(SORB) Sorbic Intl

Sorbic International Plc

("Sorbic International" or the "Group" or the "Company")

Preliminary Unaudited Results

Sorbic International plc, (AIM:SORB), the third largest sorbates producer in China, today announces its preliminary unaudited results for the year ended 30 September 2011.

Summary

John McLean, Non-Executive Chairman of Sorbic International, commented:  "This year has been a period of significant development for the Group, with construction at the new facility in Inner Mongolia now largely complete.  Despite challenges in the wider economy, Sorbic has made good progress and continues to manage raw material prices where possible.

"The Company is poised to become more sales oriented and expand its market share in China as part of the strategy to build sustainable long-term growth.  With the new facility now close to commencing full production, the Group will soon be in a position to capitalise on the significantly increased capacity."

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Notes to Editors:

Sorbic International's principal activity is the production and sale of the food preservatives Sorbic Acid and Potassium Sorbate from its base in Linyi City, Shandong Province, People's Republic of China. Approximately half of Sorbic International's production is sold to overseas markets, across 46 countries and half into the Chinese domestic market.

Sorbic Acid is a naturally occurring organic compound that is used in all kinds of foods for its anti-decomposition and anti-fungus function and also in grains, medicines, cosmetics, toothpaste, tobacco, animal feed, latex, paper-manufacturing and pesticides. Potassium Sorbate is used to inhibit moulds and yeasts in many foods, such as cheese, wine, yogurt, dried meat, baked goods, cosmetics and pharmaceuticals.

CHAIRMAN'S STATEMENT

Introduction

2011 proved to be an exciting yet challenging year for the Group.  

I am pleased to say that the Group has remained focused and has continued with its expansion in Inner Mongolia where cheaper resources will improve margins and give Sorbic a competitive edge.  The project has now entered the final phase of its development with the soft launch of the Group's sorbate line having taken place on 4 November 2011.

The results for year ended 30 September 2011 show a significantly improved revenue of £14.7 million (2010: £12.1 million), although profit before tax was lower at £0.3 million (2010: £0.6 million) and profit after tax and exchange differences of £0.9 million (2010: £0.8 million).  The Group achieved earnings per share of 0.36 pence (2010: 1.04 pence).

Gross margin decreased from 18.5% to 10.2% due to the rising costs of raw materials.  The Group has made a conscious effort to reduce the number of long-term contracts for the current year to less than 40% of total sales in order to provide a degree of flexibility for price adjustment.  Although raw material price inflation was factored in during pricing negotiations, the inflationary impact was much higher than anticipated.  China's consumer price index ("CPI"), the main gauge of inflation, rose 4.2% year-on-year in November 2011, according to data released by the National Bureau of Statistics ("NBS").  Though still high, the figure marked the slowest surge from July's three-year peak of 6.5%.  The Company's average gross margin dropped significantly below 10% during the second quarter of the financial year (January-March 2011).  The Company was only able to raise prices slightly and therefore passed some of the increased costs to customers not on long-term contracts.   Accordingly, price increases were not achieved at the same rate as the cost increases with a consequent reduction in margins.  The Company faces resistance from customers to move from long-term contracts, but will, over time, look to reduce the proportion of such contracts.

Despite the Group's capital commitment for the facility in Inner Mongolia being affected by rising steel and construction costs, the Company's decision to locate to Inner Mongolia has been reaffirmed by the ready availability of low cost resources; the cost of coal and electricity are halved, and water is free, and these cost savings are expected to improve both production efficiency and margins.

The Chinese Yuan has appreciated by more than 27.5% since 2005 or approximately 4.5% per annum.  The market's expectation for the Chinese Yuan appreciation in 2011 is between 4.5 and 5.5% and will continue to follow a gradual pace going forward.  Its appreciation has benefited the Group's China investment in sterling value.

The Group is now well positioned to increase the scale of its production.  This will broaden Sorbic's competitive position as the Company is poised to become more sales oriented and expand its market share in China as part of the strategy to build sustainable long-term growth.

2012 Economic outlook and the domestic Chinese market

Despite the possibility that the Chinese economic growth rate may continue to slow down in 2012, it is still projected to deliver an impressive 8% growth rate (source: Marketwatch).  Rising disposable income and urbanisation will continue to drive the Chinese economy in the foreseeable future.  The food processing industry will benefit from these factors.  Between 2001 and 2006 the industry grew at a compound annual growth rate of 20% to reach approximately US$288 billion¹.  As consumers increasingly value the convenience and variety of processed foods, the industry is expected to continue to expand.  Currently only approximately 30% of food in China is processed, compared to 60-80% in Western countries².  The current level of adoption suggests significant room for growth in the domestic market, especially in urban areas.

In addition, recent food safety scandals have drawn unwanted international attention and have become a growing public concern in China.  In the latest four-month campaign, government investigators have inspected nearly six million food and additive producers and the authorities have arrested more than 2,000 people and closed down 5,000 businesses since concerns over the use of harmful ingredients peaked in the spring of 2011.  The latest enforcement campaign shows the seriousness with which the Chinese government takes the country's food safety concerns.

Government intervention will continue to play a large role in the short-term, by forcing domestic firms to comply with new improved standards.  In the long-term, as consumers become more aware and are less willing to accept substandard quality, producers will in turn increasingly invest in better practices and products to ensure quality, thus generating new opportunities for the Group's products.

¹Source:  New Zealand China Trade Association ("NZCTA")

 ² Source: New Zealand China Trade Association ("NZCTA")

New Production Lines - Inner Mongolia

Construction of the new plant in Ulanqab City, Inner Mongolia, which will double the Group's production capacity to 15,000 tonnes per annum, is on schedule and is expected to be fully operational by summer 2012.  Once they are operating at full capacity, the two new lines have capacity of £38 million at current prices and at higher margins than the existing facilities.

The stable power supply at the Inner Mongolia facility will be a significant factor for the future growth of the Company given the challenges that have been faced due to the power outages experienced at the Linyi factory over recent years that have impacted on production. The additional land available in Inner Mongolia for future expansion will also be of great importance going forward.

The Board expects the financial benefit of the two new lines to be fully reflective by FY 2013.

The Board

As announced on 31 October 2011, Ray Ang, stepped down as a Non-Executive Director of Sorbic International due other work and travel commitments.  However, his experience will still be available as a consultant to Sorbic International. The Board joins me in thanking Ray for his valuable contributions to the Group over the last three years.

The Group is seeking to recruit another Non-Executive Director who will bring the appropriate skills and industry experience to the Board.

Operational outlook for 2012

With the soft opening ceremony at the new facility held earlier this month, the next phase of development for the Group will be for the potassium sorbate line to become operational in spring 2012 and the sorbic acid line to commence production in summer 2012.

In anticipation of the expanded production capacity next year, the Group's sales team has been regularly engaging and updating existing and potential new clients on the development of the new facility in Inner Mongolia at recent trade fairs.  The Board will continue to monitor and manage the speed at which the facility operates depending on the availability of capital.  With the ongoing global economic uncertainty, the main challenge for FY 2012 will be to improve margin stability and market share in existing markets, while building up relationships with domestic and Asian clients where demand is growing.

A fall in commodity prices due to slow world economic growth is expected to help stabilise China's inflation to within 4% for 2012 (source: Marketwatch) and ease inflationary pressure on the Company's raw material prices.

The Board would like to thank the management and the employees for their hard work and continued dedication to the Group.  On completion of the new facility, Sorbic will be well placed to benefit from further growth in the demand for food additives, both internationally and from an increasingly important domestic market.

John McLean

Chairman

14 December 2011

Unaudited Consolidated Statement of Comprehensive Income