NEC Networks & System Integration Corp

TSE:1973

Good morning, everyone, and thank you for joining today's half-year results presentation. We are now into the live Q&A. As I said in the prerecording, the group has made an encouraging start to the year with strong revenue and profit growth. The transformation of Tate & Lyle into a purpose-led, science-driven and customer-obsessed business continues to go well, and we are successfully navigating a difficult external environment. Turning now to your questions.

And the first question comes from John Ennis at Goldman Sachs.

Two actually. So my first is on the volume within FBS. You cited a 10 percentage point adjustment between what you consider the underlying volume growth versus the reported volume growth. Can you break down the different movement parts there and give us some more explicit color on the -- on which of those continue into the second half, so that we can try and work out what to adjust for?

And then my second question is actually on the cash inflow from [ hereon ] going forward. You said $76 million, $31 million was part of a prior JV, $15 million for a tax obligation. So I guess the underlying is about $30 million.

And is that effectively the correct run rate post this year? Or is there any else we need to consider just as we try and model to sort of cash contribution from that business unit? I've got some others, but I'll leave it there. And plus the mark that I can always come back on.

Thank you, and let me take volume first. So as you rightly said, we talked about an underlying volume of 2%. And that's important because we're seeing strong structural customer demand. When you break down the difference between that and the reported number, firstly, there's the impact of reporting the Primary Products business in Europe in the numbers for the first time, they used to sit in Primary Products.

And as you know, we're looking to exit that business over time. So there was about a 3-point difference -- 3 to 4 points difference because of Primary Products Europe. And that's because we're shifting low-margin business there into high-margin business in Food & Beverage Solutions, where the volume ratios are very different.

The second issue was driven by some one-offs. So we are exiting some low-margin business in Europe, and we had some disruption in our Holland facility in the first half. We don't expect those to continue. I mean clearly, the drift on Primary Products Europe will.

And then finally, the operating environment is really quite difficult at the moment. So we saw some supply chain challenges in the first half, getting raw materials into plants, getting transport to deliver products to customers that had an impact as well. And I think we'll see some of that continue into the second half as well as we start to see supply chains stabilize across the world.

So I think in summary, we sold pretty much everything that we made in the first half, with some challenges in supply chain likely to continue into the second half alongside the Primary Products in Europe. So hopefully, that gives you a sort of a bridge to work with as we go into the second half.

On your point on premium cash, you're right, there were 3 components to the $76 million, there's the -- what we might consider the typical ongoing dividend stream coming out of that business of about $30 million. There was the $31 million for previously earned dividends from a joint venture. And then a top-up for tax because of the way the tax structure works, we place some of the cash taxes for premium.

In terms of going forward, I mean, clearly, the ongoing dividend, we expect to continue into future years, so the $30-odd million. We're also expecting a little bit more of dividends from prior JV earnings in the following year as well. So I'd say, we'll see a little bit more next year, ex tax. And then the $30 million should sustain beyond the second year. I don't know, Dawn, if anything you need to add to that.

Yes. I think the only thing I would say is, clearly, in addition to the $30 million, we will also get the tax each year because remember that the tax actually sits in our tax line, it's not netted off in the JV line as well.

So John, hopefully, that helps.

Yes, that's perfect. So just to fully clarify effectively, $45 billion a year, but next year, a bit higher because you still have some more coming from the prior JVs.

Yes, I think that's a good way to -- so we'll go to our next question, which is from Patrick Higgins at Goodbody.

I guess firstly, just on costs. Could you give us a sense on your inflation expectations into H2,? do you need supplementary pricing ahead of finalizing current pricing negotiations for 2023? And how should we, I guess, just generally think about dynamics between your hedging, your current inflationary prices -- inflationary pressure, sorry, in pricing? And is there any risk to security of supply we should be aware of within Europe as well?

And second question is just, I guess, one trend we've seen across some of your [ ingredient ] peers has been destocking by customers into Q4. Is that something you've seen in recent months?

Okay. So let me give you some headlines on inflation and ask Dawn to add, and I'll come back on supply security and destocking.

So I mean, clearly, significant inflation in the first half, which we successfully offset with the right balance between productivity and inflation pass-through. We're going to see some incremental inflation in the second half, including our third quarter because, obviously, we were well hedged in the first half compared to the second half.

And that has required the continuation of some supplementary pricing, which is pretty much done for the third quarter. And obviously, the pricing round for next year is in the very early stages. I don't know, Dawn, if you have to put some numbers around that maybe.

Yes. So I think in the first half, we have seen GBP 85 million of inflation, which is virtually the same that we saw in the whole of last year on FBS. I think as Nick said, we covered all of the inflation in the first half through productivity, cost control, mix and pricing. As we move into second half, we expect that level of inflation to increase, maybe in the region of 20%.

And the reason for that is, obviously, we've been hedging at higher prices. In the first half, we saw the benefit in terms of hedging that we've taken previously in the year and in the prior year, so we are expecting inflation to pick up. And what we will look to do is clearly to cover that as we have done in the first half and we did last year through the 4 levers that I talked about.

Great. So Patrick, coming back to your second two questions. Let me cover destocking first. So far, what we're seeing is very consistent demand and pull from our customers. We haven't seen any significant sign of destocking yet. There are some ups and downs across regions and customers as always, but that's a normal course of business. We're staying very close to it. We're hearing the same things that you were hearing.

But so far, good, consistent customer demand. We'll see how that evolves through the second half of the year and into next year as inflation continues to bite.

On supply security, I'd say, I've got to give the team a huge amount of credit in the first half for navigating some very challenging situations, getting raw materials in, product out to customers because of some transport challenges and consistently doing a good job of that.

But I don't think those challenges are going to going to go away magically in the second half. So we're going to have to continue to be agile and resilient and make sure we're really focused on working with our customers to serve them as best we can. So I think we expect to see more of the same in the second half. Okay. So our next question comes from Chris Pitcher at Redburn.

A couple of questions, please. I think a follow-up on the dividend. Can you just confirm the mechanics of the dividend that is not exposed to earnings but are actually driven by equity value, so as a return on that, so that carries on? And then in terms of operating questions, can you give us an idea of the sales and profit contribution from Quantum? How is it performing?

And in terms of your China business, can you share a specific growth rate and what sort of working assumptions you have for COVID restrictions because there's been a lot of press around perhaps lifting, perhaps tightening?

Sure. So let me take the dividend first. You're right, it's linked to the equity ownership, not to earnings. So there's an agreement on the level of payout based upon that, as you mentioned.

On Quantum, Quantum performing very well despite some of the challenges of lockdown in China and delivering as we expected. As you will have seen, we said that the M&A that we've done in -- or integrated in the first half was about a point of contribution to growth on the top line. So that gives you some kind of level of quantum.

And what we're seeing in China, in the first quarter, when probably lockdowns were at their severe is, so you had a significant lockdown in Shanghai, for instance, we did see a reduction in demand from customers.

That started to recover in the second quarter, and we're starting to see China back into growth. I mean, we're assuming that we're going to see some more stability in China as things evolve. But like every other company, we're watching very carefully to see how the situation with COVID evolves.

I mean the good news is despite the lockdowns in China and some of the short-term challenges in the first quarter especially, we still saw good performance from the overall business. So it's not impacting the total business, but obviously, we need to keep on watching how things evolve.

And just on the dividend. If Primary or Primient runs at loss and the value of the equity diminishes as a result of that or indeed, there is any impairment, does that then affect the ability to pay the dividend? Or is it -- or are there contingencies against that?

Conversation specifically with KPS, our partner there about Primient going into loss and what would happen to the dividend stream. And we're clearly not expecting Primient to go into loss, it had a more challenging first half. But we've seen that in the Primary Products business before as inflationary challenges hit the business.

So we're anticipating Primient performing very well, going forward. So it's not something we've really focused on up until this point. And our next question comes from Martin Deboo at Jefferies. We're not picking up anything from Martin.

Guys, I was muted. I'm down amongst the grunge, I'm afraid. You don't take that, that I'm not impressed by the FBS and Sucralose you'd all say, I am. So just to clarify why I'm pushing, I do need to push a bit on [ Primient ] in Europe. It's going to be a bit technical. I'm happy to just ask one, pause and let you answer and ask a second one.

So Primient. Clearly, the earnings down was very scary. But just to make sure I've understood, there's a lot of leverage in that business. So the operating profit won't be down as much as 62% I assume. Feels to me they're probably down 20% or something. Just clarify that.

Secondly, what were these operational challenges? Did they result from the operational unbundling that occurred as separation? In other words, they're essentially a sort of one-off result of that. Or are they something else? I just think we need to understand them, given the earnings materiality? And did they affect you in terms of the cross supply agreement back into taking a lot of PLC?

And then just picking up some of the questions that were asked about leverage at Primient. I'm just looking forward now, what's the fixed floating debt mix at Primient? And therefore, what's the downside risk to the earnings next year from rising interest rates?

And then just a final footnote on Primient. What was the JV business that was sold? And just [ tell what ] all that was. I've got some questions on Europe, but if you want to pause there, that would be great.

Let me try and unbundle those. Dawn, why don't I get you to talk about the interest and therefore, the impact on earnings.

On the operational challenges, let me cover that first. So really two things, inflationary impact of raw materials coming into the plants. And the timing of ability to pass through pricing is different in the Primary Products business, as you're aware, Martin. Secondly, some operational disruption in the plants. So some challenges in manufacturing in the short term that we've seen in the past.

And from a reliability perspective, sometimes clients have some challenges. We saw that in the first half and expect that to abate over time. So we're absolutely confident with KPS' support that they'll work through all of that because that's why we brought them in. They're a very strong manufacturing-based company.

It really didn't -- it really wasn't driven at all by the separation of the 2 businesses. Actually, the separation in the first half went pretty flawlessly in terms of all of the cross agreements we've got in supply and transition service agreements, et cetera. So that clearly went well. And KPS are proving to be a very positive partner for us.

In terms of some of those operational challenges in the plants impacting -- taking a lot of volumes, there was a limited impact because of the cross supply agreements, but not significant in the grand scheme of things for our business in the first half.

So overall, a tough half for the business operationally and with inflation. But as I said, we've seen that before in the past, and I'm sure that's going to going to improve over time. Do you want to talk about the leverage points and impacts on earnings?

Yes. I think -- I mean, clearly, from a Primient perspective, I mean, half of their debt is fixed and half is variable. Having said that, they have negotiated quite a good deal in terms of the debt. And I think what we need to remember is that Primient is a strong cash generation business. And we've seen that if you think about the dividends that we've received year-to-date.

So Martin, on your first question, clearly, the impact on earnings will be -- the interest charge will have impacted the earnings flow-through as well. So that to your first question.

Yes. No, clearly, it would. So I think the underlying operating fall isn't as high. I've got some questions on Europe. Could we be happy to take one on that? Or should I defer to someone else, so I can come back at the end?

Please go ahead.

Okay. So in Europe, just to understand this transition out of Primary. So the first thing is, again, just to establish on it, it looks to me as if your Primary Product volumes in Europe were probably down 40% to 50%, so I'm getting that from the 3% that you excluded sort of tie to materiality of that business.

So it seems that business is really now contracting fast. So what is the nature of the transition you're trying to pursue? You're trying to get out of isoglucose and switch the grind capacity into something else?

And just a factual question, the 12% you excluded in that nice bridge you had, Dawn, you excluded Europe primarily from the volume number. But does the 12 percentage points of mix in FBS benefit from the Europe decline? Because coming back to the sort of [ non-grounded ], these mix numbers you're posting consistently are just absolutely amazing. And I'm trying to get a sense of what's the sustainability of that versus how much is the Europe Primary mix effect. Okay. I'm done on those.

Why don't -- I'll let Dawn take the mix question. On the overall materiality of the exit, it's not nearly as significant as 40%, Martin. I don't have the precise number in my mind, but we can come back to you on that. But you're absolutely right. What we're trying to do is exit out of isoglucose and to some extent, industrial starch and trade those up into higher-margin specialty products like maltodextrin and clean-label starches.

And we've got a capital investment program that will evolve over time to help us do that. We saw that migration continue in the first half. That's good. And I'd say importantly, on top of that as well, we also saw an improvement in the earnings profile of the Primary Products Europe business because of pricing improving as we said it would.

So we had two benefits. One is we're trading into higher-margin business and FBS as we trade out of PP Europe, but we're also seeing an improvement in the importance of that business as well. Do you want to take the...

Yes. And I think to pick up on your other points, I mean, remember, there is an impact from the [ Cook ] strike on Primary Products volume clearly from a co-product perspective, which is possibly also impacting the numbers that you're sharing.

In terms of the mix piece, I mean, as you've said, it's very strong mix benefit that we've seen in the half. And those 12 points comes from 3 primary drivers, and they're broadly equal weighted. So the first one is the exit of low-margin business, which is a choice for us to exit that, which clearly we will start to lap as we move to the back end of this year.

The second one actually is a really strong performance by the team in terms of customer and product mix management. And the third one is actually the move, the strategic move to become a more innovation and solutions business, which clearly, we envisage that piece will be sustainable as we move forward. And I think the customer and product mix, certainly in the short term, we would see that continuing.

And our next question comes from Alicia Forry of Investec.

I wanted to ask about M&A. You've mentioned growth to come from inorganic as well as organic over the medium term. So can you discuss what the M&A hunting grounds look like at the moment? Are you seeing handfuls of targets? Or is it more like tens of potential targets out there that you're considering?

And then you did mention on Sucralose that there was some phasing impact in H1. Can you possibly quantify that estimated phasing impact for us?

Sure. So on the M&A point, so I think firstly, delighted with the success of the integration we've seen so far of the M&A we've done. So the stevia business is doing very well. Quantum successfully integrated in the first half of the year. So we're getting real momentum from the M&A we've done. And it's important that we focus on that as well because those are businesses that we need to be successful.

The M&A pipeline continues to evolve. And it's focused on the things that we've talked about before. So strengthening our core platforms in sweetening, in texturants and in fortification. And the deals we've done so far are very focused on that, extending into more fortification areas.

So we did a small chickpea protein acquisition in the first half as well, which gives us exposure to plant-based proteins, which will help us with formulation across our categories. And we're continuing to look for like -- deals like that to help strengthen the core portfolio. The pipeline is growing.

It's certainly not a handful of companies. But equally, it's always difficult to predict when you're going to do the next deal. So we're working at it.

The good news is the deals we've already done are contributing. And on top of that, because of the strong cash generation of the business, independent of the dividend from Primient, we saw 3x the cash delivery in the first half that we saw last year. We've got the balance sheet to be able to deploy it when we find the right deals, but the key is to find the right deals first.

On Sucralose, I think the phasing in the first half was on top of a very strong underlying performance of the business. I'd say, there's probably a handful of percentage points of volume growth in there. It's always difficult to be precise, to be honest, what's really customer phasing versus growth.

But we do think there are a few points that means that the volume growth we saw in the first half is unlikely to sustain into the second half.

Great. Our next question comes from Lauren Molyneux at Citi.

I just had a couple left really. Firstly, I just wanted to dig a bit more into these productivities. Obviously, it's impressive that you've upgraded this target for productivities now. But can you talk a bit more about what factors are giving you the confidence to upgrade here the target? And where you see the biggest opportunities, I guess, to drive more upgrades?

And then how we should think about the phasing of this $15 million where it falls into H1 versus H2? And whether there's any ongoing benefit into the next fiscal year as well that we could think of?

And then my other question would just be around -- obviously, you've announced this new Capital Markets Day for February next year. So just can we get any sort of flavor or early indications as to what to expect from this event? What do you want to focus on and highlight the time at the day?

So why don't you take productivity and I'll take Capital Markets Day?

Yes. So thanks, Lauren. So you're right. We have upgraded our target for the year from $10 million to $15 million. And I think that reflects a really strong culture that we're seeing around productivity and cost control in the business. And if you look at central costs, we're 23% down in the half. So I think a really strong performance.

In terms of the areas that we look to target on productivity, clearly, it's coming across a range of areas, whether it's on raw materials, packaging, whether it's the efficiency of how we run our plants in terms of debottlenecking those plants, but also in terms of procurement as well.

So it's pretty much across the piece. And we continue to focus on that because it's an important lever not only to ensure that we can continue to invest for the future, but also an important lever in terms of offsetting inflation as well.

Thanks, Dawn. So Lauren, on Capital Markets Day, I mean I suppose put very simply because we don't want to kind of get into too much detail about the event at this point, we're trying to really shine a light at how through the transformation that we're delivering in Tate & Lyle, notably with the transaction to separate out Tate & Lyle and Primient.

We're really creating this specialty growth focus, science-driven solutions company to help our customers grow in the areas where food is growing. So putting ourselves right at the center of the future of food. That's really the headline.

And then to unpack for you how that's going to evolve over the next few years and the focus for the innovation and the markets that we're looking to serve.

So it's about really shining a light on the new Tate & Lyle and building confidence and belief in the future growth potential that, there's no doubt, we demonstrated in the first half of this year. Well, our next question comes from Karel Zoete of Kepler.

I have a couple of follow-ups. The first one is on the momentum in stevia. Can you provide an update what you're seeing, and we see quite some optimistic remarks here from many others. But -- for example, growth in North America was a bit slower or in sweeteners than the group average. So that's the first question.

And the other question is on the Thailand scale-up in your tapioca-based starches. What's the momentum here? In general, texturants did quite well. So are we already seeing an impact? Or is that yet to come?

On stevia, like others, we're very optimistic about the future of our stevia business. The acquisition we made a couple of years ago, I mean, is performing extraordinarily well. And actually, at the moment, we're selling all of the stevia that we can make.

So we're in the middle of upgrading our stevia facility in the U.S. and in China, and that capacity is coming on stream through the second half of next year into this year rather into next year to allow us to continue growth momentum on stevia. And part of that is trading up into higher-value stevia as well. So improving the quality of our stevia business. So we remain very confident in that business.

In our Thailand business, as you say, we're seeing very strong focus on texturants, very good growth in texturants. At the moment, we're in the middle of a capacity upgrade there to allow us to unlock growth going forward. So we feel good about having that business in the portfolio.

All right. Can I do a follow-up questions to stevia? Is the market structure in terms of new entrants technologies, is that changing? Or is it fairly stable?

I think we're seeing very strong demand for the traditional range of stevia products that's been driving the business historically. What we're also seeing because of the improvement in technology and the ability to make more cost-effectively, high-value, high-quality stevia products, we're seeing a shift also towards higher-quality stevia as the cost of production of that comes down.

And that's where, for example, our enzymatic technology is really, really important. And that's the basis of some of the premium products that we're starting to see come into the market. So I think the stevia market is becoming more sophisticated as technology creates greater quality and better tasting variants to allow for reformulation. So I think we're going back to Alicia, Investec. Alicia?

Sorry, I didn't have a question. I just forgot to lower my hand, excuse me.

Fair enough. Okay. So I think we have no more questions. So with that, thank you to everyone for watching and for all of your questions.

In summary, the group has made an encouraging start to the year, delivering strong revenue and profit growth. And importantly, we're continuing to progress our growth-focused strategy. We look forward to speaking to you again at the Capital Markets event in February. And with that, thank you for your time, and I hope you all have a great day. Bye now.