Tate & Lyle reported a 14% raise in third-quarter revenue, ignoring the impact of exchange rates. That included the recently acquired CP Kelco, without which sales fell 4%.
Food & Beverage Solutions saw a 4% volume growth in the third quarter, but revenue was 4% lower driven by weaker pricing. Cash profits (EBITDA) rose over the period.
CP Kelco (CPK) delivered in line with the group’s expectations with strong volume growth.
Revenue guidance has been marginally lowered, now expected to be a mid-single digit decline (previously a ‘slight drop’). EBITDA expectations are towards the lower end of guided range of 4-7%.
As of 9 January, the £215mn buyback programme had been completed.
The shares fell 9.6% in early trading.
Our view
We had been hoping that managements full-year guide given back in November was a little cautious, but that doesn’t seem to be the case. Cash profit is now expected at the lower end of the 4-7% guided range, bringing medium term targets of 7-9% growth into question.
The promised demand acceleration into the second half of Tate’s financial year hasn’t materialised, and when combined with pricing pressure, means revenue is under pressure in key segments like food & beverage solutions.
We’re also monitoring the potential impact from new weight loss drugs, though we remain sceptical about whether these will move the dial.
On a more positive note, Tate’s making good on its promise to streamline operations and focus on the most profitable parts of the business. The margin benefits are coming through, and an underlying cash profit (EBITDA) margin of 24.9% at the half year mark was a step up from the prior year.
The core business is in food & beverage solutions, with smaller units focusing on European sweeteners and the sugar alternative Sucralose. But it's the core business, specifically solution-based partnerships, that we see as a key growth driver. This is where it partners with customers to create bespoke solutions to their dietary and nutritional needs. Deeper relationships and closer ties add an element of stickiness to the business, and enable Tate & Lyle to leverage its technical expertise.
The £1.4bn CP Kelco deal, a leading provider of pectin, speciality gums and other nature-based ingredients, was a key part of the plan to become a leader in the speciality space. So far, the integration is going well, with strong volume growth last calendar year and progress on improving margins.
The acquisition added some debt to what is otherwise a rock-solid balance sheet. We aren’t concerned, levels are still well within the target range and good cash generation can support an orderly reduction should management want to take that route.
The renewed focus on speciality ingredients and solutions, a strong management team, and a balance sheet with enough firepower to expand all give scope for optimism. We don’t think the valuation looks too demanding, now that takeover rumours have been stripped out, but there are genuine question marks around the outlook for the coming year and medium-term targets look stretched.
Environmental, social and governance (ESG) risk
The Food and Beverage industry is medium risk in terms of ESG, with some subsectors - like agriculture, tobacco and spirits - falling into the high-risk category. Product governance is an area of concern industry wide due to strict quality and safety regulations and incoming environmental regulations. Other risks vary by sub-industry, but human capital, community relations and resource use tend to impact most companies in this sector either directly or through their supply chains.
According to Sustainalytics, Tate & Lyle’s management of material ESG issues is strong.
Tate & Lyle ESG reporting doesn't adhere to leading standards, but they have assigned board-level responsibility for overseeing ESG issues. There’s a robust environmental policy that ties executive compensation directly to ESG performance targets. Scope 1,2 and 3 emissions data is disclosed, and the group’s carbon intensity has been on a declining trend for several years. Additionally, the whistleblower program is considered very strong.
Tate & Lyle key facts
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