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

Good morning, everyone, and thank you for joining today's presentation. We are now into the live Q&A. As I said in the pre-record, Tate & Lyle performed very well in the 2023 financial year as we delivered double-digit revenue and EBITDA growth and made significant progress delivering our strategy.

We will now take your questions. But before we start, I just wanted to wish Martin Deboo from Jefferies all the very best in his retirement at the end of this month. Martin has covered Tate & Lyle for over 16 years, and we will miss his in-depth analysis and challenge of our business. Martin, we wish you all the best. With that, we will turn to the questions, with the first one -- and actually, it's coming from Martin Deboo from Jefferies.

Sorry, Nick. Just unmuting myself. Gosh, I get the privilege of the first question, do I? It's going to be -- it's going to feel a bit nerdy, I think. I just wanted ask on Sucralose. I mean volumes dropped off quite significantly in H2, down high teens, it looks like to me. I just want to -- you did touch on it in the prepared remarks, but I just wanted to sort of drill into that a bit. Secondly, I was quite surprised that Sucralose had a cost recovery issue because I don't think of Sucralose as an inputs-dependent business, but you allude to the constraints of multiyear contracts. So could you just talk a little bit about Sucralose? I know it's not the main event, but you did give me the first question.

Sure. Of course. So let me pick both of those up, and maybe Dawn can add something on the cost as well. So on Sucralose, what we saw, and we said this in the first half, some phasing of volume into the first half. That's the first point is big customers pulled quite strongly on their contracts in the first half. What we also saw in the second half is we're lapping a record quarter in Q4 2022. So 2 of those things sort of added up to the half 1, half 2 volume imbalance. But actually, in relative terms, nothing too concerning for us. On the cost side, what you do see on Sucralose is clearly, input cost inflation from things like sugar and energy, and that was an impact in the last financial year. But nevertheless, we felt good about the overall profit delivery on Sucralose. Dawn, anything to add or...

Yes. I think if you think about the role of Sucralose in the portfolio, its role is to deliver attractive returns, and it's delivered that in the year, with around 30% margin. The other thing to say is the global market for sucralose remains very robust and continues to grow. It's a choice for us to have long-term contracts because that helps to balance the risk. And actually, as inflation normalizes, we would expect the profitability of Sucralose to also normalize. But as Nick said, I mean, overall good performance on Sucralose.

So hopefully, Martin, that covers your key points on that.

It does. And I just wish you both my very best. So my very best wishes for the future.

Good luck to you, too. Our next question comes through Alex Sloane of Barclays.

Two please from me. The first one, just on FBS and the double-digit mix improvement there. I mean, clearly, some evidence from that of your success in prioritizing higher-value business over volume. Maybe you could talk about the outlook for mix for the year ahead. I mean I presume we should not be expecting necessarily double-digit mix to continue. But in terms of thinking about potentially softer volume tonnage and continued destocking, can the combination of volume and mix remain in low single-digit plus positive territory? And maybe related to that, could you give us a sense of where you see customer inventory levels now versus maybe 2019 levels in terms of maybe getting a base case of how deep and long this destocking drag might last? So that's the first question. And then just the second one. The WHO obviously published a new guideline last week on nonsugar sweeteners use, and I appreciate that's actually quite a controversial guideline, not necessarily endorsed by all health bodies and professionals. But interested if you think that guideline might have any impact even near or longer term in terms of the addressable market that you laid out for your sweeteners pillar at the CMD earlier this year?

Sure. Okay. So why don't I talk about the volume piece? And then Dawn, maybe give the mix story. So as you rightly say, Alex, through the first 3 quarters of last year, we saw a really successful reset of the business where we saw significant revenue and margin improvement as we look to focus the business on those customers who value doing business with us, higher-margin products. And just resetting the business for growth going forward, and that really played out in a strong financial algorithm. That continued into the fourth quarter, with one other thing flowing through the whole year, which was this sense of exiting low-margin business, particularly in Europe. What we saw in the fourth quarter in addition to that was some signs of destocking emerging, both in customers and, we think, in consumer pantries as well as they adjusted to a post-COVID inflationary world. And we've seen some of that flow into the first quarter this year. The good thing in that is a couple of things. Firstly, we're still seeing a robust financial algorithm. So the algorithm in the fourth quarter was as robust as in the first 3 quarters despite the signs of destocking. And we've also built an assumption on volume destocking for the foreseeable future into our guidance for this year. And we're expecting to see sequential improvement in volume through this year as the destocking impact subsides. And that's what we're hearing from customers as well as we go around the world. In terms of the nature of the mix and its sustainability, I'll let Dawn handle that, and then I'll come back and give you a perspective on the WHO announcement.

Yes. Thanks, Nick. I mean as you said, a very strong performance in terms of price/mix on the FBS business. So 25 points of growth in the year. Roughly half of that came from inflation pass-through of price. And the other half came from, as Nick talked about, the very intentional reset of the business, and there were 4 key drivers in equal shares that drove half of that total price/mix. The first one was solution selling. So in line with our long-term strategy and in line growing our solutions business, that became a bigger part of our business during the year, increasing 2 points. We also prioritized strategic customers, customers that will value long-term partnerships around solutions. And the other 2 pieces were prioritization of product mix and new products, so higher-margin products as well as the exit of low-margin business. And if you think about those factors, as Nick talked about, we expect them to continue into the first part of this year. But the first one, which is the solution selling piece, which is in line with our long-term strategy, that's the piece that we expect to see as we gradually move through the year and we get back to volume growth, that's the piece of price/mix that we would look to see ongoing.

Thanks, Dawn. So let me come back and talk about the WHO announcement then. And just to put it into context to start with. So there is a huge waste of scientific evidence out there that low- and no-calorie sweeteners are an effective tool in helping weight management alongside a huge number of other lifestyle choices. And that's really important in a world where obesity and diabetes is the biggest health challenge facing the world. And what we're seeing from customers is massive demand for those products because they're trying to provide consumers with positive choice to reduce their sugar intake. It's also true to say that sweetness is a habit for people. And therefore, dealing with obesity and diabetes in the short term is about growing cohorts of grown-ups who are used to high-sugar diets. So you need solutions today. We also believe that reducing sweetness in diets over time is important, but that's a generational thing with young people coming through. So we anticipate continued strong demand for our no- and low-calorie sweeteners and all the other sweetener solutions in our portfolio going forward. I think the other thing I'd say is the WH guidance is conditional. And that means it's based on a low weight of evidence. And therefore, there is a little bit of controversy about it. So for us, we'll clearly watch it very carefully, but we've got a belief that what we're doing is the right thing to help solve the immediate problem of growing obesity and diabetes in the world. So hopefully, that gives you a perspective on all of your questions for today. So next, we'll go to Damian McNeela at Numis.

I guess the first one for Dawn maybe. Can you give us some color on the degree of cost inflation that we're likely to see in the coming financial year and whether there are any sort of regional split or regional variances in that expectation? And then secondly, on the solutions side of the business, I mean you're making good progress. Are you able to sort of give us an indication of what the pipeline for solutions looks like as we stand now and give us sort of a sense of what that might be for the coming year, please?

Great. Thanks. So why don't you take the first one and then I'll come back on the solutions piece?

Sure. So in terms of inflation, I mean, we've done a really good job covering inflation, and we've covered it through a combination of price/mix management, productivity, very strong performance on productivity in the year as well as cost management and cost discipline. So the 4 levers that we've pulled to cover inflation, we would expect to use those levers moving forward. We still expect to see inflation as we move into this year. Remember that we are hedged forward. So in an inflationary environment, that takes time for inflation to feed through. And similarly, as you're coming down the other side, that benefit takes time to see through. But as we move through the year, if we look at the spot price today, the spot price versus our input prices is lower. So if that continues, then we would expect to see some benefit in the second half of the year. I mean the reason why we're not guiding to a specific number on inflation is because we expect it -- we expect to cover it from a unit margin perspective this year as we have done in previous years.

And Damian, maybe I'd just add one other point to that is we -- consciously, when we came into contracting for this year, we gave customers the choice on whether we would cover the inflation we saw for them as we contracted or we'd float. So the book is relatively balanced from a risk perspective in that regard. So let me come back to your question about solutions. So we saw good progress last year. Let's start with that. So 2 percentage points increase in the overall mix of solutions in the pipeline up to 18%, we expect to see continued progress this year. And as you know, we're looking to double the pipeline from solutions as a percentage of the mix over the next 5 years. Will the progress be absolutely linear? Probably not, but there's no reason to assume we're not going to see progress in this year as well. The question is what's the balance on those solutions from cost out versus healthier alternatives. I think that mix may be a little bit different in the near term. And then there's also a question about how fast products go to market in the current environment. But the progress last year was very solid. The pipeline looks good, and we're anticipating making progress this year as well. So our next question comes from Lauren Molyneux at Citi.

Just a couple for me, please. Firstly, on Primient, can you talk a bit more specifically around the improvement that you're expecting in this business in terms of the profit delivery there and maybe some of the moving parts and also how much visibility you have into that improvement in profitability given the pricing and the recent operational improvements? And also, I think there's a bit of a cost -- sorry, a financial headwind there. And then secondly, obviously, your progress against the productivities again this year, so more than doubled your initial expectations. And I was wondering what the expectations are in terms of productivities this year. Can you talk about whether you're actually discovering more opportunities as you move through this program and whether there's potential maybe to upgrade the expectations there and then just generally kind of the phasing of those productivities over your midterm target?

Sure. So I'll cover Primient, and then maybe, Dawn, if you cover the productivity piece. The only thing I'd add on productivity, Lauren, before Dawn jumps in is we've just exited a very successful program, the 150 million that we delivered over the previous 5 years, which was ahead of target and ahead of schedule. And the productivity we delivered this year give us huge confidence in the future program that Dawn will lay out in a minute. So we feel that productivity is an engine of the business. In terms of Primient, I think the first thing to say is we're very happy with the progress on separation. The 2 businesses separated very cleanly. The relationship with KPS is very strong. And let's not forget, we received a $76 million dividend out of the Primient business last year because they're very cash-generative. They had some operational challenges through the year, which we talked quite a lot about at the half 1. But the good news is, as we came into the fourth quarter, many of those operational challenges have been addressed. And through the pricing round, we saw a return to more normal levels of margins. So we're very positive about the potential of Primient for this year and the relationship that we've developed. And if I was to think about it in simple terms, broadly, what we saw in terms of delivery from Primient in the second half was delivered in the fourth quarter. So that's sort of quite a good sense of where the business might go this year. And we have very good visibility of performance in Primient because we talk every month about performance. This is a very transparent relationship, got this cross-supply agreement that's working well. So tough year for them last year but signs of material strengthening coming into this year, which gives us confidence about delivery this year. And don't forget also the demand for bulk sweeteners in the U.S. remains robust. The thing -- I think the financing point you're making is, of course, the interest charge in Primient is a bit more of a lag than it would have been when interest rates were -- when the deal was struck, but that will play out in the numbers next year overall, I think. So Dawn, do you want to take the productivity unless you've got anything to add on Primient?

Sure. No, I think you covered it well, Nick. So on productivity, as Nick said, we're really pleased with our productivity performance, so $21 million delivered in the year, which is above our target going into the year. And I think it demonstrates the culture that's embedded in the business, but it also demonstrates the agility to be able to adapt if higher inflation comes in as well. If we look forward, we've set out a 5-year productivity target to deliver USD 100 million cumulative savings over the next 5 years. I would anticipate a similar amount each year in terms of savings coming through. And what we're really focusing on is looking at end-to-end process and really looking at how can we improve both the customer experience and the employee experience when we look across the piece in our business. So I think very exciting program. The other thing, if you think about the CLARIA example that we talked about in the presentation, where we talked about the new CLARIA process, where we're reducing energy and reducing water use by around 35%, we will also look to join that up from a productivity perspective as well. So not only does it bring sustainability benefits, but it also brings productivity savings, too.

That's a really good point. So Lauren, hopefully, that gives you a sense on your 2 questions. And we'll move on to Patrick Higgins at Goodbody.

I guess a couple for me. Firstly, just coming back to the destocking trends that you've called out. Is there specific platforms or categories, I guess, that you're seeing this play out more in? Secondly, you mentioned you're using some targeted programs to develop new ways to work with your customers. Could you give us a few examples of that? Or what exactly -- what those programs are? And then finally, just on M&A, what's the pipeline like? Is multiples becoming more reasonable then? Yes, any update on that side, please.