Tate & Lyle Predicts Results to Be at Lower End of Expectations
In the first weeks of January 2009 Tate said it has seen signs that customer de-stocking may be coming to an end. However, orders remain at lower levels than in the first half of the financial year and Tate now expect the outturn for the Group’s continuing operations in the year to 31 March 2009 to be broadly in line with the lower end of market expectations, which approximates to the outturn for the prior year.
28/01/09 The 2009 calendar year sweetener pricing round in the US has concluded satisfactorily, with price increases anticipated to recover higher net corn costs, Tate & Lyle PLC have reported in a management statement covering the period from 1 October 2008 to 31 December 2008.
The global economy has continued to deteriorate since the company reported Interim Results on 6 November 2008, particularly in the US where results at the company’s US Ingredients business were held back by significant customer de-stocking in November and December. Reductions in US gasoline consumption, together with a higher relative fall in the oil price than the corn price, also impacted ethanol demand and margins.
Results at Tate’s European Ingredients, Sugars and Sucralose businesses were together broadly in line with our expectations.
Significant movements in foreign exchange rates benefited the translation of profits earned in foreign currencies, but also had an adverse direct and indirect impact on our export markets.
In the first weeks of January 2009 Tate said it has seen signs that customer de-stocking may be coming to an end. However, orders remain at lower levels than in the first half of the financial year and Tate now expect the outturn for the Group’s continuing operations in the year to 31 March 2009 to be broadly in line with the lower end of market expectations, which approximates to the outturn for the prior year.
Tate said that their focus on the food sector gives them a measure of resilience, although not immunity, to the current conditions in the global economy. “We are a well-financed business and are confident of our ability to deliver positive cash flows and weather the prevailing economic storms,” the company said.
In the Food & Industrial Ingredients, Americas division, the difficult economic conditions led to significant de-stocking by customers, although in the first weeks of January 2009 we have seen signs that this de-stocking may now be coming to an end. As expected, costs were higher as Tate incurred additional costs in commissioning patented new technology at the Loudon, Tennessee corn wet mill. The strong US dollar, while benefiting the translation of profit into sterling, directly and indirectly affected demand. Exports of HFCS into Mexico became less competitive against local sugar as a result of the Mexican peso’s devaluation of around 30%. In addition to reduced local demand, exports from the US paper industry, which is the main customer for our industrial starches, reduced as the strong US dollar undermined its competitiveness in the global market.
Oil prices fell from their highs of the summer, leading to much lower ethanol prices. Corn prices also fell but not to the same relative extent, resulting in low ethanol contribution margins, even for wet mill producers. With a number of dry mill ethanol producers operating within Chapter 11 bankruptcy, and reduced consumption of US gasoline, ethanol margins are likely to remain under pressure in the short term. Looking forward, ethanol margins should be supported by the Renewable Fuel Standard.
Energy prices are hedged in advance and there will be minimal impact from lower fuel costs in the remainder of the financial year.
Lower net corn costs benefited Food & Industrial Ingredients, Europe. There was good demand for food ingredients and HFCS (isoglucose) but there was reduced demand for industrial starches for use in paper and board. The Food Systems business continued to perform in line with expectations.
Energy costs were higher at our corn wet mills. The interrupted gas supply from Russia affected our Central and Eastern EU plants during January. However, there was no major disruption in supplying our customers’ needs and the profit impact was not material.
The small HFCS quota in the Netherlands was surrendered on 1 October 2008 and restructuring aid of €7 million (£5 million) was booked as operating profit during the period.
Within the Sugars division, Tate’s EU sugar refineries benefited from the lower institutional raw sugar prices from 1 October 2008, which reduced as part of the reform of the EU sugar regime. The market, particularly UK retail, remains extremely competitive, and the profit improvement until the next institutional price change on October 1 2009 is expected to be small. The construction of the new biomass boiler, which is able to replace up to 70% of current gas consumption at the UK refinery, is nearing completion on time and will be commissioned in the new financial year. In addition to the benefits of generating energy from biomass, falling gas prices will also reduce costs once current contracts expire. Molasses has continued its strong performance.
Sucralose volumes increased by 6% over the comparative period in the prior year. Sales values were lower in constant currency, but margins remained stable. Although the rate of innovation by customers has been variable, the number of new product launches increased over the comparative period. Tate said they are also encouraged by progress in improving manufacturing yields as they implement process developments identified at the company’s pilot plant. Their petition to appeal the preliminary, non-binding decision in our International Trade Commission (ITC) litigation against a number of Chinese manufacturers and distributors concerning alleged infringement of certain of our patents was accepted. The ITC indicated that it would now publish its binding decision on 23 February 2009, a postponement from the previous indication of publication on 21 January 2009.
Central costs decreased as Tate benefited from last year’s management reorganisation and other cost reductions. There was an improved performance at our captive reinsurance company.
Tate said that the persistent economic downturn and its uncertain impact on customer demand continues to make any comment about the outlook difficult.
“We are pleased that, against the backdrop of a volatile and challenging market, we have been able to complete the annual sweetener pricing round in the US satisfactorily. Since the beginning of the 2009 calendar year we have seen signs that the significant customer de-stocking which occurred in November and December may be coming to an end”, the company said.