Sorbic International Regulatory News (SORB)

28 Oct 2009 11:39



28 October 2009

Sorbic International plc

("Sorbic International" or "the Company")

Trading Update and Expansion Plans

Loan from Albany Capital

Trading update

Sorbic International (ticker: SORB.L), the food preservatives group, is pleased to announce that trading remains robust and in the year ended 30 September 2009, results are broadly line with expectations, on a constant currency basis. This performance has been achieved despite a 10 day closure of production facilities following a small explosion and fire at a nearby factory not related to Sorbic. Since this incident, operating and environmental controls in Linyi, Shandong Province have been further tightened and Sorbic, whilst not involved in the incident, passed its inspection.

Expansion of production facilities

Sorbic International, through its subsidiary, LVST currently operates from a site in Linyi City. The existing facility has two production lines which are currently operating at their full capacity. Since production capacity cannot meet current demand the Company proposes to construct new production facilities to meet future growth in demand. As detailed in the readmission document of September 2008, Sorbic International intends to expand its facility with the addition of two more production lines which would double the existing capacity. The Board approved the construction of the new production lines in November 2008. It was originally proposed these would be built at the Company's existing site in Linyi.

However, in August 2009, the Company received an offer from Economic Development Bureau of Ulanquab, Inner Mongolia to build the planned new production facility in Chahar Industrial Park and a study trip was conducted by the Board. This was followed by the commissioning of an independent report into the feasibility of the proposal for the Company's new production facilities.

The main drivers of the relocation of the new facilities are:

The availability of rich resources like coal, electricity and water at a lower cost will  improve gross profit margins by approximately 20% and enhance the Company's  competitive advantage;

Tax incentive that lowers effective rate of tax from 25% to 15% (a 40% saving) for the  next  10 years;

Cheap industrial land resource at less than 45% of the National benchmark land price; and

As an early entrant into Chahar Industrial Park should allow the Company to foster  stronger relationship with local government which has committed full support for it's  construction project and future development plans;

In addition, increasing regulatory requirements by the local authorities at the Company's existing site will result in additional environmental costs over the longer term and further reinforces the benefits of relocation to the new proposed facilities for the Company's new production capacity.

Whilst there is an additional investment of approximately £800,000 in relocating to Inner Mongolia, the Board believes that the long term financial gains from relocation are substantial and these outweigh the costs and a necessary delay in completing the new facilities

As at 30 September 2009, Sorbic International had already committed RMB 41.7million to the construction of the two new production lines. Of this, approximately RMB7.9 million relates to the new dormitory, canteen and office building. The balance of RMB 33.8 million are down payments for equipment that will be transferred to Inner Mongolia. The two new lines in Linyi were originally estimated to begin production from March 2010.

Construction in Inner Mongolia is expected to commence from spring next year and be completed by autumn the same year.

Loan from Albany Capital

Sorbic International continues to make progress and its wholly owned subsidiary in China, LVST, remains profitable and cash generative. However, until LVST receives its appropriate tax clearance from the Chinese tax authorities, which is currently in process, under the Company's current tax structure LVST cannot release administrative funds to the holding company, Sorbic International plc, without incurring the significant costs of withholding taxes. Consequently, Albany Capital Group Limited ("ACGL") (formerly Albany Capital plc), which is a significant shareholder (20.4%) in the Company, has agreed to provide Sorbic International with a one year term loan facility of up to £300,000 on a fixed rate of 7.5 per cent. per annum in order to fund head office costs until such time as the Group restructures its tax affairs to allow a more economic flow of funds to the UK from Asia.

The directors, excluding John McLean who is also a director of ACGL, having consulted with Finncap the Company's nominated adviser, consider the terms of the loan are fair and reasonable insofar as shareholders are concerned.

Commenting, John McLean, Chairman of Sorbic International, said:

"We are pleased that trading to 30 September 2009 was broadly in line with our expectations on a constant currency basis. The Board remains confident of the future prospects for Sorbic International, and is particularly excited by the opportunity that has arisen in Inner Mongolia. These new facilities will provide Sorbic International with purpose built production facilities which should benefit from significant efficiencies. Inner Mongolia is also very well logistically positioned with a modern infrastructure across energy, water and transport. The new site will also have the opportunity for additional expansion as we look towards greater capacity in order to meet growth in anticipated future demand."

Notes to Editors: www.sorbicinternational.com

About Chahar Industrial Park

Chahar Industrial Park is located in Ulanqab City, Inner Mongolia, in the north of the Peoples Republic of China ("PRC") and is the traffic hub that links North China with its neighbour, Mongolia and the main land route for international trade from China to Mongolia, Russia and Europe. Ulanqab City has a total land area of 54.5 thousand square kilometres and a population of 2.73 million people and is a one hour to drive from Hohhot Baita Airport, which lies 130 kilometers east of Hohhot. Beijing is 300 kilometers (3 hour drive) to the south and Tianjin port is 400 kilometers away.

About Sorbic International plc

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, Peoples 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.