Treatt has transformed itself from a trading house to a provider of value-added, technical flavour and fragrance solutions. It seeks to build close, mutually beneficial relationships with its customers across as many touch points as possible.
Treatt’s strategy has evolved but its underlying aim is to create outstanding sustainable ingredients solutions, designed around its customers’ needs. In turn, this should result in the delivery of long-term and consistent growth in profitability. Treatt’s strategic priorities are to:
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drive innovation, particularly in its core categories, but also investing in new ones;
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increase its focus on technical, value-added (and hence higher-margin) solutions; and
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invest for future growth with the physical relocation in the UK, having completed the US expansion plan on time and on budget last year.
People and culture are viewed as important assets and the key to enabling and unlocking the priorities set out above, thus Treatt consistently invests in its culture by giving its staff a wide range of training opportunities and by actively engaging with its communities in the UK and US. It works to reduce its environmental impact and this helps to reduce cost and drive efficiencies.
Treatt has strong environmental, social and corporate governance credentials and has invested significantly in this space. It introduced free share awards for its staff in 2014 to improve employee ownership and continuously strives to reduce its environmental impact. Its use of citrus is highly sustainable, as it is largely a by-product of the juice industry. During 2019 Treatt increased the proportion of its volumes transported by logistics groups that were part of the Sustainable Shipping Initiative.
Treatt has invested heavily in how it uses market insights across its business to become more agile. Its marketing department has increased its scope in data gathering and analysis and the company has improved how the information is shared around the business. The commercial functions are now closer together and work in partnership with category managers to unlock more effective and targeted marketing.
Treatt has identified the categories of citrus, tea, health and wellness, and fruit and vegetables as key drivers of growth, given their size and Treatt’s expertise. This is to better serve its customers and to concentrate on the higher-growth and higher-margin opportunities within the business. During H120, the fastest-growing category was tea, which was up 47.5% versus H119, and over the next few years it should benefit from the increased manufacturing capacity at Treatt’s US facility. We set the seven main categories out in turn below. Treatt has formed dedicated, cross-functional teams to further develop these. Coffee has been added as a separate category this year, as Treatt has entered fast-growing beverage category, although it is not expected to become material for at least two to three years.
Treatt has a long history of expertise in citrus and it has been a core part of its business for many decades. The taste for citrus flavours remains a winner in the beverage industry and is often used to encourage consumers to try new or exotic flavours, as they can be paired with the more traditional orange, lemon or lime flavours. The natural citrus flavour can be touted by brands, together with its provenance. Citrus also has the advantage of working well in most beverage categories, from juices and flavoured waters to sparkling drinks and teas. Treatt maintains long-term relationships with citrus growers and processors across more than 10 countries to provide a stable and sustainable supply and to smooth out some of the pricing volatility.
Tea is the second most widely consumed beverage worldwide, after water. All teas come from the same plant; it is the processing method that gives each tea its distinctive properties. It is popular in different forms depending on geography, but RTD tea in particular has increased in popularity globally, with the market growing by 40% between 2011 and 2016, far outpacing the growth of the carbonated soft drinks market. Current consumer interest in sugar reduction gives further opportunity for this market to grow, with companies providing healthier variants. Natural energy drinks, kombucha and cold brew teas are all outpacing market growth, driven by the trend of healthier consumption. Tea has a broad appeal and embraces the current consumer trends of low-sugar, natural products that have additional health benefits. Tea can be niche, premium or every day, giving Treatt a wide spectrum in which to operate. Treatt’s expertise centres on authenticity of flavour and it can provide solutions from a black tea flavour for an RTD tea beverage to a delicate top note in a blended beverage.
Reducing sugar levels and calories in both food and drink is a global trend that is being driven by increasing consumer awareness of the detrimental effects of sugar on health. The food and drink industry as a whole is reformulating its product ranges as sugar reduction concerns become more prevalent and sugar taxes and levies are introduced. The key concern, however, is not to have a detrimental effect on taste. Sugar reduction is also technically complicated, which is where Treatt’s expertise comes in. Sugar provides flavour, sweetness and mouth feel. Treatt operates principally in the niche of flavour, which is difficult to replicate. It has a growing reputation here and is recognised for bringing the important technical sugar authenticity to the flavour profile of a beverage. Treatt’s 100% natural, calorie-free sugar reduction range can deliver a sugar flavour that allows customers to bring an authentic sucrose or fructose profile to natural and artificial high-intensity sweeteners.
Providing natural fruit and vegetable flavours to food and beverages or fragrance to home and personal care items is another capability that taps into the current consumer trend for more natural products with clean labels. Treatt’s fruit and vegetable flavour range is comprised of highly concentrated aqueous distillates. They are 100% natural and are distilled for shorter time periods at lower temperatures to maximise flavour. Their concentration results in them being extremely effective even at lower dosages. Watermelon, mango, cucumber and berry flavours have been particularly successful recently as they provide a fresh and authentic flavour.
Herbs, spices and florals
Premium beverages come in a range of flavours and floral, herbed and spiced flavours have gained in popularity as consumers experiment with new and exotic flavours, particularly at the premium end of the spectrum. Treatt sources, manufactures and supplies over 500 herb, spice and floral products. They are 100% natural ingredients, made FTNF. Treatt works closely with its customers to match specific requirements. Products include essential oils such as peppermint and lavender.
Aroma and high-impact chemicals
High-impact aroma chemicals (HICs) are ideal for creating powerful flavours and fragrances and often offer a low-cost solution at low dosage. Treatt has an extensive range of speciality HICs and a long history in the space. Treatt’s ability to deliver a consistent and quality service in this space stands it apart from other players.
Coffee is one of the quickest-growing beverage categories in the world and, like tea, it is the processing method (blending and roasting) that gives each coffee its distinctive properties. Coffee has grown consistently as a beverage over the last decade, with an ever-increasing choice of variants and formats. In its H1 results announcement, Treatt confirmed that it continues to build up its coffee platform, which it expects to make a meaningful contribution to profits in two to three years’ time. Its experts can craft blended solutions that take account of taste profile, naming, regional requirements and desired caffeine levels, thus enabling Treatt to deliver stand-out products in this diverse yet crowded market.
Treatt primarily runs its business by geographical segment, as reflected in its segmental reporting, though over the years it has increasingly strived to bring its people together and share knowledge globally. As part of its focus on culture and employee engagement, employees in each of the product categories are encouraged to share information and best practices globally. The US is Treatt’s largest and most dynamic market: it lends itself perfectly to Treatt’s clean-label proposition, as consumers increasingly demand healthier and more natural products. The Asian market has witnessed extremely fast growth over the past few years. As discussed below, the well-known trends of increasing affluence and urbanisation have driven growth in the underlying ingredients space. In addition, Treatt has increased its focus on Asia over the past few years, thus being able to seize on a greater number of opportunities. The business remains small in the context of Treatt, however. North America and Europe (including the UK) have exhibited slower growth, but still represent 69% of overall sales.
These are diverse and evolving markets, which present a number of opportunities as several trends continue to gain traction. Reduction in sugar levels continues to be the most significant trend, with government initiatives, levies and taxes applied across multiple countries and consumers shifting their preferences towards ‘better-for-you’ products. New brands are establishing their credentials as natural, sugar free and ethical/sustainable and more established brands continue to reformulate to compete more effectively, stay relevant and avoid sugar levies and taxes. Treatt’s increasingly large portfolio of 100% natural sugar reduction solutions allows its customers to reduce sugar levels while maintaining a clean label, and not having a dramatic impact on taste.
This is a mature and established market for Treatt, but there is an increased focus on innovation and new product development. Over the last decade, the US market has witnessed a marked consumer desire for healthier, more natural and more sustainable products across the food, beverage and personal care space. Again, Treatt’s expertise in sugar reduction is creating opportunities. Over the last few years, the US market has experienced a surge in demand for iced tea and RTD blended tea, which plays well into Treatt’s expertise in tea (detailed above). These two trends are coming together as increasingly health-focused consumers are shifting their consumption towards tea thanks to its healthier connotations. In addition, the RTD coffee category has witnessed sharp growth, which plays into Treatt’s emerging expertise in the area.
China is increasingly a focus as the rising affluence of the middle classes and urbanisation trends drive growth in the Asian beverages industry. Tastes are increasingly influenced by western culture and hence health and wellbeing are coming to the fore here too. Treatt is continuing to grow its footprint across Asia, as its core categories are in the sweet spot of consumer and customer demand.
The relocation and expansion in the UK and US, respectively, provide the platform for the new strategy to develop and are key enablers of growth. The US expansion was completed on time and on budget and became fully operational in the summer of 2019. The new capacity has begun to come on stream this year, in time for the peak beverage season in the Northern hemisphere. The expansion took into account future needs and there is c 40,000 sq ft additional space to further increase capacity in the longer term, if necessary (as a reminder, the expansion just completed was 60,000 sq ft).
Treatt has outgrown its current UK manufacturing facilities in Bury St Edmunds and it fully and carefully explored its options. In May 2015 the company announced its intention to fully relocate the UK business to another site near the existing one, and in November 2017 it announced an equity fund-raising through a placing to help meet the costs of the expansion project (the placing was for 10% of share capital, with shares placed at 410p and raising £21.6m before expenses, or £20.8m on a net basis).
Once completed, the new facility will be purpose-built, with upgraded machinery and the latest technology. The project is obviously complex, but the overall cash outflow over two to three years is forecast to be £35m, including spend of £6–8m on some capital projects that have been held back in view of the relocation (in effect delayed capex as management has sensibly reduced capital expenditure to the minimum possible over the past few years, in view of the imminent relocation). Construction began during 2019, with a move-in date initially anticipated for summer 2020 and later shifted to early 2021. There will be a three- to six-month delay due to the COVID-19 pandemic, which has slowed down (but not stopped) construction. We forecast expansionary capex costs of £18m in FY20 and £10m in FY21 bringing the total to £44m over the lifetime of the project, with a further £5m of disposal proceeds in FY21–22 as the old site is divested. This brings our forecast total project cost to £39m, above the £36m guidance. Management expects ROI to be 10–15% three years after completion. (We note that our overall capex also includes maintenance capex, which is in addition to the project capex.)
The new facility has been carefully planned. The buildings have been designed with the future in mind and to accommodate medium-term growth, combined with the option of modular expansion in the longer term.
Treatt does not have any explicit financial targets for the medium term, other than to deliver consistent and sustainable growth in profits and increasing margins. In the shorter term, gross margins can fluctuate due to a number of factors, particularly cyclical changes in raw material costs.
Over the medium to long term, however, the evolution of the portfolio towards higher value-added technical ingredient solutions suggests gross margins should continue to rise. We forecast gross margin improvement of 40bp in FY20 as there is some benefit from the reduction in citrus prices, and then 20bp improvement in FY21 and FY22.
Treatt’s commitment to contain fixed costs remains clear and management views an EBIT margin in the mid-teens as achievable in the medium term, versus our forecast of 12.4% for FY20 and our unchanged DCF terminal EBIT margin assumption of 16.5%.
In Exhibit 3 we illustrate Treatt’s EBITDA and operating margin over the decade FY14–FY23e, where we can see a broadly steady improvement despite the economic and raw materials cycles that occurred over the period.
Exhibit 3: EBITDA and operating margin progression (FY14 to FY23e)
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Source: Edison Investment Research, Treatt data
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