatement of the other information, we are required to
report that fact. We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our
responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements
of the other information where we conclude that those items meet
the following conditions:
• Fair, balanced and understandable set out on page 38 –
the statement given by the Directors that they consider
the annual report and financial statements taken as
a whole is fair, balanced and understandable and provides
the information necessary for shareholders to assess
the Group’s performance, business model and strategy,
is materially inconsistent with our knowledge obtained
in the audit; or
• Audit Committee reporting set out on pages 40 to 42 –
the section describing the work of the audit committee
does not appropriately address matters communicated
by us to the Audit Committee; or
• Directors’ statement of compliance with the UK Corporate
Governance Code set out on page 38 – the parts of the
Directors’ statement required under the Listing Rules
relating to the Group’s compliance with the UK Corporate
Governance Code containing provisions specified for review
by the auditor in accordance with Listing Rule 9.8.10R(2)
do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
Opinions on other matters prescribed
by the Companies Act 2006
In our opinion the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance with the Companies
Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
•
the information given in the Strategic Report and the
Directors’ Report for the financial year for which the Group
financial statements are prepared is consistent with the
financial statements; and
•
the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable requirements.
57
Financial Statements INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TREATT plc (CONTINUED)
As part of our audit, we will consider the susceptibility of the Group
and Parent Company to fraud and other irregularities, taking account of
the business and control environment established and maintained by
the Directors, as well as the nature of transactions, assets and liabilities
recorded in the accounting records. Owing to the inherent limitations of
an audit, there is an unavoidable risk that some material misstatements
of the financial statements may not be detected, even though the audit
is properly planned and performed in accordance with the ISAs.
However, the principal responsibility for ensuring that the financial
statements are free from material misstatement, whether caused by
fraud or error, rests with management who should not rely on the audit
to discharge those functions.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of
our auditor’s report.
Other matters which we are required to address
Following the recommendation of the Audit Committee, we were
appointed by the Board of Directors of the Parent Company in
February 1988 to audit the financial statements for the year ending
30 September 1988 and subsequent financial periods. The period of
total uninterrupted engagement including legacy firms is 30 years,
covering the years ending 30 September 1988 to 30 September 2017.
The non-audit services prohibited by the FRC’s Ethical Standard
were not provided to the Group or the Parent Company and we remain
independent of the Group and the Parent Company in conducting
our audit.
Our audit opinion is consistent with the additional report to the
audit committee.
This report is made solely to the Parent Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. Our audit work has been undertaken so that we might state
to the Parent Company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Parent Company and the Parent Company’s
members as a body, for our audit work, for this report, or for the
opinions we have formed.
NEIL STEPHENSON
(Senior Statutory Auditor)
For and on behalf of RSM UK AUDIT LLP,
Statutory Auditor
Chartered Accountants
Abbotsgate House
Hollow Road
Bury St. Edmunds
Suffolk IP32 7FA
28 November 2017
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the
Parent Company and its environment obtained in the course of the
audit, we have not identified material misstatements in:
•
•
the Strategic Report or the Directors’ Report; or
the information about internal control and risk management
systems in relation to financial reporting processes and
about share capital structures, given in compliance with
rules 7.2.5 and 7.2.6 of the FCA Rules.
We have nothing to report in respect of the following matters in relation
to which the Companies Act 2006 requires us to report to you if,
in our opinion:
• adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have
not been received from branches not visited by us; or
•
the Parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are not
in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by
law are not made; or
• we have not received all the information and explanations
we require for our audit.
Responsibilities of directors
As explained more fully in the Directors’ responsibilities statement set
out on page 26, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and
fair view, and for such internal control as the Directors determine is
necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible
for assessing the Group’s and the Parent Company’s ability to continue
as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Group or the Parent Company
or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit
of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the
basis of these financial statements.
58
Treatt plc – Annual Report & Financial Statements 2017 GROUP INCOME STATEMENT
for the year ended 30 September 2017
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating profit 1
Net finance costs
Profit before taxation and exceptional items
Exceptional items
Profit before taxation
Taxation
Profit for the year attributable to owners of the Parent Company
Earnings per share
Basic
Diluted
Adjusted basic 2
Adjusted diluted 2
Notes
4
5
7
8
9
11
11
11
11
2017
£’000
109,627
(82,819)
26,808
(13,003)
13,805
(913)
12,892
—
12,892
(3,347)
9,545
18.29p
17.72p
18.29p
17.72p
1 Operating profit is calculated as profit before net finance costs, exceptional items and taxation.
2 All adjusted measures exclude exceptional items, and in the case of earnings per share the related tax effect, details of which are given in note 8.
All amounts relate to continuing operations.
Notes 1 to 30 form part of these financial statements.
2016
£’000
88,040
(67,639)
20,401
(10,852)
9,549
(703)
8,846
(553)
8,293
(2,144)
6,149
11.85p
11.68p
12.84p
12.65p
59
Financial Statements
GROUP STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 September 2017
Profit for the year attributable to owners of the Parent Company
Other comprehensive income/(expense):
Items that may be reclassified subsequently to profit or loss:
Currency translation differences on foreign currency net investments
Current tax on foreign currency translation differences
Fair value movement on cash flow hedges
Deferred tax on fair value movement
Items that will not be reclassified subsequently to profit or loss:
Actuarial gain/(loss) on defined benefit pension scheme
Deferred tax on actuarial gain or loss
Other comprehensive income/(expense) for the year
Total comprehensive income for the year attributable to owners of the Parent Company
Notes 1 to 30 form part of these financial statements.
Notes
9
23
9
26
9
2017
£’000
9,545
(1,107)
59
659
(112)
(501)
1,468
(250)
1,218
717
10,262
2016
£’000
6,149
2,576
—
120
(47)
2,649
(4,297)
643
(3,654)
(1,005)
5,144
60
Treatt plc – Annual Report & Financial Statements 2017
GROUP AND PARENT COMPANY STATEMENTS OF CHANGES IN EQUITY
for the year ended 30 September 2017
Share
capital
£’000
Share
premium
£’000
Own shares
in share
trusts
£’000
Hedging
reserve
£’000
Foreign
exchange
reserve
£’000
Group
1 October 2015
Net profit for the year
Other comprehensive income:
Exchange differences
Fair value movement on cash flow hedges
Actuarial loss on defined benefit
pension scheme
Transfer between reserves
Taxation relating to items above
Total comprehensive income
Transactions with owners:
Dividends
Share–based payments
Movement in own shares in share trusts
Gain on release of shares in share trusts
Issue of share capital
Taxation relating to items recognised
directly in equity
Total transactions with owners
Notes
1,050
2,757
(423)
(700)
23
26
9
10
25
24
9
—
—
—
—
—
—
—
—
—
—
—
3
—
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
94
—
(3)
—
91
—
—
120
—
—
(47)
73
—
—
—
—
—
—
—
Retained
earnings
£’000
Total
equity
£’000
29,382
33,185
6,149
—
—
(4,297)
20
643
6,149
2,576
120
(4,297)
—
596
1,119
—
2,576
—
—
(20)
—
2,556
2,515
5,144
—
—
—
—
—
—
—
(2,095)
597
—
171
—
(2,095)
597
94
171
—
91
91
(1,236)
(1,142)
1 October 2016
1,053
2,757
(332)
(627)
3,675
30,661
37,187
Net profit for the year
Other comprehensive income:
Exchange differences
Fair value movement on cash
flow hedges
Actuarial gain on defined benefit
pension scheme
Taxation relating to items above
Total comprehensive income
Transactions with owners:
Dividends
Share–based payments
Movement in own shares in share trusts
Gain on release of shares in share trusts
Issue of share capital
Taxation relating to items recognised
directly in equity
Total transactions with owners
23
26
9
10
25
24
9
—
—
—
—
—
—
—
—
—
—
5
—
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
162
—
(5)
—
157
—
—
659
—
(112)
—
9,545
(1,107)
—
—
59
—
—
1,468
(250)
9,545
(1,107)
659
1,468
(303)
547
(1,048)
10,763
10,262
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,025)
951
—
193
—
748
(1,133)
(3,025)
951
162
193
—
748
(971)
30 September 2017
1,058
2,757
(175)
(80)
2,627
40,291
46,478
Notes 1 to 30 form part of these financial statements.
61
Financial Statements
GROUP AND PARENT COMPANY STATEMENTS OF CHANGES IN EQUITY
for the year ended 30 September 2017
Share
capital
£’000
Share
premium
£’000
Own shares
in share
trusts
£’000
Retained
earnings
£’000
Notes
1,050
2,757
(423)
—
—
—
—
—
—
3
3
—
—
—
—
—
—
—
—
—
—
—
94
—
—
(3)
91
1,053
2,757
(332)
—
—
—
—
—
—
5
5
—
—
—
—
—
—
—
—
—
—
—
162
—
—
(5)
157
10
25
24
10
25
24
4,077
2,878
2,878
(2,095)
—
597
171
—
(1,327)
5,628
3,444
3,444
(3,025)
—
951
193
—
Total
equity
£’000
7,461
2,878
2,878
(2,095)
94
597
171
—
(1,233)
9,106
3,444
3,444
(3,025)
162
951
193
—
1,058
2,757
(175)
7,191
10,831
(1,881)
(1,719)
Parent Company
1 October 2015
Net profit for the year
Total comprehensive income
Transactions with owners:
Dividends
Movement in own shares in share trusts
Capital contribution to subsidiary undertakings
Gain on release of shares in share trusts
Issue of share capital
Total transactions with owners
1 October 2016
Net profit for the year
Total comprehensive income
Transactions with owners:
Dividends
Movement in own shares in share trusts
Capital contribution to subsidiary undertakings
Gain on release of shares in share trusts
Issue of share capital
Total transactions with owners
30 September 2017
Notes 1 to 30 form part of these financial statements.
62
Treatt plc – Annual Report & Financial Statements 2017
GROUP AND PARENT COMPANY BALANCE SHEETS REGISTERED NUMBER: 01568937
as at 30 September 2017
Group
Parent Company
ASSETS
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investment in subsidiaries
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Redeemable loan notes receivable
Current tax assets
Derivative financial instruments
Cash and bank balances
Total assets
LIABILITIES
Current liabilities
Borrowings
Provisions
Trade and other payables
Current tax liabilities
Derivative financial instruments
Redeemable loan notes payable
Net current assets
Non-current liabilities
Borrowings
Post-employment benefits
Deferred tax liabilities
Derivative financial instruments
Total liabilities
Net assets
EQUITY
Share capital
Share premium account
Own shares in share trusts
Hedging reserve
Foreign exchange reserve
Retained earnings
Total equity attributable to owners of the Parent Company
Notes 1 to 30 form part of these financial statements.
Notes
12
13
14
15
16
17
18
29
23
19
20
21
22
23
29
20
26
16
23
24
2017
£’000
2,727
604
14,821
—
1,380
19,532
42,878
19,973
—
148
483
4,748
68,230
87,762
(7,680)
(57)
(17,816)
(1,450)
—
—
(27,003)
41,227
(7,293)
(5,821)
(764)
(403)
(14,281)
(41,284)
46,478
1,058
2,757
(175)
(80)
2,627
40,291
46,478
2016
£’000
2,727
637
11,361
—
1,436
16,161
29,990
17,853
—
4
—
6,588
54,435
70,596
(487)
(67)
(14,151)
(999)
(9)
(675)
(16,388)
38,047
(7,755)
(7,401)
(1,111)
(754)
(17,021)
(33,409)
37,187
1,053
2,757
(332)
(627)
3,675
30,661
37,187
2017
£’000
—
—
—
8,205
—
8,205
—
523
—
—
—
2,590
3,113
11,318
—
—
(487)
—
—
—
(487)
2,626
—
—
—
—
—
(487)
10,831
1,058
2,757
(175)
—
—
7,191
10,831
2016
£’000
—
—
—
7,737
—
7,737
—
13
1,350
—
—
1,399
2,762
10,499
—
—
(718)
—
—
(675)
(1,393)
1,369
—
—
—
—
—
(1,393)
9,106
1,053
2,757
(332)
—
—
5,628
9,106
The Parent Company reported a profit for the year of £3,444,000 (2016: £2,878,000).
The financial statements were approved by the Board of Directors and authorised for issue on 28 November 2017 and were signed on its behalf by:
Tim Jones
Chairman
Richard Hope
Chief Financial Officer
63
Financial Statements
GROUP AND PARENT COMPANY STATEMENTS OF CASH FLOWS
for the year ended 30 September 2017
Notes
2017
£’000
2016
£’000
2017
£’000
Group
Parent Company
Cash flow from operating activities
Profit before taxation
Adjusted for:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Loss on disposal of property, plant and equipment
Loss on disposal of subsidiaries
Net finance costs
Share-based payments
Increase in fair value of derivatives
(Decrease)/increase in post-employment benefit obligations
14
13
5
7
25
29
12,892
8,293
3,392
1,399
137
7
—
913
966
(185)
(112)
1,347
142
2
—
703
566
(122)
145
—
—
—
481
(2)
—
—
—
2016
£’000
2,871
—
—
—
—
14
—
—
—
Operating cash flow before movements in working capital
16,017
11,076
3,871
2,885
(13,607)
(2,454)
4,727
4,683
(2,822)
1,861
(900)
13
(5,111)
(105)
(675)
12
(2,501)
688
1,541
10,804
(2,022)
8,782
(752)
—
(679)
(109)
—
8
(6,766)
(1,532)
2,284
(925)
(3,025)
355
(1,311)
(6,216)
(85)
(6,301)
6,581
280
4,748
(4,468)
280
381
(711)
(2,095)
265
(2,160)
5,090
15
5,105
1,476
6,581
6,588
(7)
6,581
—
(509)
668
4,030
53
4,083
(900)
—
—
—
675
13
(212)
—
(10)
(3,025)
355
(2,680)
1,191
—
1,191
1,399
2,590
2,590
—
2,590
—
695
(277)
3,303
6
3,309
(752)
—
—
—
—
5
(747)
—
(19)
(2,095)
265
(1,849)
713
—
713
686
1,399
1,399
—
1,399
14
13
29
7
7
10
19
20
Movements in working capital:
Increase in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables
Cash generated from operations
Taxation (paid)/received
Net cash from operating activities
Cash flow from investing activities
Investments in subsidiaries
Proceeds on disposal of property, plant and equipment
Purchase of property, plant and equipment
Purchase of intangible assets
(Purchase)/sale of redeemable loan notes
Interest received
Cash flow from financing activities
Increase in bank loans
Interest paid
Dividends paid
Net sale of own shares by share trusts
Net (decrease)/increase in cash and cash equivalents
Effect of foreign exchange rates
Movement in cash and cash equivalents in the year
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash and cash equivalents comprise:
Cash and bank balances
Bank borrowings
Notes 1 to 30 form part of these financial statements.
64
Treatt plc – Annual Report & Financial Statements 2017
GROUP RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
for the year ended 30 September 2017
Movement in cash and cash equivalents in the year
Increase in bank loans
Cash (outflow)/inflow from changes in net debt in the year
Effect of foreign exchange rates
Movement in net debt in the year
Net debt at beginning of year
Net debt at end of year
Notes 1 to 30 form part of these financial statements.
2017
£’000
(6,301)
(2,284)
(8,585)
14
(8,571)
(1,654)
(10,225)
2016
£’000
5,105
(381)
4,724
(223)
4,501
(6,155)
(1,654)
65
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017
1. GENERAL INFORMATION
3. SIGNIFICANT ACCOUNTING POLICIES
Treatt plc (“the Parent Company”) is a public limited company
incorporated in the United Kingdom and domiciled in England and
Wales. The Parent Company’s shares are traded on the London Stock
Exchange. The address of the registered office is included within the
Parent Company Information section on page 102.
2. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS
New and amended accounting standards
There were no new standards or amendments to standards, which had
a material impact on these financial statements, and are mandatory
and relevant to the Group for the first time for the financial year ended
30 September 2017.
Accounting standards in issue but not yet effective
At the date of authorisation of these financial statements the following
standards and interpretations, which have not been applied in these
financial statements and which are considered potentially relevant,
were in issue but not yet effective (and in some cases had not yet been
adopted by the EU):
• Annual improvements 2014-2016
•
•
•
•
•
•
•
•
•
•
IFRS 2 Share-based payments (amendments)
IFRS 9* Financial instruments: Classification, measurement,
impairment, general hedge accounting and derecognition of
assets and liabilities
IFRS 10 Consolidated financial statements (amendments)
IFRS 12 Disclosure of interests in other entities (amendments)
IFRS 15* Revenue from contracts with customers
IFRS 16* Leases
IAS 7 Statement of cash flows (amendments)
IAS 12 Income taxes (amendments)
IAS 28 Investments in associates and joint ventures (amendments)
IAS 39 Financial Instruments: Recognition and measurement
(amendments)
*These standards have been identified by the Financial Reporting
Council as having the potential to significantly impact on many
companies’ results and financial positions. Following an initial review
of the likely impact, the Directors anticipate that the adoption of IFRS
9 and 15 will not have any impact on the financial statements of the
Group or the Parent Company, other than on disclosure notes. Based
on leases in existence at 30 September 2017, the adoption of IFRS 16
will not have an impact on net assets or to the annual profit or loss
charge of more than £10,000.
The Directors also anticipate that the adoption of the other standards
and interpretations in future periods will have no material impact
on the financial statements of the Group or the Parent Company.
The significant accounting policies which have been used in the
preparation of these financial statements are set out below.
Accounting convention
The Group is required to prepare its annual consolidated financial
statements in accordance with International Financial Reporting
Standards (IFRS) as adopted for use by the European Union.
The Parent Company has also prepared its own financial statements in
accordance with IFRS as adopted by the European Union. The financial
statements have also been prepared under the historical cost
convention (unless a fair value basis is required by IFRS) and are in
accordance with the Companies Act 2006 applicable for companies
reporting under IFRS.
The Parent Company has taken advantage of the exemption under
Section 408 of the Companies Act 2006 and has not presented
its own income statement in these financial statements.
Basis of consolidation
The Group accounts consolidate the accounts of Treatt plc and all of its
subsidiaries (entities controlled by the Parent Company) made up to 30
September each year. Control is achieved where the Parent Company
has the power to govern the financial and operating policies of an
investee entity so as to obtain benefits from its activities. All intra-
group transactions, balances and unrealised gains on transactions
between Group companies are eliminated on consolidation. Unrealised
losses are also eliminated unless the transaction provides evidence
of an impairment of the asset transferred.
Going concern
The Directors have, at the time of approving the financial statements,
a reasonable expectation that the Parent Company and the Group
have adequate resources to continue in operational existence for the
foreseeable future. Thus they continue to adopt the going concern
basis of accounting in preparing the financial statements. Further detail
is contained in the Directors’ Report on page 24.
Presentation of financial statements
The primary statements within the financial information contained
in this document have been presented in accordance with IAS 1,
“Presentation of Financial Statements”.
Investments in subsidiaries
Investments in subsidiaries in the Parent Company balance sheet are
stated at cost, less any provision for impairment.
Business combinations
The acquisition of subsidiaries is accounted for using the purchase
method. The cost of the acquisition is measured at the aggregate fair
values, at the date of exchange, of assets given, liabilities incurred or
assumed, and equity instruments issued by the Group in exchange for
control of the acquiree. The acquiree’s identifiable assets, liabilities and
contingent liabilities that meet the conditions for recognition under
IFRS 3 are recognised at their fair value at the acquisition date, except
for non-current assets (or disposal groups) that are classified as held
for sale in accordance with IFRS 5, “Non-current assets held for sale
and discontinued operations”, which are recognised and measured at
fair value less costs to sell.
The accounting policy for goodwill is shown later in this note under
intangible assets.
66
Treatt plc – Annual Report & Financial Statements 2017 3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
Revenue represents amounts receivable net of trade discounts, VAT
and other sales-related taxes. Revenue is recognised in these financial
statements when goods are physically despatched from the Group and/
or Parent Company’s premises or other storage depots, irrespective
of the terms of trade, as the Directors believe that this is the point at
which the significant risks and rewards of ownership are transferred
to the customer in accordance with IAS 18, “Revenue Recognition”.
Effect of changes in foreign exchange rates
Transactions in currencies other than Pounds Sterling are recorded at
the rate of exchange at the date of transaction. Assets and liabilities in
foreign currencies are translated into Pounds Sterling in the balance
sheet at the year-end rate.
Income and expense items of the Group’s overseas subsidiaries
are translated into Pounds Sterling at the average rate for the year.
Their balance sheets are translated at the rate ruling at the balance
sheet date.
Exchange differences which arise from the translation of the opening
net assets and results of foreign subsidiaries and from translating
the income statement at an average rate are taken to reserves.
Under IAS 21, “The Effects of Changes in Foreign Exchange Rates”,
these cumulative translation differences which are recognised in the
Statement of Comprehensive Income are separately accounted for
within reserves and are transferred from equity to the income statement
in the event of the disposal of a foreign operation. All other exchange
differences are taken to the income statement.
Research and development expenditure
Expenditure on research activities is recognised as an expense and
charged to the income statement in the period in which it is incurred.
Expenditure arising from any specific development is recognised
as an asset only if all of the following conditions are met:
• An asset is created that can be identified;
•
It is probable that the asset created will generate future economic
benefits; and
• The development cost of the asset can be measured reliably.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated
by using tax rates that have been enacted or substantively enacted by
the balance sheet date. Where the Group and/or Parent Company have
a net current tax asset in one legal jurisdiction and a liability in another,
and consequently have no legal right of set off, then these assets and
liabilities will be shown separately on the balance sheet as required
by IAS 12, “Income Taxes”.
Current tax is charged or credited in the income statement, except
when it relates to items credited or charged directly to equity, in which
case the current tax is also dealt with in equity.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amount of assets and liabilities in
the financial statements and the corresponding tax bases used in the
computation of taxable profit, and is accounted for using the balance
sheet liability method. Deferred tax liabilities are recognised for all
taxable temporary differences and deferred tax assets are recognised
to the extent that it is probable that taxable profits will be available
against which deductible temporary differences can be utilised. Such
assets and liabilities are not recognised if the temporary difference
arises from the initial recognition of goodwill or from the initial
recognition (other than in a business combination) of other assets and
liabilities in a transaction which affects neither the tax profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in
joint ventures, except where the Group is able to control the reversal of
the temporary difference and it is probable that the temporary difference
will not reverse in the foreseeable future. As the Group is in fact in a
position to control the timing of the reversal of the temporary differences
arising from its investments in subsidiaries it is not required to
recognise a deferred tax liability. In view of the variety of ways in which
these temporary differences may reverse, and the complexity of the tax
laws, it is not possible to accurately compute the temporary differences
arising from such investments.
Development expenditure meeting these conditions is amortised
on a straight line basis over its useful life. Where these conditions
for capitalising development expenditure have not been met, the
related expenditure is recognised as an expense in the period in which
it is incurred.
Deferred tax is recognised in respect of the retained earnings of
overseas subsidiaries and associates only to the extent that, at the
balance sheet date, dividends have been accrued as receivable or a
binding agreement to distribute past earnings in future has been
entered into by the subsidiary or associate.
No assets were recognised in the year as the above criteria was not met.
Leases
Rentals receivable under operating leases are recognised in the income
statement as and when they fall due.
Rentals payable under operating leases, where substantially all of the
benefit and risks of ownership remain with the lessor, are charged
against profits on a straight-line basis over the term of the lease.
Deferred tax is measured at the average tax rates that are expected to
apply in the periods in which timing differences are expected to reverse,
based on tax rates and laws that have been enacted or substantively
enacted by the balance sheet date. Where the Group and/or Parent
Company have a net deferred tax asset in one legal jurisdiction and
a liability in another, and consequently have no legal right of set off,
then these assets and liabilities will be shown separately on the balance
sheet as required by IAS 12, “Income Taxes”.
Taxation
The tax expense represents the sum of the tax currently payable and
deferred tax attributable to current profits.
Deferred tax is charged or credited in the income statement, except
when it relates to items credited or charged directly to equity, in which
case deferred tax is also dealt with in equity.
67
Financial Statements NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Exceptional items
The Group has elected to classify certain items as exceptional and
present them separately on the face of the income statement.
Exceptional items are classified as those which are separately identified
by virtue of their size, nature or expected frequency, to allow a better
understanding of the underlying performance in the period.
Post balance sheet events and dividends
IAS 10, “Events after the Balance Sheet Date” requires that final
dividends proposed after the balance sheet date should not be
recognised as a liability at that balance sheet date, as the liability does
not represent a present obligation as defined by IAS 37, “Provisions,
Contingent Liabilities and Contingent Assets”. Consequently, final
dividends are only recognised as a liability once formally approved at
the Annual General Meeting and interim dividends are not recognised
until paid.
Cash flow
The Statement of Cash Flows explains the movement in cash and cash
equivalents and short term borrowings.
Property, plant and equipment
Property, plant and equipment is stated at cost less depreciation.
Depreciation is provided on all property, plant and equipment, except
freehold and long leasehold land, using the straight-line basis to write
off the cost of the asset, less estimated residual value, as follows:
• Plant and machinery:
4-10 years
• Buildings:
50 years
Intangible assets
Goodwill
Goodwill arising on consolidation represents the excess of the cost of
the business combination over the Group’s interest in the net fair value
of the identifiable assets, liabilities and contingent liabilities at the date
of acquisition. In accordance with IFRS 3, “Business Combinations”,
for acquisitions prior to 1 October 2009, any revision to the estimated
cost of an acquisition (e.g. for deferred consideration) is included as
an adjustment to the cost of the acquisition. Any revisions to cost for
acquisitions dated on or after 1 October 2009 are included as a charge
or credit to the Income Statement. Goodwill is initially recognised as an
asset at cost and is subsequently measured at cost less any accumulated
impairment losses. Goodwill which is recognised as an asset is
reviewed for impairment at least annually in relation to the cash
generating unit it represents. Any impairment is recognised immediately
in the income statement and is not subsequently reversed. On disposal
of a subsidiary, the attributable amount of goodwill is included in the
determination of the profit or loss on disposal.
Other intangible assets
Amortisation (which is included within administrative expenses) is
provided on all intangible assets, other than goodwill, using the straight-
line basis to write off the cost of the asset, less estimated residual
value, as follows:
• Software licenses:
4 years
• Lease premium:
85 years
Impairment of property, plant and equipment and intangible assets
Provision will be made should any impairment in the value of properties
or other non-current assets occur.
The need for any non-current asset impairment write down is assessed
by comparison of the carrying value of the asset against the higher of
net realisable value and value in use.
Inventories
Inventories are stated at the lower of cost and net realisable value.
Cost is based on raw material costs plus attributable overheads.
Net realisable value is based on estimated selling price less further
costs expected to be incurred through to disposal. Provision is made
for obsolete, slow-moving and defective items.
Onerous contracts
Provisions for onerous contracts are recognised when the expected
benefits from a contract are lower than the unavoidable costs of
meeting the contract’s obligations.
Financial instruments
Financial assets and financial liabilities are recognised on the Group
and/or Parent Company’s balance sheet when the Group and/or Parent
Company have become a party to the contractual provisions of the
instrument.
Financial assets
Financial assets held by the Group are either classified as held for
trading or are accounted for as trade receivables, loans, other
receivables and cash and cash equivalents at amortised cost. The
classification depends on the nature and purpose of the financial
assets and is determined at the time of initial recognition.
Trade and other receivables
Trade and other receivables are initially recognised at fair value.
They are subsequently measured at their amortised cost using the
effective interest method less any provision for impairment. A provision
for impairment is made where there is objective evidence, (including
customers with financial difficulties or in default on payments), that
the asset is impaired. A provision for impairment is established when
the carrying value of the receivable exceeds the present value of the
future cash flow discounted using the original effective interest rate.
The carrying value of the receivable is reduced through the use
of an allowance account and any impairment loss is recognised in
the income statement.
Loans receivable
All loans receivable are initially recognised at fair value. After initial
recognition, interest-bearing loans are measured at amortised cost
less any impairment loss recognised to reflect irrecoverable amounts.
An impairment loss is recognised in profit or loss when there is
objective evidence that the asset is impaired, and is measured as the
difference between the loan’s carrying amount and the present value
of estimated future cash flows discounted at the effective interest
rate computed at initial recognition. Impairment losses are reversed in
subsequent periods when an increase in the loan’s recoverable amount
can be related objectively to an event occurring after the impairment
was recognised, subject to the restriction that the carrying amount
of the loan at the date the impairment is reversed shall not exceed
what the amortised cost would have been had the impairment not
been recognised.
68
Treatt plc – Annual Report & Financial Statements 2017 3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call
with banks, and other short term highly liquid investments with original
maturities of three months or less. Bank overdrafts that are repayable
on demand and form an integral part of the Group’s cash management
are included as a component of cash and cash equivalents for the
purposes of the consolidated cash flow statement. Bank overdrafts are
shown within borrowings in current liabilities on the balance sheet.
Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to
the substance of the contractual arrangements entered into. An equity
instrument is any contract that evidences a residual interest in the
assets of the Group or Parent Company after deducting all of its liabilities.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at the fair value of
the consideration received, net of issue costs. After initial recognition,
interest-bearing loans and borrowings are measured at amortised cost
using the effective interest method. All borrowing costs are recognised
in the income statement in the period in which they are incurred.
Trade payables
Trade payables are not interest-bearing and are stated at their
nominal value.
Equity instruments
Equity instruments issued by the Parent Company are recorded at the
proceeds received, net of direct issue costs.
Derivative financial instruments
The Group’s activities expose it to both the financial risks of changes
in foreign currency exchange rates and interest rates. From time to
time the Group uses foreign exchange forward and option contracts
and interest rate swap contracts to hedge some of these exposures.
The Group does not use derivative financial instruments for
speculative purposes. The use of financial derivatives is governed
by the Group’s policies approved by the Board. Further information
on currency and interest rate management is provided in note 29,
“Financial Instruments”.
Hedge accounting
At the inception of the hedge relationship, the Group documents the
relationship between the hedging instrument and the hedged item,
along with its risk management objectives and its strategy for
undertaking various hedge transactions. Furthermore, at the inception
of the hedge and on an on-going basis, the Group documents whether
the hedging instrument that is used in a hedging relationship is highly
effective in offsetting changes in fair values or cash flows of the hedged
item. Hedge accounting is discontinued when the hedging instrument
expires or is sold, terminated, or exercised, or no longer qualifies for
hedge accounting. At that time, any cumulative gain or loss on the
hedging instrument recognised in equity is retained in equity until the
forecasted transaction occurs. If a hedging transaction is no longer
expected to occur, the net cumulative gain or loss that was recognised
in equity is recognised immediately in profit or loss for the period.
Changes in the fair value of derivative financial instruments that do
not qualify for hedge accounting are recognised in the income statement
as they arise.
Cash flow hedges
Changes in the fair value of derivative financial instruments that
are designated and effective as cash flow hedging instruments are
recognised directly in equity. The ineffective portion is recognised
immediately in the income statement. If the cash flow hedge of a firm
commitment or forecasted transaction results in the recognition of an
asset or a liability, then, at the time the asset or liability is recognised,
the associated gains or losses on the derivative that had been previously
recognised in equity are included in the initial measurement of the
asset or liability. For transactions that do not result in the recognition
of an asset or a liability, amounts deferred in equity are recognised
in the income statement in the same period in which the hedged item
affects net profit or loss.
Pension costs
One of the Group’s UK subsidiaries, R C Treatt & Co Limited, operates
a defined benefit scheme through an independently administered
pension scheme.
For defined benefit retirement plans, the cost of providing benefits
is determined using the projected unit credit method, with actuarial
valuations being carried out every three years and updated at each
balance sheet date. The post-employment benefits obligation
recognised in the balance sheet represents the present value of the
defined benefit pension obligations adjusted for unrecognised past
service cost, and as reduced by the fair value of scheme assets.
Any asset resulting from this calculation is limited to past service costs,
plus the present value of available refunds and reductions in future
contributions to the scheme.
In accordance with IAS 19, “Employee Benefits”, the asset or liability in
the defined benefit pension scheme is recognised as an asset or liability
of the Group under non-current assets or liabilities under the heading
“Post-employment benefits”. The deferred tax in respect of “Post-
employment benefits” is netted against other deferred tax assets and
liabilities relating to the same jurisdiction (see taxation accounting
policy) and included in the deferred taxation asset or liability shown
under non-current assets or liabilities.
The service cost and net interest on assets, net of interest on scheme
liabilities, are reflected in the income statement for the period, in place
of the actual cash contribution made. All experience gains or losses on
the assets and liabilities of the scheme, together with the effect of
changes in assumptions are reflected as a gain or loss in the Statement
of Comprehensive Income.
The Group also operates a number of defined contribution pension
schemes. The contributions for these schemes are charged to the
income statement in the year in which they become payable.
Share options, the employee benefit trust and share incentive plan trust
Shares held by the “Treatt Employee Benefit Trust” for the purpose
of fulfilling obligations in respect of various employee share plans
are deducted from equity in the Group and Parent Company balance
sheets. The treatment in the Parent Company balance sheet reflects
the substance of the entity’s control of the trust.
The Group has an HMRC-approved share incentive plan (“SIP”). The
Group also has a wholly-owned UK Trust, Treatt SIP Trustees Limited
(“Trust”), to whom shares are issued at nominal value for the purpose
of fulfilling obligations under the SIP. The treatment of the Trust in the
Group and Parent financial statements is consistent with that of the
EBT as explained above.
69
Financial Statements NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Share-based payments
IFRS 2, “Share-based Payments”, requires that an expense for equity
instruments granted be recognised in the financial statements based
on their fair value at the date of grant. The Group has adopted the
Black-Scholes model for the purposes of computing fair value of
options under IFRS. The fair value excludes the effect of non market-
based vesting conditions. This expense, which is in relation to share
option schemes for staff in the UK and US, is recognised on a straight-
line basis over the vesting period of the scheme, based on the Group’s
estimate of the number of equity instruments that will eventually vest.
At each balance sheet date, the Group revises its estimate of the
number of equity instruments expected to vest as a result of the effect
of non market-based vesting conditions. The impact of the revision of
the original estimates, if any, is recognised in profit or loss such that the
cumulative expense reflects the revised estimate, with a corresponding
adjustment to the retained earnings reserve.
Savings-related share options granted to employees are treated as
cancelled when employees cease to contribute to the scheme.
Cancelled options are accounted for as an acceleration of vesting.
The unrecognised grant date fair value is recognised in profit
or loss in the year that the options are cancelled.
The Group has an HMRC-approved SIP for its UK-based employees
under which employees can be awarded Free and Matching Shares.
The fair value of shares awarded under the SIP is the market value
of those shares at the date of grant, which is then recognised on a
straight-line basis over the vesting period.
Where the Parent Company grants options over its shares to employees
in subsidiaries, it recognises this as a capital contribution equivalent
to the share-based payment charge recognised in the Group Income
Statement. In the financial statements of the Parent Company, this
capital contribution is recognised as an increase in the cost of
investment in subsidiaries, with the corresponding credit being
recognised directly in equity.
Critical accounting estimates, assumptions and judgements
Estimates and judgements are continually evaluated and are based on
historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future.
The resulting accounting estimates and assumptions will, by definition,
seldom equal the related actual results. The Group has evaluated the
estimates and assumptions that have been made in relation to the
carrying amounts of assets and liabilities in these financial statements.
The key accounting judgements and sources of estimation uncertainty
with a significant risk of causing a material adjustment to assets and
liabilities in the next 12 months include the following:
Pensions – movements in equity markets, interest rates and life
expectancy could materially affect the level of surpluses and deficits
in the defined benefit pension scheme. The key assumptions used
to value pension assets and liabilities are set out in note 26 “Post-
employment benefits”;
Useful economic life and residual value estimates – the Group reviews the
useful economic lives and residual values attributed to assets on an
on-going basis to ensure they are appropriate. Changes in economic
lives or residual values could impact the carrying value and charges
to the income statement in future periods;
Provisions – using information available at the balance sheet date,
the Directors make judgements based on experience on the level
of provision required against assets, including inventory and trade
receivables, and for liabilities including onerous contracts. Further
information received after the balance sheet date may impact the level
of provision required;
Share-based payments – in accordance with IFRS 2 “Share-based
Payments”, share options and other share awards are measured at fair
value at the date of grant. The fair value determined is then expensed
in the income statement on a straight line basis over the vesting period,
with a corresponding increase in equity. The fair value of the options is
measured using the Black-Scholes option pricing model. The valuation
of these share-based payments requires several judgements to be
made in respect of the number of options that are expected to be
exercised. Details of the assumptions made in respect of each of the
share-based payment schemes are disclosed in note 25 “Share-based
Payments”. Changes in these assumptions could lead to changes in the
income statement expense in future periods;
Goodwill – determining whether goodwill is impaired requires an
estimation of the value in use of the cash-generating units to
which goodwill has been allocated. The value in use calculation
requires the Group to estimate the future cash flows expected to arise
from the cash-generating unit and a suitable discount rate in order to
calculate present value. Future changes in performance or disposals
could also impact the value of goodwill. Details of the assumptions
made in respect of goodwill and deferred consideration are disclosed
in note 12. These estimates could change materially in future years
in line with actual and expected future performance;
Taxation – the Group operates in a number of tax jurisdictions and
estimation is required of taxable profit in order to determine the Group’s
current tax liability. There are transactions and calculations for which
the ultimate tax determination can be uncertain. The Group periodically
evaluates situations in which applicable tax regulation is subject to
interpretation and establishes provisions where appropriate based on
amounts expected to be paid to the tax authorities; and
Deferred tax assets – deferred tax assets are recognised for all unused
tax losses to the extent that it is probable that taxable profit will be
available against which the losses can be utilised. Management
judgement is required to determine the amount of deferred tax assets
that can be recognised, based upon the likely timing and level of future
taxable profits together with future tax planning strategies.
Description of the nature and purpose of each reserve
within equity
Share premium account – the share premium account represents
amounts received in excess of the nominal value of shares on issue
of new shares.
70
Treatt plc – Annual Report & Financial Statements 2017 3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Own shares in share trusts – own shares in share trusts relate to shares held in the Treatt Employee Benefit Trust (the ”EBT”) and Treatt SIP
Trustees Limited (the “Trust”). The shares held in the EBT and Trust are all held to meet options to be exercised by employees, and share awards
and tax-approved purchases by employees under the SIP. Dividends on those shares not beneficially held on behalf of employees have been
waived. At 30 September 2017 the market value of the shares held by the EBT was £1,626,000 (2016: £1,212,000), and the market value of shares
held by the SIP was £1,640,000 (2016: £506,000) of which £1,252,000 (2016: £470,000) relates to shares beneficially held by employees.
Hedging reserve – the hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging
instruments related to hedged transactions that have not yet occurred.
Foreign exchange reserve – the foreign exchange reserve records exchange differences arising from the translation of the financial statements
of overseas subsidiaries.
Retained earnings – retained earnings comprises the Group’s annual profits and losses, actuarial gains and losses on the defined benefit
pension scheme and dividend payments, combined with the employee share option reserve which represents the equity component of
share-based payment arrangements.
4. 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 flavour,
fragrance, beverage and consumer product industries with manufacturing sites in the UK, US and Kenya. 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
United Kingdom
Rest of Europe
The Americas
Rest of the World
– Germany
– Ireland
– Other
– USA
– Other
– China
– Other
2017
£’000
10,271
7,206
7,280
11,235
42,571
8,164
5,772
17,128
109,627
2016
£’000
8,794
5,527
5,871
11,011
33,729
4,142
4,536
14,430
88,040
All Group revenue is in respect of the sale of goods, other than property rental income of £17,000 (2016: £17,000). No country included within
“Other” contributes more than 5% of the Group’s total revenue. The largest customer represented 10.7% of Group revenue (2016 there were
no customers which represented more than 10% of Group revenue).
Non-current assets by geographical location, excluding deferred tax assets, were as follows:
United Kingdom
United States
Rest of the World
2017
£’000
11,358
6,364
430
18,152
2016
£’000
7,645
6,611
469
14,725
71
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
5. PROFIT FOR THE YEAR
Profit for the year is stated after charging/(crediting):
Group
Depreciation of property, plant and equipment
Amortisation of intangible assets1
Loss on disposal of property, plant and equipment
Research and development costs
Operating leases
– plant & machinery
– land & buildings
Net foreign exchange gain2
Rent receivable
Cost of inventories recognised as expense3
Write down/(write back) of inventories recognised as an expense
Shipping costs
IT & telephony costs
Insurance costs
Energy & utility costs
1 Included in administrative expenses.
2 Excludes foreign exchange gains or losses on financial instruments disclosed in note 23.
3 Included in cost of sales.
The analysis of auditor’s remuneration is as follows:
Fees payable to the Parent Company’s auditors and their associates for the audit of:
– the Parent Company and Group accounts
– the Group’s subsidiaries pursuant to legislation
Total audit fees
Fees payable to the Parent Company’s auditors and their associates for other services to the Group:
– tax compliance services
– tax advisory services
– other assurance services
– financial modelling software services*
Total non-audit fees
*The financial modelling software services in the prior year were included in Other Intangible Assets.
6. EMPLOYEES
Group
Number of employees
During the year the average number of staff employed by the Group, including Directors, was as follows:
Technical and production
Administration and sales
During the year, the Directors shown on page 22 were employed by the Parent Company.
72
2017
£’000
1,399
137
7
1,402
7
113
(512)
(17)
70,653
1,278
1,799
681
692
389
2017
£’000
45
86
131
—
2
3
—
5
2016
£’000
1,347
142
2
895
12
100
(8)
(17)
58,357
(561)
1,643
601
583
498
2016
£’000
36
71
107
1
2
–
11
14
2017
Number
202
129
331
2016
Number
190
126
316
Treatt plc – Annual Report & Financial Statements 2017
6. EMPLOYEES (continued)
Employment costs
The following costs were incurred in respect of the above:
Wages and salaries
Social security costs
Pension costs (see note 26)
Share-based payments (see note 25)
2017
£’000
12,375
1,522
756
966
15,619
Directors
The information on Directors’ emoluments and share options set out on pages 52 to 55 form part of these financial statements.
7. NET FINANCE COSTS
Group
Finance costs
Bank overdraft interest paid
Other bank finance costs
Loan interest paid
Loan note interest paid
Pension finance cost (see note 26)
Finance revenue
Bank interest received
Net finance costs
8. EXCEPTIONAL ITEMS
The exceptional items referred to in the income statement can be categorised as follows:
Group
Legal and professional fees
Restructuring costs
Less: tax effect of exceptional items
2017
£’000
555
176
5
1
188
925
12
913
2017
£’000
—
—
—
—
—
2016
£’000
10,874
1,040
761
566
13,241
2016
£’000
431
134
20
7
119
711
8
703
2016
£’000
302
251
553
(38)
515
The exceptional items in the prior year all related to non-recurring items. The legal and professional fees relate to the costs in respect of the full
and final settlement of the Earthoil earnout dispute. The restructuring costs related to one-off non-recurring reorganisation costs incurred in the
US and Kenya.
73
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
9. TAXATION
Group
Analysis of tax charge in income statement:
Current tax:
UK corporation tax on profits for the year
Adjustments to UK tax in respect of previous periods
Overseas corporation tax on profits for the year
Adjustments to overseas tax in respect of previous periods
Total current tax
Deferred tax:
Origination and reversal of temporary differences
Effect of reduced tax rate on opening assets and liabilities
Adjustments in respect of previous periods
Total deferred tax (see note 16)
Tax on profit on ordinary activities
Analysis of tax charge/(credit) in other comprehensive income:
Current tax:
Foreign currency translation differences
Deferred tax:
Cash flow hedges
Defined benefit pension scheme
Total deferred tax
Total tax expense/(credit) recognised in other comprehensive income
Analysis of tax credit in equity:
Current tax:
Share-based payments
Deferred tax:
Share-based payments
Total tax credit recognised in equity
2017
£’000
1,278
(84)
2,260
(10)
3,444
(135)
—
38
(97)
3,347
2016
£’000
967
9
1,370
8
2,354
(179)
(27)
(4)
(210)
2,144
(59)
—
112
250
362
303
(218)
(530)
(748)
47
(643)
(596)
(596)
(16)
(75)
(91)
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 19.5% (2016: 20%).
The differences are explained below:
Profit before tax multiplied by standard rate of UK corporation tax at 19.5% (2016: 20%)
Effects of:
Expenses not deductible in determining taxable profit and other items
Research and development tax credits
Difference in tax rates on overseas earnings
Adjustments to tax charge in respect of prior years
Total tax charge for the year
2017
£’000
2,514
120
(196)
965
(56)
3,347
2016
£’000
1,659
51
(145)
566
13
2,144
The main rate of UK corporation tax was reduced from 20% to 19% with effect from 1 April 2017. The Group’s effective UK corporation tax rate
for the year was therefore 19.5% (2016: 20%). The adjustments in respect of prior years relate to the finalisation of previous year’s tax computations.
74
Treatt plc – Annual Report & Financial Statements 2017
10. DIVIDENDS
Equity dividends on ordinary shares:
Parent Company and Group
Interim dividend
Final dividend
Dividend per share for
years ended 30 September
2017
Pence
1.45p2
3.35p3
4.80p
2016
Pence
1.35p1
3.00p1
4.35p
2015
Pence
1.28p
2.76p
4.04p
2017
£’000
1,461
1,564
3,025
2016
£’000
662
1,433
2,095
1 Accounted for in the subsequent year ended 30 September 2017 in accordance with IFRS.
2 The declared interim dividend for the year ended 30 September 2017 was paid on 17 August 2017 and has therefore also been accounted for in the year ended
30 September 2017.
3 The proposed final dividend for the year ended 30 September 2017 of 3.35 pence will be voted on at the Annual General Meeting on 26 January 2018 and will
therefore be accounted for in the financial statements for the year ending 30 September 2018.
11. EARNINGS PER SHARE
Group
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 (“EBT”), together with shares held by
the Treatt SIP Trust (“SIP”), which do not rank for dividend.
Profit after taxation attributable to owners of the Parent Company (£’000)
Weighted average number of ordinary shares in issue (No: ‘000)
Basic earnings per share (pence)
2017
9,545
52,198
18.29p
2016
6,149
51,895
11.85p
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:
Weighted average number of shares
Weighted average number of shares held in the EBT and SIP
Weighted average number of shares used for calculating basic EPS
Executive share option schemes
All-employee share options
Weighted average number of shares used for calculating diluted EPS
Diluted earnings per share (pence)
2017
No (‘000)
52,780
(582)
52,198
1,229
445
53,872
17.72p
2016
No (‘000)
52,575
(680)
51,895
645
122
52,662
11.68p
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:
Profit after taxation attributable to owners of the Parent Company
Adjusted for:
Exceptional items (see note 8)
Taxation thereon
Earnings for calculating adjusted earnings per share
Adjusted basic earnings per share (pence)
Adjusted diluted earnings per share (pence)
2017
£’000
9,545
—
—
9,545
18.29p
17.72p
2016
£’000
6,149
553
(38)
6,664
12.84p
12.65p
75
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
12. GOODWILL
Group
Cost
1 October 2015
Deferred consideration
1 October 2016
30 September 2017
Accumulated impairment losses
1 October 2015
1 October 2016
30 September 2017
Carrying amount
30 September 2017
30 September 2016
£’000
3,507
1,652
5,159
5,159
2,432
2,432
2,432
2,727
2,727
The goodwill arising on the acquisition of Earthoil is attributable to the anticipated profitability of Earthoil’s products in new and rapidly growing
existing markets.
The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable
amount of goodwill arising on the acquisition of Earthoil is determined from value in use calculations. The key assumptions for the value in use
calculations are those regarding the discount rates, revenue, overhead growth rates and perpetuity growth rate. Management estimates discount
rates using pre-tax rates that reflect market assessments of the time value of money and the risks specific to Earthoil. As at the year ended 30
September 2017, the impairment review has concluded that the value in use of Earthoil significantly exceeds its carrying value. In performing this
impairment review, the Group has prepared cash flow forecasts derived from the most recent financial budgets approved by the Board for the five
years ending 30 September 2022. Thereafter, a growth rate for pre-tax profit of 0% (2016: 2%) per annum is assumed into perpetuity. A rate of
9.7% (2016: 9.6%) has been used to discount the forecast cash flows. The key assumptions are based on past experience adjusted for expected
changes in future conditions.
Based upon this impairment review the recoverable amount of Earthoil exceeds its carrying amount by £11.0m (2016: £7.8m). The recoverable
amount is most sensitive to changes in the discount rate and sales growth. A 1% change in the discount rate or sales growth would change
the recoverable amount by £2.3m.
13. OTHER INTANGIBLE ASSETS
Group
Cost
1 October 2015
Exchange Adjustment
Additions
Disposals
1 October 2016
Exchange adjustment
Additions
Disposals
30 September 2017
76
Lease premium
£’000
Software licences
£’000
343
—
—
—
343
—
—
—
343
888
13
109
(246)
764
(3)
105
(121)
745
Total
£’000
1,231
13
109
(246)
1,107
(3)
105
(121)
1,088
Treatt plc – Annual Report & Financial Statements 2017
13. OTHER INTANGIBLE ASSETS (continued)
Group
Amortisation
1 October 2015
Exchange adjustment
Charge for year
Disposals
1 October 2016
Exchange adjustment
Charge for year
Disposals
30 September 2017
Net book value
30 September 2017
30 September 2016
Lease premium
£’000
Software licences
£’000
21
—
4
—
25
—
4
—
29
314
318
549
4
138
(246)
445
(2)
133
(121)
455
290
319
Total
£’000
570
4
142
(246)
470
(2)
137
(121)
484
604
637
Intangible assets with a net book value of £32,000 (2016: £54,000) have been pledged as security in relation to the Industrial Development Loan
detailed in note 20.
14. PROPERTY, PLANT AND EQUIPMENT
Group
Cost
1 October 2015
Exchange Adjustment
Additions
Disposals
1 October 2016
Exchange adjustment
Additions
Disposals
30 September 2017
Depreciation
1 October 2015
Exchange adjustment
Charge for year
Disposals
1 October 2016
Exchange adjustment
Charge for year
Disposals
30 September 2017
Net book value
30 September 2017
30 September 2016
Land &
buildings
£’000
Plant &
machinery
£’000
6,367
577
—
—
6,944
(134)
3,783
—
10,764
973
679
(576)
11,840
(254)
1,328
(965)
Total
£’000
17,131
1,550
679
(576)
18,784
(388)
5,111
(965)
10,593
11,949
22,542
1,135
132
140
—
1,407
(34)
149
—
1,522
9,071
5,537
4,998
385
1,207
(574)
6,016
(122)
1,250
(945)
6,199
5,750
5,824
6,133
517
1,347
(574)
7,423
(156)
1,399
(945)
7,721
14,821
11,361
77
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
14. PROPERTY, PLANT AND EQUIPMENT (continued)
Analysis of land & buildings
Net book value
Freehold
Long leasehold
2017
£’000
8,381
690
9,071
2016
£’000
4,831
706
5,537
Included in plant and machinery are assets in the course of construction totalling £841,000 (2016: £275,000) which are not depreciated.
Property, plant and equipment with a net book value of £6.0m (2016: £6.2m) has been pledged as security in relation to the Industrial Development
Loan and Equipment Financing Loans detailed in note 20.
Capital commitments
Contracted but not provided for
15. INVESTMENTS IN SUBSIDIARIES
Parent Company
Cost
1 October 2015
Investment in subsidiaries
Capital contribution to subsidiaries
1 October 2016
Capital contribution to subsidiaries
Inter group transfer of subsidiary
30 September 2017
Parent Company
Subsidiary:
R C Treatt & Co Limited – at cost
50,000 ordinary shares of £1 each, fully paid
Treatt USA Inc – at cost
2,975,000 common stock of US$1 each, fully paid
Earthoil Plantations Limited
4,051,000 ordinary shares of 50p each, fully paid
Earthoil Kenya Pty Limited
2,500 “A” ordinary shares of KES20 each, fully paid
2,500 “B” ordinary shares of KES20 each, fully paid
2017
£’000
609
2017
£’000
3,584
2,376
2,245
—
8,205
2016
£’000
362
£’000
5,485
1,655
597
7,737
950
(482)
8,205
2016
£’000
2,855
2,155
2,245
482
7,737
During the year the Parent Company had the following subsidiary undertakings:
Subsidiary
Country of incorporation
Holding
Principal activity
Wholly owned by Treatt plc:
R C Treatt & Co Limited
Treatt USA Inc
Earthoil Plantations Limited
Treatt SIP Trustees Limited
Wholly owned by Earthoil Plantations Limited:
Earthoil Kenya Pty Limited
Earthoil Africa EPZ Limited
Earthoil Extracts Limited
England1
USA2
England1
England1
Kenya3
Kenya3
Kenya3
100%
100%
100%
100%
100%
100%
100%
Supply of flavour and fragrance ingredients
Supply of flavour and fragrance ingredients
Supply of natural cosmetic ingredients
Employee share trust
Intermediate holding company
Supply of organic & fair trade vegetable oils
Supply of organic & fair trade essential oils
Registered office addresses:
1 Northern Way, Bury St. Edmunds, IP32 6NL, UK.
2 The Prentice-Hall Corporation System Inc., 1201 Hays Street, Suite 105, Tallahassee, FL 32301, USA.
3 LR. No. 3734/1018 Lavington, Insecta Building, Braeside Gardens off Muthangari Road, P. O. Box 76618-00508, Yaya Centre, Nairobi, Kenya.
78
Treatt plc – Annual Report & Financial Statements 2017
16. DEFERRED TAXATION
Group
UK deferred tax asset
Overseas deferred tax liability
Net deferred tax asset
2017
£’000
1,380
(764)
616
A reconciliation of the net deferred tax asset is shown below:
UK deferred tax
Overseas deferred tax
Group
1 October 2015
Exchange differences
Credit/(charge) to
income statement
Credit/(charge)
to OCI
Credit/(charge)
to equity
For the year
For change in tax rate
For the year
For change in tax rate
For the year
For change in tax rate
1 October 2016
Exchange differences
(Charge)/credit to income statement
Charge to OCI
Credit to equity
Post-
employment
benefits
£’000
Fixed
assets
£’000
Cash flow
hedge
£’000
Share-based
payments
£’000
591
—
23
—
732
(89)
—
—
1,257
—
(18)
(250)
—
(209)
—
58
29
—
—
—
—
(122)
—
(11)
—
—
202
—
(24)
—
(47)
—
—
—
131
—
(32)
(112)
—
(13)
63
—
57
—
—
—
60
(10)
170
—
8
—
359
537
Fixed
assets
£’000
(1,198)
(204)
(31)
—
—
—
—
—
(1,433)
42
53
—
—
(1,338)
Other
temporary
differences
£’000
161
38
98
—
—
—
25
—
322
(16)
97
—
171
574
2016
£’000
1,436
(1,111)
325
Total
£’000
(390)
(166)
181
29
685
(89)
85
(10)
325
26
97
(362)
530
616
30 September 2017
989
(133)
At the balance sheet date, R C Treatt & Co Limited had a deferred tax asset in relation to its pension liability. R C Treatt & Co Limited has
a specific plan in place to reverse the deficit and so this deferred tax asset has been recognised.
The deferred tax rate applied to UK companies within the Group is 17% (2016: 17%) as legislation has been substantively enacted which reduces
the main rate of UK corporation tax from 19% for the 2017/18 tax year to 17% for the 2020/21 tax year. The impact of estimating the timing
of deferred tax reversals in the intervening years before the rate reaches 17% is not considered to be material. The deferred tax rate applicable
to the Group’s US subsidiary was 36% (2016: 36%).
17. INVENTORIES
Group
Raw materials
Work in progress and intermediate products
Finished goods
2017
£’000
22,289
13,363
7,226
42,878
2016
£’000
12,395
13,476
4,119
29,990
Inventory with a carrying value of £16.2m (2016: £11.2m) has been pledged as security in relation to the Industrial Development Loan
detailed in note 20.
79
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
18. TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Amounts owed by subsidiaries
Other receivables
Prepayments
Group
Parent Company
2017
£’000
18,096
—
1,153
724
19,973
2016
£’000
16,250
—
852
751
17,853
2017
£’000
—
516
7
—
523
2016
£’000
—
13
—
—
13
The Group’s credit risk is primarily attributable to its trade receivables. Before accepting any new customer, the Group uses a range of information,
including credit reports, industry data and other publicly or privately available information in order to assess the potential customer’s credit quality
and determine credit limits by customer, and where appropriate will only accept orders on the basis of cash in advance, or if secured through a
bank letter of credit. Processes are in place to manage trade receivables and overdue debt and to ensure that appropriate action is taken to resolve
issues on a timely basis. Credit control operating procedures are in place to review all new customers. Existing customers are reviewed as
management become aware of any specific changes in circumstances.
The average credit period taken for trade receivables is as follows:
Group
Average debtor days
2017
57
2016
66
An impairment review has been undertaken at the balance sheet date to assess whether the carrying amount of financial assets is deemed
recoverable. The primary credit risk relates to customers which have amounts due outside of their credit period. A provision for impairment
is made when there is objective evidence of impairment which is usually indicated by a delay in the expected cash flows or non-payment from
customers. The amounts presented in the balance sheet are net of amounts that are individually determined to be impaired as follows:
Group
Impairment provision
At start of year
Released in year
Provided in year
Foreign exchange
Balance at end of year
2017
£’000
308
(130)
139
(3)
314
2016
£’000
307
(147)
136
12
308
The impairment of trade receivables has been carried out by the Group’s management based on prior experience and their assessment of the
current economic environment.
The Group’s top five customers represent 33% (2016: 29%) of the Group’s turnover. These customers have favourable credit ratings and
consequently reduce the credit risk of the Group’s overall trade receivables. The Directors consider that the carrying amount of trade and other
receivables approximates to their fair value. The Group holds no collateral against these receivables at the balance sheet date.
The ageing profile of trade receivables which are past their due date but not impaired is as follows:
Group
Number of days past the due date:
1-30
31-60
Over 60
80
2017
£’000
1,372
198
647
2016
£’000
1,809
726
1,286
Treatt plc – Annual Report & Financial Statements 2017
18. TRADE AND OTHER RECEIVABLES (continued)
The ageing profile of impaired trade receivables is as follows:
Group
Number of days past the due date:
Current
1-30
31-60
Over 60
2017
£’000
—
—
—
314
2016
£’000
15
2
8
283
The currency risk in respect of trade receivables is managed in conjunction with the other currency risks faced by the Group as part of its overall
hedging strategy. For further details see note 29 and the Financial Review on pages 16 to 20. The currency exposure within trade receivables,
analysed by currency, was as follows:
Group
GB Pound
US Dollar
Euro
2017
£’000
3,330
13,257
1,917
2016
£’000
3,245
10,941
1,899
Trade receivables with a carrying value of £7.9m (2016: £6.1m) have been pledged as security in relation to the Industrial Development Loan
detailed in note 20.
19. CASH AND BANK BALANCES
Group
Cash and bank balances of £4,748,000 (2016: £6,588,000) comprise cash held by the Group and short term deposits with an original maturity
of one month or less. The carrying amount of these assets approximates to their fair value.
A detailed analysis of net cash balances by currency is shown in note 29. All material cash balances are held with the Group’s main banks,
being Lloyds Banking Group, HSBC and Bank of America. The credit ratings of these banks are considered to be satisfactory.
20. BORROWINGS
Current
Group
Term loans
Bank borrowings
Non-current
Group
Term loans
UK revolving credit facilities
2017
£’000
3,212
4,468
7,680
2017
£’000
585
6,708
7,293
2016
£’000
480
7
487
2016
£’000
827
6,928
7,755
81
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
20. BORROWINGS (continued)
Loans and borrowings
Term loans comprise the following:
Group
Loan – UK
Industrial development loan – US
Equipment financing loans – US
2017
£’000
3,000
775
22
3,797
2016
£’000
—
1,001
306
1,307
The loan of £3,000,000 (2016: nil) is repayable by 30 April 2018, with an interest rate of 1.2% above UK base rate.
The industrial development loan is repayable by fixed quarterly instalments over 20 years ending on 1 July 2021. The rate of interest payable has
been fixed at 3.66% for ten years ending on 1 July 2021 by way of an interest rate swap which covers the full term of the loan. The fair value of this
interest rate swap (based on the mark-to-market valuation provided by Bank of America) at the year-end was £39,000 (2016: £80,000) based on
year end exchange rates. The fair value of this swap is not included on the balance sheet or through the income statement as the amount involved
is not material. Similarly, the Directors do not apply hedge accounting in respect of US borrowings due to the lack of materiality of the items involved.
The equipment financing loan of £22,000 (2016: £306,000) is repayable by fixed monthly instalments over five years ending on 31 December 2017,
with a fixed interest rate of 2.89%.
The US Dollar overdraft facility (“line of credit”) of $6 million is a three-year facility expiring in 2020. The US term loans and line of credit,
both held by Treatt USA Inc, are secured by a fixed and floating charge over Treatt USA’s current and non-current assets.
Other borrowings
The Group’s UK facilities are unsecured. UK borrowings of $9m are held on a four year revolving credit facility (RCF) which expires in 2019.
The rate of interest on $9m of UK revolving credit facilities has been fixed for ten years at a rate of 5.68% through an interest rate swap ending
on 29 December 2020. Hedge accounting has been applied to the fair value of this swap, details of which are provided in note 29.
Borrowings are repayable as follows:
Group
– in one year or less
– in more than one year but not more than two years
– in more than two years but not more than five years
2017
£’000
7,680
6,898
395
14,973
2016
£’000
487
219
7,536
8,242
Further information on Group borrowing facilities is given in notes 28 and 29, including a detailed analysis of cash balances by currency.
Borrowing facilities
At 30 September 2017, the Group had total borrowing facilities of £25.9m (2016: £22.4m) of which £14.0m (2016: £3.1m) expires in one year or
less at the balance sheet date. At 30 September 2017 the Group had access to £15.7m (2016: £20.8m) of financing facilities including its own cash
balances at that date.
Following year end working capital facilities have been renewed at existing or improved terms thereby reducing the total borrowing facilities which
expires in one year or less to £2.2m, resulting in all facilities extending longer than one year from the balance sheet date.
21. PROVISIONS
Group
Onerous contract provision:
At start of year
Utilised in year
Additional provision in year
Foreign exchange
Balance at end of year
2017
£’000
67
(67)
60
(3)
57
2016
£’000
239
(243)
67
4
67
Onerous contract provisions relate to losses which are or were expected to materialise in the future on fixed price contracts as a result of
significant increases in certain raw material prices. The onerous contract provision expense is included in cost of sales within the income statement
and is expected to be utilised in the following financial year.
82
Treatt plc – Annual Report & Financial Statements 2017
22. TRADE AND OTHER PAYABLES
Current
Trade payables
Amounts owed to subsidiaries
Other taxes and social security costs
Accruals and other creditors
Group
Parent Company
2017
£’000
13,311
—
577
3,928
17,816
2016
£’000
9,996
—
408
3,747
14,151
2017
£’000
—
416
1
70
487
2016
£’000
—
711
1
6
718
Trade payables principally comprise amounts for trade purchases and on-going costs. The Directors consider that the carrying amount of trade
and other payables approximates to their fair values.
The currency risk in respect of trade payables is managed in conjunction with the other currency risks faced by the Group as part of its overall
hedging strategy. For further details see note 29 and the Financial Review on pages 16 to 20. The currency exposure within trade payables,
analysed by currency, was as follows:
Group
GB Pound
US Dollar
Euro
23. DERIVATIVE FINANCIAL INSTRUMENTS
Group
Derivative financial assets:
Current:
Foreign exchange contracts
Derivative financial liabilities:
Current:
Foreign exchange contracts
Non-current:
Interest rate swaps
The gains/(losses) on derivative financial instruments were as follows:
Group
Income statement:
Foreign exchange contracts
Other comprehensive income:
Interest rate swaps
Foreign exchange contracts
Further details on the Group’s hedging policies and derivative financial instruments are disclosed in note 29.
2017
£’000
1,631
6,160
1,207
2017
£’000
483
483
—
403
403
2017
£’000
2016
£’000
1,407
4,618
1,181
2016
£’000
—
—
9
754
763
2016
£’000
(119)
(2,196)
351
308
659
(54)
174
120
83
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
24. SHARE CAPITAL
Parent Company and Group
Called up, allotted and fully paid
At start of year
Issued in year
At end of year
2017
£'000
1,053
5
1,058
2017
Number
52,655,170
250,000
52,905,170
2016
£'000
1,050
3
1,053
2016
Number
52,495,170
160,000
52,655,170
During the year the Parent Company issued 150,000 (2016: 160,000) ordinary shares of 2p each to the Treatt SIP Trust for the purpose of meeting
its obligations under an HMRC-approved share incentive plan in the UK. In addition the Parent Company issued 100,000 (2016: Nil) ordinary shares
of 2p each to the Employee Benefit Trust for the purpose of meeting obligations under employee share option schemes.
The Parent Company has one class of ordinary shares with a nominal value of 2p each, which carry no right to fixed income.
25. SHARE-BASED PAYMENTS
The Group has applied the requirements of IFRS2 “Share-based Payments”.
The Group operates executive share option schemes for Directors, senior management and other key employees within the Group in addition to
issuing UK and US approved savings-related share options for employees of certain subsidiaries. Options are granted with a fixed exercise price
and will lapse when an employee leaves the Group subject to certain “good leaver” provisions.
The Group also operates an HMRC-approved share incentive plan in the UK, and operates an equivalent scheme for its US employees.
The share-based payments charge was as follows:
Group
Share option schemes – see (a) below
Share incentive plans – see (b) below
Effect of movement in foreign exchange rates
2017
£’000
827
124
951
15
966
2016
£’000
514
83
597
(31)
566
84
Treatt plc – Annual Report & Financial Statements 2017
25. SHARE-BASED PAYMENTS (continued)
(a) Share option schemes
Under the schemes listed below, options have been granted to subscribe for the following number of existing ordinary shares of 2p each in the
capital of the Parent Company. These share options are expected to be settled via the transfer of shares out of the Treatt Employee Benefit Trust.
The equity-settled options which existed during the year were as follows:
UK SAYE1 Scheme 2014
UK SAYE1 Scheme 2015
UK SAYE1 Scheme 2016
UK SAYE1 Scheme 2017
US ESPP2 Scheme 2016
US ESPP2 Scheme 2017
UK LTIP3 Scheme 2014
US LTIP3 Scheme 2014
UK LTIP3 Scheme 2015
US LTIP3 Scheme 2015
UK LTIP3 Scheme 2016
US LTIP3 Scheme 2016
UK LTIP3 Scheme 2017
US LTIP3 Scheme 2017
US Executive4 Options 2012
UK Executive4 Options 2013
US Executive4 Options 2013
UK Executive4 Options 2014
US Executive4 Options 2014
UK Executive4 Options 2015
US Executive4 Options 2015
UK Executive4 Options 2016
Number of share
options outstanding
Number
exercised in year
Exercise price
per share
43,032
167,070
235,933
102,143
—
15,235
48,131
—
115,320
113,993
109,033
124,680
27,034
52,213
97,740
—
51,965
128,400
164,816
110,678
175,708
172,746
137,993
6,226
1,231
—
31,077
—
52,151
75,061
12,089
—
—
—
—
—
—
6,790
—
—
—
—
—
—
138.0p
132.0p
138.0p
413.0p
148.0p
404.0p
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
79.0p
147.2p
147.2p
Nil
Nil
Nil
Nil
Nil
Date option
exercisable
Sep 2017 – Feb 2018
Sep 2018 – Feb 2019
Sep 2019 – Feb 2020
Sep 2020 – Feb 2021
July 2017
July 2018
June 2017 – June 2024
June 2017 – March 2018
June 2018 – June 2025
June 2018 – March 2019
Dec 2019 – Dec 2026
June 2019 – June 2026
Dec 2020 – Mar 2020
June 2020 – June 2027
Dec 2017 – Mar 2021
Dec 2016 – Dec 2023
Dec 2018 – Dec 2023
Dec 2017 – Dec 2024
Dec 2017 – Dec 2024
Dec 2018 – Dec 2025
Dec 2018 – March 2019
Dec 2019 – Dec 2025
1 The SAYE schemes are HMRC-approved Save As You Earn share option plans, which vest after three years. Options are forfeited where employees choose to leave
the Group before the end of the three year period.
2 The ESPP schemes are IRS-approved Employee Stock Purchase Plans, which vest after one year. Options are forfeited where employees choose to leave the
Group before the end of the vesting period.
3 Share options are awarded to certain key employees in the UK and US under a Long Term Incentive Plan. All awards are nil-cost options which vest, subject
to achievement of the relevant performance conditions, after three years and can be exercised over the following seven years in the UK, or upon vesting in the US.
Save as permitted in the LTIP rules, awards lapse on an employee leaving the Group.
4 Details of the Executive options are provided in the Directors’ Remuneration Report.
85
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
25. SHARE-BASED PAYMENTS (continued)
The fair value per option granted using the “Black-Scholes” model, and the assumptions used in the share-based payments calculations,
are as follows:
All-employee share schemes:
SAYE 2014
SAYE 2015
SAYE 2016
SAYE 2017
US ESPP 2016
US ESPP 2017
Share price at date of grant
Contractual life
Expected life
Expected volatility
Risk-free interest rate
Dividend yield
Expected cancellations
Expected forfeitures
Fair value per option at date of grant
172.5p
3.5 years
3.5 years
23.4%
2.02%
2.2%
10.0%
5.5%*
39.0p
165.0p
3.5 years
3.5 years
23.3%
1.52%
2.4%
10.0%
11.0%
35.6 p
172.5p
3.5 years
3 years
20.7%
0.36%
2.4%
10.0%
6.0%
31.7p
516.3p
3.5 years
3 years
25.6%
0.49%
0.9%
10.0%
1.0%
123.0p
172.5p
1 year
1 year
19.4%
0.36%
2.4%
10.0%
0.0%*
21.6p
475.0p
1 year
1 year
32.0%
0.49%
0.9%
10.0%
0.0%*
87.0p
Key-employee share schemes:
UK LTIP 2014
US LTIP 2014
UK LTIP 2015
US LTIP 2015
UK LTIP 2016
US LTIP 2016
UK LTIP 2017
174.0p
3.2 years
3 years
23.3%
2.02%
2.2%
0.0%
0.0%*
162.1p
158.0p
10 years
10 years
23.3%
1.44%
2.5%
0.0%
3.0%
123.6p
158.0p
3.2 years
3 years
23.3%
1.44%
2.5%
0.0%
0.0%
146.0p
170.0p
10 years
5 years
20.7%
0.86%
2.4%
0.0%
0.0%
150.7p
170.0p
3.2 years
3.2 years
20.7%
0.86%
2.4%
0.0%
0.0%
157.3p
503.5p
10 years
5 years
25.6%
0.51%
0.9%
0.0%
0.0%
481.7p
Share price at date of grant
Contractual life
Expected life
Expected volatility
Risk-free interest rate
Dividend yield
Expected cancellations
Expected forfeitures
Fair value per option at date of grant
Share price at date of grant
Contractual life
Expected life
Expected volatility
Risk-free interest rate
Dividend yield
Expected cancellations
Expected forfeitures
Fair value per option at date of grant
174.0p
10 years
10 years
23.4%
2.02%
2.2%
0.0%
0.0%*
139.5p
US LTIP 2017
516.3p
3.2 years
3.2 years
25.6%
0.49%
0.9%
0.0%
0.0%
502.2p
Executive share schemes:
US Exec 2012
UK Exec 2013
US Exec 2013
UK Exec 2014
US Exec 2014
UK Exec 2015
US Exec 2015
147.2p
10 years
10 years
23.6%
1.70%
2.5%
0.0%
0.0%*
30.0p
147.2p
10 years
10 years
23.3%
1.70%
2.5%
0.0%
0.0%
29.6p
139.7p
10 years
10 years
23.4%
1.26%
2.7%
0.0%
0.0%
106.1p
139.7p
10 years
10 years
23.4%
1.26%
2.7%
0.0%
0.0%
106.1p
164.5p
10 years
5 years
23.3%
1.25%
2.5%
0.0%
0.0%
145.5p
164.5p
10 years
5 years
23.3%
1.25%
2.5%
0.0%
0.0%
145.5p
78.0p
10 years
10 years
21.7%
0.84%
4.0%
0.0%
0.0%
8.45p
UK Exec 2016
273.5p
10 years
5 years
20.7%
0.57%
1.6%
0.0%
0.0%
252.3p
Share price at date of grant
Contractual life
Expected life
Expected volatility
Risk-free interest rate
Dividend yield
Expected cancellations
Expected forfeitures
Fair value per option at date of grant
Share price at date of grant
Contractual life
Expected life
Expected volatility
Risk-free interest rate
Dividend yield
Expected cancellations
Expected forfeitures
Fair value per option at date of grant
*Actual forfeiture experienced.
86
Treatt plc – Annual Report & Financial Statements 2017
25. SHARE-BASED PAYMENTS (continued)
Expected volatility was determined by calculating the historical volatility of the Group’s share price over a period equivalent to the vesting period
of the respective options prior to their date of grant.
The risk-free interest rate was based on the simple average of the historical daily gilt yields quoted for five year benchmark gilts during the month
in which a grant of options is made.
Details of movements in share options during the year were as follows:
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Cancelled during the year
Outstanding at end of year
Exercisable at end of year
2017
No of options
2017
Weighted average
exercise price
2016
No of options
2016
Weighted average
exercise price
2,054,300
369,625
(37,757)
(322,618)
(5,335)
(2,345)
2,055,870
91,163
£0.45
£1.31
£1.24
£0.79
£1.35
£1.38
£0.60
£0.65
1,441,505
805,756
(22,837)
(158,973)
—
(11,151)
2,054,300
—
£0.61
£0.47
£1.33
£1.04
—
£1.36
£0.45
—
Forfeiture arises when the employee is no longer entitled to participate in the savings-related share option scheme as a consequence of leaving
the Group whereas cancellation arises when a participant voluntarily chooses to cease their membership of a scheme within the vesting period.
The options outstanding had a weighted average remaining contractual period of 5.5 years (2016: 6.5 years). The weighted average actual market
share price on date of exercise for share options exercised during the year was 480.6 pence (2016: 179.8 pence) and the weighted average fair
value of options granted during the year was 261.8 pence (2016: 107.3 pence).
(b) Share incentive plans
All UK-based employees are eligible to participate in an HMRC-approved SIP once they have been with the Group for a qualifying period of up to
twelve months. US employees participate in a similar scheme through the use of nil cost Restricted Stock Units (“RSUs”). During the year UK
employees were awarded £550 (2016: £525) of “Free Shares”, and US employees $850 (2016: $825) of RSUs, in Treatt plc. There are no vesting
conditions attached to the Free Shares or RSUs, other than being continuously employed by the Group for three years from the date of grant.
UK employees can also buy shares in Treatt plc out of pre-tax income, subject to an annual HMRC limit, currently £1,800. These shares are called
“Partnership Shares” and are held in trust on behalf of the employee. The employees must take their shares out of the plan on leaving the Group.
For every Partnership Share acquired during the year, one “Matching Share” was awarded under the rules of the SIP. Matching Shares are subject
to the same forfeiture rules as Free Shares.
Details of the movements in the SIP were as follows:
Outstanding at start of year
Granted during the year
Forfeited during the year
Released during the year
Outstanding at end of year
Exercisable at end of year
No of free and matching shares
2016
2017
147,548
59,598
(9,619)
(16,673)
53,303
102,556
(3,614)
(4,697)
180,854
147,548
—
—
No of nil cost RSUs
2016
21,228
21,248
(4,188)
—
38,288
—
2017
38,288
16,864
(248)
—
54,904
—
In accordance with IFRS 2, no valuation model is required to calculate the fair value of awards under the SIPs. The fair value of an equity-based
payment under the SIPs is the face value of the award on the date of grant because the participants are entitled to receive the full value of the
shares and there are no market-based performance conditions attached to the awards.
87
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
26. POST-EMPLOYMENT BENEFITS
Group
The Group operates a wholly-funded defined benefit pension scheme for certain UK employees. The scheme’s assets are held separately from
the assets of the Group and are administered by trustees and managed professionally. From 1 October 2001 this scheme was closed to new
entrants and from 1 January 2013 was not subject to any further accruals. Instead members of the final salary pension scheme became eligible
for membership of a defined contribution pension plan with effect from 1 January 2013.
Defined contribution schemes are operated on behalf of eligible employees, the assets of which are held separately from those of the Group
in independently administered funds.
The pension charge for the year was made up as follows:
Defined contribution schemes
Other pension costs
2017
£’000
732
24
756
2016
£’000
737
24
761
Defined benefit pension scheme
The Group accounts for pensions in accordance with IAS 19, “Employee Benefits”, details of which are as follows:
The valuation used for IAS 19 disclosures in respect of the defined benefit pension scheme (“the scheme”) has been based on the most recent
actuarial valuation at 1 January 2015 carried out by Barnett Waddingham and updated by Mrs L Lawson, a Fellow of the Institute and Faculty
of Actuaries, to take account of the requirements of IAS 19 in order to assess the liabilities of the scheme at 30 September 2017. Scheme assets
are stated at their market value as at that date.
The scheme is subject to the Statutory Funding Objective under the Pensions Act 2004. A valuation of the scheme is carried out at least once
every three years to determine whether the Statutory Funding Objective is met. As part of the process the Group must agree with the trustees
of the scheme the contributions to be paid to address any shortfall against the Statutory Funding Objective. The Statutory Funding Objective does
not currently impact on the recognition of the scheme in these financial statements.
The scheme is managed by a board of trustees appointed in part by the company and part from elections by members of the Scheme. The trustees
have responsibility for obtaining valuations of the fund, administering benefit payments and investing the scheme's assets. The trustees delegate
some of these functions to their professional advisers where appropriate.
The scheme exposes the Group to a number of risks:
Investment risk: The scheme holds investments in asset classes, such as equities, which have volatile market values and while these assets are
expected to provide real returns over the long term, the short-term volatility can cause additional funding to be required if a deficit emerges.
Interest rate risk: The scheme's liabilities are assessed using market yields on high quality corporate bonds to discount the liabilities. As the scheme
holds assets such as equities the value of the assets and liabilities may not move in the same way.
Inflation risk: A proportion of the benefits under the scheme are linked to inflation. Although the scheme's assets are expected to provide a good
hedge against inflation over the long term, movements over the short-term could lead to deficits emerging.
Mortality risk: In the event that members live longer than assumed a greater deficit will emerge in the scheme.
Member options: Certain benefit options may be exercised by members without requiring the consent of the trustees or the company, for example
exchanging pension for cash at retirement. In this example, if fewer members than expected exchange pension for cash at retirement then a funding
strain will emerge.
The assets do not include any investment in shares of the Group and there were no plan amendments, curtailments or settlements during
the period. The disclosure liability makes no allowance for discretionary benefits.
88
Treatt plc – Annual Report & Financial Statements 2017
26. POST-EMPLOYMENT BENEFITS (continued)
The financial assumptions used to calculate scheme liabilities and assets under IAS 19 are:
Discount rate
Rate of inflation (RPI)
Rate of inflation (CPI)
Rate of increase in pensions in payment – CPI max 5%
Rate of increase in pensions in payment – CPI max 3%
Rate of increase in pensions in payment – CPI max 2.5%
Revaluation in deferment
Mortality table
Commutation allowance
Proportion married (at retirement or earlier death)
Rate of increase in salaries
Life expectancy for male aged 65 in 20 years’ time
Life expectancy for female aged 65 in 20 years’ time
Life expectancy for male aged 65 now
Life expectancy for female aged 65 now
2017
2016
2.85%
3.40%
2.40%
2.40%
2.20%
2.05%
2.40%
100% of S2PxA table with
CMI_2015 projections
with a long term average
rate of improvement of
1.25% pa
20%
75%
N/A
24.0
26.2
22.3
24.3
2.60%
3.25%
2.25%
2.25%
2.10%
1.95%
2.25%
100% of S2PxA table with
CMI_2015 projections
with a long term average
rate of improvement of
1.25% pa
20%
75%
N/A
23.9
26.1
22.2
24.2
Effect of the scheme on future cash flows
The Group is required to agree a schedule of contributions with the trustees of the scheme following a valuation which must be carried out at least
once every three years. The latest valuation of the scheme took place as at 1 January 2015. The valuation revealed that there was a funding surplus
in the scheme as at that date of £314,000, being a funding level of 102%. It was agreed with the trustees that, consequently, the Group could cease
making contributions to the scheme for the foreseeable future. It was further agreed that if the annual actuarial funding update revealed that the
scheme funding level had fallen to below 95%, then contributions would be resumed. The actuarial funding update as at 30 September 2017
revealed an actuarial deficit of £336,000 (2016: deficit of £1,676,000), being a funding level of 98% (2016: 92%). The Group has therefore agreed
with the trustees to cease on-going contributions to its defined benefit pension scheme in 2018 (2017: £300,000). The weighted average duration
of the defined benefit obligation is approximately 18 years.
Scheme assets:
Equities
Target return funds
Bonds
Other
Fair value of scheme assets
Present value of funded obligations (scheme liabilities)
Deficit in the scheme recognised in the balance sheet
Related deferred tax
Net pension liability
Changes in scheme liabilities
Balance at start of year
Interest cost
Benefits paid
Remeasurement losses:
Actuarial gain arising from changes to demographic assumptions
Actuarial gain/(loss) arising from changes in financial assumptions
2017
£’000
11,135
5,599
4,152
83
20,969
(26,790)
(5,821)
990
(4,831)
(27,252)
(699)
719
—
442
2016
£’000
10,025
5,499
4,189
138
19,851
(27,252)
(7,401)
1,258
(6,143)
(21,251)
(835)
770
1,005
(6,941)
Balance at end of year
(26,790)
(27,252)
Changes in scheme assets
Balance at start of period
Interest on scheme assets
Employer contributions
Benefits paid
Remeasurement gains:
Return on plan assets (excluding amounts included in interest expense)
Balance at end of year
19,851
511
300
(719)
1,026
20,969
18,292
716
(26)
(770)
1,639
19,851
89
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
26. POST-EMPLOYMENT BENEFITS (continued)
Amount charged to finance costs
Interest on scheme assets
Interest on scheme liabilities
Net finance expense
Net expense recognised in income statement
Amount recognised in statement of comprehensive income
Gain on scheme assets in excess of interest
Gain from changes to demographic assumptions
Gain/(loss) from changes to financial assumptions
Remeasurement gain/(loss) recognised in statement of comprehensive income
Actual return on scheme assets
Cumulative remeasurement loss recognised in statement of comprehensive income
Approximate effect of change of assumptions on liability values at 30 September 2017:
Reduce discount rate by 0.25% pa
Increase inflation and all related assumptions by 0.1% pa
Increase life expectancy by one year
2017
£’000
511
(699)
(188)
(188)
1,026
—
442
1,468
1,537
(6,980)
2016
£’000
716
(835)
(119)
(119)
1,639
1,005
(6,941)
(4,297)
2,355
(8,448)
Increase liability by:
£’000
1,309
380
1,135
The above sensitivities are approximate and only show the likely effect of an assumption being adjusted whilst all other assumptions remain
the same. The assumptions used in preparing this sensitivity analysis are unchanged from the prior year.
27. COMMITMENTS UNDER OPERATING LEASES
The Group as lessee
As at 30 September 2017, the Group had total commitments for future minimum lease payments under non-cancellable operating leases which fall
due as follows:
Within one year
In one to two years
In two to five years
In more than five years
2017
£’000
85
56
64
3
208
2016
£’000
61
25
27
—
113
The Group as lessor
As at 30 September 2017, the Group had contracted with tenants for the following future minimum lease payments which fall due as follows:
Within one year
Details of lease payments under operating leases recognised as an expense in the year are disclosed in note 5.
2017
£’000
9
2016
£’000
8
90
Treatt plc – Annual Report & Financial Statements 2017
28. CONTINGENT LIABILITIES
Parent Company
The Parent Company has guaranteed the Industrial Development Loan and “Line of Credit” for Treatt USA Inc. At the balance sheet date the liability
covered by this guarantee amounted to US$1,040,000 (£775,000) (2016: US$1,300,000 (£1,001,000)).
The Parent Company has also guaranteed certain bank borrowings of its UK subsidiaries R C Treatt & Co Limited and Earthoil Plantations Limited.
At the year-end the liabilities covered by this guarantee amounted to £12,843,000 (2016: £4,006,000).
29. FINANCIAL INSTRUMENTS
Parent Company and Group
Capital risk management
The Group and Parent Company manage their capital to ensure that entities in the Group continue as going concerns whilst maximising returns to
stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of net debt and equity shareholders’
funds. The Group is not subject to any externally imposed capital requirements. Board policy is to operate with a mix of short and medium term
borrowings. The Group has a mix of facilities, including a £2m three year revolving credit facility with Lloyds Banking Group and a $9m four year
revolving credit facility with HSBC in the UK, together with a $6m four year line of credit facility with Bank of America in the US. None of these
facilities expire in the same financial years and all bank facilities are operated independently and are therefore not syndicated. The Group’s net debt
position is monitored daily and reviewed by management on a weekly basis. Further details of the Group’s capital management are given in the
Chairman’s Statement, Chief Executive Officer’s Report and Financial Review on pages 10 to 20.
Categories of financial instruments
In the following table those financial instruments which are measured subsequent to initial recognition at fair value are required to be grouped
into levels 1 to 3 based on the degree to which the fair value is observable:
•
•
•
level 1 – fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
level 2 – fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the
asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
level 3 – fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
Group
Parent Company
Financial assets
Redeemable loan notes receivable from subsidiaries
Trade receivables
Cash and cash equivalents
Derivative financial instruments
– forward currency contracts (level 2)
Financial liabilities
Redeemable loan notes payable
Trade payables
Bank borrowings
UK term loan
UK revolving credit facilities
US term loans
Derivative financial instruments
– forward currency contracts (level 2)
Derivative financial instruments – interest rate swap (level 2)
2017
£’000
—
18,096
4,748
483
23,327
2017
£’000
—
13,311
4,468
3,000
6,708
797
—
403
Group
2016
£’000
—
16,250
6,588
—
22,838
2016
£’000
675
9,996
7
—
6,928
1,307
9
754
28,687
19,676
2017
£’000
—
—
2,590
—
2,590
2017
£’000
—
—
—
—
—
—
—
—
—
2016
£’000
1,350
—
1,399
—
2,749
Parent Company
2016
£’000
675
—
—
—
—
—
—
—
675
91
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
29. FINANCIAL INSTRUMENTS (continued)
Fair values of financial assets and liabilities
The estimated fair values of financial assets and liabilities is not considered to be significantly different from their carrying values.
Financial risk management objectives
The Group and Parent Company collate information from across the business and report to the Board on key financial risks. These risks include
credit risk, liquidity risk, interest rate risk and currency risk. The Group has policies in place, which have been approved by the Board, to manage
these risks. The Group does not enter into traded financial instruments as the costs involved currently outweigh the risks they seek to protect
against. Speculative purchases of financial instruments are not made.
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group or Parent Company.
The Group’s credit risk is primarily attributable to its trade receivables and details of how this risk is managed are explained in note 18.
The credit risk on liquid funds is limited because the counterparties are banks with good credit ratings assigned by international credit rating
agencies as outlined in note 19. The Directors are of the opinion that there are no significant concentrations of credit risk. The carrying amount of
financial assets recorded in the financial statements, which is net of impairment losses, represents the Group and Parent Company’s maximum
exposure to credit risk.
The loan notes receivable by the Parent Company are made up as follows:
Parent Company
Variable Rate Unsecured Loan Notes 2015 (A)
Variable Rate Unsecured Loan Notes 2015 (B)
2017
£’000
—
—
—
2016
£’000
950
400
1,350
As disclosed in note 30, the loan notes were receivable by the Parent Company from two of its subsidiaries, comprising the Earthoil Group and
were repaid during the year.
92
Treatt plc – Annual Report & Financial Statements 2017
29. FINANCIAL INSTRUMENTS (continued)
Liquidity risk management
Liquidity risk refers to the risk that the Group may not be able to fund the day to day running of the Group. Liquidity risk is reviewed by
the Board at all Board meetings. The Group manages liquidity risk by monitoring actual and forecast cash flows and matching the maturity profiles
of financial assets and liabilities. The Group also monitors the drawdown of debt against the available banking facilities and reviews the level
of reserves. Liquidity risk management ensures sufficient debt funding is available for the Group’s day to day needs. Board policy is to maintain
a reasonable headroom of unused committed bank facilities.
The Group has a number of debt facilities, details of which, including their terms and maturity profile, are given in note 20.
The Board also monitors the Group’s banking covenants which are calculated under IFRS. There were no breaches during the year or prior period.
Interest rate risk management
The Group is exposed to interest rate risk on short to medium term borrowings primarily with three major institutions being HSBC, Lloyds Banking
Group and Bank of America. The risk is managed by maintaining borrowings with several institutions across a number of currencies, principally US
Dollar and Sterling. Long term financing is primarily used to finance long term capital investment.
The Group hedges a portion of its interest rate risk through an interest rate swap which has the effect of fixing the interest rate on a notional principal
of US$9 million of borrowings. The interest rate swap is for a period of ten years ending in 2020 and swaps variable 3 month US LIBOR for a fixed
rate of 5.68%. The Group has complied with the requirements of IAS39, “Financial Instruments: Recognition and Measurement” and designated this
interest rate swap as a cash flow hedge. The hedge was 100% effective during the period and is expected to be going forward, and consequently
the carrying value (which is the same as the fair value) of the interest rate swap has been taken to the hedging reserve, and the corresponding
liability was as follows:
Derivative financial instruments
Non-current liabilities
Interest rate swaps
2017
£’000
403
2016
£’000
754
The fair value of the interest rate swap equates to the mark-to-market valuation of the swap provided by HSBC and represents the amount which
the Group would expect to pay in order to close the swap contract at the balance sheet date.
The gain/(loss) on interest rate swaps was as follows:
Group
Other comprehensive income
2017
£’000
351
2016
£’000
(54)
The derivative financial instrument for the interest rate swap described above is classified as level 2.
93
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
29. FINANCIAL INSTRUMENTS (continued)
Interest rate risk management (continued)
Interest rate risk is further diversified by having a mix of fixed and floating rate borrowings, as well as holding borrowings in a range of currencies
as follows:
Group
Bank borrowings:
US Dollars
Sterling*
Other*
Total Net Debt
Loan notes payable:
Sterling
Floating rate
financial liabilities
Fixed rate
financial liabilities
Total
2017
£’000
(869)
2,790
799
2,720
—
2,720
2016
£’000
(5,060)
(762)
(759)
(6,581)
675
(5,906)
2017
£’000
7,505
—
—
7,505
—
7,505
2016
£’000
8,235
—
—
8,235
—
8,235
2017
£’000
6,636
2,790
799
10,225
—
10,225
2016
£’000
3,175
(762)
(759)
1,654
675
2,329
*Bank borrowings are shown net of positive cash balances as rights of set-off exist.
The Parent Company bank balances were all held in Sterling.
Interest on floating rate bank deposits is based on UK base rates or currency LIBOR as applicable. Interest on bank overdrafts is charged at
1.2%-2.25% above bank base or currency LIBOR rates.
Fixed rate financial liabilities comprise the Industrial Development Loan of US$1,040,000 (2016: US$1,300,000), equipment financing term loans
of $29,000 (2016: $398,000) and $9,000,000 revolving credit facility (see note 20).
The loan notes payable by the Parent Company and Group are made up as follows:
Parent Company
Series A Variable Rate Unsecured Loan Notes 2015
Series B Variable Rate Unsecured Loan Notes 2015
2017
£’000
—
—
—
2016
£’000
475
200
675
Following the settlement of the Earthoil earnout legal dispute, the loan notes were settled during the financial year.
Interest rate sensitivity analysis has been performed on the floating rate financial liabilities to illustrate the impact on Group profits if interest rates
increased or decreased. This analysis assumes the liabilities outstanding at the period end, after taking account of rights of set off, were outstanding
for the whole period. A 100 bps increase or decrease has been used, comprising management’s assessment of reasonably possible changes in
interest rates. If interest rates had been 100 bps higher or lower, then profit before taxation for the year ended 30 September 2017 would have
decreased or increased as follows:
Impact on profit before tax of 1% interest rate movement
Group
Parent Company
2017
£’000
120
2016
£’000
89
2017
£’000
—
2016
£’000
(7)
It has been assumed that all other variables remained the same when preparing the interest rate sensitivity analysis and that floating rate short
term bank borrowings in the same currency are netted against each other for the purpose of interest rate calculation.
94
Treatt plc – Annual Report & Financial Statements 2017
29. FINANCIAL INSTRUMENTS (continued)
Foreign currency risk management
Foreign currency risk management occurs at a transactional level on revenues and purchases in foreign currencies and at a translational level in
relation to the translation of overseas operations. The Group’s main foreign exchange risk is the US Dollar. Board policy is for UK businesses to
mitigate US Dollar transactional exposures by holding borrowings in US Dollars and Euros as well as by entering into foreign currency forward
contracts and options. Further details of the Group’s foreign currency risk management can be found in the Chairman’s Statement, Chief Executive
Officer’s Report and Financial Review on pages 10 to 20.
The following table details the forward and option contracts outstanding at the year end:
As at 30 September 2017
US Dollars:
Forward contract to sell US Dollars in 3 months
Forward contract to sell US Dollars in 6 months
Euros:
Forward contract to sell Euros in 3 months
Forward contract to sell Euros in 6 months
As at 30 September 2016
US Dollars:
Forward contract to sell US Dollars in 3 months
Forward contract to sell US Dollars in 6 months
Euros:
Forward contract to sell Euros in 3 months
Forward contract to sell Euros in 6 months
Average
contract rate
1.296
1.301
1.097
1.096
Average
contract rate
1.299
1.303
1.161
1.158
Nominal
currency
‘000
$8,400
$8,400
€1,500
€1,500
Nominal
currency
‘000
$6,750
$6,750
€1,375
€1,375
Contract
GBP
£’000
6,481
6,456
1,367
1,369
Contract
GBP
£’000
5,195
5,182
1,185
1,187
Fair value
gain
£’000
205
196
42
40
483
Fair value
gain/(loss)
£’000
1
(2)
(4)
(4)
(9)
The derivative financial instruments for the foreign currency contracts and options described above are all held as cash flow hedges and are
classified as level 2. The fair value of the foreign currency contracts at the year end equate to the mark-to-market valuation of the contracts and
options provided by HSBC and Lloyds Banking Group. These represent the amounts which the Group would expect to pay in order to close these
contracts at the balance sheet date.
The gain/(loss) on foreign currency financial instruments during the year was as follows:
Group
Income statement
Other comprehensive income
2017
£’000
(119)
308
189
2016
£’000
(2,196)
175
(2,021)
The Group’s currency exposure, being those exposures arising from transactions where the net currency gains and losses will be recognised in the
income statement, is as follows:
Net foreign currency financial (liabilities)/assets:
US Dollar
Other
2017
£’000
(4,820)
(12)
(4,832)
2016
£’000
(1,433)
1,644
211
95
Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 September 2017 (continued)
29. FINANCIAL INSTRUMENTS (continued)
Foreign currency risk management (continued)
A currency sensitivity analysis has been performed on the financial assets and liabilities to sensitivity of a 10% increase/decrease in the Pounds
Sterling to US Dollar exchange rate. A 10% strengthening of the US Dollar has been used, comprising management’s assessment of reasonably
possible changes in US Dollar exchange rates. The impact on profit for the period in the income statement would be a gain/(loss) on net monetary
assets or liabilities as follows:
Group
Impact of 10% strengthening of US Dollar against GB Pound
2017
£’000
2016
£’000
(536)
(159)
In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk since it is limited to the year-end
exposure and does not reflect the exposure during the year.
30. RELATED PARTY TRANSACTIONS
The following transactions were carried out with related parties:
Group
Remuneration of key management personnel
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate. Further information about
the remuneration of individual Directors is provided in the Directors’ Remuneration Report on pages 52 to 55.
Salaries and other short-term employee benefits
Employers’ social security costs
Pension contributions to money purchase schemes
Share-based payments
2017
£’000
1,139
96
53
341
1,629
2016
£’000
1,071
90
55
215
1,431
During the year no Directors (2016: nil) were members of a defined benefit pension scheme as the scheme was closed to future accrual
with effect from 31 December 2012. The aggregate accumulated total pension payable at age 65 as at 30 September 2017 was £13,000
(2016: £21,000) per annum.
Parent Company
Transactions with subsidiaries:
Interest received from:
Earthoil Plantations Limited
Earthoil Africa EPZ Limited
Dividends received from:
R C Treatt & Co Limited
Treatt USA Inc
Balances with subsidiaries:
Redeemable loan notes receivable:
Earthoil Plantations Limited
Earthoil Africa EPZ Limited
Amounts owed to/(by) Parent Company:
Earthoil Plantations Limited
R C Treatt & Co Limited
2017
£’000
9
4
1,977
2,167
2017
£’000
—
—
(416)
516
2016
£’000
4
2
1,862
1,037
2016
£’000
950
400
13
(712)
The redeemable loan notes were redeemed in full during the financial year. Amounts owed to the Parent Company are unsecured and will
be settled in cash.
96
Treatt plc – Annual Report & Financial Statements 2017
NOTICE OF ANNUAL GENERAL MEETING
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE
ATTENTION. IF YOU ARE IN ANY DOUBT AS TO WHAT ACTION TO TAKE
YOU ARE RECOMMENDED TO CONSULT YOUR STOCKBROKER, SOLICITOR,
ACCOUNTANT OR OTHER INDEPENDENT ADVISER AUTHORISED UNDER
THE FINANCIAL SERVICES AND MARKETS ACT 2000.
If you have sold or transferred all of your ordinary shares in Treatt plc, you should pass this document, together with the accompanying form
of proxy, to the person through whom the sale or transfer was made for transmission to the purchaser or transferee.
Notice of the Annual General Meeting which has been convened for 26 January 2018 at 10.30 am at The Athenaeum, Angel Hill, Town Centre,
Bury St. Edmunds, Suffolk, IP33 1LU is set out below.
To be valid, forms of proxy must be completed and returned in accordance with the instructions printed thereon so as to be received by the
Company’s registrars, Link Asset Services (formally Capita Asset Services), PXS1, 34 Beckenham Road, Beckenham, Kent, BR3 4ZF as soon as
possible and in any event not later than 48 hours (excluding weekends and public holidays) before the time appointed for holding the meeting.
Notice is hereby given that the Annual General Meeting of the Shareholders
of Treatt plc (the “Company”) will be held at The Athenaeum, Angel Hill,
Town Centre, Bury St. Edmunds, Suffolk, IP33 1LU on 26 January 2018,
at 10.30 am for the transaction of the following business:
Special Business
To consider and, if thought fit, to pass the following resolutions, of
which Resolutions 8 and 9 will be proposed as Ordinary Resolutions
and Resolutions 10 and 11 will be proposed as Special Resolutions.
Ordinary Business
1. To receive the audited accounts and related reports of the Directors
and Auditors for the year ended 30 September 2017.
8. Approval of Remuneration Policy
THAT:
The Remuneration Policy be and is hereby approved.
2. To approve the Directors’ Remuneration Report.
9. Authority to allot securities
3. To approve a final dividend of 3.35p per share on the ordinary
shares of the Company for the year ended 30 September 2017.
4. To re-elect Tim Jones as a Director of the Company.
5. To re-elect Richard Hope as a Director of the Company.
6. To re-appoint RSM UK Audit LLP as Auditors of the Company, to
hold office from the conclusion of this meeting until the conclusion
of the next Annual General Meeting.
7. To authorise the Directors to determine the remuneration of the
Auditors of the Company.
THAT:
In accordance with section 551 of the Companies Act 2006 (the
“Act”) the Directors be and are hereby generally and unconditionally
authorised to exercise all the powers of the Company to allot shares
in the Company and to grant rights to subscribe for, or to convert
any security into, shares in the Company (the “Rights”) within the
terms of the restrictions and provisions following; namely:
(i) this authority shall (unless previously revoked, varied or
renewed) expire on the earlier of the date of the next Annual
General Meeting of the Company following the passing of this
resolution number 9 and 26 April 2019; and
(ii) this authority shall be limited up to an aggregate nominal
amount of £349,174 (representing approximately 33 per cent of
the existing issued share capital of the Company as at the date
of this notice).
The power granted pursuant to this resolution shall allow and enable
the Directors to make offers, and enter into agreements before the
expiry of such authority which would or might require shares to be
allotted or Rights to be granted after such expiry and the Directors
may allot shares or grant Rights under any such offer or agreement
as if the power conferred hereby had not expired.
97
Other Information
NOTICE OF ANNUAL GENERAL MEETING (continued)
10. Disapplication of pre-emption rights for up to 5% of existing
11. Authority to purchase own shares
share capital
THAT:
Conditionally upon the passing of resolution 9 above and in
accordance with Section 570 of the Act, the Directors be and
are hereby given power to allot equity securities pursuant to the
authority conferred by resolution 9 above as if Section 561 of the
said Act did not apply to any such allotment provided that:
(i) the power hereby granted shall be limited:
(aa) to the allotment of equity securities in connection with
or pursuant to an offer by way of a rights issue to the
holders of shares in the Company and other persons
entitled to participate therein, in the proportion (as nearly
as may be) to such holders' holdings of such shares (or,
as appropriate, to the number of shares which such other
persons are for these purposes deemed to hold) subject
only to such exclusions or other arrangements as the
Directors may feel necessary or expedient to deal with
treasury shares, fractional entitlements, record dates or
legal, regulatory or practical problems in, or under the laws
of, any territory; and
(bb) to the allotment (otherwise than pursuant to sub-
paragraph (i)(aa) of this resolution) of equity securities up
to an aggregate nominal amount of £52,905 (representing
approximately 5 per cent of the existing issued share
capital of the Company as at the date of this notice);
(ii) the power hereby granted shall expire on the earlier of the date
of the next Annual General Meeting of the Company following
the passing of this Resolution and 26 April 2019;
The said power shall allow and enable the Directors to make an
offer or agreement before the expiry of this power which would
or might require securities to be allotted (or treasury shares to be
sold) after such expiry of this power and the Directors may allot
equity securities (or sell treasury shares) pursuant to such offer or
agreement as if the power conferred herein had not expired
By order of the Board
ANITA STEER
Secretary
14 December 2017
THAT:
The Company is hereby generally and unconditionally authorised to
make market purchases (within the meaning of Section 693 of the
Act) of ordinary shares of 2p each in the capital of the Company
("ordinary shares") provided that:
(i) the maximum number of ordinary shares authorised to be
purchased is 5,290,517 (representing approximately 10 per cent
of the present issued share capital of the Company);
(ii) the minimum price (excluding stamp duty, dealing or other costs)
which may be paid for an ordinary share so purchased is 2p;
(iii) the maximum price which may be paid for an ordinary share so
purchased is an amount equal to 5 per cent above the average
of the middle market quotations shown for an ordinary share
in The London Stock Exchange Daily Official List on the five
business days immediately preceding the day on which that
ordinary share is purchased;
(iv) the authority hereby conferred shall expire at the conclusion of
the Annual General Meeting of the Company to be held in 2019,
unless such authority is renewed, varied or revoked prior to
such time; and
(v) the Company may prior to the expiry of such authority make
a contract to purchase ordinary shares under the authority
hereby conferred which will or may be executed wholly or partly
after the expiry of such authority, and may make a purchase of
ordinary shares in pursuance of any such contract.
Registered Office:
Northern Way
Bury St. Edmunds
Suffolk IP32 6NL
The note on voting procedures and general rights of shareholders, together with explanatory notes on the resolutions to be put to the meeting,
which follow on pages 99 to 101 form part of this notice.
Due to the level of shareholder attendance in recent years, and capacity restraints, we are unfortunately unable to hold our AGM at our site
in Northern Way, Bury St. Edmunds in 2018. We are therefore moving the location of the AGM to the Athenaeum in Bury St. Edmunds
(address above). We appreciate a benefit of holding the AGM on site is that it provides shareholders with an opportunity to attend a site tour
and consequently we plan to hold a ‘Shareholder Open Day’ in the spring/summer of 2018, participation permitting. To receive further details
in due course please register your interest by emailing cosec@treatt.com or calling the CoSec team on 01284 702500.
98
Treatt plc – Annual Report & Financial Statements 2017
NOTE ON VOTING PROCEDURES AND GENERAL RIGHTS
OF SHAREHOLDERS:
Only those persons entered in the Register of Members of the Company
(the Register) as at close of business on 24 January 2018 (the Record
Date) shall be entitled to attend or vote at the AGM in respect of the
number of ordinary shares in the capital of the Company registered
in their names at that time. Changes to entries on the Register for
certificated or uncertificated shares of the Company after the Record
Date shall be disregarded in determining the rights of any person to
attend or vote at the AGM. Should the AGM be adjourned to a time not
more than 48 hours after the Record Date, that time will also apply for
the purpose of determining the entitlement of members to attend and
vote (and for the purpose of determining the number of votes they may
cast) at the adjourned AGM. Should the AGM be adjourned for a longer
period, to be so entitled, members must have been entered on the
Register by close of business two days prior to the adjourned AGM
(excluding weekends and public holidays) or, if the Company gives
notice of the adjourned AGM, at the time specified in such notice.
Voting at the meeting will be conducted by poll rather than on a show
of hands, which the Board believes provides a more accurate reflection
of shareholder views and takes into account the number of shares held
by each member. Those shareholders who are unable to attend the
meeting should submit a form of proxy as detailed below. Shareholders
attending the meeting may also wish to vote in advance of the meeting
by submitting a form of proxy. Members who have done so will not
need to vote at the meeting unless they wish to change their vote or the
way in which the proxy is instructed to vote.
A member entitled to attend and vote at this meeting may appoint a
proxy or proxies to attend and vote instead of him or her. The proxy
need not be a member of the Company. A form of proxy is provided
with this notice and instructions for use are shown on the form.
Additional forms of proxy can be obtained from the Company’s
registrars on tel no 0371 664 0300. Calls are charged at the standard
geographic rate and will vary by provider. Calls outside the United
Kingdom will be charged at the applicable international rate. Lines are
open between 09:00 – 17:30, Monday to Friday excluding public
holidays in England and Wales. Instruments appointing proxies must be
lodged with the Company's registrars not less than 48 hours before the
time fixed for the meeting to be effective. Completion and return of a
form of proxy will not preclude a member from attending and voting in
person at the meeting or any adjournment of the meeting. Alternatively,
you may submit a proxy vote online through using the Signal Shares
share portal service at www.signalshares.com no later than 10:30 am
on 24 January 2018 (or in the case of an adjournment, not later than
48 hours (excluding non-business days) before the time fixed for the
holding of the adjourned meeting).
An abstention option is provided on the form of proxy to enable you to
instruct your proxy to abstain on any particular resolution, however,
it should be noted that an abstention in this way is not a ‘vote’ in law
and will not be counted in the calculation of the proportion of the votes
‘For’ and ‘Against’ a resolution.
CREST members who wish to appoint a proxy or proxies through the
CREST electronic proxy appointment service may do so for the Annual
General Meeting to be held on 26 January 2018 and any adjournment(s)
of the meeting by using the procedures described in the CREST Manual.
CREST personal members or other CREST sponsored members, and
those CREST members who have appointed a voting service provider(s),
should refer to their CREST sponsor or voting service provider(s), who
will be able to take the appropriate action on their behalf. Please note
the following:
a) In order for a proxy appointment or instruction made using
the CREST service to be valid, the appropriate CREST message
(a “CREST Proxy Instruction”) must be properly authenticated
in accordance with Euroclear UK & Ireland Limited's ("EUI")
specifications and must contain the information required for such
instructions, as described in the CREST Manual. The message,
regardless of whether it constitutes the appointment of a proxy or
an amendment to the instruction given to a previously appointed
proxy must, in order to be valid, be transmitted so as to be received
by the issuer’s agent (ID RA10) by the latest time(s) for receipt of
proxy appointments specified in this notice of the Annual General
Meeting. For this purpose, the time of receipt will be taken to be
the time (as determined by the timestamp applied to the message
by the CREST applications host) from which the issuer’s agent is
able to retrieve the message by enquiry to CREST in the manner
prescribed by CREST. After this time any change of instructions to
proxies appointed through CREST should be communicated to the
appointee through other means.
b) CREST members and, where applicable, their CREST sponsors
or voting service providers should note that EUI does not make
available special procedures in CREST for any particular messages.
Normal system timings and limitations will therefore apply in relation
to the input of CREST Proxy Instructions. It is the responsibility of
the CREST member concerned to take (or, if the CREST member
is a CREST personal member or sponsored member or has
appointed a voting service provider(s), to procure that his CREST
sponsor or voting service provider(s) take(s)) such action as shall
be necessary to ensure that a message is transmitted by means of
the CREST system by any particular time. In this connection, CREST
members and, where applicable, their CREST sponsors or voting
service providers are referred in particular to those sections of the
CREST Manual concerning practical limitations of the CREST system
and timings.
c) The Company may treat as invalid a CREST Proxy Instruction in the
circumstances set out in regulation 35(5)(a) of the Uncertificated
Securities Regulations 2001.
Members may change proxy instructions by submitting a new proxy
appointment using the methods set out above. Note that the cut-off
time for receipt of proxy appointments also apply in relation to amended
instructions; any amended proxy appointment received after the
relevant cut-off time will be disregarded.
The right to appoint a proxy does not apply to persons whose shares
are held on their behalf by another person and who have been
nominated to receive communications from the company in accordance
with section 146 of the Companies Act 2006 (“nominated persons”).
Nominated persons may have a right under an agreement with the
registered shareholder who holds the shares on their behalf to be
appointed (or to have someone else appointed) as a proxy. Alternatively,
if nominated persons do not have such a right, or do not wish to
exercise it, they may have a right under such an agreement to give
instructions to the person holding the shares as to the exercise of
voting rights.
A member of the Company which is a corporation may authorise
a person or persons to act as its representative(s) at the AGM.
In accordance with the provisions of the Companies Act 2006
(as amended by the Companies (Shareholders’ Rights) Regulations
2009), each such representative may exercise (on behalf of the
corporation) the same powers as the corporation could exercise
if it were an individual member of the Company, provided that they
do not do so in relation to the same shares. It is therefore no longer
necessary to nominate a designated corporate representative.
99
Other Information NOTICE OF ANNUAL GENERAL MEETING (continued)
Pursuant to Section 319A of the Companies Act 2006, the Company
must cause to be answered at the AGM any question relating to the
business being dealt with at the AGM which is put by a member
attending the meeting, except in certain circumstances, including if it is
undesirable in the interests of the Company or the good order of the
meeting that the question be answered or if to do so would involve the
disclosure of confidential information.
Members satisfying the thresholds in Section 338 of the Companies
Act 2006 may require the Company to give, to members of the Company
entitled to receive notice of the AGM, notice of a resolution which those
members intend to move (and which may properly be moved) at the
AGM. A resolution may properly be moved at the AGM unless (i) it
would, if passed, be ineffective (whether by reason of any inconsistency
with any enactment or the Company’s constitution or otherwise);
(ii) it is defamatory of any person; or (iii) it is frivolous or vexatious.
The business which may be dealt with at the AGM includes a resolution
circulated pursuant to this right. A request made pursuant to this right
may be in hard copy or electronic form, must identify the resolution of
which notice is to be given, must be authenticated by the person(s)
making it and must be received by the Company not later than 6 weeks
before the date of the AGM.
Members satisfying the thresholds in Section 338A of the Companies
Act 2006 may request the Company to include in the business to be
dealt with at the AGM any matter (other than a proposed resolution)
which may properly be included in the business at the AGM. A matter
may properly be included in the business at the AGM unless (i) it is
defamatory of any person or (ii) it is frivolous or vexatious. A request
made pursuant to this right may be in hard copy or electronic form,
must identify the matter to be included in the business, must be
accompanied by a statement setting out the grounds for the request,
must be authenticated by the person(s) making it and must be received
by the Company not later than 6 weeks before the date of the AGM.
In accordance with Section 311A of the Companies Act 2006, the
contents of this notice of meeting details the total number of shares
in respect of which members are entitled to exercise voting rights
at the AGM, the total voting rights members are entitled to exercise
at the AGM and, if applicable, any members’ statements, members’
resolutions or members’ matters of business received by the Company
after the date of this notice will be available on the Company’s website
www.treatt.com.
As at 23 November 2017 the Company’s issued share capital consists
of 52,905,170 ordinary shares. The total number of voting rights in the
Company as at 23 November 2017 (the latest practicable reporting date
prior to publication of this document) is 52,204,016.
A statement of Directors' share transactions and copies of their service
contracts and the letters of appointment of the Non-executive Directors
are available for inspection during usual business hours at the
registered office of the Company from the date of this notice until the
date of the AGM (Saturdays, Sundays and public holidays excluded)
and will be available at the place of the meeting for fifteen minutes prior
to and during the meeting.
Except as provided above, members who wish to communicate
with the Company in relation to the meeting should do so using the
following means:
Calling the Company Secretary on +44 1284 702500;
Emailing the Company Secretary on cosec@treatt.com; or
Writing to: The Company Secretary, Treatt plc,
Northern Way, Bury St. Edmunds, Suffolk, IP32 6NL.
EXPLANATORY NOTES
Report and Accounts (Resolution 1)
The Directors of the Company must present the accounts to the meeting.
Directors’ Remuneration Report (Resolution 2)
The Companies Act 2006, implemented by the Enterprise and
Regulatory Reform Act 2013, provides that a quoted company may not
make a remuneration payment to a Director of the Company unless
the payment is consistent with the Company’s Remuneration Policy,
as approved by shareholders, or the payment is approved by a
Shareholders’ Resolution. The legislation requires two resolutions to be
put to shareholders on separate sections of the Directors’ Remuneration
Report. The first of these is an advisory resolution on the Implementation
Section of the Directors’ Remuneration Report, which details the
remuneration packages paid to Directors during the year ended 30
September 2017. You can find the Implementation Section of the
Directors’ Remuneration Report on pages 52 to 55.
Declaration of a dividend (Resolution 3)
A final dividend can only be paid after the shareholders at a general
meeting have approved it. A final dividend of 3.35 pence per ordinary
share is recommended by the Directors for payment to shareholders
who are on the register of members at the close of business on 16
February 2018. If approved, the date of payment of the final dividend
will be 22 March 2018. An interim dividend of 1.45 pence per ordinary
share was paid on 17 August 2017. This represents an increase of 0.45
pence per share, or 10.4 per cent, on the total 2016 dividend.
Re-election of Directors (Resolutions 4 and 5)
In accordance with the Articles of Association, all Directors retire at
least every three years and all newly appointed Directors retire at the
first Annual General Meeting following their appointment. Furthermore,
any Non-executive Director having been in post for nine years or more
is subject to annual re-election.
At this meeting, Tim Jones and Richard Hope will retire and stand for
re-election as Directors. Short biographies of these Directors are given
on page 23. Having considered the performance of, and contribution
made, by each of the Directors standing for re-election the Board
remains satisfied that the performance of each of the relevant Directors
continues to be effective and to demonstrate commitment to the role
and, as such, recommends their re-election.
Reappointment and remuneration of auditors (Resolutions 6 and 7)
Resolutions 6 and 7 propose the reappointment of RSM UK Audit
LLP as Auditors of the Company and authorise the Directors to set
their remuneration.
100
Treatt plc – Annual Report & Financial Statements 2017 Authority to purchase own shares (Resolution 11)
In certain circumstances, it may be advantageous for the Company
to purchase its own shares and resolution 11 seeks the authority
from shareholders to continue to do so. The Directors will continue to
exercise this power only when, in the light of market conditions
prevailing at the time, they believe that the effect of such purchases will
be to increase earnings per share and is in the best interests of
shareholders generally. Other investment opportunities, appropriate
gearing levels and the overall position of the Company will be taken into
account when exercising this authority.
Any shares purchased in this way will be cancelled and the number
of shares in issue will be reduced accordingly, save that the Company
may hold in treasury any of its own shares that it purchases pursuant
to the Act and the authority conferred by this resolution. This gives the
Company the ability to re-issue treasury shares quickly and cost-
effectively and provides the Company with greater flexibility in the
management of its capital base. It also gives the Company the
opportunity to satisfy employee share scheme awards with treasury
shares. Once held in treasury, the Company is not entitled to exercise
any rights, including the right to attend and vote at meetings in respect
of the shares. Further, no dividend or other distribution of the
Company’s assets may be made to the Company in respect of the
treasury shares.
The resolution specifies the maximum number of ordinary shares that
may be acquired (approximately 10 per cent of the Company’s issued
ordinary share capital as at 23 November 2017) and the maximum and
minimum prices at which they may be bought.
The total number of options to subscribe for ordinary shares that were
outstanding at 23 November 2017 (the latest practicable reporting date
prior to publication of this document) was 2,055,870. The proportion of
issued share capital that they represented at that time was 3.8 per cent
and the proportion of issued share capital that they will represent if the
full authority to purchase shares (existing and being sought) is used
is 4.3 per cent.
Resolution 11 will be proposed as a Special Resolution to provide the
Company with the necessary authority. If given, this authority will
expire at the conclusion of the next Annual General Meeting of the
Company in 2019 or, if earlier, 26 April 2019 (the date which is 15
months after the date of passing of the resolution).
The Directors intend to seek renewal of this power at subsequent
Annual General Meetings.
Remuneration Policy Report (Resolution 8)
As referred to under Resolution 2 above, two resolutions are required
to be put to shareholders on separate sections of the Directors’
Remuneration Report. The second of these is a binding resolution,
passed by a majority, to approve the Company’s Remuneration Policy.
Although the policy was approved at the 2017 Annual General Meeting,
it has been revised to remove the overarching flexibility and to make
minor technical changes to bring it into line with the policies operated
by other FTSE SmallCap companies and therefore requires the approval
of Shareholders. Once approved, a Remuneration Policy only requires
Shareholder approval every three years unless any revisions are
required. The policy, which is set out on pages 46 to 51, will apply to
all payments made to Directors from the date the policy is approved
by shareholders. In the event that this resolution is not passed at the
Annual General Meeting, the version of the Remuneration Policy
approved by shareholders in 2017 will continue in force.
Directors’ authority to allot securities (Resolution 9)
The Company may only allot ordinary shares or grant rights over
ordinary shares if authorised to do so by shareholders. This resolution
seeks to grant authority to the Directors to allot unissued share capital
of the Company and grant rights and will expire at the conclusion of the
next Annual General Meeting of the Company in 2019 or, if earlier, on
26 April 2019 (the date which is 15 months after the date of passing of
the resolution). There is no present intention of exercising this authority,
which would give Directors authority to allot relevant securities up to
an aggregate nominal value of £349,174 approximately 33 per cent of
the Company’s issued ordinary share capital as at 23 November 2017.
Disapplication of pre-emption rights (Resolution 10)
Under Section 561 of the Act, if the Directors wish to allot any
of the unissued shares or grant rights over shares or sell treasury
shares for cash (other than pursuant to an employee share scheme)
they must in the first instance offer them to existing shareholders in
proportion to their holdings. There may be occasions, however, when
the Directors will need the flexibility to finance business opportunities
by the issue of ordinary shares without a pre-emptive offer to existing
shareholders. This cannot be done under the Act unless the
shareholders have first waived their pre-emption rights.
Resolution 10 asks the shareholders to do this and, apart from rights
issues or any other pre-emptive offer concerning equity securities, the
authority will be limited to the issue of shares for cash up to a maximum
aggregate nominal value of £52,905 (which includes the sale on a non
pre-emptive basis of any shares held in treasury), which is equivalent
to approximately 5 per cent of the Company’s issued ordinary share
capital as at 23 November 2017. Shareholders will note that this
resolution also relates to treasury shares and will be proposed as
a Special Resolution.
This resolution seeks a disapplication of the pre-emption rights on a
rights issue so as to allow the Directors to make exclusions or such
other arrangements as may be appropriate to resolve legal or practical
problems which, for example, might arise with overseas shareholders.
If given, the authority will expire at the conclusion of the next Annual
General Meeting of the Company in 2019 or, if earlier, 26 April 2019
(the date which is 15 months after the date of passing of the resolution).
The Directors intend to adhere to the provisions in the Pre-emption
Group’s Statement of Principles and to not allot shares for cash on
a non pre-emptive basis pursuant to the authority in Resolution 10 (i)
in excess of an amount equal to 5% of the total issued ordinary share
capital of the Company; or (ii) in excess of an amount equal to 7.5% of
the total issued ordinary share capital of the Company within a rolling
three-year period, without prior consultation with shareholders.
101
Other Information PARENT COMPANY INFORMATION AND ADVISORS
Directors
Tim Jones (Chairman and Non-executive Director)
Daemmon Reeve (Chief Executive Officer)
Richard Hope (Chief Financial Officer)
Anita Haines (Non-executive Director)
Jeff Iliffe (Non-executive Director)
Richard Illek (Non-executive Director)
David Johnston (Senior Independent Non-executive Director)
Secretary
Anita Steer
Registered Office
Northern Way, Bury St. Edmunds, Suffolk, IP32 6NL.
Tel: + 44 (0) 1284 702500. Email: cosec@treatt.com.
Website: www.treatt.com
Registered Number
01568937
Audit Committee
Remuneration Committee
Nomination Committee
Jeff Iliffe (Chairman)
David Johnston
Tim Jones
David Johnston (Chairman)
Jeff Iliffe
Richard Illek
Tim Jones
Tim Jones (Chairman)
Daemmon Reeve
Anita Haines
Jeff Iliffe
Richard Illek
David Johnston
Investec Investment Banking, 2 Gresham Street, London, EC2V 7QP.
RSM UK Audit LLP, Abbotsgate House, Hollow Road, Bury St. Edmunds, Suffolk, IP32 7FA.
KPMG LLP, Botanic House, 98-100 Hills Road, Cambridge, CB2 1JZ.
Crowe Howarth LLP, 124 South Florida Avenue, Suite 201, Lakeland, Florida 33801-4629.
Greene and Greene, 80 Guildhall Street, Bury St. Edmunds, Suffolk, IP33 1QB.
HSBC Bank plc, 140 Leadenhall Street, London, EC3V 4PS.
Lloyds Banking Group, Black Horse House, Castle Park, Cambridge, CB3 0AR.
Bank of America, 5th Floor, 101 E. Kennedy Boulevard, Tampa, FL 33602.
Link Asset Services (formally Capita Asset Services, The Registry, 34 Beckenham Road, Beckenham,
Kent, BR3 4TU.
Treatt plc's share price is available on www.ft.com. Annual and interim reports are available on the Group’s
website (www.treatt.com).
Brokers
Auditors
Tax Advisors
Solicitors
Bankers
Registrars
Share Price
102
Treatt plc – Annual Report & Financial Statements 2017
FINANCIAL CALENDAR
2016/17
Financial year ended
Results for year announced
30 September 2017
28 November 2017
Annual Report and Financial Statements published
14 December 2017
Annual General Meeting
Final dividend for 2017 goes ‘ex-dividend’
Record date for 2017 final dividend
Last day for dividend reinvestment plan election
Final dividend for 2017 paid
26 January 2018
8 February 2018
9 February 2018
1 March 2018
22 March 2018
2017/18
Interim results to 31 March 2018 announced
Interim dividend for 2018 goes ‘ex-dividend’
Record date for 2018 interim dividend
Last day for dividend reinvestment plan election
Interim dividend for 2018 paid
Financial year ended
8 May 2018*
5 July 2018*
6 July 2018*
26 July 2018*
16 August 2018*
30 September 2018
Results for year to 30 September 2018 announced
27 November 2018*
Final dividend for 2018 paid
21 March 2019*
*These dates are provisional and may be subject to change
103
Other Information NOTES
104
Treatt plc – Annual Report & Financial Statements 2017 Produced by corporateprm, Edinburgh and London. www.corporateprm.co.uk
+44 (0)1284 702500 enquiries@treatt.com www.treatt.com
Northern Way, Bury St. Edmunds, Suffolk, IP32 6NL, United Kingdom