KIOTECH INTERNATIONAL PLC 6 MONTH RESULTS

Kiotech International plc, a leader in the manufacturing and marketing of high performance natural feed additives for global agricultural and aquaculture markets with products which improve the health and output of animals, is pleased to announce its interim results for the 6 months to 30 June 2011.

Key points: Financial

• 32% increase in profit before tax and share-based payments to £1.04m (2010: £0.79m)
• 12% increase in earnings per share to 4.03 pence per share (2010: 3.61 pence per share)
• 5 percentage point increase in gross margin to 31% (2010: 26%)
•  Cash balance of £3.44m at 30 June 2011 (31 December 2010: £3.53m)

Key points: Operational

• Integration of Optivite completed with benefits coming through
• Investment in 3rd feed additive production line completed doubling production capacity
• 11% increase in Kiotechagil sales
• China subsidiary reaches the significant milestone of breakeven enabling future growth opportunities to be self-financing

Richard Rose, Chairman, commented:
“The Group has delivered a strong performance in the first half of the year and this is continuing. The improvement in our gross margin reflects our focus on our higher value feed additive ranges and close attention to selling prices. The Group is well positioned to continue its success in the second half of the year and is currently evaluating a number of acquisition opportunities, which could potentially meet our criteria for value creation”

Chairman’s statement
I am pleased to report that trading in the first half of the year has been most encouraging with profit well ahead of the same period last year.
The Group is focused on supplying high performance natural animal feed additives for global agricultural markets through its strong trading brands Kiotechagil and Optivite. Management have successfully refocused the business on higher margin products and in addition acted quickly to ensure raw material price increases have been passed on through selling prices.

Results
In the six months to 30 June 2011 profit before tax and share-based payments increased by 32% to £1.04m (2010: £0.79m). As a consequence of the strategic focus on higher margin products and markets, like-for-like sales reduced from £11.08m to £9.36m whilst gross margin was maintained at £2.88m (2010: £2.89m) reflecting a significant increase in gross margin percentage from 26% to 31%. Administration costs have fallen by 11% benefiting from acquisition synergies and initiatives.

Our liability for tax has been provided at the current prevailing rates although research and development tax credits are likely to reduce the eventual tax charge and the effective tax rate once the benefit is known with greater certainty. 2010 benefited from favourable adjustments to prior year computations resulting in a first half credit of £0.13m.
Basic earnings per share increased by 12% from 3.61 pence per share to 4.03 pence per share and diluted earnings per share rose from 3.57 pence per share to 3.99 pence per share.
The balance sheet remains strong with good cash generation and the Company ended the period with a cash balance of £3.44m.

Optivite integration
The integration of Optivite, purchased in September 2009, is complete and the Group’s focus is now to build on its trading brands within the UK and internationally. Capital investment continues to improve production efficiencies targeted principally at minimising waste whilst increasing throughput; further benefits from investment are likely to be evident in the second half of the year.
The success of the integration process and in particular the consolidation of the production units has recently been acknowledged by FEMAS, the main industry and globally recognised accreditation body.

Operations – International agriculture
The international division, operating under the Optivite and Kiotechagil brands, continued to make progress during the period and managed to maintain margins while addressing significant pressures in the raw material markets by an active pricing policy. Overall, out of 61 countries supplied, there have been particularly strong performances in Argentina, Bulgaria, Chile, Greece, Japan, Malaysia, Philippines and Syria.

At the beginning of the year we completed a re-structuring programme within the export customer service department and the Optivite International sub-division. A key feature of the integration was the closure of our Aldermaston facility and the transfer of the Kiotechagil customer service department to Manton Wood. This consolidation has been a success and steps are underway to combine the back-office processes of the two trading brands in order to provide greater flexibility to facilitate and support the continuing growth of the international division. This development will ensure that we are well placed to continue to provide the most effective and efficient service to our overseas customer base.

The Optivite International brand had a very strong year in 2010 and is now consolidating that growth. In order to increase Optivite’s brand presence internationally, with new product launches and entry into new territories, we are recruiting international account managers who have significant feed additive experience, both technically, commercially and globally.

The main focus of the international sales team will continue to be the introduction of new products to our distributors. Kiotechagil has continued the roll out of Neutox, a feed safety product, and pHorce, a high content, low inclusion acidifier along with the introduction of a new enzyme range, Feedzyme. All these products have been well received. Optivite International has also started to make inroads with various new products, such as Red-Lite, a chemical-free insect control product for poultry and grain storage and Optimax, a high strength acidifier, as well as a new improved formulation of our omega 3 product Optomega, which has only been possible due to the investment in the new production line.

In China we have moved away from a direct sales approach in selling feed additives to the large mills to forming strategic alliances within the premix segment. These alliances are beginning to show benefits by accelerating access into the complex buying network of the larger organisations by leveraging the established relationships of our partners. Working through the premix segment is also beneficial to our partners who can now add value to their product by utilising both our feed additive range and also the nutritional expertise of Kiotech.

We are also appointing local distributors to service small to medium sized farmers and end users, which would otherwise be very difficult and costly to reach directly owing to the geographical size of China.

Success in China will not be achieved overnight, it requires persistence and patience. The acceptance of Genex®, an Optivite registered performance enhancing acid and essential oil combination, within a few of the top feed mills in China, demonstrates that our strategy is beginning to show results. The volumes are currently small but as confidence continues to grow, the expectation is that the volumes will increase significantly.
In Brazil, we are now selling our acidifier products to some of the major integrators. Our Brazilian distributor visited the Manton Wood facility in the first half of the year to finalise the distribution strategy and the focus leading into the year-end will be on the implementation of this and we anticipate volumes to grow as our products gain wider use respectively.

Operations – UK agriculture
Following the re-structure of our UK agriculture business, including the exit from Optivite’s low margin commodity products, sales have been focused on our higher margin feed additive products. These ranges, manufactured at Manton Wood, have been sold to the major integrators and compounders along with vitamin and mineral premixes to the pig and poultry home-mix segment. The business re-structure has enabled the corporate identity to be positively reinforced within the UK agricultural market and the brand awareness of Optivite within the customer base has strengthened significantly.

The strategy to focus on the more sophisticated, added value, in-house designed ranges, which is our core competence, is now beginning to manifest itself in the results through an increase in profitability despite the drop in sales revenue. Within the integrator and compound feed market, the decision making process is complex and lengthy, involving technicians, nutritionists, finance and operations thus creating a time lag from initiation through to sales.
Further specific market-led opportunities for our products are being developed within the pig sector as concerns relating to disease legislation such as salmonella control continue to increase. Optivite is involved in discussions with industry leading bodies to formulate control programmes that will be set as standards for farmers, incorporating several of the Group’s leading antimicrobial brands.

The organic market remains strained owing to the current economic climate and this is reflected in lower consumer uptake. Sales should benefit from the anticipated implementation of further EU legislation in January 2012 requiring sole use of organic raw materials in feed rather than the current 95%. We anticipate this legislation to be a positive driver for Vitrition, our organic feed brand, as we believe many compound feed mills will question their future in the organic feed market. In contrast to some other manufacturers, Vitrition has a dedicated organic feed content, mill and formulations which make it easier for the company to comply with the new legislation.

Vitrition is trading well, strengthening its margins and raising profitability while responding quickly to raw material price rises. This action has managed to abate the well publicised grain price inflation experienced during the first half of 2011.The outlook for Vitrition remains positive with many customer contracts and raw material prices agreed into 2012.

Operations – Aquaculture
Trials of Aquatice® continue with a number of farmers and larger animal health companies in South East Asia; recent trials in the Philippines and China had some encouraging results. We are working closely with the industry in the region and the technology is attracting increasing interest.
We are in the process of moving production of Aquatice® from outsourced manufacture to our Manton Wood site; this will lower costs and increase control and flexibility.
Discussions and collaboration are continuing with some key partners, which we hope will lead to distribution agreements and possibly licensing of the technology.

Outlook
The Group has delivered a strong performance in the first half of the year and this is continuing. The improvement in our gross margin reflects our focus on higher value feed additive ranges and close attention to selling prices.
The Group is well positioned to continue its success in the second half of the year and is currently evaluating a number of acquisition opportunities, which could potentially meet our criteria for value creation”