Tate & Lyle PLC
LSE:TATE
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Tate & Lyle PLC
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My name is Josh, and I will be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Nick Hampton, to begin today's conference.
Thank you, operator. Good morning, everyone, and welcome to Tate & Lyle's Third Quarter Conference Call. I will make some introductory comments and then we'll be happy to take your questions. The group's trading in the third quarter was encouraging and in line with our expectations, driven by strong top line performance in our continuing business or what will be the new Tate & Lyle comprising food and beverage solutions and Sucralose. Consumer demand for healthier food and drink continues to strengthen across our markets with our leading expertise in sweetening, mouthfeel and fortification and a unique portfolio which helps to remove sugar, calories and fat and add fiber to food and drink, we are very well placed to meet this growing demand. This was reflected in the top line growth delivered by Food & Beverage Solutions in the quarter, with double-digit revenue growth across each region. Volume was 6% higher, while revenue was 19% higher, with 3 percentage points coming from acquisitions. Revenue from New Products was 54% higher. Looking through the global pandemic as a 2-year picture compared to the quarter ended December 2019, and before reporting changes, volume in Food & Beverage Solutions grew by 12% and revenue by 31%. This growth reflects the increasing strength of our customer relationships and the potential of our Ingredients platforms. As expected, Sucralose also performed well in the quarter, with revenue 8% higher, reflecting continued solid demand and good customer mix. In Discontinued Operations, which is our primary products business in the Americas, volume was broadly in line with the comparative period and on a 2-year basis. However, as expected, performance was significantly weaker due to cost inflation and actions taken to reduce costs in the comparative period to mitigate the impact of the global pandemic. A key focus in the third quarter was to renew those customer contracts, which are based on a calendar year cycle and to offset anticipated inflation. I am pleased that in both our continuing and discontinued businesses, we achieved that goal. However, the cost environment remains uncertain, and we will need to stay agile and very close to our customers as we navigate the year ahead. Turning to the outlook for the year ending 31st of March 2022. For our Total Operations, which is the current Tate & Lyle Group, our guidance remains unchanged. With the performance of continuing operations, the new Tate & Lyle expected to be stronger offsetting performance in Discontinued Operations. The strategic transformation we announced last July is progressing well, and we expect to complete the sale of a controlling stake in our primary products business in the Americas at the end of March. As previously announced, following completion of the transaction, we intend to return approximately GBP 500 million to ordinary shareholders by way of a special dividend with an associated share consolidation. We will announce the timing of this shortly after completion of the transaction and subject to shareholder approval, expect to execute the special dividend before the end of the third quarter of the next fiscal year. The ability of my colleagues to continue serving our customers through the pandemic while also progressing the separation of our 2 businesses is a great testament to their dedication and agility. And I want to thank them all for their outstanding delivery. Earlier this week, we were delighted to announce the appointment of Dawn Allen as our new Chief Financial Officer from the 16th of May. I look forward to welcoming Dawn and working together to deliver Tate & Lyle's growth agenda. In conclusion then, we are entering a new and ambitious chapter for Tate & Lyle as a growth-focused Speciality Food & Beverage Solutions business. We are doing this from a position of strength and with positive momentum, supported by increased investments in innovation and a strong balance sheet to fund growth, the new Tate & Lyle is extremely well positioned to deliver on its 5-year ambition to mid-single-digit organic revenue growth and on average, operating margin expansion of at least 50 to 100 basis points for the year. With that, I will open up the call for questions.
[Operator Instructions] And our first question comes from the line of James Targett from Berenberg.
Couple of questions from me. Firstly, could you just talk a little bit about your inflationary costs in terms of the level of inflation that you're seeing? And I appreciate you're saying you are covered -- you're covering your costs in both parts of the business, but just in terms of -- so we can think of implications for sort of percentage margins even if you do cover your unit costs for the first part of FY '23? And then I guess my second question is on the freedom of FBS, kind of the top line. Could you maybe split out the kind of the mix price component of that sort of 13% growth above the top line -- above the volume growth, sorry. And the volume growth year-to-date in FBS is already sort of in the high single digits. So as we move into next year, that's obviously well ahead of your -- the initial kind of midterm guidance for New Tate. How do you think about volume growth trending in FY '23?
Sure. So James, thank you. Let me take your first -- your second question first on FBS. So if you look at the revenue growth in Q3 of 19%, very similar to the first half, by the way. So a continuation of what we saw in the first half. You've got [ 6% ] volumes, so therefore, 13 points of leverage between volume and revenue. Roughly 3 percentage points of that comes from corn price pass-through, so you've got -- you're left with 10. About 3 of the remaining 10 came from acquisitions, notably Stevia, where you've got a good revenue product but relatively light. So you've got 7 left, which is primarily driven by mix. And of course, the key driver of that is the fact that you've got both good customer mix across the business as we look to selectively trade up the business, but also importantly, the strong growth of new products. So we saw another 50% growth of new products in the quarter, which is very encouraging. And again, consistent with the first half, albeit helped by acquisitions. But still, if you strip out the impact of acquisitions, you've got new products growing at 20% plus. On inflation rather than getting to kind of specific percentages, clearly, very happy with the fact that the team did a good job with the contracting round across both businesses to cover the anticipated inflation we saw. As we look forward, I mean, clearly, there's this potential for more inflation, but we're well covered on things like corn and energy. And we've built some flexibility into some contracts to revisit should we see some further inflation. So we feel pretty well [ assessed ] as we enter the new year with the caution being that there could be more inflation to come. And from a margin perspective, as I said, our real focus was on maintaining absolute margins, and we'll see how that evolves as the year progresses.
Just following up on just the first part on the FBS just on the volume side. How do you -- maybe obviously, the volume growth you're delivering is obviously well above what you're guiding for in the medium term. So I'm just thinking how you would like -- how we should be thinking about volumes over the next sort of 12 months?
Look, I think with clearly over a 2-year picture. If you look at the volumes, then the volume growth is not as high as we saw in the third quarter, indeed the first half because we're sort of -- there's this sort of disturbance from the COVID impact. So I would say, I would think about moderating expectations more in line with what we said in our medium-term guidance as we go into next year. We've somewhat helped a little bit by the acquisitions as well this year as well. So those 2 factors have clearly held. Having said that, the base business has performed very strongly this year. So we're encouraged with the momentum we take into next year.
Our next question is from John Ennis from Goldman Sachs.
I've got 3 questions actually, Nick, if you don't mind. But my first is I guess could you just talk about what really drove the upgrade to the FBS guidance? I suppose the COGS environment as if anything, gotten worse since we last spoke. So is it just the pricing came through at a level higher than you expected? Or is it also that volumes have held up just to get a bit of clarity there. Then my second question is on the volume. Again, a very strong performance in 3Q. I guess you've had some competitors talk about supply challenges and supply chain disruption, which don't really appear to be impacting your business to the same degree. Has this helped boost the 3Q volume performance in terms of market share gains as you kind of capitalize on supply chain disruptions elsewhere and can that persist? And then my third is, I guess, a more general question around the term integrated solutions that gets talked about a lot in this space. Is there any kind of color you can give us now in terms of what proportion of your business is now working with customers to reformulate and selling multiple ingredients rather than single ingredients for the continuing FBS business. Maybe that can help us also think about the mix growth within FBS?
Sure. So John, let me take your questions in turn. So the upgrade on FBS. So we were very encouraged by the continued top line momentum we saw in the third quarter. So if you think about you kind of spin around the world, we saw double-digit growth across all markets. And Q3 was a tougher lap for us in developed markets, especially because we were sort of lapping a post-COVID court, if you like, rather than during COVID in the first half, yet we saw the same momentum on revenue flow through. What we also saw in growth markets was an acceleration because actually COVID impacted growth markets later. So it's a combination really of 2 things. The continued momentum we're seeing on the top line, which is, I think, a little bit ahead of where we thought we might be. And secondly, the fact that we managed to get the pricing [ around ] the way we had hoped. And that -- the combination of those 2 things, I would say, so coming together. In terms of volumes, look, supply chain is very difficult at the moment. Everybody is working really hard to maintain supply to customers, and we are dealing with that like everybody else. Did it impact our business positively from a share perspective in quarter 3? I don't think particularly, I think we did a good job of navigating it, but we had some challenges as well. And that's just that's the nature of the world we're operating in at the moment, and we'll continue to try and stay on top of it and serve our customers as well as we can going forward. Then your last question on Integrated Solutions. I would say, look -- I would say we're working increasingly in partnership with customers to help them with reformulation or simplification of recipes. It's still a relatively small part of our mix, so plus or minus 20%. It was difficult to be precise on these things. But that is growing as a proportion of the business. And in some ways, the thing that encourages me is there's plenty more to go at. We're on a journey that's going to continue. So we're hoping to see that percentage rise over time, especially as we see the success of new products continue to flow through.
Our next question comes from the line of Martin Deboo from Jefferies.
Martin Deboo, Jefferies. Two from me. Can we just go to the bit of the business, you probably don't want to talk about, but which I feel obliged to ask about, which is Primary. Clearly, the guidance indicates a downgrade to expectations there. I'm interested to know just what the moving parts of that were in Q3 and particularly what's happened on the commodities line within Primary? And then how -- the subsidiary question is does that change to actually improve in Q4, given that's the first quarter of the new calendar pricing round. I'll just squeeze one in the middle, which is you just, I think, alluded to the concept of a pricing round in FBS as well or at least calendar year pricing. As we learn about this new business, can you just give me a sense of how much of FBS is on annual calendar year contracts? And third one is -- just coming from left field is, just what's your latest thinking on where pro forma net debt will be post separation. The qualitative indication and announcement in July was it would be pretty close to 0. Is that still the guidance? Those are my questions.
Okay. Thanks, Martin. I'll take your last one first because it's somewhat the most simple. Nothing has changed. So we're anticipating pro forma net debt to be 0 as we execute the special dividends [ opposed ] to special dividend. On Primary products, look, performance in the quarter was broadly as expected. So we saw actually relatively robust demand for sweeteners and starches on a 2-year basis and for the quarter flat. We absorbed significantly more inflation than we had to in the first half. So I would think -- I think it was sort of double the amount of inflationary impact in the first half. And there were some extra costs from getting back into normal maintenance programs in the plants as we come out of COVID. Coproducts and ethanol relatively positive. But the net of all of that was just modestly down on where we expected to be, but nothing too dramatic. As we look forward into the fourth quarter, we're expecting to see significant improvements in Primary products. As I said, with the volume we've contracted and the pricing we've achieved, we're expecting to get back to sort of pre-inflation margins and see a positive pickup as we go into the new financial year as a result. And then the other question was on...
Yes, last question was on calendar year pricing -- calendar year contracting in FBS.
So it varies quite significantly region by region. So a significant proportion of the business in North America and Europe is on an annual contracting round without putting too specific numbers on it, I think of it as sort of 80% plus. There's less so in growth markets where there's a balance of annual pricing and actually sort of month-by-month pricing as we renew contracts on a rolling basis. So if you look at that as a balance sheet, you end up with more than half of your business being on annual contracts around business -- the [ way ] of business we have in North America, especially.
Our next question comes from the line from Patrick Higgins from Goodbody.
Three questions for me, if you don't mind. So firstly, just on Sucralose, obviously, quite a strong Q3 volume after [indiscernible] H1. How should we think about that in terms of, I guess, timing that will partially unwind versus, I guess, additional volumes that you've been able to hold on to due to the more local supply that you can provide. And second question is just on the European Primary Products business. How has that trended into Q3 after the challenging H1? And how should we think about it's performance in Q4 and FY '23, how is pricing in that business gone in general? And then finally, just, I guess, comforting that the transaction to dispose Primary Products is on track and nearing completion. Just interested to hear your thoughts and what kind of opportunities you're seeing from an M&A perspective or how full your pipeline of opportunities is? And how quickly you can deploy the additional capital spread coming in?
Thanks, Patrick. On Sucralose, we were expecting to see a strong quarter because of continued demand from customers that we talked about in the first half. And actually, the mix was good as well because of U.S., we saw strong demand from regional customers, not just the big multinationals. As we go into the fourth quarter, we're lapping a bigger quarter in quarter 4 last year. So we'll likely see some slowdown in growth. But we feel very good about the full outcome for the year, and we're still expecting both revenue and profits to be modestly ahead of last year as we close the full year. As we go into next year, as you rightly point out, we've got a little bit of more capacity coming on stream through the year. So that should allow us to certainly deliver a little bit more volume growth, and our target is to continue to maintain profitability on that business into fiscal '23 to our next fiscal year. So I think that covers Sucralose. On Primary Products in Europe, the fundamentals of the business didn't really change in the third quarter. We still have high corn costs and low sugar prices. So it was a drag in quarter 3 as it has been in the first half of the year. We'll see some improvement in the second -- in the last quarter, driven by pricing for the calendar '22 round. So that's positive move forward. And we're starting to see some moderation in corn prices in Europe, although modest at this point. So as we go into the next financial year, we expect to see modest improvements in that business. But I think more importantly, medium term, our focus will be both on running that business down as we invest in finishing capacity for Food & Beverage Solutions. And we're expecting to see corn price and sugar price moderate over time as well. So we're not expecting to see a drag from Primary Products in Europe next year. And then your last question on the transaction and M&A. First, I think it's important to say we're very, very pleased by the performance of the 2 deals we did last year. Our pipeline looks encouraging. We're working hard at unlocking more deals as we complete the transaction to divest the majority of Primary Products in the Americas. And of course, as the world opens up, it's getting a bit easier to travel and make the right relationship. It's always difficult to predict when transactions are going to complete. So I wouldn't want to give you a target, but we're working very hard on doing more of the right kind of deals to accelerate the growth of the business in the next 1 to 2 years.
Our next question comes from the line of Alex Sloane from Barclays.
A couple of questions for me. Just firstly, picking up on the new product momentum, which is obviously very strong in the quarter. Is there any particular skew to that by product technology end market or indeed geography? And how do you see the pipeline for new products over the next 12 to 18 months? And the second one, just -- I mean, obviously, in the U.K., we have looming later this year, the HFSS regulations due to [ kick ] into force. Are you seeing any sort of tangible benefit from that in terms of a step-up in customer reformulation in the U.K.? And is that something you expect to see more of through the course of the year?
Okay. So let's start with big picture there with new products in -- generally. But the encouraging thing is we're seeing good double-digit growth across all 3 platforms. So sweeteners, texture or mouthfeel and fortification, our Fibers portfolio. This year, it's being led by sweeteners. And a big piece of that obviously is the Stevia acquisition, but more broadly across Allulose, Monk Fruit, we're seeing good broad-based growth in sweeteners. We're seeing good growth in clean label starches. And that's consistent with the clean label trend across the world. And frankly, our fibers are in huge demand because dietary fibre is absolutely on trend and Promitor is a very strong product. So it's good broad-based growth across the portfolio. And that's important actually because it's not any one thing. And as you look at the pipeline going forward, that would be true as well. It's a broad-based pipeline across the 3 platforms rather than 1 individual product. So it gives us a balanced portfolio for the future. And as I said, obviously, the 50-odd-percent growth year-to-date and in the quarter is helped by acquisitions, but we're still growing 25% plus if you strip out acquisition. So new products is really fueling the growth of the business at the moment. And that's incredibly encouraging. And of course, it's about reformulating if you think about sweeteners to take sugar out, it's the things that we've talked about in terms of healthy living, which brings me on to the U.K. We're not seeing anything specific in the U.K. that's significant versus elsewhere in the world, but it's clear that legislation is going to start to have a big impact everywhere.We're seeing it in Latin America with front-of-pack labeling. We're seeing it in Asia because of the focus on a [indiscernible] and diet, we're seeing it in North America because of people's increased concern about health post-COVID. So the U.K. will be a part of that, but it's a global phenomenon that we're dealing with here. And that's what's helping with those new product numbers that I just talked about.
Our next question comes from the line of Karel from Kepler.
I have a few follow-up ones. The first one with regards to the volume growth. Has there been any significant preordering ahead of the price increases? That's the first question. The second question is with regards to the change of Tate & Lyle, you aim to refocus as a growth company and nearly there. In terms of culture within the company and change of agenda, what can the new CFO add? And then the third question is on texturants, a follow-up question. Most of your texturants today are still corn-based. How is the momentum with non-corn based texturants? And can we expect any major innovations in the coming years in this field?
Thanks, Karel. So let me take your questions in order. So on volume, we haven't seen any significant evidence of preordering. Our volume run rates have been pretty consistent through the whole of quarter 3. We didn't see anything in December that was particularly unusual. And frankly, the challenges with a shortage of transport globally makes it very difficult to shift volumes quickly. So there is a sort of natural hedge there if you like. on Dawn coming in. Look, we are delighted that Dawn's joining the business. I mean she brings a huge amount of experience from the food and beverage industry. She also comes from a very purpose-led organization, which is very consistent with the culture we're trying to drive. And more recently, she has played a core role in the transformation in Mars from an operating model perspective. So she brings a good balance of industry background, cultural fits, and then experience the transformation that is just a perfect fit for what we're doing in the next phase of our growth. So it's a really encouraging appointment for us. On texturants, as you rightly say historically, very corn-focused. The Tapioca acquisition clearly helped shift that for us, and we're delighted with the performance of the Tapioca business so far this year. And yes, I think you will see us increasingly look to expand into other substrates for texturants as we look to grow the business and strengthen our texturants portfolio and service of our customers.
[Operator Instructions] Our next question comes from the line of Chris Pitcher from Redburn.
And apologies if this has been covered, my phone dropped off briefly. On Sucralose, you're still seeing continued strong volume growth. And last time we spoke, there was a discussion around potentially expanding capacity if you could get the contracts in place long duration enough. Are you going through the process at the moment of having those discussions? And when should we expect some sort of decision on whether you're going to double down Sucralose or not? And then secondly, apologies following up on NewCo, but with the pricing, with the contracting round now done, does that give you more visibility, can you say more around expected dividends? And can we just finalize the tax structure and interest of NewCo? Have you got any more color on that?
On NewCo, look, I won't go into details of any commercial discussions we're having at the moment. What we are doing already is increasing capacity modestly to allow us a little bit of room to grow in the short term. Longer term, we'll see how the commercial shape of the business plays out. On NewCo, the contracting round went as we had hoped. That's good for the business. I don't think there's anything new to say on dividend or on interest at this stage. I mean, we'll come back to it at the full year when we finalize the transaction. So I'll probably wait until then.
Okay. So we have no further questions in the queue, so I'll hand you back over to the speakers.
Thank you, operator. Thank you all for your questions. Look, in summary, Food & Beverage Solutions continues to deliver strong top line growth. New products performance remains excellent, and we saw positive contracting for the 2022 calendar year. The transaction to create 2 focused businesses is on track for completion at the end of March, and we're looking forward with confidence of the future of the new Tate & Lyle. With that, Dawn and I look forward to talking with you on the 9th of June at our full year results. And thank you, everyone. Thank you, operator. Have a good rest of your day.
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