Good morning, everyone, and thanks for joining us today. For those that don't know me, I'm Daemmon Reeve. I'm the CEO at Treatt, and I'm joined today by, as usual, Richard Hope, our CFO. You have all seen the numbers by now, and I'd like to pass my thanks to all of my colleagues at Treatt for their incredibly hard work in delivering this set of numbers for our H1 of the year. Clearly, what you've seen from the numbers is our very strong revenue growth in the period. The important part for me to explain and you understand is the reversion to a very much an H2 weighted year for the business, which is typical.
Last year was a much more atypical H1 , where we had strong growth in retail channels, which was disturbed due to COVID impacted factors. This year, we're back to a much more normal seasonal pattern of demand in the business, which is H2 weighted for good reason. That reason is the build by the beverage companies, typically around the spring for ultimate consumption of those beverages in the Northern Hemisphere, summer. Last year, we did see some rather atypical retail, behavior and launches, in the H1 , which gave an unusual high margin mix in the H1 of last year compared with the period that we've just reported on. H2 is typically a stronger half for us, both in revenue and margin.
During lockdown and COVID impacted times, demand channels were disturbed, but we're back to the more normal seasonal Treatt pattern now with, which we've experienced across the last decade. This is the output of what I have just said, with 9% growth in revenue leading us to upgrade revenue guidance for the year, which Richard will come on to talk more about. We do expect H2 margins to be materially higher. The, as the product mix swings round towards the higher margin, healthier living categories, which we typically see in the H2 of the year.
Clearly, as I said, the margin mix and the product mix did impact the numbers in the H1 , but we are confident in the outlook for the H2 and the increase in dividend that you see there. I think attests to our confidence in the H2 outlook for the business. Five of our six categories performed very well, with only tea, which I have flagged, seeing any weakness in the period. All of our other categories delivered between 7.7% and 22.5% growth. As you can see, the citrus category performed really well. As we transition our citrus category towards a more added value mix of products, this category continues to be an important one for the business. It's also a category which we expect to deliver an accelerated performance in the H2 .
The synthetic aroma category benefited from increased partnering with key customers, and also importantly, the provision of molecules that go into flavors that flavor alternative proteins. Meat-free alternatives, which has seen some very solid growth in the last year or two. We expect this rate of growth to continue to support the H2 numbers. Herbs, spices, and florals had a very good H1 , and that was benefited from some geographical reopening, Japan being an important example of that. Also within that category, there's some very important ingredients also for beverage. Fruit and vegetables has seen a positive growth for more than a decade now, and that growth continues. A lot of this category feeds into growth opportunities in premium beverage. We expect this category to accelerate during the H2 as the traditional beverage seasonality swings into the business.
The same story is true of health and wellness, which again had a very impressive set of results in the H1 . We expect that category to continue to deliver an accelerated performance across the H2 , again, as beverage demand picks up due to the seasonality. Which leaves only tea, which benefited, as I mentioned earlier, from very strong retail launches in the corresponding period last year with the mix is now transitioning back to more on-trade driven demand as we move out of COVID impacted channels.
Good morning, everyone, and thank you for joining us this morning on what is my last results announcement after an incredible 19 years at Treatt. I'm proud to be leaving the business in very good health, and it is very well positioned for growth for many years to come. This slide shows our revenue performance over the last decade, and it is notable that the first six months of this financial year delivered a record H1 revenue growth and demonstrates the underlying strength of the overall growth in our business today.
This graph particularly shows the progressive revenue growth over the last 10 years, and with H2 seasonality in the business driven by spring and summer beverage consumption in the Northern Hemisphere, as Daemmon mentioned, and order books up by more than 25%, we now expect our full year revenue to be up by more than 15% on the prior year. I now turn to our profit performance over the last decade. As the dotted line shows, we remain on track to deliver consensus profit before tax and exceptionals for the full financial year. This would be the 10th consecutive year of growth in profits, demonstrating how we have transitioned the business from a traded to very much an added value business.
The H1 revenue growth, which Daemmon was talking about, that was driven by our three largest categories of citrus, herbs, spices, and florals and synthetic aroma, reflected the fact that the growth in H1 came from our categories that have slightly lower margins than the faster-growing, healthier living categories, which we expect to dominate H2. Therefore, the product mix impacted margins, and that is why the profit proportions are as you see on the screen there. As you can see, over the last 10 years, we've maintained a consistent progressive dividend policy, and our policy for the interim dividend is to pay a third of the previous year's dividend. I'm pleased to confirm that we've maintained that policy with a 25% increase in the interim dividend, which really does demonstrate our confidence in the outlook for the rest of the financial year and beyond.
Looking at the income statement in more detail, we've covered the revenue growth in the period, which was a very encouraging 9% against a strong comparator. As expected, gross margins reflected a more traditional product mix, but it was still improved from those in H1 2020. In terms of administration costs, given the growth over the last 12 months, these grew by a relatively modest 9%. This was very much driven by growth in employee numbers, which were up 15% on 12 months earlier, as we invest strongly in skills across the group. As I will come onto shortly, global inflationary pressures are of less significance to Treatt. Finally, we made a GBP 3.3 million gain on the disposal of our old U.K. site, and have incurred exceptional costs in relation to the U.K. relocation, as shown on the slide.
Now looking at the cash flow statement. We had an operating cash flow inflow of GBP 7.7 million for the period. Whilst working capital increased by GBP 15 million, this was very much driven by the positive factors of inventory build to support our strong order book and receivables, which were reflective of a strong end to the half year. Following the receipt of GBP 5.6 million for the sale of our old site, closing net debt of GBP 19.8 million represents about 0.85x EBITDA. We would expect cash flow, however, to be much stronger in the H2 and to end the year with net debt much nearer to GBP 10 million.
To summarize the guidance we are giving today, we now expect full year revenue to be up by at least 15% on the prior year, and we confirm that we are maintaining our guidance for profit before tax and exceptional items to be in line with market consensus of GBP 21.7 million for the full financial year. Looking more widely at factors affecting the Treatt business, much more important than general inflation is the wide range of fluctuations in raw material prices, which we experience every year. Here, Treatt has many decades of experience in managing this risk for our customers. Equally, in terms of supply chain, we are very experienced in managing global logistics, and it is a clear part of our business model to hold high levels of inventory in order to maintain exceptional customer service.
Finally, in terms of general inflation, this only impacts approximately 5% of cost of goods sold, and we are in fact a relatively low energy user, as our manufacturing processes use lower temperature extraction in order to maintain the characteristics of the input raw materials.
I want to talk to you about our future and our optimism about revenue growth within that future. There is much more to come from Treatt, not least all the upside of our new Skyliner Way facility in Bury St Edmunds. Customer reaction to our new facility has been, frankly, spectacular. This week, we are pleased to say that we begin manufacturing from the new site, which is an important landmark in our history. An important part of our business model is the co-creation work we do where our scientists work on the bench with our customer scientists, and our new facility brings a much more enhanced environment to do just that. Our addressable market is growing.
From opportunities in developing low and no sugar beverages to ready-to-drink cold brew coffee and the premiumizing world of beverage, authenticity is really important, and our extracts enable the true taste of the input material to be experienced in the beverage. The growth we have seen in the provision of molecules for alternative proteins is expected to continue. As trends around health and planet positive food drive consumer behavior, we feel that we've got the business in a very positive state and a very relevant position for the market that we serve. We certainly look forward to explaining more to investors at our capital markets day on the twenty-seventh of May, more about the long-term upside that we see coming from the business and our new headquarters in Bury St Edmunds. Our business model is usefully defensive in challenging economic times.
Premium branded beverages are seen as affordable luxuries, and they are experiencing growing demand. COVID impacted channels and the important on trade are returning to pre-pandemic levels of demand. This is important for our business as we feel volume demand returning. Health trends are certainly driving further growth and opportunities. After experiencing an important period of growth, we feel there is much more to come from Treatt. What we always say about ESG is that we have been running the business along positive ESG principles before ESG became an acronym in the investment community. We have very good momentum on sustainability with a new ESG framework being finalized with clear vision, objectives, and KPIs being set out. There's some very exciting work going on in our supply chain, for example, and we'll talk more about this at our full year results in six months' time.
In terms of outlook, we are already seeing the expected customer behavior as we begin H2 with increased demand for our healthier living categories and increased demand in all the other categories continuing. We're very pleased to say that manufacturing is underway at our new U.K. facility. This is an important step for the business, and our coffee category is also progressing well. We're confident about the long-term opportunity that coffee will bring an incremental advantage to our business. We will enjoy all the benefits to come from our new U.K. headquarters, which is not just about staff and customer attraction, but a plethora of efficiency gains, productivity benefits, and so forth. There is certainly much more to come from that, and the team are busily working at realizing those gains over the next few months.
We're confident in the outlook and our long-term prospects for the business. Lastly, but not least, I would like to pass my thanks to Richard Hope, our CFO, who retires at the end of June. Richard has been always a sound advisor for me as CEO. I've very much enjoyed working with Richard on road shows and within the business for these last 10 years of my term as CEO, and Richard's near 10 years before I became CEO. His contribution for the business has been incredible, and I thank him sincerely for the work that he's done for Treatt over the years. Thank you.
Thank you. We will now take questions. We've got a question from Charles Hall at Peel Hunt.
Morning, Daemmon. Morning, Richard. Can I just ask about the regional mix and the trends you're seeing in China and the States? China, obviously, a lot of difficulties operating at the moment with lockdown restrictions and just get a feel for how that market is moving. The U.S. obviously saw a decline in the H1 . Is that just down to seasonality, or is it product launches, and what gives the confidence behind the H2 outlook?
Thanks for the question. I think certainly China has been impacted by various lockdowns in key cities such as Shanghai. We remain very confident about the upside potential of China for the Treatt business. In fact, we're very close to a number of quite significant wins and new product launches in that key market. Certainly, in the longer term, we expect China to emerge as an important second geography for us behind North America. It will be no surprise at all to me if in five years' time, China is not somewhere between 12% and 15% of revenue for the business.
We do have some near-term opportunities that are beginning to be unlocked, and we certainly look forward to restrictions in key cities being unlocked to enable those to move forward. In the U.S., it was an interesting period for the business in the U.S. I think it's the comparator really from last year that's distorted the figures for this year, because actually, in absolute terms, the figures for this year in North America were good. Last year, we had some very large new product launches that didn't really repeat in the H2 , but the pipeline fills from some of those launches were quite significant. Demand is much more evenly spread now. We are confident about the H2 outlook, particularly for the North American market.
We're already seeing demand come through strongly. We actually finished the H1 very strongly. March was an impressive month for the business, and that demand has continued through April and now into May. It's the normal sort of seasonality swing of beverage demand in the spring for ultimate consumption in the summer. I mean, the order book gives us a lot of confidence about not just the H2 , but the longer term upside for the business. I think, you know, the teams are certainly performing very well in the North American market, where there's still a lot of opportunities in our pipeline to realize.
Daemmon, one more question. The Wolf and his team have now been in place for a few months. Do you want to just give a feel for the changes you've been making in R&D and any feel for where you can go with a stronger team?
Yeah, yes, thanks, Charles. Yes. Wolf has been in place now for four or five months. He's currently this week again in the U.S. with the team there. He's making some very important, I would say, changes around the goal-setting agenda, understanding our capabilities as a business. You know, Wolf is still very much in discovery phase. In terms of getting the global team together to start thinking about metrics and opportunities where we can serve our customers better, improving our offering and accelerating our offering in cold brew coffee.
I think Wolf and his team are bringing some important thinking and work in that respect, and I certainly look forward to seeing what we can realize over the next months and years.
That's great. Thanks very much.
We'll go to Nicola Mallard from Investec.
Thank you. Morning. A couple of questions from me. Daemmon, you mentioned the customer reaction to the new site had been, I think spectacular was the word. I just wondered if there's any examples of, you know, wins that you can share with us that you feel have come out of that sort of new site. Secondly, on the order book, just wondering whether you could give us a guide on how big the order book is in [pound] millions, you know, what's the length of the order book, how far out does it run, and also perhaps what amount of that falls in the H2 , given your, you know, sort of confident outlook.
And then finally on your volume or your revenue guidance of at least 15%, could you give us an idea of what is price and volume perhaps behind that? Because I know citrus prices are still high, aren't they? Thank you.
Thanks, Nicola. Yeah, I mean, I am delighted first of all with customer reaction to the new site. More importantly, my reaction, it's the reaction of our sales team at Treatt, who have experienced obviously this firsthand from customers. I mean, there are already some new relationships that we're building. I think what the new site has done has really sort of cemented our sort of strategic transition over the last decade. I mean, 10 years ago, we were much more of a trading company with some manufacturing and some science, and progressively we have, of course, flipped that business model around to become a science-led manufacturer of natural extracts for the business.
What our old premises did not do was really support that sort of look and feel of the business that we've become. The new premises very much reflects the business that we've become. We've put science literally right at the front end of the new building. On arrival, visitors see clever white-coated chemists doing important work in laboratories, and that really does reflect the sort of business that we've become. The whole look and feel of the business, not just from the scientific side, but also now from the manufacturing side, and also the culture that we have within the business, the feel of the business. I mean, customers typically have lunch amongst our colleagues in our hub, and there's such a positive vibe around the business. Customers enjoy the experience of visiting Treatt.
Importantly, we've got a sales team who are now very proud of our facility that we work from and are very keen to bring customers in. That's an important part of our development, which gives us a lot of confidence, not just about the next few months, but also the longer term.
Nicola, just on the order book. The gross order book is approximately GBP 60 million. In terms of length, the vast majority of customers contract for up to 12 months. We have a small number of large customers who have one or two contracts that are longer than that. We make our own internal estimates as to when we think the customers are going to call off. Yes, there is no direct linear relationship between growth in the order book and revenue. Obviously we then map out the order book to get to our internal forecast, which then gives us the confidence to raise the revenue guidance that you've got. In terms of price and volume, again, you're absolutely right to call out citrus. Orange oil prices are at an all-time high.
This is not anything to do with global inflation. This is pure supply and demand. We've had a number of small crops recently, which has caused the price to go up. Lemon oil on the other hand is down. There is a mix, and the more added value the product becomes, the less linked to the underlying raw material price it is. Approximately, I would say GBP 3 million of our growth in H2 is likely to have been price rather than volume.
That's great. Thank you very much.
We'll go to Sara Welford from Edison Group.
Good morning. Firstly, can I ask, can you talk a little bit more about coffee in terms of what you're seeing? Will your products allow entirely new innovation, or do you think that they will allow sort of advanced or better applications, but I guess remaining within sort of the existing capabilities of what is in the market? Secondly, just going back to China, can I ask, are you working mainly with the multinationals here at the moment, or do you tend to work more with the local businesses or is it a mix of both? Thank you.
Thanks, Sara. I think in terms of coffee, we are very excited about the prospects for our coffee platform. The ready-to-drink cold brew coffee market is growing and is going to keep growing at double digits. There's a lot of brands in the marketplace, and a lot of those brands, some of the brand owners are talking to us about improvements they'd like to make in terms of the quality of coffee. The reason that we got into coffee in the first place is that coffee is very technically challenging to produce high quality extracts. There's a very good reason why baristas freshly grind
Coffee beans in a good quality coffee shop, and that's because the flavor molecules start to degrade as soon as you start meddling with the beans. Industrial coffee extracts work in very much the same way. In fact, our team feel a lot of the cold brew coffee extracts in the market actually contain a lot of instant coffee. The premiumization of that category offers some very good potential. We are developing and have some technology already that we feel that can bring some high quality value into that space. At our capital markets day, one of our coffee customers will be on site that day. We'll be talking more about our abilities in coffee, I'm sure, and indeed the market potential.
We see coffee as probably the biggest wild card opportunity for Treatt for the long term that we've had for several years in terms of being an incremental category for the business. You know, coffee could be quite an important category for us over the medium to long term. We're building now, and it's very much in line with the rest of our portfolio where we bring great relevance to the market, where we can overcome some technical challenges to bring authenticity into beverage. Coffee is certainly something that's occupying a lot of our time and thinking and a lot of our R&D efforts.
In terms of China, the opportunity that we see in China is really, it's largely centered around national beverage companies, some of which are, of course, of quite significant scale. I think there's a growing interest within that important geography around health awareness around calories. I think there's demand for something new and refreshing, authentic, in terms of beverage. We're certainly quite excited about the opportunities that that market presents itself, and it seems, when I look at the opportunity pipeline of all the projects that we have in-house, even with the COVID-impacted situation in China certainly weighs in, you know, with a heavy load in terms of that opportunity pipeline.
We are certainly encouraged by the prospects for our business in China.
Okay, thank you.
We'll now go to Charles Hall from Peel Hunt.
Daemmon, can you just give an update on the hard seltzer cocktail market? Obviously, it was very hot last year, lot of excitement around it, then it cooled off materially. How are you seeing that market, in terms of both the main brands, which have obviously now been experiencing much greater competition, and your ability to have multiple customers in that market.
I think the hard seltzer market, and it sort of wider family, the canned cocktail market, presents a lot of opportunity for our business. I mean, for us, it's not just about hard seltzers, you know, it is very much about canned cocktails. For example, a gin and tonic with a twist of lemon or lime, we could be the lemon or lime in that gin and tonic. It's very interesting, even in the U.K. market, which is an important market for us, to see what consumers are now drinking on trains on a Friday and Saturday evening. They're typically drinking canned cocktails and it's unflavored beer that seems to be left on the shelf, certainly in my experience.
It's also very interesting what people are taking to parties. You know, it tends to be now packs of sort of canned cocktails rather than bottles of wine and different products. I think this trend for us is a good example of how our addressable market continues to grow. I mean, the hard seltzer market itself, and I actually took our incoming CFO, Ryan, to a supermarket or two in Florida a few weekends ago, and we were discussing the sort of hard seltzer market and the canned cocktail market. The fridge space available for this category in sort of some of the leading supermarkets is still very significant. We're still very optimistic about the upside potential of this category.
As I think consumers are moving towards an increasing awareness around calories, I think this could be an important factor. I mean, 100 calories or less seems to be the sweet spot in terms of younger consumers wanting an alcoholic drink, but with lower calories. I think there's a number of factors here that speak very strongly to Treatt strength. Certainly, we can play in that market and appear in that market where we've got some opportunity in canned cocktails, which we don't have in unflavored beer. The addressable market continues to excite us and a number of our customers, and it's becoming much more than just a North American thing. We're seeing many more opportunities emerge within the European market, for example.
We'll go to Cathal Kenny from Davy.
Good morning, and thanks for taking my questions. A couple of questions from my side. Firstly, on the order book, do you delineate between the indirect and direct channel? Second question relates to admin costs for Richard, just in terms of what should we expect in terms of the second half. I know you've onboarded quite a number of new people into the organization. Another one for Richard, just on the inventory position, how we should think of that through the remainder of this year. Finally, just on the citrus part of the business in terms of margin into the H2 , should we expect margins there to move upward as you push more value add in that category?
In terms of the indirect and direct, our order book, obviously within it, we know who the customers are, so therefore we know what is going direct and indirectly. A lot of the larger longer term contracts tend to come from the brand owners with one or two notable exceptions. We don't publicly give the split between indirect and direct. Typically it will be slightly biased or skewed towards the direct. In terms of administrative costs for the rest of this financial year, we would expect the full year admin costs to continue to show sort of low double-digit growth on the prior year.
We do have the depreciation costs from the beginning of manufacturing at our new U.K. facility coming into admin costs in H2 and you know continuing full year effect of headcount increases. Looking further ahead on administration costs, wage inflation will have some impact on FY 2023 and presumably beyond. Our wage cycle begins first October in line with our financial year, so that is yet to impact the business. However, we do have significant efficiencies that we're building into the business as well over the next couple of years and so we've obviously built that into our own financial models looking further ahead.
H2 margins, I couldn't quite catch the full question, Cathal, but basically we do expect the healthier living categories to have a significant positive uplift to margins. As the healthier living categories have grown over the last few years, that kind of seasonality has got even bigger. We do expect that to have an impact in H2.
Great. Just the inventory position within working capital, Richard, for H2?
The inventory position, the assumption to make on inventory is that we would expect the receivables element of the working capital outflow in H1 to unwind. In these times, you know, with supply chain difficulties, orange oil prices at record highs, et cetera, I would expect inventory levels to remain at similar levels to where they are at the half year.
That's very clear. Thank you, and congrats on your retirement.
Thank you, Cathal.
That's the end of questions. Daemmon, do you have any closing remarks?
Only to say thank you everybody for your time and interest in Treatt. Certainly, if you've got any further questions you'd like to ask us, we'd be very happy to take those. Sincere thanks for your interest in Treatt today, and look forward to speaking to you soon. Thank you.
Thank you.