Tate & Lyle reported a 7% drop in underlying first-half revenue to £775mn (£803mn expected), reflecting lower Food & Beverage Solutions revenue, partially offset by strong Sucralose performance. Volume growth returned in the Food & Beverage Solutions business.
CP Kelco performed as expected, delivering strong volume growth and higher revenue. The acquisition is expected to be completed in the next few days.
Underlying cash profit (EBITDA) was up 6% to £188mn (£179mn expected) off the back of better volumes and cost savings.
Free cash flow rose from £48mn to £127mn, largely a result of the timing of some payments. There was net cash on the balance sheet, including leases, of £39mn.
Full-year guidance is unchanged, looking for a slight drop in revenue and cash profit growth of 4-7%.
The shares were broadly flat in early trading.
Our view
The return of volume growth from the main Food & Beverage Solutions business is good to see. The drop in revenue was more a product of lower prices as Tate is passing on lower inflation to its customers. The other main callout from half-year results was the slightly soft full-year profit guide that sits behind market expectations. But we think this is a case of management being a little conservative.
A few more quarters of volume growth from here would be welcome after a period of demand weakness. We’re also monitoring the potential impact from new weight loss drugs, though we remain sceptical about whether these will move the dial.
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% was a step up from last 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 sale of Tate’s remaining stake in the Primient joint venture is important. It was the last remnant of the legacy business and an important hurdle to clear. From here, acquisitions like the £1.4bn CP Kelco deal, a leading provider of pectin, speciality gums and other nature-based ingredients, are a key part of the plan.
The acquisition will add 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. Markets have taken this on board, and along with rumours that Tate could be a takeover target from Private Equity firm Advent, the valuation’s seen a rerating in recent months. That increases the pressure to deliver, and there are no guarantees.
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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