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

Hello, and welcome to the Tate & Lyle Q3 Trading Statement Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Nick Hampton, Chief Executive to begin today's conference. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Tate & Lyle's third quarter conference call. I will make some brief and structural comments, and then Dawn and I will be happy to take your questions. The group's performance in the third quarter was consistent with the first half of the financial year with revenue 16% higher than the comparative period. Revenue growth was driven by top line momentum in Food & Beverage Solutions, which delivered another strong quarter of double-digit revenue growth. Revenue growth of 19% benefited from mix management, the pricing through the input cost inflation and acquisitions. In North America, we saw continued revenue growth despite some limited supply chain disruption. Both the regions of Europe and Asia, Middle East, Africa and Latin America delivered strong double-digit revenue growth, reflecting good commercial performance. As expected, sucralose revenue was lower, reflecting the rebalancing of orders paid into the first half. The 2023 calendar year pricing round has been completed successfully with strong customer demand and the recovery of higher input cost inflation. Turning to the outlook for the year ending 31st of March 2023. We continue to expect revenue growth reflecting current top line momentum to offset input cost inflation through strategic mix management, pricing, productivity and cost discipline and adjusted profit before tax to be in line with the current market expectations with stronger profits in Food & Beverage Solutions offsetting lower profits in the minority holding and premiums. With that, I will open up the call for questions.

[Operator Instructions] And our first question today comes from Alex Sloane of Barclays.

Just 2 from my side. Just on the calendar pricing round and the positive outcome, you indicate that the premium unit margins can get back to pre-inflation levels. I wonder if you can help us kind of give a ballpark in terms of what that means in terms of the improvement in unit margins, maybe percentage-wise? Or is the right way to think about that, that the ongoing EBIT for that joint venture business could get back maybe towards March '21 levels, all else equal? And then I'd just be interested in terms of that pricing round, obviously, most relevant to Premium, but to what extent does it impact the FBS business? Could you maybe remind us how much of that division is relevant when it comes to this renegotiation process?

Sure. So let me take those 2 questions in turn. On premium, what we saw in our conversations with them was as the pricing rounds coming to completion, it's gone very well with positive demand and good return to cover inflation, what that would imply at least as you think about the future, of course, volume dependent and operational performance ending is a return to similar levels to the prior financial year. And obviously, a lot to go through over the next few months as we look at demand patterns and the return to normal pricing margin levels. But I would think it's reasonable to think about it in those terms at this stage. When we look at our contracting round for calendar year '23, I'd say the 3 things really. Firstly, we saw strong demand and have recovered inflation as we built new contracts with customers for the new calendar year. That's clearly predominantly across North America and Europe, but there is some contracting in our markets in Latin America, Asia and Middle East and Africa as well. Secondly, as we've done those contracts, we look to be more dynamic and flexible in the way that will allow customers to take their own view of inflation after inflation. What does that mean to be fair to customers and to balance cost recovery with increasing prices, we provided them with the flexibility to choose whether they lock in for prices for the full year. And we cover as best we can those forward prices or we need pricing open the second half and take a more dynamic approach through the year. But net-net, what it means is we've got a good look at March profile as we go to the next financial year.

And we now move on to our next question, which is Lauren Molyneux of Citi.

I was wanting to talk a bit more, if you could around the elements of the SPS revenue growth? And maybe give us more of an idea of how the split between volume, pricing and mix growth. And then any more details on around that volume growth because I remember at H1, there was some underlying kind of adjusting factors in that volume growth. So a little color there would be helpful. And then I also wanted to ask around what you're seeing across the different regions in terms of FBS and how the market is evolving. And whether you're seeing any kind of change in customer behavior or any sort of the destocking that you've heard called out by some ingredients change?

Okay. So let me take the first question collectively, and I'll come back to the regional discussion at the end. So as we said, we saw revenue growth similar to the first half, so 19% on FBS, and underlying volume trends were similar to the first half. So what that means really is the facts driving revenue growth ahead of volume in half 1 continued to fair in quarter 3. So we saw the pass-through of inflation and that was a similar contribution is around about double-digit volumes revenue average. Positive mix is also a significant factor. Although as we said in the half 1 call, slightly lower impact. So -- and that impact comes from being positive customer mix, progression on new products and the continuing cycling assets and low-margin business. And there's a little bit of contribution from acquisitions with [indiscernible]. So the shape is effectively very similar to the first half, a little bit of change in the moving parts. Dawn, do you want to add anything to that?

No. I mean I think you covered it. I think you covered it really well. The only thing to say is, obviously, quarter 3, we are lacking in quarter 3 last year where we started to see accelerated inflation in the comparative period. And I think from a volume perspective, the drivers that we talked about in the first half, they've also continued into quarter 3 as well. But what we have seen on that is that demand continues to be strong in the quarter.

So let me move on and talk about the real picture that you asked about. I think it is important you look at it on a regional basis, because you've seen different inflationary impacts around the world. And the overall kind of on a region-by-region basis, we have seen pretty consistent customer demand. It's remained robust through the third quarter. In North America, that would be true with a little bit of noise around things like transport and regularity in supply chain, both inbound and outbound with customers picking up and some noise around the Christmas period with the impacts of the Arctic storm. But offsetting that, we're seeing improved economic sentiment in North America as we enter the new year. In Europe, I'd say, although demand has remained good, we're a bit more cautious because engineering costs are most pressured in Europe. And the impact of these on consumer sentiment and therefore, growth into the fourth quarter, we'll have to see what happens post business. In Asia, on the other hand, we continue to see robust demand. And actually, the relaxation of COVID restriction in China should be positive in the medium term. It's less clear what the short-term impact would be based post the Chinese New Year, but through the wave of COVID in China this time around, we saw continued demand because there wasn't a shutdown so people were still shopping. So I think overall, we're seeing similar trends to the ones we saw in the first half. And it will be key what happens in quarter 4 as we think about looking into the next financial year, but we're still confident with guidance for the full year at this stage.

And up next, we have John Ennis of Goldman Sachs.

I had a bit of a broader question coming back to your medium-term outlook where you, I guess, always sort of guided for the sort of 4% to 6% revenue growth ambition, which in the current environment, of course, is hard to really use given a lot of inflation and pricing pass-through. So I guess is it fair to assume that target is migrating increasingly to a volume mix target? It is sort of the first part of the question. And then the second part related to that, are you from a volume mix standpoint for the first 9 months of this year on track to be within that 4% to 6%, which I suppose links back to the earlier question around deconstructing the 19% revenue growth between maybe volume mix versus inflation repricing.

Yes. Great question, John. So I would say that we clearly have to adjust the revenue assumption for the extraordinary inflationary environment we see. So the 4% to 6% that you quote, would be in a more normalized inflation environment. If you look through that and then look at the sort of volume revenue dynamics in the first half, you can see clearly from the breakdown we gave in the first half that we would remain on track to be within that range or slightly better actually when you look at the first half numbers because we do see structure, as you remember, from the inflationary impact, I think, we said was about half of the impact volume revenue in the first half. So it's clearly the mix and the cost impact of MPG took us above that range. As we said on the call, that impact and that balance was similar in quarter 3. So I think you can read into that, that we're absolutely on track against the ambition we set for ourselves for the first 3 quarters of the year. As I said, we're tracking very carefully what happens from a demand perspective post Christmas and during the fourth quarter, and we'll give a clearer view of the short-term outlook for the following financial year when we get to the full year results. Alongside that, of course, we've got the Capital Markets event coming up in a couple of weeks, and we'll lay out a new set of financial targets for Tate & Lyle for the next few years.

And now we're moving on to Martin Deboo of Jefferies.

My questions have mainly been answered. I just want to mock up a couple. First of all, just in FBS, Nick and Dawn, you've seen the close -- there was quite a stir caused by [indiscernible] yesterday had a very weak Q4 on what looked like weak demand and an inventory unwind in the U.S. I'm detecting a more positive tone from you and not seeing an inventory unwind in the U.S., would that be correct? And the second question is, Nick, just to clarify what you said about the restoration of premium profit. So I think you'd expect something like the prior financial year, which I take to be FY '22. I'm asking the question because FY '22 was already impacted, I think, to some extent, by inflation and also an interruption at Lafayette. So what's the right sort of reference year to think about premium profits relative to.