Tate & Lyle plc (TATE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the call regarding today's earlier announcement on unlocking the growth potential of Tate & Lyle and the proposed sale of controlling stake in the Primary Products business. Today's presentation is being run as a webcast followed by a live Q&A. The presentation has been prerecorded, and I will play the recording in a moment. The duration of the presentation is 29 minutes. Following the presentation, there will be a live Q&A with Nick Hampton, Chief Executive; and Vivid Sehgal, Chief Financial Officer. Please note that only preregistered participants will be able to ask questions. Thank you. I will now play the recording.

Good morning, and welcome to the presentation about the announcement we made today to unlock the growth potential of Tate & Lyle through the proposed sale of a controlling stake in our Primary Products business. Today's announcements represents the start of a new era for Tate & Lyle and delivers on its long-term strategic ambition to increasingly focus on the potential of its high growth Food & Beverage Solutions business. The agenda for today's presentation is on the screen. I will start with an overview of the proposed transaction. Then I will outline why we are excited about the prospects for the new Tate & Lyle as a growth-focused Food & Beverage Solutions business, our plans to build on the growth we have delivered over the last 3 years and the financial framework, which we believe will drive strong returns for shareholders, balancing investment in growth with a continued commitment to a progressive dividend policy. Vivid Sehgal, our Chief Financial Officer, and I will then take your questions. The proposed transaction will enable Tate & Lyle to focus on its high-growth Food & Beverage Solutions business and to drive strong and sustainable growth through an acceleration in innovation and a step-up in R&D investment and solutions development. The transaction will also allow Tate & Lyle to reallocate capital to our faster-growing Food & Beverage Solutions business to drive organic and inorganic growth. The proposed transaction also supports the long-term potential of the Primary Products business. We are delighted to be entering into a partnership with KPS Capital Partners, who have a proven track record of successfully transforming and creating value in manufacturing and industrial businesses. The new joint venture, or NewCo, as I will refer to it, will comprise the Primary Products business in North America and Latin America, representing 95% of the division's revenue. The small Primary Products business in Europe will remain with Tate & Lyle. Each partner will own 50% of NewCo, with KPS having board and operational control. The combined expertise of the 2 partners offers the potential for NewCo to create significant future value as an independent business. The headline enterprise value of the transaction is $1.7 billion, which is equivalent to a multiple of 5.1x EBITDA for the 2021 financial year. Tate & Lyle will receive gross cash proceeds of approximately $1.3 billion and intends to return around GBP 500 million to shareholders via a special dividend following completion. Tate & Lyle will also benefit from an ongoing cash dividend stream from NewCo and potential future value upside from the retained equity stake. The proposed transaction will create 2 focused, leading businesses: Tate & Lyle, as a global leader in sweetening, mouthfeel and fortification, dedicated to delivering healthier food and drink for consumers; and NewCo, as a leader in plant-based products for food and industrial markets. Each business will have its own assets and manufacturing base, as shown on this slide. While there will be a level of interdependency between the 2 companies, the transaction has been structured so that this will be limited to relatively few product lines. Importantly, following completion, around 75% of Tate & Lyle's revenue will come from ingredients produced at its own facilities. Primary Products is a resilient business that has delivered steady earnings over a number of years. After an extensive competitive and thorough process in which we evaluated all options, we believe we have found a strong and like-minded partner in KPS to take NewCo forward on the next stage of its development. KPS invests exclusively in manufacturing and industrial businesses and has proven expertise in creating value from businesses like NewCo. KPS currently operates 149 production facilities across 22 countries. KPS is known for its ability to execute complex corporate carve-outs with recent investments, including the acquisitions of Lufkin Industries from Baker Hughes and Schlumberger's Rod Lift business. In the U.K. between 2009 and 2015, KPS delivered the successful turnaround and sale of Waterford, Wedgwood and Royal Doulton. The combined operational expertise of the Primary Products management team and KPS will further strengthen NewCo and offer the opportunity to unlock potential future value in a way that would not be possible given Tate & Lyle's current strategy and capital allocation priorities. Tate & Lyle and NewCo will continue to work closely together and have established long-term agreements to provide supply security and economic protection for both parties. Under a 20-year agreement, NewCo will supply certain speciality ingredients to Tate & Lyle and will also provide corn procurement services for Tate & Lyle in North America. Overall, having spent a significant amount of time with KPS over the last 6 months, we firmly believe a partnership with them represents the best way forward for the NewCo business, its customers and our employees. Moving now to the strategic rationale of the proposed transaction for Tate & Lyle. Since I joined the business, we have been on a journey to become a more focused solutions business, and I'm delighted that we have found an excellent partner in KPS to achieve this acceleration in our strategic ambition. The proposed transaction has a compelling strategic logic for Tate & Lyle on a number of levels. It repositions Tate & Lyle as a leading global food and beverage solutions business focused on faster-growing speciality markets with the opportunity to: firstly, benefit from growing global consumer demand for healthier food and drink, a trend which the global pandemic is accelerating; secondly, to accelerate growth through a step-up in R&D investment and innovation; and thirdly, to increase the focus on solutions development to support and strengthen customer relationships. Importantly, the proposed transaction will substantially reduce our exposure to more volatile commodities markets and to bulk ingredients in North America. I am also confident that as a fully focused speciality food and beverage solutions business, our attractiveness as a partner to other speciality ingredients businesses will be stronger. And with a simple business, we will be able to refocus capital towards delivering stronger organic and inorganic growth. I will now talk about the new Tate & Lyle, the benefits of the proposed transaction and our future financial framework. Centered around our Food & Beverage Solutions business, the new Tate & Lyle will continue to be a purpose-led business, delivering growth and having a positive impact on society. It will be a global leader in sweetening, mouthfeel and fortification, creating solutions for customers, which meet growing consumer demand for healthier food and drink. It will be centered around science and R&D, building on its long track record of innovation and scientific excellence. It will be a global business with a strong presence in developed markets and a platform for accelerated growth in the higher-growth markets of Asia, Middle East, Africa and Latin America. It will retain its experienced management team and have a very strong balance sheet, providing significant flexibility to invest for growth. In short, the new Tate & Lyle will be a high-quality, growth-focused speciality business, operating in exciting segments of the food and beverage market that are seeing significant growth. Our purpose of improving lives for generations will remain at the heart of everything we do. We will continue to progress the ambitious targets we established last year for the 3 pillars of our purpose, all of which are aligned to specific United Nations Sustainable Development Goals. These include: targets to reduce the amount of sugar in people's diets; progress equity, diversity and inclusion across our business and in our local communities; and significantly reduce greenhouse gas emissions across our value chain. The shape of our business may change, but the importance of our purpose and our values will remain constant. Over the last 3 years, we've established a strong platform for growth, creating a position of strength from which to execute this transaction. Since 2018, we have significantly increased the focus on our customers, created a successful innovation model, strengthened our technical capabilities and expanded our portfolio through new product launches and acquisitions. During that period, in Food & Beverage Solutions, revenue has grown by a compound annual growth rate of 4% and our customer pipeline by 14%. At the same time, Revenue from New Products has grown by a compound annual growth rate of 13% and the innovation pipeline by 14%. In the last 3 years alone, our innovation team has launched 36 new products, a marked step change from historic levels. And this creates a strong platform from which to accelerate further. Growth has been delivered across all 3 regions, with revenue from North America and Asia, Middle East, Africa and Latin America both up by a compound annual growth rate of 5%, and in Europe by 2%. This is a business with positive momentum, and now is the right time to unlock its true growth potential. Another reason why I believe this is the right time to take this step is that the pandemic has accelerated many of the trends in the global food industry that Tate & Lyle is very well placed to benefit from. The world's population is expected to increase by over 1 billion in the next 16 years as people live longer and more people move into cities. This will drive a need for greater convenience, food with extended shelf lives and healthier snacking. For example, in Spain, France, Brazil and the U.K., people are snacking 50% more often than before the pandemic. The pandemic has also focused people's minds on their personal well-being and the importance of maintaining a healthier diet. They want products which are lower in sugar and calories, with cleaner labels and more fiber to improve their gut health and help build immunity. Sustainability is also a key trend in the food industry, with growing demand for plant-based and more natural options and for food that is sourced in a sustainable and environmentally responsible way. Given that both consumers and governments are increasingly focused on the importance of diet and health, it's clear that these trends are here to stay. With Tate & Lyle, our unique portfolio and technical expertise in sweetening, mouthfeel and fortification, which helps remove sugar, calories and fat and add fiber to consumer products across the world, this is the right time to focus our people, innovation and capital to capture the full benefits of these trends. The proposed transaction we have announced today will allow Food & Beverage Solutions to build on this strong platform. We will do this by accelerating delivery of our strategic growth framework, strengthening our product portfolio and technical capabilities, leveraging our deep scientific expertise to meet growing consumer needs and by stepping up investments in R&D and innovation. To support these actions, we will allocate capital to prioritize growth opportunities. Let me briefly explain each of these in more detail. This slide shows the strategic growth framework for Food & Beverage Solutions. This framework has been successfully executed over the last 3 years, and the proposed transaction will give us the opportunity to accelerate its delivery. The framework is based on 4 main pillars, all underpinned by our Sharpen, Accelerate and Simplify priorities. The first pillar is to continue to execute focused market strategies, maximizing opportunities in developed markets and accelerating growth in the faster-growing markets of Asia Middle East, Africa and Latin America. The second pillar is to expand that portfolio by further strengthening our 3 platforms of sweeteners, texturants and fortification. And over time, to move into new platforms. This will be achieved either organically or through value-enhancing acquisitions like the tapioca and stevia businesses we bought over the past year. The third pillar is to accelerate innovation by increasing our investments in R&D, both by building on our strong in-house scientific expertise and with external partners through increased focus on open innovation. This step-up in R&D investments and innovation will also help strengthen our fourth pillar, developing an integrated solutions approach for customers to further strengthen our position as a partner for growth. Serving our customers is at the center of our strategic growth framework. By accelerating its delivery in the ways I have just explained, the proposed transaction would expand our customer offering and enhance the way we serve them. As a focused business, with a strong financial position, the proposed transaction also provides an opportunity for Tate & Lyle to further strengthen its technical capabilities in sweetening, mouthfeel and fortification. These capabilities are highly valued by customers as they look to reformulate existing products and launch new products with a greater focus on health and wellness. This is an area of significant growth for us. Over the last 3 years, in sweetening, revenue from products supporting sugar reduction, excluding Sucralose, increased by a compound annual growth rate of over 20%. Over the same period, in mouthfeel, our range of clean-label texturants delivered revenue growth with a compound annual growth rate of over 30%. And in fortification, revenue for our soluble fibers grew by more than 15%. The proposed transaction will enable us to invest further in our network of application labs where we work with customers to reformulate their products for local markets. We already have 17 labs across the world, with a new lab being opened in Dubai later this summer. The transaction will also help us to further leverage and enhance our scientific expertise. Tate & Lyle has been at the forefront of food ingredient science and innovation for over 100 years. Our deep scientific knowledge in the fields of biochemistry and material science are at the very heart of our company. Our core capabilities in enzymology and fermentation, industrial scale-up, drying and crystallization and separation and fractionization mean we are uniquely placed to create solutions, which directly address the growing consumer trends I talked about earlier. For example, through the combination by deep understanding of biochemistry and our separations capabilities, we are able to take stevia leaves and produce natural and low-calorie sugar reduction solutions without a bitter aftertaste. Supported by our nutrition and regulatory knowledge, the clinical research we undertake with academic organizations worldwide, intellectual property and ingredients reputation management and our external partnerships and open innovation activities, we have created a leading science-based innovation platform, which we will use to accelerate growth. As I have just outlined, Tate & Lyle has some unique advantages that have underpinned the recent strong performance of Food & Beverage Solutions. This has translated into a proven track record of innovation success with revenue from New Products more than doubling over the last 5 years. And New Products, as a percentage of Food & Beverage Solutions revenue, up from 8% to 14% over the same period. We believe this proposed transaction provides an opportunity to build on these successes, significantly increase our ambition for Tate & Lyle and drive stronger sustainable growth. Central to this is our intention to step up our investments in R&D to accelerate innovation and drive growth. Our ambition for the 5 years following completion of the proposed transaction is to increase investments in R&D for around 3% of Food & Beverage Solutions' revenue to more than 4% annually. And to grow New Products' revenue as a percentage of Food & Beverage Solutions' revenue from 14% in the 2021 financial year to around 20% by the 2026 financial year. With positive momentum, the strong platform we have built, the increased focus from the proposed transaction and our plans to increase investments in innovation, we are confident we can sustainably accelerate organic growth. Our ambition for the new Tate & Lyle in the 5 years following completion is to deliver mid-single-digit percent revenue growth. We also have an ambition to expand our operating margins by at least 50 to 100 basis points per annum from a pro forma base of 13% in fiscal 2021. This reflects positive sales mix from higher-margin new products, increasing revenue through closer relationships with customers, strong operating discipline and the continuation of our productivity program, operating leverage and the simplification of central activities. Operating margin excludes our share of NewCo profits, which will be reported as a joint venture from completion. We expect to continue to deliver strong cash generation, either as free cash flow from our controlled businesses or as dividends from the NewCo joint venture, both of which will be available to reinvest for growth. Our ambition is for top line growth and operating margin expansion to drive acceleration in earnings per share growth. The efficient use of capital will also remain a key focus, with an ambition to increase organic return on capital employed by 50 basis points on average each year. Finally, we will continue to look to accelerate growth through value-enhancing M&A. Our capital allocation framework will be focused on prioritizing growth and driving shareholder value. The disciplined use of our strong balance sheet will continue to be a key priority. We are targeting 0 financial leverage on completion, providing us with plenty of flexibility to fund growth. While doing this, we intend to maintain investment grade credit metrics. Within these disciplines, we will prioritize investing in growth, both organically and inorganically. Consistent with the sale of a controlling stake in the Primary Products business, it is intended to reduce the dividend to reflect the earnings base of the refocused Tate & Lyle. The payout ratio is expected to be maintained, and the dividend per share re-based by around 50%. Following completion, it is intended to return around GBP 500 million to shareholders and to undertake a share consolidation. From there, it is intended that the existing progressive dividend policy will be maintained. Before moving on, I want to highlight that in the press release and the appendices to this presentation on our website, we have provided reconciliations of the pro forma financial information for the year ended 31st of March 2021 used in this presentation. Following completion of the proposed transaction, the growth profile of the new Tate & Lyle benchmarks attractively to speciality ingredient peers. Our ambition for top line growth and operating margin expansion over the next 5 years illustrate the step-up in performance we expect for our new growth-focused business. Together with the attractive return on capital employed, this benchmarks well against a best-in-class group of industry peers. The Board intends to align management incentives to these new growth ambitions. Moving to the investment case, the new Tate & Lyle will be a purpose-led and growth-focused business. Ultimately, that is what underpins our investment case. Food & Beverage Solutions will be focused on accelerating top line growth and margin expansion supported by cash generated from Sucralose and cash dividends from NewCo. We expect growth in earnings per share in constant currency to accelerate, organic return on capital employed to improve and strong cash generation to support our progressive dividend policy. Returning now to cover some of the details of the transaction. On governance, NewCo will be an independent business with a stand-alone management team. KPS will have majority board voting rights and operational control. Tate & Lyle will cease to consolidate NewCo at completion, with the Primary Products business being classified as held for sale and disclosed as a discontinued business in our half year results. Following completion, Tate & Lyle will equity account for its interest in NewCo as a joint venture. Tate & Lyle will appoint 2 of up to 7 directors on NewCo's Board. NewCo is expected to generate significant and steady free cash flow with the ability to pay meaningful dividends over time to Tate & Lyle and KPS. As stated at our full year results presentation in May, a significant amount of work has already been undertaken to prepare a blueprint for how to separate the 2 businesses. And this has been shared with and agreed in principle by KPS. Operational, financial and IT separation planning is well advanced. The 2 partners will work together to ensure an efficient separation, and where necessary, transitional service agreements will be put in place for a limited period of time post completion. This is a Class 1 transaction and the shareholder circular will be distributed in due course and a general meeting is expected to be scheduled in the autumn. Closing of the transaction, which is conditional on shareholder approval, antitrust clearance and various other conditions is expected to occur in the first quarter of the 2022 calendar year. In summary, today marks the beginning of a new, ambitious and exciting chapter for Tate & Lyle. The one strong company we are today will become two even stronger companies in the future, each focused on their respective strategies and capital allocation priorities. We are delighted to be entering into a new partnership with KPS and look forward to working together to provide NewCo with the opportunity to unlock its true potential. The 20-year agreements we have put in place will ensure both parties continue to work together to the benefit of the 2 businesses. The proposed transaction delivers strong value for shareholders, with around GBP 500 million intended to be returned to Tate & Lyle shareholders via a special dividend following completion. Most importantly, the proposed transaction repositions Tate & Lyle as a growth-focused global speciality food and beverage solutions business. In the future, Tate & Lyle will be able to focus all its resources and capital on capturing the significant opportunity arising from growing consumer demand accelerated by the pandemic for healthier food and drink. Growth will be accelerated by a step-up in R&D investments and innovation, with a strong balance sheet providing the flexibility to drive organic and inorganic growth. Tate & Lyle has an exciting future full of opportunities. I would like to finish by thanking everyone at Tate & Lyle for the hard work that made today's announcement possible. It's people that make a company great, and at Tate & Lyle, we have truly amazing people. Thank you.

Thank you, ladies and gentlemen. That is the end of the recording. I will now hand over to Nick Hampton for a few words before we start the Q&A session.

Thank you, operator, and good morning, everybody. Thank you for joining the call at such short notice. I guess while my nerves are still a bit shredded from last night, and I wanted a different result from the penalty shootout, the one that we got, this really is an exciting day for Tate & Lyle as we announced the repositioning of our business to accelerate our journey to become a faster-growing speciality food and beverage solutions business. So with that, Vivid and I will be very happy to take any questions you might have.

[Operator Instructions] Our first question comes from James Targett from Berenberg.

Yes, a couple of questions from me. Just firstly, on the margin upside for the NewCo business. I suppose 50 to 100 basis points per annum for 5 years, from my understanding, that's quite aggressive. So I'm wondering if you could talk about the phasing of that and just a little bit more color of where the big levers are going to be in that margin progression. And secondly, on the NewCo, could you give us some idea of what's the midterm outlook for that business is in terms of growth rate and profitability and what your kind of long-term ambition for your stake in the NewCo are? And then finally, just you did mention the sort of investments in -- inorganic investments and M&A. I just wonder how this transaction has changed the priority of M&A strategically for Tate & Lyle.

Sure, James, thank you for the three questions. Let me start with the operating margin expansion. And as you know, in our Food & Beverage Solutions business, we've been very successful at driving margin expansion over the last 3 years. And that really reflects the progress we are making on bringing new products to market, improving the mix in the business and building a solutions-based business for customers. What this transaction allows us to do is to invest heavily -- more heavily in R&D and accelerate that journey. So that's a big piece of the margin expansion. But on top of that, we've got plenty of operating efficiency to go after and leverage as we grow the business. So it's a really -- it's a mix of those things. And look, we'd expect to start that journey next year. We're already on a journey, and the increased investments should help with that. And I'll ask Vivid to add a bit more color maybe in a minute. On the new Primary Products business or NewCo, with a partner in KPS who are really committed in both investing for growth and driving margin expansion, we're very confident that we're going to see strong value creation from the 50% stake we're keeping. We've got a joint business plan for the next 3 years that delivers precisely on the ambitions that we set, and we look forward to getting on with that with them as the transaction closes. As I think about M&A, Look, our priorities haven't really changed. I mean it's about 3 things. It's about strengthening those 3 core platforms in sweetening, in mouthfeel or texturant and fortification. It's about potentially expanding into a fourth platform if that helps us serve our customers better. And that's the critical thing, any new platform really has to contribute to that solutions capability we're providing to customers. And then thirdly, it's about geographic expansion. We said we've got aggressive growth goals for our growth markets across Asia, Middle East and Africa and Latin America where we're still underrepresented. So the M&A focus is really doubling down on those things with a team that's really capable of executing as they've demonstrated through this transaction. So we're excited about the potential, both for inorganic growth, but more importantly, the value growth of the business. And this is an organic growth story to start with. Vivid, is there anything you've got margins?

Yes, I think on the margin side, I think Nick said it well. Just a bit more color. I mean, look, Tate & Lyle has a history of sort of delivery. Our top line revenue has been extremely strong. Our margin expansion is strong, and we've got a strong balance sheet. But in terms of the color behind that, if you think about this, we're going to have a step up on the top line growth. This is going to be driven by future growth in NPD as well as growth markets. And both of those have strong margin profiles. We have a strong history that will continue on the productivity program as well as we're going to look at strong operating leverage and streamlining our central cost but reinvesting back in R&D. So I think the question was around sort of cadence of that. In the first few years, we look as our cost control will be the predominant element of that. And as we focus and put more into R&D and innovation, you'll see a step-up in the mix and the margin profile as we go forward. So a very nice balance of cost and margin and mix profile going forward. And we're confident we can deliver that.

Can I just have a quick follow-up on the M&A? Nick, your answer on the M&A question, just wondering kind of what was driving your decision to return the GBP 500 million versus -- to shareholders versus investing that in acquisitions?

It's a very considered balance to recognize our shareholders upfront for the value of the transaction, but also maintain enough firepower to do the kind of M&A we envisage in the next few years. So as always, it's not a perfect science. But we feel it's the right balance for both the growth of the business and for our shareholders.

Our next question comes from Martin Deboo from Jefferies.

It's Martin Deboo from Jefferies here. Just a few brief ones from me that sort of go to the terms of the transaction. First of all, why a 50% stake, not a controlling stake? Is there -- I appreciate KPS are in control of the JV, but on the face of it, it's 50/50. Why not 51/49 or more aggressive than that? Secondly, on earnings dilution, you're saying you'll maintain payout ratio that then will fall by around 50%. Is that effectively saying 50% earnings dilutive, or am I missing something there? Thirdly, why a special div rather than a buyback to offset some of the dilution? Just intrigued why you are on that route. And then just fourth, very quickly, what -- broad brush is in the supply agreement, what products are coming back out [ as they ] JV back into FBS?

So let me take the last question first, Martin, on the long-term agreement. So this is a long-term agreement that creates supply security and economic certainty for both sites. So it's an agreement for supply of the 25% of FBS revenue that will come from the NewCo plants. Importantly, 75% of our revenue is coming from our own facilities as we move forward. And effectively, it's both the supply agreement based on volume, service, price and service levels agreement. And then there's a reverse agreement for the primary products that we'll supply to them out of Sagamore. It also includes an agreement on corn procurement, so we maintain the scale of our corn procurement activities across the 2 businesses across North America. And importantly, it's a long-term 20-year agreement that secures supply for the medium term for both sides of the business. So we spent 12 months working through the shape of that supply agreement before we even talked to KPS. And in the last 6 months, they've agreed to the long-term agreement basically unchanged. And that was a really important pillar of this, that alongside their commitment to invest and grow the Primary Products business going forward. So we've got 2 strong businesses as we move forward. I then come back to your point about the 50/50, it was important for them that they have operating control of the business understandably, but equally, it was important for us that we maintain a significant stake because we believe in the future potential of Primary Products, and we want to be sitting at the table with them as we execute the transaction and the supply agreements. So it feels like the right balance for now, so we can we can deliver the deal, we can benefit from the ongoing dividend stream and longer-term benefit from the growth potential of the business as well. So we're really happy about the balance of the agreement. So I think that addresses your first 2 questions. Vivid, do you want to take the dividend point?

Sure, sure. I -- the line was not very clear, Martin, but I think the question was around why we stepped down 50%. So the answer is very clear. The 50% reduction in our dividend is in line with the amount of profit and earnings that we're moving over to NewCo. There was a sort of 50/50 split on that basis. So we're really ensuring the payout ratio is maintained. But what's important, I think, is that the special dividend of the GBP 500 million will allow a share consolidation, so we certainly expect that dividend per share to be raised as part of that program. And then we'll maintain a progressive dividend policy going forward. So that's our current pathway with a pivot to growth as our sort of crunch factor here.

And I think the last question...

Vivid, it's Martin again. Yes, sorry. If you didn't hear me, this question is very important, so I'll just try them again. Does the fact that you're saying that the dividend aside from the consolidation will fall by 50% and you're maintaining a constant payout ratio, is that effectively guidance that the deal will be 50% earnings dilutive? I just wanted to be crystal clear on that. And the other question was why a special div, not a buyback?

So the answer to your first question is yes. So the 50% reduction is in line with the earnings dilution. That's correct. That's how we're looking at it. So -- and in terms of the second point, we felt that the element of a share -- a special dividend was actually a more efficient way of returning cash to shareholders. We felt that the share buyback was a long process that was -- sort of will take quite a bit of time, and therefore, we felt that the shareholders would appreciate the special dividend and the associated share consolidation and dividend per share step-up that, that created.

Our next question comes from Alicia Forry from Investec.

My question is around the sort of ongoing [ businesses ] that you mentioned from the [ NewCo ] you take. Are there any details you can provide us about that, perhaps a minimum percent payout or some discussion about how that's going to be structured? And then second would be going forward on your target, particularly the margin target. Sucralose is obviously still a part of Tate, and there has been some margin erosion there and a bit of uncertainty, I think, we all know going forward with regards to the shape of that business given the external pressure there. So I was curious whether your targets include some potential further margin erosion out of Sucralose. And then finally, my third question is have you decided who will be appointed to the NewCo Board from Tate? And if so, could you share that?

So maybe I'll leave the dividend point to Vivid, to the last. On the operating margin, Alicia, look, it includes the whole of the business that we're talking about, the remaining Tate & Lyle. So it does include an assumption on Sucralose. As we said, we're looking to maintain steady earnings on Sucralose going forward. It's still a very attractive product for us. The market is still growing for sucralose, and we're seeing increased interest from customers still. So we built in an assumption on Sucralose into our model, and that's included in the 50 to 100 basis points of margin expansion. On the NewCo Board, we will have very senior financial and operational membership. So we won't announce the new Board members yet, we'll do that as the transaction closes. But the key for us is that we've got strong financial representation and strong operational representation, so we can ensure the delivery of that long-term supply agreement.

Just on the dividend point, really, the key factor here is that we expect our NewCo to be strongly cash generative in which we would share a 50% dividend stream cash dividend from that. So in terms of the numbers, that's one that we will continue to work with our new partner on, but both parties are committed to providing a cash dividend and both parties are committed to driving value as well as cash delivery. And I think the really positive element for us is that our new partner in KPS has a track record of actual improvement in industrial assets and in cash generation. And that was a very, very important part of our reverse due diligence on a potential partner to see their capabilities and how they've actually delivered in the past. And the good news is that on both of those, they delivered extremely well. So we're confident that there will be margin and cash accretion from this deal.

[Operator Instructions] Our next question comes from Heidi Vesterinen from Exane BNP Paribas.

I have a couple of questions, and we'll go one by one. First, on M&A, you talked about the potential for a fourth leg. Can you talk about what sort of areas interest you? And would you roll out going into completely new areas, for example, flavors? That's the first question.

Okay. So let me take that question then. So I think we've been very consistent in saying that any platform that we would add to our business has to help us with providing integrated solutions for our customers, most likely to be plant-based because that's where the business is moving, where the food industry is moving. We've talked a little bit about plant proteins in the past. That's a good example. I wouldn't speculate at this point about whether we'd move broader afield into things like flavors because what we need to do is focus on things that can really add to the portfolio and increase our relevance to our customers on the solutions we can provide. And they're all in the area of creating healthier food and drink, and that's a trend that's been accelerating as a result of the pandemic, which is why this is such a good time to reposition the business.

And then given that M&A multiples are very high in this industry, is M&A contingent on U.K. getting a much higher valuation multiple? Or do you see opportunities as things stand now?

Look, I think M&A is possible with or without a potential re-rating. I mean clearly, a re-rating helps when you look at the maths. But the key for us is whatever deal we do has to be both accretive from a growth perspective for the business, beneficial to our customers and our ability to serve our customers and provide the right value for shareholders. And that's possible with or without a re-rating. We proved that last year with the 2 deals we did. If a re-rating happens and the market will decide that, then that's obviously helpful.

And maybe I can just add, I think the part of our strategy is to ensure that we have 0 leverage and 0 net debt on our balance sheet post a shareholder return. I think that will give us the agility and the flexibility in the event for both organic and inorganic opportunities. And while we are sort of tracking towards investment-grade metrics, we do have the flexibility to actually move quickly in the event that we need to. So that's definitely part of our thought process at this stage.

And then the next one, I saw on your slide where you benchmarked yourself with speciality ingredient peers. I saw in the footnote, you cite Kerry, Corbion, Sensient and DSM. Could you explain why you have chosen those peers specifically?

In conversation with our advisers, it felt like they were a good representative group to use and we're disclosing that for transparency so you can look at who the peers we've used are. I think it's as simple as that really.

And then while we have you here, is it possible to get a word on current [ trade increase ], both on new Tate and NewCo, if possible?

So look, as we've seen the world start to emerge from the pandemic across the world at different paces, we're seeing encouraging early signs of momentum in the business on both sides. No real change to what we said at our full year results when we talked about the trajectory this year, but we're seeing some encouraging momentum. It's different across various parts of the world, but both businesses are tracking where we'd hope them to be. And we're only 2 months into the year, obviously, but it's a solid start for the business.

Our next question comes from Chris Pitcher from Redburn.

A couple of questions from me. On the new Tate business, can you give us a sense of what sort of CapEx will be required to drive your growth ambitions? And does the transaction meaningfully change the working capital requirements of the new business? And then perhaps to follow-up on the earlier question around your operating margin targets, you're looking for an increase of 1% in your R&D expenditure. Are you looking to invest more in commercial resources? And will there be any sort of savings program that you will discuss to help fund this and drive the margin targets?

So Vivid, do you want to take the first question and then I'll come back to the R&D.

Absolutely. So I think from a CapEx perspective, we are going to see a small uplift. So if you look at our current profile, we're expecting over the period to have between 5% and 6% CapEx, that will be front-faced. So we are looking to invest CapEx within the next couple of years. That's been our plan to actually relate to the demand that we're seeing, particularly within New Products as well as the growth markets. So we are planning to do that CapEx investment that will be slightly higher in the next couple of years, but on average, that 5% to 6% is about right. In terms of the working capital, look, this company is very disciplined in working capital. What we will see is a continued focus on working capital and perhaps a bit more stability with Primary Products being a bit more volatile with the corn price that is there. So I think it's more of the same, constant discipline in working capital and a focus of disciplined CapEx with a small step-up at the beginning, but one that we'll control well.

So then, Chris, coming back to your question on the step-up in R&D investment, really across 3 areas: firstly, increasing the amount of investment we put into Hoffman into our ICD innovation center. So more scientists to accelerate new product developments internally. Secondly, focusing on open innovation, so finding partners outside the business increasingly to grow and provide more innovation power in the business. And then thirdly, clearly continuing to invest behind applications' capability to work with customers to provide solutions. That's the flywheel that really drives the growth. In terms of funding that, the funding comes really from 2 areas. One is that growth and accelerated growth we've talked about and the margin expansion. And secondly, to your point, we will continue with our productivity drive. That's what good companies do. As part of the agreements we made with KPS, we're going to continue the journey to the $150 million we've already announced across the 2 businesses. And like all companies, we won't stop there as we start to see opportunities arise and get more efficient in what we do.

Can I have one follow-up? Just on the joint ventures, there's nothing around change of control or anything to be aware of there that -- this transaction that's being discussed with your JV partners?

No, there isn't. It's all very straightforward.

Our next question comes from Alex Sloane from Barclays.

Two questions from me. Just firstly, on the joint venture supply agreements and the 20-year agreements that you have -- yes, that you stated are in place. Is there an expectation within that agreement that the 75% -- the 75%, 25% split in terms of supply from assets that you own versus the JV will change over time, can that get to 100% by repurposing Sagamore in time? That's the first question. And the second one, just on central costs. It sounds like that's going to be certainly in the early years, the key or a key driver of your margin growth ambition. I wonder if you could frame maybe the context of that in terms of where ultimately central costs may be as a percentage of sales might be kind of -- might normalize for the pro forma company?

Okay. So let me take your first question, Alex, on the supply agreements. I mean, obviously, the 75/25 split and how that evolves will depend on where the business grows over time. So there isn't a plan to take capacity out of the NewCo sites for the products that are manufactured there. Over time, as we think about growing the business, both inorganically and organically, I would expect the shift to be more towards the -- a higher number made in our own facilities. That's a natural evolution over time as we think about investing in growth. But there isn't a specific target set as part of the supply agreements. The key is that those agreements are in place to continue to supply the business successfully and economically. And also, there's a commitment to investing capital in the NewCo facilities, if that's the right thing for growing the business as well. I don't know if you want to take the...

Yes, certainly. Yes. I mean on the central costs, you're absolutely right. This is a focus of the company. First of all, Tate & Lyle has a history of sort of optimizing cost as well as operating leverage. And if you look at our EBIT margins, our return on capital employed, a large portion of that is driven by the cost efficiency of this company, and that's going to carry on going forward. I think at this stage, we're not going to give a sort of what's the target. What I will say, though, is that it's an important sort of focus of the company, and we're already on a pathway as part of the blueprint towards separation and the future of Tate & Lyle. We're already looking at that. So that's something that is firmly on our minds. And we're coming out with that view of reallocating that cost back into the more commercial and R&D. So what I can say at this point in time, very strong focus from us on cost, continued focus on EBIT margin expansion and that return on capital employed will be driven largely by both mix as well as cost efficiencies as we go forward.

We currently have no further questions. So I'll hand the call back over to Nick.

Thank you, operator, and thank you all for joining the call today. So look, in summary, today's announcement represents the start of a new era for Tate & Lyle. We're bringing in a strong partner in KPS to take NewCo forward on the next stage of its growth journey, and it also delivers importantly on our long-term strategic ambition to increase our focus on our higher-growth Food & Beverage Solutions business. And we're really confident about the future of Tate & Lyle as a result and looking forward to completing the transaction over the next 6 months or so. So with that, thank you for your time, and I hope you have a good rest of your day.