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 prerecording, today, we announced the start of an exciting new era for Tate & Lyle with the proposed acquisition of CP Kelco, a transaction that significantly accelerates our growth-focused strategy and delivers on our ambition to become a leading and differentiated specialty food and beverage solutions business.

Turning now to your questions. The first question comes from Damian McNeela at Deutsche and Numis.

Two questions for me, please. Firstly, just are you able to sort of provide a bit more granularity on the margin build back within CP Kelco? How much of that is sort of self-help? How much of that is sort of dependent on market recovering? And then secondly, just -- is there any indication of what proportion of CP Kelco's revenues are solutions-based and whether you're going to change your sort of medium-term targets around portion of sales from solutions, please?

Thank you for your question. Look, maybe I'll take the first question. But look, if I sort of take a step back here and look at the big picture, when we talked about doing M&A consistently to you over the last 5 years, we've said that whatever we do has to increase customer relevance. And what this does for us is it secures leadership in mouthfeel, along sweetening and fortification. We also said that whatever we do has to expand exposure to growth markets, and it does that, it takes us from 30% to 35%. And if you think about those two things in the round and you think about the innovation in growth markets, this will no doubt accelerate our ability to provide solutions to customers versus selling ingredients. And we'll think about what the right target for that is, as we put the 2 businesses together and think about the specific growth strategies on a region-by-region, category-by-category perspective. But there's no doubt that their solutions offering with our solutions offering will allow us to accelerate solution selling and topline growth. And then you link that to your second question about margin recovery and expansion, a lot of this is about growth and solutions, so our ability to shift the mix of the portfolio of both businesses. And that's reflected in how we thought about the guidance on the topline, so increasing the guidance to the top end of our range. It's also about a recovery from a low point in the cycle as we start to see the benefits of the significant capital investments they've made in productivity and capacity flow-through. And it's also about a portion of industry recovery. So we're really confident over the next few years, we'll see margins recover to more like historical levels on a steady basis. So hopefully, that gives you a sort of sense of answers to your two questions. And our second question comes from Karel Zoete, Kepler.

My first question with regards to the guidance for EBITDA growth. When you say for the top line, we expect to be at the high end of the 4% to 6% and there's significant margin expansion. Does it imply that EBITDA growth in the years ahead will be above the [ ballpark ] of 7% to 9%? And the second question is, are there certain areas where you say antitrust issues might be present, there's overlapping clients or capabilities?

Sure. I'll ask Dawn to take the question on EBITDA in a minute. Let me add a couple of points first, though. On antitrust, we clearly have to go through antitrust clearance as is normal in any transaction of this size. But we don't see any specific issues in any geography. It's obviously going to drive the timeline to completion because there's a sort of probably a 4-month process to get through antitrust, but we don't anticipate any problems. On your question on EBITDA growth, I mean, clearly, as we add in the natural growth cycle of the business, the 7% to 9%, and we add in the cost synergies, which, by the way, we've worked really hard in partnership with the CP Kelco team to frame up; we're going to see those flow-through in the first couple of years. And there's natural recovery as we move to solutions settling. We'd expect to see very favorable EBITDA growth over the first few years and sustaining our longer-term guidance into the medium term. And of course, the medium term is a few years out. I don't know, Dawn, whether you want to add anything specifically to that?

Yes. I mean, thanks, Karel. I mean I would say we're really excited about this combination. CP Kelco has a broad, high-quality portfolio, a well-invested asset base and actually really strong customer reputation. So the combination enables us to deliver enhanced EBITDA margin along the 3 drivers that Nick talked about, cost synergies in the first 2 years, revenue synergies up to 10% over the first few years as well as the recovery in CP Kelco business. And as I talked about, this is a very strong performing business. If you look over the longer term, its margins are above 20%. So that should give us confidence actually that we can accelerate the EBITDA.

Okay. Let's move on. So our next question comes from Alex Sloane at Barclays.

A few questions from my side. Just firstly, on CP Kelco, in terms of the volume decline, I think [ 13% ] volume decline in '23. Are you able to kind of break that down in terms of what was destocking, what was market and if any of that market growth was part structural or you see it all as kind of cyclical pressure? And related, I guess, in terms of the recovery at CP Kelco before we think about synergies, do you have a view on where EBITDA might have put back to in, say, '25 on a standalone basis? And then just the second question, I think you talked about orange peel being a key feedstock for the pectins. I guess there's been some concern over supply shortages there. So any impact on the outlook in the short term in terms of input costs on that front?

So let me take your 3 questions in terms. So on the short-term challenge on volume last year, as you said, [ 13% ], I would break that broadly down into 2 big buckets. 2/3 of it, plus or minus, was the consistent industry decline that we've seen across many ingredient sectors, driven by consumer softness, customer destocking, et cetera. They also had some supply challenges as they bring on stream the significant capital investments they've made. And of course, as those capital investments come on stream, we would expect to see that volume come back. So that's a sort of positive coming into this year. And what we're seeing so far in the first few months of this year is very similar to the shape that we're seeing in our business, which is some volume recovery and revenue recovery and a sort of stabilization of margin, which is encouraging as we think about moving forward and benefiting from the investments that have been made. So when you think about the recovery, if you take synergies to one side, we're very clear in our minds that we can build margins back to the historical levels over time without synergies. There's the benefits of the significant capital investments that we talked about in the presentation. There's the natural return to market growth because fundamentally, these ingredients categories are growing across the world because they're natural, they're clean label, they're from plants, and therefore, they're on trend with consumer trends. So I would think about the cost synergies being a benefit of putting the 2 companies together rather than an underlying margin recovery in CP Kelco. And then your last question on orange peel, they are a major player in pectin. They're the #1 supplier of pectin globally. And as you would expect, they have very disciplined procurements and hedging policies for all [ material ] purchasing like we are. So these things always go in cycles. They'll manage that cycle very well as we would with our corn-based cycle. So let's move on then to Joan Lim, BNP Paribas.

Just 2 questions. I think you mentioned that CP Kelco had sales in personal care and household. Is it a new area of adjacency Tate wants to move into, so moving away from food and going more into personal care and household? And my second question is, can you perhaps give us a sneak peek of how CP Kelco can help with solutions selling it? Any examples of how this revenue synergies will come from?

Sure. I mean, let me take the first question -- second question first rather, and then I'll come back to the new channels because fundamentally, the excitement about this combination is our ability to better serve our core categories. So if you look at the overlap of the 2 businesses, the overlap in the 4 key global categories we're in is very, very strong, and that allows us more [ weapons ] to grow faster with our customer. I'll give you one example. So if you think about a breakfast yogurts, which typically has a fruit compote with it. So typically, you'd find in the yogurt itself, we'd be using our sweetener systems and our starch systems to help with sugar reduction and mouthfeel. But we can't help with the fruit compote. Think about the fruit compote, CP Kelco brings the pectin that allows the structure of the fruit compote to be shelf-stable. So the combination of the 2 means we can work on the entire product for customers. If you look at an ice cream, for instance, you'll see both their products and our products in it typically. If you look at a fruit-based beverage, for the sugar reduction, we can provide the solution, but we can't provide the mouthfeel. They can because of the nature of their pectins and gums businesses. So there are lots of examples where the customer will overlap in terms of solutions capability is very strong. And I could go category by category by category and explain that to you. And that's part of the category opportunity over and above the greater exposure to gross markets. Then you look at adjacent categories, and we think together, we could probably build a stronger business in confectionery. So it allows us to strengthen our existing categories beyond where we are, potentially into further categories. And then to your first question, there's a very interesting go-to-market capability there in personal care, which is actually all about using nature-based ingredients to replace petrochemical-based ingredients. And that's something we've been thinking about as a Tate & Lyle team for a while. And in fact, we did with our old business, but they have more presence there, which will allow us to work with them. And in fact, some of the innovation conversations we've been having pre this deal with them have actually been about that very thing, how might they take some of our ingredients beyond food. So I think it's a longer-term opportunity. That's very interesting for us as well. So as far as I can tell, that's the end of the questions today. So look, thank you for everyone, for watching and for all your questions. I mean, look, in summary, this marks the beginning of a new ambitious and exciting era for Tate & Lyle and for CP Kelco. This is a real partnership. The proposed combination will create a leading specialty food and beverage solutions business, focused on delivering for our shareholders, customers and employees. Thank you for your time today, and I wish you all a very good day.