Tate & Lyle PLC
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Tate & Lyle PLC
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Good morning, ladies and gentlemen, and welcome to the Tate & Lyle Q3 trading statement.My name is Mark, and I'll be your coordinator for today's event. [Operator Instructions]I will now hand over to your host, Javed Ahmed, to begin today's conference. Thank you.
Thank you, operator. Good morning, everyone, and welcome to the conference call.With me is Nick Hampton, our Chief Financial Officer, and I'm pleased to say, my successor as Chief Executive from the 1st of April 2018.Before Nick and I take your questions, let me briefly summarize today's third quarter trading update.The group saw volume momentum in both divisions and remains on track to deliver progress in adjusted profit before tax in constant currency for the year ending 31st of March 2018, in line with guidance.In specialty food ingredients, the core business delivered good volume growth, including a continuation of modest volume growth in North America and broad-based growth in other regions. In Food Systems, profit improved, although volume was lower. SPLENDA Sucralose performed as anticipated, with profit in line with the comparative period. For the division as a whole, decisions taken in the first half, particularly to invest behind the longer-term development of the business, will moderate profit growth in the second half. And overall, we are pleased with the progress we are making behind our focus on top line growth.In Bulk Ingredients, sweetener volume in North America grew. And profit growth is currently expected to be robust for the financial year ending 31st of March 2018. The 2018 calendar year bulk sweetener pricing round is now substantially complete, with margins broadly in line with the previous year.Finally, the balance sheet remain strong. Cash flow generation is good, and net debt is expected to be lower than at the year-end.So overall, we remain on track to deliver progress for the year ending 31st of March 2018, in line with the guidance at our half year results in November.And with that, Nick and I will open up the call for questions.
[Operator Instructions] The first question comes from the line of Arthur Reeves from Societe Generale.
My -- I've got 2 questions, please. One, about what you're talking about, the margins in speciality and the investment made earlier. Could you outline what they are again, please, so that we can be a bit more precise? And my second question is about currency. What is the U.S. dollar doing to your business in the second half, please?
Arthur, I'll take the first one, and then I'll hand over to Nick for the second one. In terms on your question on the investments, we took a decision, which we highlighted in half 1 on the back of what was shaping up to be a very good, strong first half, we were up 13%, to invest in the long-term development of the business and capability build. So specifically in terms of infrastructure; improved and expanded our applications labs, facilities in emerging markets; go-to-market resources, so more feet on the ground, particularly in the emerging markets; and where we felt it was appropriate to make any volume, margin, pricing trade-offs as we grew the business and went for share gain and new customer acquisitions. So that's very simply what we've done, so very much with a long-term view.
Arthur, just to pick up on your currency point for half 2 specifically. If you remember, our guidance on a full year basis is that a $0.01 movement in the dollar-pound exchange rate drives the currency impact of about 2 million for the full year. So depending on where the rates land for the balance of the year, we're expecting to see a headwind in the second half that is similar to the impacts for the half year impact. And net-net, I'd say for the full year currency is probably going to be a slight drag on us rather than a positive because obviously we had a half 1 upside. And if you look then into next year, we'll obviously see some impact on currency depending on where the rate lands.
The next question comes from the line of Martin Deboo from Jefferies.
Javed, we wish you well for the future. I just want to say that. Questions: I have the question Arthur had on SFI investment, as you might expect. I suppose my add-on to that would be what -- do you expect that investment to start earning a return in '19? I know it's early to talk about '19, but I'm just thinking of the lay-down of SFI starch into '19. And my second question, probably more for Nick, is just talk to us a bit about cash generation in FY '18, Nick, and how you're seeing -- you've -- often make a statement about the year-end net debt position in Q3. I don't see that, but if there's anything you can say about the shape of cash and debt, that will be helpful.
Martin, thanks. So as we said, the investments will moderate the profit growth in the second half for SFI but serve us very well over the longer term. I mean overall it's a strong year for the business, anyway. And I'm actually very glad we made these investments based on the evidence already thus far in terms of the growth momentum that we're seeing. So yes, we would expect these to be long term absolutely the right -- earn the right kinds of returns for us.
So Martin, let me talk about net debt then. So I'd anticipate, at year-end, we're going to see, if I look at it in constant currency terms, net debt below GBP 400 million for the full year. Now depending on where the currency lands at year-end closing balance sheet, we should see some lowering of net debt driven by currency as well.
The next question comes from the line of Alicia Forry from Investec.
Just 3 very quick questions from me. One, on the SFI profit growth statements, when you said that you expect SFI profit growth to moderate in H2 versus H1, are you talking about the constant currency growth rate or the reported profit growth rate, so i.e. moderate versus the 4% constant currency growth rate that the SFI division posted in H1 or versus the 11% reported profit growth rate? That would be helpful. And then on the SFI business, looking out now, you've got contracts presumably settled for calendar 2018. Can you give us some color on the backdrop of the SFI market? So we've clearly seen a tough environment in packaged good and bev in many developed markets recently, so what are you seeing for 2018? And then finally, on bulk margins, presumably these have been helped by the industry capacity reduction a few years back. Eventually, that will become less of a boost, so what does the landscape for bulk profitability look like from your perspective? What flexibility do you have to adjust the cost base once this favorable effect from the industry begins to dissipate?
Okay, so let me take these in turn, Alicia. The SFI profit growth where we're talking about moderating profit growth, we always talk about in underlying constant FX, so it is at constant FX that we are referring to that. The second question is contracts for settlement in '18 in -- on the SFI side. The market, as you say, it's a challenged market. We're talking primarily North America now, so that's what I'll -- we're focused on. And we have seen pretty much the market in the -- pretty -- along the same lines as we saw in half 1. It's a pretty flat environment out there. Against that flat environment, we are seeing modest growth, saw a continuation of that in Q3. And that's very much, I think, a derivative of the approach, the 3-pronged approach, that we're consistently following through on, which is growing ahead of -- and gaining share with some of our larger customers. You know they're a big percentage of our business, about approximately 40%. Continuing to make solid progress in the newer channels we've targeted, food service and private label, to call out a couple. And the third, the specific targeted subcategories we're going in are doing particularly well with some of our CLARIA starches in the dairy category. So overall, yes, a pretty muted environment, as you just suggested, but our approach seems to be standing us in good stead at the moment. So -- and then your third question, in terms of bulk margins: I -- it's -- pretty much as far as I've seen this industry, it's been pretty good at managing -- it's a pretty disciplined industry. It's been pretty good at managing overall capacity, and I think you've seen that over the years. At the moment, carbonated soft drink consumption is -- has marginally declined over the last 2 or 3 years, so I don't see -- and we're not feeling anything different at the moment that I would particularly call out. And as I said, the industry seems to be able to manage itself pretty well over the longer term.
The next question comes from the line of Anton Brink from Kepler Cheuvreux.
Two questions. First one, for Nick. Although I acknowledge the improvements in core SFI North America, I'm wondering how high an expansion of the SFI business in other geographical regions with higher growth will be on your agenda. Are we likely to see more M&A on this front going forward? Second question, can you guys clarify what you've done to invest behind the longer-term development of the sucralose business? How much has this cost us? And was this CapEx already included in the guided GBP 150 million CapEx number?
Anton, thanks. Let me take both your questions in turn. I mean, look, clearly, emerging markets is going to be a significant part of the future success at Tate & Lyle. And Javed talked about some of the investments we've already made to underpin that earlier in his -- in one of his answers. As for my longer-term priorities, in the short term, we're focused on closing out this year and setting next year up for success. And Javed and I are working through, with the rest of the executive team, a successful handover, but I'll spend more time talking about my priorities and what I think they are when we get to our May results announcement. I think that's the appropriate time to talk about that. In terms of investments in sucralose, we've made the investments we think are necessary to underpin cash generation from the sucralose business. So the shutting of the Singapore facility and the scale at McIntosh and the CapEx that we put into that is now beyond us. And anything on sucralose that we've spent or will spend is being factored into our forecast for capital for this year.
The next question comes from the line of John Ennis from Goldman Sachs.
I've just got the one question actually. Most of mine have already been answered, but it's on Commodities. They were obviously quite a big boost for the bulk business in the first half. I just wondered if there's anything you could say regarding the trends you've seen in the third quarter so that we can get a bit of an idea of what to expect for the second half from that business which is always a bit volatile.
John, the Commodities, you referred to the first half gain. So clearly we -- there was a first half gain. Q3 has been very satisfactory, so nothing to call out on that one, as we've always said. And that's the reason we disclose Commodities separately now. If there's anything particularly which is going to change our guidance either at the divisional level or at the overall level for Q4, because we do need to look at these Commodities on a quarter-to-quarter basis, we'll guide you appropriately, but at this point, we don't see anything which would be changing our guidance. Quarter 3 has been satisfactory.
The next question comes from the line of Liz Coen from Davy.
Just a question. I think most of my questions have already been answered at this stage. Just on volumes in EMEA: So H1, you reported quite a strong volume growth of 8%. Just are you still seeing strong volume growth coming through? Just with you have a tougher comp in H2 prior year of 11%.
Yes, EMEA actually also had another very solid quarter for us. So I will say broadly in line with what we saw in the first half, so the business certainly is marching along and doing very well for us.
We have one final question in the queue. [Operator Instructions] The last question comes from the line of Jeremy Fialko from Redburn.
Jeremy Fialko, Redburn, here. 2 questions from me. First one is on the core Bulk Ingredients. You had about 16% constant currency profit growth in the first half. Is the second half profit growth going to be pretty similar to that sort of level? And then secondly, if you could just update us your thoughts on the tax rate from 2019 onwards in the wake of the cuts that have been made in the U.S.
Jeremy, I'll take your first question, and then I'll pass on to Nick for your second one. The short answer to your first question, on core bulk, is we're not seeing anything based on what we've seen so far in Q3 and, looking ahead to Q4, that the second half is going to shape up any differently than the first half. So the business, as we said, we're looking for robust profits for the full year here. So the business is doing well.
And Jeremy, let me perhaps add some -- one last point to Javed on the core bulk piece, which is clearly the thing that we are not clear on yet for the second half is how Commodities play out because obviously that sits in the bulk number. But we will obviously come back with the full year. On tax, I mean, clearly the U.S. tax reform creates a very different landscape. There are lots of moving parts, but the lower rates clearly is a positive going forward. And we're not changing our guidance on tax for this year at this stage. When I look at beyond this fiscal year into '19, it feels like we can anticipate a net positive from the overall impact as we sort through the details. And that is in contrast to our previous guidance where we thought we were going to see a moderate increase in our tax rate. So we'll give more precise guidance to the full year, but net-net it feels like it's going to be a positive for us going forward.
Okay. We currently have no questions coming through. [Operator Instructions] So at the moment, we've had no more questions coming through, so I'll hand back over to you.
Thank you. Thank you, operator.So I would wrap up but just on a personal note here because this is my last call before I retire from the role as Chief Executive. So I would like to thank all of you for your support and your interest in Tate & Lyle. I have been very, very deeply privileged to have led this great company for more than 8 years. And I look forward to watching it continue to progress and thrive for many years ahead under Nick's leadership. So thank you all very much.And thank you, operator.
Thank you, Javed. Thank you, ladies and gentlemen, for joining today's call. You may now replace your handset. Thank you.