- Weaker pound and soft US demand weigh on earnings
- Challenges are ‘predominantly short term’
- Order book up 25% year-on-year
Shares in Treatt (TET) tumbled more than 30% to 551p after the natural extracts-to-ingredients supplier warned profits for the year to September 2022 will fall well short of previous forecasts.
Although the company still expects to report strong sales growth for the year and boasts an ‘excellent’ order book, Treatt now expects pre-tax profits before exceptional items to be between £15 million and £15.3 million.
That is below the £21.7 million analysts were previously looking for as well as the £20.9 million achieved in the 2021 financial year.
WARNING WAS ON THE CARDS
Treatt had essentially softened investors up for a warning in May, when it referenced the anticipated return to its traditional second half profit weighting.
A second half weighted alert is often the precursor to a cut to full year expectations and Treatt has duly served up a profit warning.
It blamed lower than expected second half demand in its higher margin tea category amid falling consumer confidence in the US, as well as the ‘significant’ margin impact from the rapid devaluation of the pound against the US dollar, for the earnings shortfall.
The company is also having to absorb ‘significant’ input cost inflation which is has not yet been able to pass on in full on some longer term contracts, while its China business has been affected by Covid-19 restrictions resulting in the loss of some higher margin revenue in the year.
SHORT TERM CHALLENGES
Treatt argues these challenges to profitability are ‘predominantly short term’ and is encouraged by other trends seen through the second half.
These include the ongoing strength of the order book, up roughly 25% year-on-year, as well as tasty growth in all other product categories besides tea.
REEVE REMAINS CONFIDENT
Whilst ‘clearly disappointed’ by the short term profits impact, CEO Daemmon Reeve said ‘we remain encouraged by the underlying trading performance of the business and are confident in the long term growth drivers for Treatt’.
Reeve highlighted ‘significant opportunities across our categories and geographies’ and said that notwithstanding the short term impacts in tea, he sees ‘strong momentum in all of our categories given the alignment with prevailing consumer trends. For example, there continues to be sustained growth in demand for our natural and authentic extracts and bespoke solutions for a wide range of beverages.’
He also remains ‘excited about the potential in coffee over the next few years’.
