AUDITED RESULTS FOR FY ENDED 30 JUNE 2011
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PureCircle Limited
('PureCircle' or 'the Company')
AUDITED RESULTS FOR THE FINANCIAL YEAR ENDED 30 JUNE 2011 ('FY 2011')
1. HIGHLIGHTS FOR THE YEAR
Financial Highlights
PureCircle (www.purecircle.com) the world's leading producer and marketer of high purity stevia products, announced its audited results for the financial year to 30 June 2011 (FY 2011) together with audited comparatives for the year ended 30 June FY 2010 (FY2010).
The audited results for FY2011 comprising profit and loss account, balance sheet and cashflow are set out in Appendix 1. A summary of the financials for FY 2011 with FY 2010 comparatives is set out below.
SUMMARY FINANCIALS
USD'000 FY 2011 FY 2010
Sales 53,262 60,773
Gross margin 18,349 24,067
EBITDA 5,232 10,486
Net loss after tax before exceptional costs (3,657) 1,231
Exceptional Costs (14,845) Nil
Net loss after tax (18,502) 1,231
Cash and short term deposits 43,137 63,601
Gross assets 266,719 273,900
Net assets 143,058 158,570
Net assets per share (US Cents) 0.93 1.03
· Sales: In FY 2011 high purity stevia sales were 12% lower than FY2010. Sales were lower than anticipated due to delays in EU approval (now expected in November/December 2011), delays in launch of major Carbonated Soft Drinks (CSD's) (now expected in FY2012) and estimated current inventory at Beverage Global Key Account's (BGKAs).
· Sales Break Down: Mix of sales in FY2011 included sales of three new products that were introduced by the company this year: our new natural sweetener SG95 and two natural flavors NSF01 & NSF02 in the newly formed PureCircle Flavors Division. These three new products contributed 13% of sales in FY2011. We expect these three new products as well as recently announced novel natural sweetener Alpha to increase significantly the diversity of sales in FY2012 and beyond thus further reducing the dependence of sales on any one product.
Reb A contributed 74% of sales in FY2011: of this BGKA's sales were 34% which is 25% lower than in FY2010 largely due to delays in EU approval, launches of major CSD's and high inventory levels as explained above. Reb A sales to all other customers contributed 40% of sales, an increase of over 100% on FY2010.
Co-products were 13% of FY 2011 revenues, which is 73% less than in FY2010 largely due to lower production volumes of Reb A.
FY 2011 $m % FY 2010 $m %
BGKAs 18.1 34% 24.2 40%
Others 21.2 40% 10.1 17%
Total Reb A 39.3 74% 34.3 57%
SG95,NSF01, NSF02 6.9 13% - -
Co-products 7.1 13% 26.4 43%
Total sales 53.3 100% 60.7 100%
· Gross margin: was 34%. This is 6 % points lower than FY2010, mainly due to a $6m lower gain on Biological assets.
· EBITDA: The Group's EBITDA was $5.2m (10%).
· Exceptional costs: : As announced on 17 June 2011, exceptional costs are associated with the decision to slow down Reb A production temporarily to reduce inventory to levels better aligned with the current market usage. Having scaled production across 2009 and 2010 to demonstrate that high purity stevia could be produced in mass market volumes, it was right to slow production in FY 2011. In addition the Group has reconfigured its production capacity to better suit its portfolio of products, now enlarged with the new PureCircle Flavors NSF01 & NSF02 and additional two novel natural sweeteners SG95 and Alpha. The exceptional costs of $14.8m include $11.5m of production costs and attributable overheads that would ordinarily have been charged to inventory and other costs of slowing production. $10.2m of the exceptional costs were non cash costs.
· Cash: the Group ended FY 2011 with cash and short term deposits of $43m, net debt of $71m and cash and bank facility headroom of over $60m. The Group is sufficiently funded for its foreseeable expansion plans.
· Inventories: of $96m are 15% lower than at December 2010 and will further reduce over the coming months as sales velocities increase. 30 June 2011 inventories can convert to more than $150m of sales value.
· All major investments made: we have invested almost $300m building our supply chain and diversified portfolio of products. The capacity and infrastructure is in place to support sales of more than $250m, without significant further investment.
Business developments
· Regulatory: Progress in the key EU and CODEX regulatory bodies mean that it is likely that high purity stevia will have been approved for use in all major remaining markets within the next 12-18 months. In particular EU approval now seems certain before the end of 2011.
· Consumer demand: Nielsen data of products containing stevia sold in USA retail outlets shows consumer purchases increasing by more than 100% in total and purchases increasing across all categories where launches have been made.
· New F&B category launches: First reformulations of big CSD brands using PureCircle's stevia in Australia and Turkey. Test marketing of CSD's in USA and LATAM. Nielsen data indicates that stevia sweetened products were launched into 8 new F&B categories during FY 2011. The new categories included: snacks, drinkable yogurt, energy drink, dessert mix and ice cream.
· Customer base: At 30 June 2011 the Group had over 150 high purity stevia customers, an increase of 50% from 30 June 2010 and from just 25 at 30 June 2009.
· Contract wins: During FY 2011 PureCircle has continued to secure additional contracts with major F&B companies. A feature of FY 2011 has been securing contracts for new natural sweetener SG95 and two natural flavors NSF01 & NSF02 as well as signing Reb A contracts with regional and local customer accounts to complement our strong global customer portfolio.
· PCL product launches: FY 2011 saw an acceleration of product launches to complement Reb A, including SG95 which secured FDA GRAS approval in July 2010.
· Launch of new flavor range: In June 2011we launched PureCircle's range of natural flavor enhancers NSF01 & NSF02. Both have secured USA FEMA approval and are excellent complements to our natural sweetener portfolio.
· Stevia by PureCircle TM Trustmark: The range and depth of customer products licensing the Stevia by PureCircle TM trustmark has increased significantly. From just one product licensing the trust mark in 2010 in one country, the program expanded during FY 2011 to licensing across more than 50 products across seven countries.
· JV setup: Our important steviasugar partnerships with Tereos and Nordzucker were formalized in October 2010 and March 2011 respectively. Both are up and running and ready to accelerate growth when the EU market opens which is expected later in 2011.
· UK business: In the UK we have chosen to go direct to market to service our portfolio of Global Key Accounts in the UK supported by our distribution agreement with Prinova who will service other customers.
· Partnerships: We continue to work closely with our partners Dohler and Firminich on various projects globally to assist our customers with best solutions.
· Supply Chain: Our leaf development continues in Kenya and Paraguay with large hectarage of stevia plantations being cultivated. We have added USA to the list of countries that grow leaf for PureCircle through partnership with S&W. The Company's plans include planting and producing stevia in EU and evaluation of stevia cultivation in various regions is being conducted. After successfully testing large scale production of Reb A, in line with decisions highlighted previously the Group has slowed down Reb A production temporarily to reduce inventory to levels better aligned with the current market usage. Concurrently production facilities have been reconfigured to better suit its portfolio of products, now enlarged with the new PureCircle Flavors NSF01 & NSF02 and additional two novel natural sweeteners SG95 and Alpha.
· R&D: Innovation and development is a fundamental part of the company and we continue our activities in various fields globally. Leaf development continues in our green houses in China, South America and East Africa. A joint project with Michigan State University (MSU) to develop new varieties of stevia for the future production of new novel natural sweeteners is well underway. Our new product development team is based in our Malaysian laboratories and has been instrumental in successfully developing and scaling the production of all new innovations announced recently, they continue to work on many other new products that will be commercialized in due time. Our application and formulation team is based at our Oak Brook IL laboratory and has been key in getting regulatory approvals for new products as well as helping various clients globally to formulate new products using our natural sweeteners and flavors.
· Patents: Our Intellectual Property has increased substantially. Our portfolio of Patents at the end of FY2011 stands at more than 60 across the world.
Commenting on the audited results, the Chairman Paul Selway-Swift said:
"Our FY 2011 results were impacted by the tough but correct decisions we have taken to reduce inventories. But we end FY 2011 with a sound business and with encouraging prospects.
"Our sales will benefit from the growing retail consumption of stevia, the expected opening of the EU market, our increased customer base and our enhanced product portfolio.
"We remain confident about the long term future for stevia."
Enquiries:
PureCircle Limited (www.purecircle.com)
Magomet Malsagov, CEO
+60 1 2388 8049
William Mitchell, CFO
+44 7974 005 163
RFC Corporate Finance (NOMAD)
+61 8 9480 2500
Steve Allen
2. BUSINESS REVIEW
2.1 CHAIRMAN'S STATEMENT
Our FY 2011 results were impacted by the tough but important decisions we have taken to reduce production until inventories are better aligned with current market demand. Having scaled production across 2009 and 2010 to demonstrate that high purity stevia could be produced in mass market volumes, it was right to slow production in FY 2011. Our decisions will generate stronger cashflow and provide further headroom on our cash and banking facilities.
We end FY 2011 with a sound business platform and encouraging prospects:
- Our customer base continues to expand and to diversify; increasing more than 50% to 159. We have secured as valued clients many of the world's global Food and Beverage companies and during FY 2011 have complemented these with many regional and local accounts;
- Our product portfolio has strengthened and deepened with the approval of SG95 as a complement to Reb A and with launching of our proprietary and new natural flavors portfolio;
- Our innovation pipeline from in-house development has an established track record and the rate of successful launches is increasing;
- Our sales and marketing team is in place and has been strengthened this year with skilled application and formulation support;
- Our stevia-sugar partnerships are developing well ; and
- We have the cash and banking headroom to meet all our forecast requirements.
High purity stevia is still a young market, being less than three years old. Consumer demand is accelerating in all open markets. With more new markets due to open in the next twelve months, notably the EU, consumer demand will increase further. As demand reaches critical mass we will be well placed to lead the industry profitably.
We remain confident of the long term future of stevia: but it remains a mid to long term growth story and there may continue to be some sales and profit volatility along the way.
2.2 CHIEF EXECUTIVE REVIEW
1. OPERATIONS
1.1 Market
PureCircle's market is defined as the consumption of high purity stevia based sweeteners and flavours by the world's Food and Beverage companies. In turn the size of this market is determined by the levels of end consumer demand for products containing high purity stevia. PureCircle's sales growth is determined by the pace of growth in the market and on our direct share of Food and Beverage high purity stevia usage.
FY 2011 has seen important progress in these long term performance indicators:
· Stevia continues to secure further regulatory approvals that open up additional markets.
· Consumer demand for products using high purity stevia, as measured by Nielsen data from USA retail stores, is accelerating at more than 100% per year.
· The number and range of Food and Beverage products using high purity stevia has expanded in all open markets.
· PureCircle continues to expand its customer base, with particular momentum made in FY 2011 in securing regional customers to complement our portfolio of global clients.
· The level and frequency of "regular" repeat orders from customers is increasing.
In addition increased volatility in commodity prices for sugar and corn continue to strengthen the long term rationale for stevia to be used as a cost effective component of the mass volume natural sweetener market.
However, when compared to the long term opportunity for high purity stevia, the current market is still small and in a development phase with the consequent implications for sales demand and volatility.
Regulatory
During FY 2011 regulatory approval progressed in all markets that have yet to approve the use of high purity stevia as an ingredient. In particular:
· EU approval which was originally expected early 2011 is now expected in late 2011 following technical approval by EFSA and an approval recommendation by the EU standing committee on food additives. PureCircle was directly involved with EU regulators in securing this very important approval.
· Saudi Arabia approval granted in April 2011 opened up a large Middle Eastern market. This approval was obtained in close collaboration with our partners.
· The issuing of CODEX usage recommendations opens the way for other remaining markets, such as Indonesia and the Philippines, to approve the use of stevia. PureCircle was directly involved in this process working closely with the Malaysian government.
· PureCircle and TCCC have made joint application to FSSAI (Food Safety and Standard Authority of India) to seek approval for high purity stevia and this is expected during calendar 2012.
During FY 2011 PureCircle successfully secured approval for its new innovations in USA. During FY2011 USA FDA gave GRAS approval for PureCircle's SG95 product and USA FEMA gave approval for PureCircle's new natural flavor products.
Growing consumer demand
Actual retail consumption of high purity stevia is growing in all markets that are open. Nielsen data from USA retailers indicates that 2010 consumption in the USA was 146 tonnes (2009 64 - an increase of 128%). By 31 March 2011 the annualized consumption rate had increased further to 195 tonnes. In retail USDollar terms for the Food and Beverage products containing stevia, annualized sales for the quarter to 31 March 2011 were running at $1.1bn, up from $459m a year earlier.
Although similar detailed retail data is not available for other markets, individual product case studies indicate that retail consumption of high purity stevia is growing in all other markets: for example beverage launches in Mexico and Argentina, table top launches in France and an array of launches in China and Australia are growing sales.
PureCircle estimates that the global consumption of high purity stevia for 2010 was about 195 tonnes (2009 85 tonnes, an increase of 129%). The annualized global consumption rate is estimated to have increased to 260 tonnes by 31 March 2011.
As actual demand is increasing, so is consumer awareness of stevia. In all markets where surveys have been carried out, consumer awareness is higher now than it was a year ago. For example in the USA consumer awareness has increased from 43% to 62%: and similar trends are evident in Mexico and France.
Stevia is being used in more categories and products
Food and Beverage usage of high purity stevia is widening into more categories and a larger number of individual products. Further this trend is evident in all open countries. For example, in the USA, at the end of 2009 just three product categories had annualized retail sales of stevia ingredient products of more than $10m. By the end of 2010 there were 10 such product categories. In 2009 PureCircle sold directly into 3 categories: by the end of 2010 this had increased to 13 categories.
Higher commodity sweetener prices
FY2011 has seen a tightening of supply against demand for sugar in all major markets. This has resulted in higher input prices for Food and Beverage users, even allowing for hedges and forward contracts. Market feedback suggests that higher prices may be a feature of the medium and longer term. If so, then this will help the further adoption of high purity stevia.
1.2 Sales
Sales: In FY 2011 our high purity stevia sales were $53.2m; $7m lower than FY2010. The sales were lower than anticipated due to the delay in EU approval (now expected in November/December 2011), delays in launch of major Carbonated Soft Drinks (CSD's) with stevia (now expected in FY2012) and estimated current inventory at Beverage Global Key Account's (BGKAs). PureCircle has been diligently working with EU regulators and BGKAs to accelerate the EU approval and to assist GKAs with their launch plans. We believe these delays are related more to phasing issues than to fundamental problems and therefore it is just a matter of time before we see required approval and major launches fall into place.
Sales Break Down: Our mix of sales in FY2011 included sales of three new products that were introduced by the company this year: our new natural sweetener SG95 and two natural flavors NSF01 & NSF02 in the newly formed PureCircle Flavors Division. These three new products contributed 13% of sales in FY2011. We expect these three new products as well as recently announced novel natural sweetener Alpha to increase significantly the diversity of sales in FY2012 and beyond thus further reducing the dependence of sales on any one product.
Reb A contributed 74% of sales in FY2011: of this beverage GKA's sales were 34% which is 22% lower than in FY2010 largely due to delays in EU approval, launches of major CSD's and high inventory levels as explained above. Reb A sales to all other customers contributed 40% of revenues, an increase of 109% over FY2010.
Co-products were 13% of FY 2011 revenues, which is 73% less than in FY2010 largely due to lower production volumes of Reb A.
During FY 2011 PureCircle has secured new customers in all markets and retained the diversified customer base established in FY 2010. We ended FY 2011 with more than 150 customers globally, up from 100 at 30 June 2010 and just 25 at 30 June 2009. In the USA we increased our customer base from 49 to 84 separate companies. Excluding sales to strategic beverage accounts, the number of orders placed in the year more than doubled.
Outside the USA FY 2011 saw customer numbers and sales grow more than 100% in Mexico, Argentina, France and China. Reviewing the range of products launched that are using high purity stevia, it is clear that PureCircle continues to secure the major share of market.
1.3 Products, new products and application support
In FY 2011 Reb A provided the core of our sales revenues. Customer usage of Reb A increased in all markets compared to FY 2010. Usage is expected to increase further in FY 2012, particularly with the expected opening of the EU market. We also expect beverage GKA's to significantly reduce their current Reb A inventories and to increase their purchases from us during calendar 2012.
During FY 2011 we extended our product range by adding three new innovations to our portfolio SG95, NSF01 & NSF02. We have USA FDA GRAS clearance for our SG95 natural sweetener product and USA FEMA approval for both our natural flavor products.
SG95 provides customers with a highly cost effective sweetening solution for partial calorie reductions and it complements sugar and High Fructose Corn Syrup ("HFCS") well. With a sweetness equivalent price positioned below that of sugar or HFCS, SG95 is ideally suited for mass volume partially reduced calorie formulations, particularly in lower per capita income geographies.
NSF01- is a FEMA approved natural flavor derived from the stevia plant. NSF-01 can be used across a range of food and beverage categories from carbonated soft drinks to cereal to naturally enhance flavors and sweetness. Customers have used NSF-01 to help reduce calories by up 10% and develop "improved" product claims.
NSF02 is the most recent breakthrough in our natural flavor product range. NSF02 naturally enhances the sweetness of sugar, HFCS and high purity stevia sweeteners, hence enabling calorie reductions to be achieved by up to 25% without any change in the ingredient labeling. Further the bulk of NSF-02 flavor enhancement properties have the added benefit of helping reduce costs associated with higher cost flavors and bulking ingredients such as erythritol in food and beverage formulations.
SG95, NSF01 & NSF02 complement Reb A well. As a portfolio they offer customers a range of natural sweetener and flavour options covering key calorie reduction and price point targets. All three products have been developed by PureCircle using proprietary technology and processes. We have more innovative products in the pipeline.
Our strategy is to provide customers with in-depth and practical hands-on support with their formulation needs. In FY 2011 we have invested to expand our application support capabilities in Oakbrook, Illinois in co-ordination with our Kuala Lumpur based stevia development science team. The range of formulation projects that we are working on, the range of food and beverage categories that they cover and the number of customers we are supporting have all increased during FY 2011.
We complement our in-house application support with a strong roster of formulation partners. During FY 2011 the Dohler Group of Germany integrated our high purity stevia into a large range of innovative formulations. Firmenich of Switzerland is taking the lead in applications using our proprietary NSF02 natural flavor.
PureCircle believes that there is a large market opportunity for high purity stevia in combination with sugar. Further we believe there are real formulation and usage benefits for customers using products developed with steviasucrose technologies rather than "in-house" simple blends. Working with our sugar Joint Venture partners we have made significant product development progress in this area during FY 2011.
1.4 Marketing
Our marketing strategy is to promote the growth of the overall high purity stevia industry and to promote PureCircle as leader within that industry. Building on the foundations established in FY 2010, during FY 2011 we have maintained this strategy and accelerated progress in achieving it.
Global Stevia Institute:
FY2011 was the first full year of operation for The Global Stevia Institute (GSI) (www.globalsteviainstitute.com). The Institute has already established itself as the leading source for credible science based information on stevia. It is in full operation as an impactful platform for health professional, key opinion leader education and media response for the fast growing global stevia industry. In the past year the GSI has reached thousands of stakeholders through webinars that provided professionals with education credit, consumer and health professional surveys, television and print media interviews and conference speaking engagements. The GSI's monthly newsletter, website and social media vehicles extend the Institutes' reach to thousands each month, across multiple languages, sharing the latest stevia news from science to regulatory.
The value of the GSI has been clearly recognized by the industry as board members are now regularly called on to speak to health professionals at product launch events and consultant on important industry challenges. Recently the GSI has extended its influence and focus in anticipation of the opening of the European market with important new additions to the board such as Dr. Margaret Ashwell OBE, former science Director for the British Nutrition Foundation.
Stevia PureCircle Trustmark:
Just one year ago PureCircle first introduced its customers to its consumer insight driven licensing program of the Stevia PureCircle trustmark and "We Grow Joy" campaign.
PureCircle recognized early on the positive acceptance of the naturalness of the stevia leaf and the importance of providing consumers information on the integrity of the source of supply of the ingredient.
From just one product licensing the trust mark in 2010 in one country, the program has expanded to licensing across more than 50 products across 7 countries. The trustmark is now being shared with consumers across such leading brands as Silk Light Soy Milk in the United States, Canderel and Beghin Say in France, Equal in Argentina and Go CoCo in Australia. More are planned in the coming year, particularly as new geographies open up.
Market Moving Insights
PureCircle has continued to place the consumer front and center of our strategies, just as our customers do. Building on the foundation of industry leading Mom's study in 2009, we further established PureCircle's ability to partner with our customers through the establishment of the PureCircle Insights Group TM. The group recognizes at its core that consumer insights must be understood locally, but that there is also predictive power in understanding trends from a global perspective as well. In the past year, PureCircle has extended its insights across the United States, Latin America, Asia and throughout Europe. The company is sought by customers and regularly by industry conferences to help Food and Beverage Manufacturers better position their products to the end consumer.
1.5 Sales and Marketing Joint Ventures
Our three sales and marketing joint ventures form an integral part of our go to market strategy and are managed within the overall sales and marketing processes. FY2011 has been a year of progress for each of them.
Natural Sweet Ventures
Our Natural Sweet Ventures (NSV) partnership with Imperial Sugar of the USA launched the Steviacane TM consumer table top product into trial across 300 stores in Texas. Sales have been ahead of internal plans since the trial launched and the product will be rolled out into more regional retails chains across the South East and the South West USA in early FY 2012. Steviacane TM is offered both in "stick" form and in 2lb granulated form, each providing a 2/3rd calorie reduction for the sweetness equivalence.
On the industrial (ie B2B side) NSV has made some important product development breakthroughs, particularly for the liquid steviasucrose market. A patented new product "Duet Master Batch" TM was shown at the important IFT show in New Orleans in June 2011 to strong reviews.
Tereos PureCircle Solutions
Our Tereos PureCircle Solutions (TPCS) partnership with Tereos of France was formed in October 2010. TPCS is our route to market for France, Spain, Italy and southern Europe. Progress in FY 2011 focused on the development and production planning for a core steviasucrose product portfolio and on supporting customers prepare for launches once the EU market opens.
With our partners, TPCS has developed a proprietary Steviasucres TM industrial steviasugar combination that will be launched formally in the fall of 2011. In addition Tereos has launched Ligne Beghin Say as a consumer table-top steviasugar product that is performing well in the French market.
NP Sweet
Our NP Sweet (NPS) Partnership with Nordzucker AG of Germany was formed in March 2011. NPS is our route to market for Germany, Poland, Scandanavia and Northern and Eastern Europe. Progress in FY 2011 has focused on initial customer contacts and supporting their projects ahead of the EU launch later in 2011.
1.6 Production
When the USA market for high purity stevia first opened in January 2009, the annual global supply of high purity stevia was approximately 200 tonnes. At these small levels the global Food and Beverage companies were not able to contemplate using high purity stevia in their larger brands: or indeed to invest time formulating with stevia in their R&D laboratories. It was therefore a strategic imperative for PureCircle to demonstrate that the supply of high purity stevia could be scaled on a sustainable basis.
We demonstrated this successfully across 2009 and 2010 producing more than 900 tonnes in large scale batches with high levels of product quality and consistency. Further we demonstrated that we could produce at rates of thousands of tonnes a year as required. Our production teams and processes have shown that stevia can be scaled on a sustainable basis.
Having had two years of "stress testing" the factories and supply chain successfully, in FY 2011 we decided to cut back production temporarily so as to bring inventory levels more in line with current market demand. During FY 2011 we have therefore scaled back production temporarily. This has been undertaken across our supply chain: from lower volumes of leaf purchase and leaf planting, to reduced extract and Reb A production. This has led to the $15m of exceptional costs described in more detail in the Group Financial review section following. In particular we have charged $11.5m of production costs and attributable overheads to profit and loss account that would ordinarily have been capitalized within inventory and other costs of associated with reducing inventory.
Whilst volumes of Reb A production have been eased back temporarily, the pace of our production innovation has accelerated. During FY 2011 we have configured our factories to be able to produce SG95 NSF01 and NSF02 in scale as well as the core Reb A. We end FY 2011 with our factories configured to produce a highly flexible and profitable product portfolio that supports fully our marketing proposition and customer service requirements across all calorie reduction and price points.
During FY 2011 we have centralized our production management into one team and we are already seeing significant synergies from all the production processes being seen in an integrated manner. We know this gives PureCircle a real point of difference in the industry.
Core to our long term business model is that our variable cost of production reduces over time. During FY 2011 we again made progress with this important performance measure and progress remains on track for our long term objectives.
1.7 Research & Development
During FY 2011 we have accelerated our research and development activities in two key areas:
- Patent filing and intellectual property protection; and
- Development of new products ready to come to market.
Our patent and intellectual property team, led by Professor Varuzhan Abelyan, has successfully filed [70] key patents in the year. These extend the breadth and depth of PureCircle's proprietary protected intellectual property considerably; not just for the existing product portfolio and processes; but also for key future pipeline innovations.
The scope of the registrations completed successfully in FY 2011 confirms again our leadership in this emerging global market.
During FY 2011 our development team, led by Dr Avetik Markosyan, have launched successfully both SG95 and NSF02 including securing USA FDA and FEMA approvals. In addition the pipeline of future development launches has expanded and further important products will come on stream during FY 2012 and future years.
2. Leaf Development
The leaf development activities encompass our leaf operations and supplier partner activities in Africa, the Americas and South East Asia. The focus of our development operations is two fold:
- Firstly to expand the volume and geographical spread of stevia as a global agricultural crop; and
- Secondly to increase the quality of stevia leaf being grown, particularly leaf being grown for PureCircle use.
Our policy is to focus our in-house resources on leaf R&D and propagation activities and to work with supplier partners to develop and secure stable long term supplies of quality leaf.
During FY 2011 the volume of stevia leaf being grown for PureCircle expanded in all the development continents and initial harvests were made for export to PureCircle's production facilities. It is clear that since our IPO in December 2007 the foundations have been put in place for rapid expansion of quality stevia leaf supply when required.
Due to the temporary scaling back of Reb A production, in FY 2011 the Group slowed down the pace of its leaf development expansion. This is a temporary slow-down whilst Reb A inventories are better aligned with current market demand.
During FY 2011 we made sound progress in developing more high yielding strains of stevia leaf. Through a combination of internal resourcing and external (e.g. University) partnerships our pipeline of improved yield strains is expanding.
3. Management
The Group has ambitious long term growth plans. To deliver these we will continue to invest in management with the skills and experience to support and drive all aspects of our growth. The priority during FY 2011 has been sales and marketing personnel including product application, formulation expertise and logistics to support our fast growing diversified customer base. Centred in Oakbrook, Illinois, USA, over the past eighteen months we have built a genuinely global sales and marketing team with coverage across all continents and all major markets.
As part of our temporary cut back in Reb A production we have had to reduce employee numbers, particularly in our factories. But we have ensured all core skills have been retained and we hope to increase production employment again in the near future.
4. Group Financial Review
The Group's financial year runs from 1 July to 30 June. The Group's audited results cover the year from 1 July 2010 to 30 June 2011 ("FY 2011"), with audited comparatives for 1 July 2009 to 30 June 2010 ("FY 2010"). The audited profit and loss account, balance sheet and cashflow are set out in Appendix 1.
Set out below is the Group's Consolidated Income statement for FY 2011 with FY 2010 comparatives.
INCOME STATEMENT
FY11
FY10
Base
Exceptional
Total
USD'000
USD'000
USD'000
USD'000
Revenue
53,262
-
53,262
60,773
Gain/(loss) on biological assets
358
(374)
(16)
6,543
Cost of sales
(40,512)
(8,634)
(49,146)
(45,213)
Economic hedge gain
5,241
-
5,241
1,964
Gross margin
18,349
(9,008)
9,341
24,067
Gross margin %
34%
NA
18%
40%
Other income and expenses
2,972
(4,566)
(1,594)
941
Selling and administrative expenses
(18,085)
(1,271)
(19,356)
(17,402)
Operating (loss)/profit
3,236
(14,845)
(11,609)
7,606
EBITDA
5,232
(14,845)
(9,613)
10,486
Adjusted EBITDA
6,289
(14,471)
(8,182)
5,069
Reconciliation of Adjusted EBITDA to (loss)/profit for the financial year:
Adjusted EBITDA
6,289
(14,471)
(8,182)
5,069
Share based payment expense
(1,415)
-
(1,415)
(1,126)
Gain/(loss) on biological assets
358
(374)
(16)
6,543
EBITDA
5,232
(14,845)
(9,613)
10,486
Finance costs
(7,933)
-
(7,933)
(6,437)
Depreciation and amortization
(5,166)
-
(5,166)
(5,002)
Less: Depreciation not charged to income
3,170
-
3,170
2,122
(Loss)/profit before tax
(4,697))
(14,845)
(19,542)
1,169
Taxation
1,040
-
1,040
62
(Loss) / profit after tax
(3,657)
(14,845)
(18,502)
1,231
Segmental reporting
PureCircle is a single segment business comprising the integrated production and marketing of high purity stevia products.
Revenues
FY 2011 sales at $53m were $7m (12%) below FY 2010. Sales were lower than anticipated due to late EU approval (now expected in November / December 2011), delays in Carbonated Soft Drinks (CSDs) launches (now expected in FY 2012) and estimated current inventory at Beverage Global Key Accounts.
Revenues included sales of three additional new innovations that were introduced during FY 2011: the new natural sweetener SG95 and two natural flavors NSF01 & NSF02 in our new flavor portfolio. These three new products contributed 13% of sales in FY2011. We expect these three new products together with the recently announced novel natural sweetener Alpha to further diversify our sales going forward and hence reduce our dependence on any one product.
Reb A contributed 74% of sales in FY2011, of which beverage GKA's sales were 34% (lower by 25% than sales in FY2010 largely due to delay in EU approval, delayed launch of major CSD's and high beverage customer inventory levels) and non beverage GKA's sales 40% . The non beverage GKA sales represent a 109% increase in revenues compared to FY2010, reflecting growth in the end user market and an enlarged customer base.
Co-product revenues were 74% lower than FY 2010 due to lower production volumes of Reb A.
Exceptional costs
To enable larger Food and Beverage brands to trial formulations with high purity stevia, the Group has been required to prove the scalability and sustainability of its supply chain. This process was undertaken successfully across 2009 and 2010. The significant increases in production in those years resulted in the Group holding inventories in excess of the then market demand.
The exceptional costs reflect the costs associated with the decision to scale back production temporarily so as to reduce inventories to levels that are better aligned with current market usage. The exceptional costs of $14.8m include $11.5m of production costs and attributable overheads that would ordinarily have been charged to inventory and other costs associated with reducing inventory.
Exceptional costs also include $2.1m of costs reconfiguring certain assets to enable production of a more flexible product portfolio.
All costs associated with the slow-down of production have been charged to profit as one off costs. $10.2m of the exceptional costs were non cash costs.
Margins and EBITDA
Economic hedge gain: As a US$ reporting Group, it is the Group's policy is to put US$ denominated long term intercompany loans from the parent company into operating subsidiaries as natural economic hedges against movements in local currency which impact local operating costs when reported in US$. In FY 2011 the Group recorded economic hedge gains of $5.2m which substantially offset higher operational costs due to currency appreciations against the US$ in Malaysia and Paraguay.
Gross margin of $18m was $6m lower than in FY 2010, mainly due to a $6m lower gain on Biological assets, reflecting the temporary slowdown in supply chain expansion.
The Group's EBITDA before one off costs was $5.2m (10% of sales) confirming the robustness of our business model, namely that increased sales volumes should translate to enhanced profitability.
Loss before and after tax
Finance charges increased $1.5m to $7.9m reflecting the Group's higher net indebtedness, which in turn is due to the higher working capital employed across FY2010 and FY2011. The measures taken to reduce inventories better in line with current demand are expected to reduce working capital employed and indebtedness gradually.
The Group's other income of $2m mainly comprises proceeds from an insurance claim relating to prior years.
The Group has recognized deferred tax assets of $1m in FY 2011 (FY2010 $0.1m). The deferred tax asset is lower than the headline rate of tax might suggest due to the tax exemptions enjoyed by the Group in its principal operating regions.
Balance Sheet
The Group's balance sheet is fully capitalized for current plans. The Group's tangible fixed assets of $70m represents production capacity sufficient to support a $300m revenue business and inventories of $96m are sufficient to generate more than $150m of revenues.
Inventories have reduced $16m (15%) from their December 2010 peak and will continue to do so in the coming months. Their reduction is being accelerated by the steps taken in FY 2011. Long term the Group expects inventories to approximate to three months forward sales demand.
The Group ended FY 2011 with cash and short term deposits of $43m, net debt of $71m and headroom on its cash and banking facilities of over $61m. The group's principal bank facilities are seven year facilities with maturity in June 2015. The principal repayments on the main facilities are bullet payments at expiry of the facilities. The $15.5m drawdown facility with expiry in August 2011 has been repaid after the 30 June 2011 year end and substantially refinanced with a new loan prior to signing of the FY 2011 accounts. Net debt is expected to reduce gradually as working capital employed decreases, particularly inventories.
Cashflow
Net cash for operating activities was a cash outflow of $18.6m in FY 2011, a $17m improvement on FY 2010. The FY 2011 outflow was principally due to $17m increase in inventories, which peaked at December 2010 and will now reduce systematically.
Capital expenditure of $6.2m was an $8m reduction from FY 2010. Our FY2011 capex focused on accelerated intellectual property rights activity and configuring our production capacity for the more flexible product portfolio.
Our operating cashoutflow after capex of $25m was a $25m improvement on FY 2010 confirming that all major infrastructure investments have been made. The Group's production footprint is ready to support a $300m sales business.
Cashflows relating to financing in FY 2011 all related to repayments and drawdowns of the Group's revolving credit facilities. These were transacted in FY 2011 with full compliance of all requirements. FY 2010 financing included the equity private placement completed in November 2009.
The Group ended FY 2011 with $43m in cash and short term deposits ($42m net of a committed deposit) and $61m of headroom on its cash and banking facilities. The Group is fully funded for its current plans.
5. Strategic developments
Our long term belief is that stevia will play an integral part in the global natural sweetener industry. As this develops the Group expects to see significant opportunities to consolidate and accelerate our leadership position through partnerships and alliances.
6. Outlook
Whilst our run rate sales continue to increase, they remain modest. Accordingly we remain cautious in the immediate term. Our slowdown in Reb A production will continue into the first half of FY 2012 and so some production costs and attributable overheads will again be charged to profits in 1H FY 2012.
We think it will be late 2012 or 2013 before the true velocity of sales is fully evident. But the expected opening of the EU and other markets, the strong growth in retail consumption of stevia sweetened products in all open markets and our enhanced customer and product base will each provide stimulus for sales growth. Sales will accelerate further when the Beverage Global Key Accounts need to replenish their inventories.
Longer term we remain confident that stevia will emerge as a major global industry. Our business model is designed for a mass volume natural sweetener market. The investments have been made and we are ready to prosper as sales volumes increase.
Paul Selway-Swift Magomet Malsagov
Chairman Chief Executive Officer
APPENDIX 1 - AUDITED PROFIT AND LOSS ACCOUNT, BALANCE SHEET AND CASHFLOW
AUDITED PROFIT AND LOSS ACCOUNT
30.06.2011
30.06.2010
USD'000
USD'000
REVENUE
53,262
60,773
FAIR VALUE (LOSS)/GAIN ON BIOLOGICAL ASSETS
(16)
6,543
COST OF SALES
(49,146)
(45,213)
GROSS PROFIT
4,100
22,103
ADMINISTRATIVE EXPENSES
(19,356)
(17,402)
OTHER INCOME
7,924
2,678
OTHER EXPENSES
(4,566)
-
FINANCE INCOME
289
118
FINANCE COSTS
(7,933)
(6,437)
SHARE OF PROFIT OF ASSOCIATE
-
109
(LOSS)/PROFIT BEFORE TAXATION
(19,542)
1,169
INCOME TAX
1,040
62
(LOSS)/PROFIT FOR THE FINANCIAL YEAR
(18,502)
1,231
OTHER COMPREHENSIVE (LOSS)/INCOME (NET OF TAX)
EXCHANGE DIFFERENCES ARISING ON
TRANSLATION OF FOREIGN OPERATIONS
1,331
(763)
TOTAL COMPREHENSIVE (LOSS)/INCOME FOR THE FINANCIAL YEAR (NET OF TAX)
(17,171)
468
(LOSS)/PROFIT FOR THE FINANCIAL YEAR ATTRIBUTABLE TO
OWNERS OF THE COMPANY
(18,362)
1,034
NON-CONTROLLING INTEREST
(140)
197
(18,502)
1,231
TOTAL COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO
OWNERS OF THE COMPANY
(17,042)
266
NON-CONTROLLING INTEREST
(129)
202
(17,171)
468
(LOSS)/EARNINGS PER SHARE (US CENTS)
- Basic
(11.93)
0.71
- Diluted
(11.74)
0.71
AUDITED CONSOLIDATED BALANCE SHEET
30.06.2011
30.06.2010
USD'000
USD'000
ASSETS
NON-CURRENT ASSETS
Intangible assets
24,674
21,188
Property, plant and equipment
70,698
69,761
Biological assets
5,229
8,621
Prepaid land lease payments
3,094
3,113
Deferred tax assets
3,573
2,043
107,268
104,726
CURRENT ASSETS
Derivatives financial instrument
-
72
Inventories
96,503
78,892
Trade receivables
14,160
19,990
Other receivables, deposits and prepayments
5,527
6,619
Tax recoverable
124
-
Short-term deposits with licensed banks
11,817
48,032
Cash and bank balances
31,320
15,569
159,451
169,174
TOTAL ASSETS
266,719
273,900
EQUITY AND LIABILITIES
EQUITY
Share capital
15,406
15,358
Share premium
131,620
130,490
Foreign exchange translation reserve
1,584
264
Share option reserve
1,552
994
(Accumulated losses)/retained earnings
(7,772)
10,590
EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY
142,390
157,696
NON-CONTROLLING INTEREST
668
874
TOTAL EQUITY
143,058
158,570
AUDITED CONSOLIDATED BALANCE SHEET (CONT'D)
30.06.2011
30.06.2010
USD'000
USD'000
NON-CURRENT LIABILITIES
Deferred tax liabilities
1,458
1,216
Long-term borrowings
Deferred income
88,997
612
79,690
969
91,067
81,875
CURRENT LIABILITIES
Trade payables
2,541
4,115
Other payables and accruals
4,581
4,318
Amount due to joint venture partners
423
-
Income tax liabilities
38
811
Short-term borrowings
25,011
24,211
32,594
33,455
TOTAL LIABILITIES
123,661
115,330
TOTAL EQUITY AND LIABILITIES
266,719
273,900
NET ASSETS PER SHARE (USD)
0.93
1.03
CONSOLIDATED CASHFLOW
30.06.2011
30.06.2010
USD'000
USD'000
CASH FLOWS FROM OPERATING ACTIVITIES
(Loss)/profit before taxation
(19,542)
1,169
Adjustments for:-
Amortisation of prepaid land lease payments
148
30
Amortisation of deferred income
(76)
-
Depreciation of property, plant and equipment
5,018
4,972
Interest expense
7,933
6,437
Interest income
(289)
(118)
Loss on disposal of plant and equipment
112
631
Share of (income)/loss of an associate
-
(109)
Share based payment expense
1,415
1,126
Intangible assets written off
271
-
Inventories written off
33
256
Plant and equipment written off
2,079
-
Write off of biological assets
1,046
-
Change in fair value of biological asset
16
(6,543)
Unrealised exchange gain
(5,658)
(694)
Operating cash flow before working capital changes
(7,494)
7,157
Increase in inventories
(17,217)
(46,468)
Decrease in biological assets
3,142
-
Decrease in trade and other receivables
12,324
12,810
Increase in trade and other payables
(811)
(1,579)
Increase in restricted cash
(397)
(927)
NET CASH FOR OPERATIONS
(10,453)
(29,007)
Interest received
289
118
Interest paid
(7,933)
(6,437)
Tax paid
(587)
(559)
NET CASH FOR OPERATING ACTIVITIES
(18,684)
(35,885)
CASH FLOWS FOR INVESTING ACTIVITIES
Addition of intangible assets
(2,392)
(4,874)
Addition of property, plant and equipment
(4,098)
(6,836)
Addition of leasehold land
-
(324)
Addition of biological assets
-
(2,078)
Increase in investment in subsidiaries
-
(503)
Proceeds from disposal of property, plant and equipment
308
63
Proceeds from liquidation of an associate
-
157
NET CASH FOR INVESTING ACTIVITIES
(6,182)
(14,395)
BALANCE CARRIED FORWARD
(24,866)
(50,280)
CONSOLIDATED CASHFLOW (CONT'D)
30.06.2011
30.06.2010
USD'000
USD'000
BALANCE BROUGHT FORWARD
(24,866)
(50,280)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from share options
-
505
Proceeds from issuance of shares to non-controlling interests
-
80
Drawdown of borrowings
29,800
81,337
Repayment of borrowings
(26,957)
(51,645)
Proceeds from private placement
-
63,882
Repayment of hire purchase
(141)
(82)
NET CASH FROM FINANCING ACTIVITIES
2,702
94,077
Effects of foreign exchange rate changes on
cash and cash equivalents
1,303
(43)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF THE YEAR
62,674
18,920
CASH AND CASH EQUIVALENTS
AT END OF THE FINANCIAL YEAR
41,813
62,674
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