Tate & Lyle PLC
LSE:TATE
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Tate & Lyle PLC
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Hello, and welcome to the Tate & Lyle Q3 Trading Statement Call. Please note, the call is being recorded. [Operator Instructions] I'd now like to hand you over to our host for this morning's call, Nick Hampton. Thank you.
Thank you, operator. Good morning, everyone, and welcome to the conference call. With me is Imran Nawaz, our Chief Financial Officer. Before Imran and I take your questions, I'd like to make some introductory comments. I continue to be pleased with the progress I'm seeing against our 3 priorities first laid out in May 2018 and on which we gave further detail at our Capital Markets Day in September. We had a solid third quarter. Group adjusted profit before tax in constant currency was ahead of the comparative quarter and our outlook for the year ending 31st of March 2019 remains unchanged. Food & Beverage Solutions performed well, with volume growth in line with the first half. In North America, volume growth continued, benefiting from our strategy to focus on winning new business in faster-growing subcategories and new channels, and on gaining share with our larger customers. Asia Pacific and Latin America showed good growth and continued momentum, especially in Southeast Asia. In Europe, Middle East and Africa, we continue to focus on mix improvements. Adjusted operating profit in the quarter was higher than the comparative period. In sucralose, volume was higher, benefiting from a program to optimize production at our facility in McIntosh, Alabama, and adjusted operating profit was slightly ahead of the comparative quarter. In Primary Products, we saw lower volume in North American sweeteners, primarily driven by weaker demand from our larger carbonated soft drink customers, and the adjusted operating profit is lower than the comparative period. The 2019 calendar year bulk sweetener pricing round is nearing completion, with margins broadly in line with the prior year. Cash flow continues to be strong and our balance sheet remains robust, giving us the flexibility to invest for longer-term growth. Overall, we are making good progress against our priorities that delivered another solid quarter and our guidance remains unchanged. And with that, Imran and I will open up the call for questions.
[Operator Instructions] Our first question comes from the line of Anton Brink from Kepler Cheuvreux.
Two questions from our side. First one is to Nick. I remember you saying that at the end of the calendar year 2018, there will be a decisive moment as a significant part of your contract portfolio in sucralose would lapse. And now we've passed that period, can you comment to us on how that went and what we should expect for sucralose profitability into the next quarter and the next year, please?
Sure, Anton. Thank you for the questions. Turning to sucralose. Look, we saw another solid quarter and we -- it continues to do well in what is after all still a growing market as a result of the great work of the team on reassessing the business and the manufacturing footprint. And we are still seeing surface capacity in the industry, so what we're expecting as we go into next year is modest pricing pressure. So no different to what we've seen before. And that's broadly what we've seen as we've looked to recontract business for next year and beyond.
Okay, clear. Then second question is on Primary Products. So can you quantify the broadly-in-line outcome of the negotiations for us? And maybe a follow up on that, am I my right to conclude that the combination of this unit margin effect and the lower volumes should imply a negative EBIT margin effect into next year?
So let me quantify that a bit. So let -- the pricing rounds coming to a close, and as I said, we're broadly in line from a margin perspective. What that really means is, through the pricing round, we've managed to price through cost inflation. We're seeing volume contracts to be broadly similar to the prior year. And I think the question for us is -- going to the next calendar year is how the volumes evolve. So yes, we saw a little bit of softness in quarter 3. We're happy with where we ended up on the pricing round for calendar 2019. And the key now for the team is to execute in a disciplined way against the contracts that we put in place, and we'll see how volume allot evolves over the next few months.
Okay, clear. And maybe last question is on the F&B Solutions segment. Implicitly, I think consensus is asking for 12% EBIT growth into H2. Is that the level we should feel comfortable with based on today's comments?
Sure. I mean, we'll see how half 2 closes out. So I'll get Imran to give you some additional comments on this. But based upon our overall outlook, we're not changing outlook for the year, so our guidance remains unchanged.
Yes, that's right. I mean, if you look at the shape of the P&L and how it's playing itself out between FBS, Primary and Commodities, the guidance is pretty much exactly where what we were talking about at H1. And the growth rates in the different segments playing themselves out in Q3 very similarly to H1, and therefore, we feel comfortable with those levels.
Our next question comes from the line of Martin Deboo from Jefferies.
Martin Deboo at Jefferies. I've got 2 questions. The first one actually just comes off what Adam's just asked. I mean, I agree with his analysis of H2 expectations. But I'm conscious in F&B Solutions, I think you were lapping some growth investment last year. So is the 12% a sort of indication of the momentum? I'm thinking just there's a lot of short [ bulk ] volume in F&B, but give me your color on what you think underlying sort of sustainable profit momentum is there. And the second question, I just want to pick up something that was asked on the Ingredion call, there seems to be some talk of politics in Mexico between sugar and HFCS, I wonder if you'd pick that up. You'd obviously appreciate what lies behind the question is the sustainability of Mexico volumes in HFCS.
Martin, thanks. Let me take the second question first. We haven't picked up anything specific or significant in Mexico on -- what I can say is that the relative pricing between sugar and high fructose corn syrup is narrowed in Mexico, but we haven't seen any significant change in the demand profile or any particular noise. So that's the answer to the first one. On margins on FBS and lapping investments, it's true, in the second half, we did start to lap the investments we made last year. As you rightly say, we talk about momentum on volume continuing into the third quarter, which is very pleasing. We're seeing a good balance between volume, revenue and margin. So as we sit today, we're pretty comfortable with the progress we're making.
[Operator Instructions] Our next question comes from the line of Liz Coen from Davy.
Just 2 questions from me, please. Firstly, just on your Commodities performance in Q3, could you just please just provide a bit more color around that and what you're seeing for the full year? And we are still in an environment of weaker soy prices in the U.S. and weaker ethanol margins. And then secondly, more broadly, just if you could please give us an update on your outlook for inflation for both Food & Beverage Solutions and Primary Products.
Let me take the first one on Commodities. So look, as we look at the Commodities business, the markets in which we operate in there, exactly the ones you mentioned, haven't really changed compared to what we saw in the first half. And as you know, we essentially built that into our guidance. At this point in time, I see no real change to the, call it, our guidance in terms of having a normal commodity year. And lastly, we had a record year. This year, expect a more normalized year for Commodities. But part of our guidance, no real surprises to us. On inflation, so I guess 2 things, really. I mean, you're talking about the pricing. Is that...
Liz, I assume you're thinking about the balance between inflation and overall margin, is that behind the question?
Exactly, yes. And I suppose, post H1, we were -- we understood from you that you were guiding inflation for the next 12 to 18 months. And just in terms of has that -- has your outlook changed in any way? Has it moderated at all?
I think what we're seeing is similar to what we've guided to in the first half. And I suppose we -- as with Primary Products, we're looking to pass through that cost inflation through the next round of pricing. We're broadly seeing that hold, so we're pretty happy with where we are. And we've got -- clearly, got our procurement team also focused on trying to lock forward pricing as well so we minimize the volatility in the business. But so far, we feel good about what we've achieved through the current pricing round.
And our next question comes from the line of John Ennis from Goldman Sachs.
A couple from me, please. The first is on the volume growth performance in F&B solutions. I wondered if you could give us the market growth, and therefore, sort if you're gaining or winning share in each of the different regions that you report, that would be helpful. And then on the sweetener demand comment. I was wondering if you -- if this volume weakness is something you expect to moderate or partially reverse in the final quarter of the year, or whether this is, I guess, an ongoing volume trend that you expect to continue both throughout this year and maybe into next year. And then building on the inflation question before, could you just comment on freight costs and whether there -- whether that's eased in the last quarter?
Okay. So let me pick up your first point, John. So looking at share in FBS, let's start with North America, where we saw similar growth to the first half, which clearly indicates, in what's a pretty flat market, that we're successfully gaining business and share. When you go around the globe, it's a bit more difficult to give you a precise answer. But given that we're seeing growth rates ahead of the market across our emerging markets, we feel pretty comfortable that we're gaining in emerging markets as well. And in Europe, we're playing a more nuanced game of trading volume up into high-margin products rather than volume. So I think it's a pretty good picture broadly across the landscape at this stage, and we'll see that -- how that evolves in the fourth quarter and into next year. On your question -- second question on volume softness in North America, I mean, what we clearly saw in the third quarter was an acceleration of pricing in carbonated soft drinks as the big players looked to recover some cost inflation. We'll see how that evolves over the next few months. I mean, we've seen a consistent decline in demand for full sugar carbonated soft drinks over time. It did accelerate in the third quarter. It's a bit early to tell whether that's going to continue. And it just makes it important for us to continue to do 2 things, really, which is, firstly, to be very disciplined about the execution, and the team's doing a nice job on that and did that through the contracting round; and secondly, to make sure we're continuing to shift our portfolio more broadly into areas where there are pockets of growth, which is what we've done successfully over the last few years and what we'll look to continue to do into the next calendar year and beyond.
I'll take your questions on freight. I mean, as you know, it's been a headwind in the first half and it continues to be a headwind into the second half, including in quarter 3. What I feel good about is the progress in having to -- in the pricing round to recover those freight costs. I expect next year, freight costs will continue to rise, but not at the same degree. But again, I mean, we've made good progress with our customers to ensure we can recover those inflationary pressures.
Thank you very much. We currently have no further questions, so I will hand back to the speakers, if I may.
Thank you, operator. Thank you all for your questions. So in summary, we're making good progress against our priorities, and we've delivered another solid quarter and our guidance remains unchanged. We look forward to seeing you all again on the 23rd of May at our full year results presentation. Thank you, everyone, for joining the call. Thank you, operator.
Thank you very much, everybody, for joining the call. You may now disconnect your lines. Thank you.