Tate & Lyle Delivers Solid H1 Performance, Creates New Venture Capital Fund

Within Speciality Food Ingredients, volumes increased by 3% with sales up by 5% (6% in constant currency) to £471 million (2011l£450 million). At a regional level, solid growth in the US and good growth in emerging markets was partially offset by softer conditions in Europe where the market remains weak.

8 Nov 2012 --- Tate & Lyle has delivered a solid performance in the first six months against the backdrop of a strong first half last year, softer market conditions in Europe and the step change in fixed costs associated with the restart of our SPLENDAR Sucralose facility in McIntosh, Alabama and business transformation initiatives. Sales in the first half increased by 6% (7% in constant currency) to £1,631 million (2011l£1,540 million) with adjusted operating profit up 1% (2% in constant currency) to £195 million (2011l£194 million). Adjusted profit before tax increased by 2% (2% in constant currency) to £179 million (2011l£177 million) while statutory profit before tax decreased by £69 million to £172 million (2011l£241 million) with the comparative period benefiting from an exceptional credit relating to the restart of our McIntosh facility.

Within Speciality Food Ingredients, volumes increased by 3% with sales up by 5% (6% in constant currency) to £471 million (2011l£450 million). At a regional level, solid growth in the US and good growth in emerging markets was partially offset by softer conditions in Europe where the market remains weak. While overall volume growth in the period fell slightly short of our expectations, due to lower volumes in September, we have made a solid start to the second half with good volume growth in October, and volume growth for the first seven months of the year is in line with the market.

Adjusted operating profit was 7% lower (7% lower in constant currency) compared with the strong first half last year reflecting the step change in fixed costs associated with the restart of our SPLENDAR Sucralose facility in McIntosh, Alabama, our business transformation initiatives and the strike at our joint-venture plant in Adana, Turkey. The effect of exchange translation was to decrease sales by £6 million compared to the first half last year.

The Speciality Food Ingredients segment comprises three broad product categories namely: starch-based speciality ingredients; high intensity sweeteners; and food systems.

In starch-based speciality ingredients, volumes increased by 3% and sales by 12% (12% in constant currency) to £273 million (2011l£244 million). While overall operating profit was slightly ahead and absolute unit margins were broadly in line, percentage margins were lower than the comparative period principally reflecting the pass through of higher corn prices and the absorption of higher fixed costs.

In modified food starches, we saw steady volume growth in the US and strong growth in Asia, which benefited from the investment we have made in growing the sales force in the region and where the market continues to grow driven by the increasing demand for packaged foods. In Latin America, the broadening of our product offering also helped us to secure sales with new customers.

While global sugar prices decreased on the back of improved harvests, they remain high by historical standards and we continued to see growth in corn-based speciality sweeteners particularly in the US where our products are used not only as sugar substitutes in cost-optimisation projects but also for their functional properties. We also continued to build the market for corn-based speciality sweeteners in Latin America, where their stability characteristics help maintain a consistent taste in beverage applications.

Our speciality fibres continue to benefit from the global health & wellness trend with particularly strong growth in China and Europe in polydextrose volumes whose versatility allows broad use in food and beverage fibre fortification projects and as a low calorie bulking agent in sugar replacement projects.

Within high intensity sweeteners, which includes SPLENDAR Sucralose and PUREFRUIT, volumes were 8% lower than the strong comparator last year driven by lower SPLENDAR Sucralose volumes. Sales decreased by 4% (5% in constant currency) to £103 million (2011l£108 million). Operating profit was lower than the comparative period as a result of the lower volumes and the additional fixed costs associated with the restart of the McIntosh facility. Prices for SPLENDAR Sucralose were broadly in line with the comparative period.

Lower first half volumes in SPLENDAR Sucralose were driven by two factors. Firstly, the exceptionally strong volume growth (17%) in the comparative period which resulted from a number of customer new product launches in emerging markets in the first quarter and secondly, softer and competitive market conditions in Europe. We saw a move towards more normal volume growth patterns in the latter part of the first half.

We are also making progress developing the market for PUREFRUIT. Monk-Fruit Extract, our zero calorie fruit-based natural high intensity sweetener, with new product launches in the US table-top market in the period building on the strong consumer interest in natural high intensity sweeteners.

At the end of the first half, we launched TASTEVA. Stevia Sweetener our new stevia-based, natural high intensity sweetener. TASTEVA. will enable customers seeking a natural sweetener to reduce sugar levels without the bitter/liquorice aftertaste often associated with other high purity, stevia-based sweeteners and further enhance our speciality sweetener portfolio.

Food systems sales were 4% lower (up 4% in constant currency) at £95 million (2011l£98 million) largely driven by a weakening of the euro. Volumes were lower than the comparative period, down 1%, with solid growth in US and Asia offset by softer market conditions in Europe.

Raw material prices remained high during the period and while we made some progress mitigating the impact of higher input costs - through the use of more cost-effective corn-based substitutes and shortening the length of customer contracts - operating margins were somewhat lower than the comparative period as were profits overall.

During the period, we expanded and consolidated our European food systems operations through the relocation of technical, marketing, formulation and pilot plant services into a new facility alongside our current production site in Roggenhorst, near Lubeck, Germany. The new facility will give us the ability to provide a fully integrated offering for a range of food applications from one location, enabling us to shorten project development cycles, improve efficiency and help customers get to market faster.

Within Bulk Ingredients, sales increased by 6% (7% in constant currency) to £1,160 million (2011l£1,090 million) on the back of higher corn prices with volumes 1% lower as expected. Adjusted operating profit increased by 6% (7% in constant currency) to £101 million (2011l£96 million) with a strong performance from sweeteners in the US and Europe more than offsetting more normal returns from co-products. The effect of exchange translation was to decrease sales by £10 million and adjusted operating profit by £2 million.

This division comprises three broad product categories namely: sweeteners; industrial starches, acidulants and ethanol; and co-products.

In North America, bulk corn sweetener volumes were 2% higher and sales increased by 16% (16% in constant currency) to £510 million (2011l£441 million) reflecting the pass-through of higher corn costs. During the period we experienced strong seasonal demand for HFCS in the US and from Mexico. Towards the end of the first half, the spread between US HFCS and Mexican sugar prices narrowed on expectations of a better sugar harvest and while we expect Mexican demand for HFCS to remain robust, the market is likely to remain competitive. Operating profits within this category were ahead of the comparative period.

In Europe, bulk corn sweetener volumes were 7% lower as a result of a lower allocation of quotas in certain non-EU markets and the strike at our joint-venture plant in Turkey. Sales increased by 1% (up 11% in constant currency) to £77 million (2011l£76 million). European sugar prices, which provide the reference price for isoglucose, remained high and ahead of the comparative period resulting in increased margins and good growth in operating profits overall.

Sales of industrial starches, acidulants and ethanol decreased by 3% (decreased by 2% in constant currency) to £312 million (2011l£322 million) with volumes 7% lower.

Industrial starch volumes decreased as we continued our strategy to gradually switch corn grind in both Europe and the US from producing industrial starches to higher margin speciality food starches. In the US, volumes were lower than the comparative period with higher margins driven by improved pricing. In Europe, while industrial starch margins were lower than the prior year period (which benefited from the poor availability of alternative starches), they were ahead of our expectations with market conditions relatively stable overall. Looking forward, the performance of this part of the business remains sensitive to changes in the macro-economic environment.

In US ethanol, where we are a small player, market conditions remained extremely challenging with excess capacity moving industry operating margins before fixed costs into negative territory and well below the prior year period. While we have taken steps to further reduce our exposure to this market by reducing production volumes down to the lowest practical extent, operating losses in this segment increased in the first half. Within our acidulants business, profits were slightly ahead and our Bio-PDO. joint venture made a small profit during the first half compared with a loss in the comparative period.

Co-product sales increased by 4% (4% in constant currency) to £261 million (2011l£251 million), with returns reverting to more normal levels during the period. This compares with a strong performance in the first six months of last year where co-products generated £19 million of additional income.

In the US, the worst drought in the mid-west for 56 years has impacted both the size and quality of this year¡¦s corn harvest. Between 11 June and 11 October 2012, the USDA reduced its forecasted supply from 15.6m to 11.8m bushels (down 24%). As a result, corn prices rose sharply at the end of June2 and have remained elevated ever since. Despite lower forecasts for direct consumption of corn into animal feed and lower export demand, the stocks-to-use ratio is still projected by the USDA to fall from 13.7% to 5.6%. As a result, corn prices are expected to remain volatile for the foreseeable future.

The extremely dry and hot conditions in the US have also impacted corn quality with aflatoxin, a byproduct of a grain fungus, present in this year¡¦s harvest particularly in those areas hardest hit by the drought. While aflatoxin does not impact the core end products of the corn wet milling process, such as HFCS, it tends to concentrate in corn gluten meal (CGM) and corn gluten feed (CGF) and if certain thresholds are breached it can restrict the end markets into which these co-products can be sold.

While the presence of aflatoxin resulted in the sale of a greater proportion of our CGM and CGF in lower value markets in the first few weeks following the harvest, we have taken steps to adjust our corn sourcing programme to help us meet customer requirements in our traditional co-product end markets. Although significant efforts are underway to mitigate the impact of aflatoxin, and we continue to monitor the situation closely, based on what we know today we believe it will result in a small increase in net corn costs for the remainder of the financial year and through to the next harvest.

Continued dry and hot conditions in central Europe have also driven up European corn prices and, with sugar prices remaining stable, this is expected to reduce isoglucose margins during the second half.

In Speciality Food Ingredients, while the company expects continued challenging market conditions in Europe, overall we expect to achieve steady volume growth and solid sales growth for the full year.

In Bulk Ingredients, we expect the firm demand for liquid sweeteners in the US to continue and demand in our other food markets to remain stable. In Europe, higher corn prices are expected to reduce isoglucose margins in the second half. Market conditions in US ethanol are expected to remain challenging.

As usual, the outcome of the 2013 calendar year sweetener pricing rounds will influence performance in the final quarter of the financial year.

Overall, while recognising the current level of uncertainty around the wider economy and corn quality and pricing, we continue to expect to make progress this financial year.

Tate & Lyle PLC also announced an investment of up to £30 million over an eight-year period in a new venture capital fund, building on Tate & Lyle’s existing venture fund activities.

The new Fund will invest in start-ups and expansion-stage companies in both developed and emerging markets in food sciences and enabling technologies in line with Tate & Lyle’s strategy to grow in speciality food ingredients.

The new Fund will be formally launched on 1 January 2013. As with Tate & Lyle’s first venture fund, which was launched in April 2006, the new Fund will be independently led and managed by Simon Barnes and David Atkinson.

“This is an important investment in our global innovation programme and represents another step in building Tate & Lyle’s platform for long-term growth” said Karl Kramer, President, Innovation and Commercial Development, Tate & Lyle.

Kramer added, “We have seen with our first Fund how beneficial a corporate venturing capability can be. The combination of the new Fund and our internal Open Innovation team will enable us to access the full spectrum of new ideas, technologies and opportunities in the global food science and investment community. This is an investment for long-term growth and, ultimately, will help us deliver more innovative solutions for our customers”.

David Atkinson, Tate & Lyle Ventures said, “We are continuing to see a real change in consumer attitudes towards health and nutrition and in particular the growing interest in functional foods. Busy lives, an ageing population and rapid urbanization in emerging markets mean that consumers across the world are looking to food to offer lifestyle solutions and bring added benefits such as fortification and enrichment. New technologies will be instrumental in this convergence as the world’s major food companies increasingly reposition themselves with a focus on innovation and health.”

Simon Barnes, Tate & Lyle Ventures said, “We will be looking to invest in companies based on strong intellectual property and with strong management teams. As with the first Fund, the independent structure of the new Fund means we can leverage Tate & Lyle’s core expertise in helping us to build our portfolio whilst retaining the ability to manage the investments in accordance with sound venture capital principles.”