Tate & Lyle PLC (OTCQX:TATYF) Q3 2016 Earnings Conference Call February 11, 2016 3:00 AM ET
Javed Ahmed - Chief Executive
Nick Hampton - CFO
Martin Deboo - Jefferies
Warren Ackerman - Societe Generale
Jeremy Fialko - Redburn Partners
James Targett - Berenberg
Alicia Forry - Canaccord Genuity
Charles Pick - Numis Securities
Robert Waldschmidt - Liberum
Jack Gorman - Davy
Julian Lakin - Mirabaud Securities
Welcome to the Third Quarter Trading Statement. My name is Faye and I'll be the coordinator for today's conference. [Operator Instructions]. I will now hand you over to your host, Javed Ahmed, Chief Executive, to begin. Thank you.
Thank you, operator. Good morning, everyone and welcome to the conference call. With me is Nick Hampton, our Chief Financial Officer. Before Nick and I take your questions, let me briefly summarize today's trading update. Overall, we remain on track to deliver our full-year guidance.
Specialty food ingredients performed steadily in the third quarter, with volume ahead of the comparative period. Volume grew strongly in Europe and also in Asia Pacific, where we continue to leverage our local technical expertise to provide solutions for customers in categories such as dairy and beverage. This growth more than offset softer demand in North America and Latin America.
In North America, demand in the quarter was softer than expected, primarily due to a lower offtake from some of our larger customers. Our strategy remains to focus our North American business on higher growth areas to drive a gradual return to growth. Markets in Latin America and notably in Brazil, remained soft, due to wider macroeconomic conditions.
In food systems, volume continued to growth and also benefitted from the acquisition of Gemacom in December 2014. However, margins declined as a result of the sharp increase in certain ingredients costs, specifically the price of egg powder following an earlier outbreak of avian flu. SPLENDA Sucralose volume was ahead of the comparative period with pricing lower year on year, as expected. This business remains ahead of expectations. In bulk ingredients, the performance of the core business excluding commodities continues to be solid, with North American sweetener volume slightly ahead of the comparative period.
Commodities and the weakness of the U.S. ethanol market in particular, continue to have a material adverse impact. As a result, we now expect a small loss from commodities in the full year and for the weakness in commodity markets to continue. We also continued to make good progress delivering on our major change initiatives with the Sucralose restructuring proceeding to plan and the new SFI capacity expansion now largely online.
In addition, we completed the realignment of Eaststarch during the quarter. And earlier this week, we announced the sale of our small bulk ingredients plan in Morocco, further focusing our business in Europe, Middle East and Africa on specialty food ingredients.
So, to conclude, our outlook for the full year remains unchanged. And as set out in our statement today, the longer term outlook for the business remains positive.
With that, Nick and I will open up the call for questions.
[Operator Instructions]. And the first question is from the line of Martin Deboo from Jefferies. Please go ahead, Martin.
I think the question I would ask is we've seen this very strikingly positive commentary from particularly Ingredion, but also ADM, other than in ethanol, around how U.S. corn-processing capacity and economics is going as we go in to the 2016 contracting year. I think the tone from yourselves which has not changed, is more cautious than that. And I'm just keen to understand why there seems to be a difference in commentary and what you're seeing or not seeing, that the others are seeing or not seeing. That's the question. Thanks.
Let me try and address that. As you rightly pointed out, there's really no change to what we said versus half one. This is a solid business for us, continues to be a solid business. The industry's in a good place, I think, in terms of balance. Harder for me to comment in terms of what they're seeing, what we're not.
But I think you want to keep in mind the objective for us and we've been very clear in our strategy, is to manage this business for steady earnings over time and steady cash flow. There's nothing here that I see right now in the market, at least from our point of view, that would cause me to change the outlook that we gave you in half one and which we're reiterating at the moment. This is the kind of outlook I would expect for us to have ongoing, steady earnings, steady cash flow.
The market's in a good balance right now and if that changes, obviously, we'll highlight that to you. But, as I said, it's harder for me to comment on what the other people may be seeing which is very clearly just staying on the game plan we've laid out.
I guess a follow-up, just given what you've said about good balance, would you expect that good balance to be benefitting the pricing environment in specialty, as well as bulk?
No, I think that's mostly to do with the bulk side. I think capacity utilization is irrelevant, certainly for the specialty side, but I think it's a much more bigger factor on the bulk side, Martin, from our experience.
And our next question is from the line of Warren Ackerman from Societe Generale. Please go ahead.
First one maybe for Nick, just back on the guidance again, just a little bit confused around the currencies. I know it's very volatile. You've maintained your constant currency guidance but FX has been a bigger hit, so reported PBT will now be lower than the constant currency figure. I get that the Brazilian real and the Mexican peso have been quite weak, but as looking at the dollar/sterling current spot of $1.45 and looking at the average over the year, depending exactly where you strike it, but let's call it $1.54 so the dollar has strengthened a fair bit.
So just interested in your thoughts on currency, especially for FY17. As things stand, Nick, are you saying that the hit from EM currencies is going to be more than the benefit of the dollar as we roll forward? I know it's difficult, but are you able to help us with the moving parts around currency? And related to that can you tell us what cost savings you have in place to try and absorb these incremental currency impacts? That's the first one.
Then just secondly, I am not sure whether you are able to say this but in terms of the SFI volume growth up in Europe and AsiaPac, down in North America and LatAm. Are you able to put some numbers around those four regions and specifically interested in your thoughts on North America. You've said a number of times now that the market has grown at 4% and you've only grown at 0.4% and that's one of the big opportunities.
I appreciate the market's slowed down a bit in North America but interested in your thoughts about the underlying market as you see it and whether you think that you can grow more in line with the market as we go forward? Thank you.
Let me take the currency point to start with. So let me clear up any confusion to start with. Clearly this year, net-net the balance of currencies is a positive for the business. Our like-for-like reported number last year was GBP184 million and that's versus a constant currency guidance, currently at $1.54, of GBP193 million. As you point out it's likely that the dollar will end up somewhat more positive than that this year. Let's say $1.52, so you'd add another couple of million to that to get to a reported number of GBP195 million if it wasn't for the drag we're seeing in Latin America because of the significant weakness in the real in Brazil and the peso in Mexico.
And those are two markets where we're somewhat exposed to currency because of local currency pricing through our ALMEX joint venture in Mexico and the local business we have in citric acid in Brazil. So net-net currency is still a significant positive for us this year. I just wanted to point out, because we've given a lot of commentary on the dollar historically, that there are some adverse movements in our reported numbers because of those currencies this year.
And presumably there's some transaction issues as well because in some of those LatAm countries like Brazil I guess you're exporting from the U.S. so it's not just translation.
But typically with transaction issues you can find a way of hedging those as appropriate if you're buying the raw materials in hard currencies. So it's more of a translational issue. I don't see it as a significant issue for the business, I just wanted to make sure that we're clear about it, given where we've got to the point in the year.
On the SFI volume let me give you as much color as I can. On North America, let's start with North America. North America, the volume picture doesn't look that different for us at the moment and we don't expect it to look that different than we did at half one. I think that's kind of where we're. Margin is solid in North America, by the way.
The Latin American business, we're seeing effectively a continuation of what we saw for the - as we've gone through the first half. It's down and that is - the volume's down probably in the double digits. But on the flip side, we've seen very strong double-digit growth in Asia Pacific and Europe. Those regions continue to do very well for us.
So the picture really hasn't changed that much from what we saw in half one. Your comment on North America in terms of returning to growth, I think I just want to put one thing right. Yes, our historical volume CAGR there has been around 0.4% which is what you rightly pointed out.
I think the market is pretty much broadly in line with that. The 4% to 5% we talk about, Warren, is the global growth rate, it's much lower in North America and so it's been in line with the market. Our objective is to beat that modestly over time as we return the thing to growth which is by implementing, as we talked about a few weeks ago at the Capital Markets Day, going after focused strategies which is working very well for us in Asia.
And our next question is from the line of Jeremy Fialko from Redburn Partners. Please go ahead.
Firstly on North America, you talked about the offtake being a bit softer than you'd expect it, so whether you could just come and give us a bit more detail on that one. And then secondly, the new capacity that you have got. So you said that's largely online. So can you talk about whether that contributed anything in the quarter and what sort of incremental contribution from that you'd hope to see over the remainder of this financial year and into 2016, 2017? Thanks.
On the offtake, the primary softness we saw was from some of our larger customers which is actually not that dissimilar if you are following the food and beverage sector, if you look at just consumption trends in the big food, as it were. It was in line with that and I said the picture doesn't look that different in Q3 than it did at the end of half one. So it's mostly the larger customers where we felt the softness. The rest of it, it was actually in good shape and as I just pointed out, margins actually are in very solid shape in North America.
Your question on capacity is, yes, that's just come online and obviously we're contracting that as we speak, as we go into the beginning of the year. The contracting cycle for SFI is a little different than bulk ingredients, as you know. And we would expect to see some benefit of that as we go into full calendar 2016 but that will be a gradual process.
The other thing I should point out is the capacity that we bought online is that it's not just for North America, it's obviously global capacity, so that capacity is being utilized as we go through the year and as we contract very much across the world.
And I guess following up on that, when do you think that your SFI volume growth can get to a figure that's in line with the overall 4% to 5% market growth that you have talked about?
On a global basis, we would expect to see heading toward that certainly as we go into next fiscal. Specifically part of the key element of that is getting North America back to above market growth which is - above North American market growth and we expect to do that gradually in the next little while.
But as I just pointed out, growth in Asia and in Europe continues to be very good for us and I would expect LatAm probably to - LatAm at least we haven't seen it getting any worse, to start coming back. But that will depend on the macroeconomic situation as well.
And our next question is from the line of James Targett from Berenberg. Please go ahead.
Just one question from me, just looking ahead, in bulk, in terms of profitability, could you just maybe give some outlook on whether the benefits from the more positive pricing in sweeteners is, offset by what you're expecting in ethanol or commodities over the next 12 months? Or is there still a net positive there? Thanks.
A couple of things, I'll give you some color on this one, James and then obviously we provide the full-year guidance in much more detail, as we go into the year a bit more. So I'll stay away from that. But what we're seeing is modest, as we have gone through the contracting round on bulk; it's been a good round for us. So the business that was up for contracting, we've seen modest margin increases on that, so we should expect to certainly see that benefit us as we go into the next 12 months.
Commodities is - by and large, on core products, there's really no new news to report. It's largely ethanol. I personally do not see ethanol situation getting better in the next - in the foreseeable future because if you look at it, the underlying dynamics of the market, there's 15.5 billion gallons out there. The RFS called for about 14.5 billion, so it is over capacity.
You look at the inventory situation, it's the highest inventory level of the past three years. We haven't seen too many things being mothballed up to this point. So I somehow don't see that situation getting any better.
And our next question is from the line of Alicia Forry from Canaccord. Please go ahead.
Just a few questions from me, firstly on Sucralose, given what you've seen on that business transition so far, is there anything that you'd like to revise about the medium term profit trajectory in that business? Then secondly, if you could comment on the Winway business in China, learnings from that, how's it going etc.?
And then finally, is there anything that you can say on the profitability of the core SFI business? I think Javed alluded to the fact that it's solid. I noticed that it improved quite bit off a low base, in H1; should we expect further sequential improvement in that operating margin on the core SFI business in H2 as well? Thanks.
On Sucralose, nothing that we have seen so far is out of expectations. I think clearly, pricing has continued to go down. And I would expect to see pricing continue to go down as we go into next year. That's what our thinking is premised on. So I don't see any change to our thinking there. What we've seen in the last little while is possibly gone down slightly less than we had anticipated, but on the trajectory, long term trajectory, I don't see any differences.
Our whole business model now is geared toward a value-focused strategy and everything that we've done is to create a low cost, sustainable business with modest profitability. So there's nothing that I've seen in a structural sense which would cause us to revise our thinking at this point.
Now as we go through the next year or two years, if anything changes, obviously we'll let you know. But there's nothing that I see right now which says that there's any change where we need to rethink anything. So that's one.
Winway in China, that was the fibers; it was mostly an asset purchase that we did over there. It was a very good facility we came across and we acquired it. And that's going very well for us actually. It is - and in fact we're doing a lot of work operationally, to expand production over there, as well. So that, in a nutshell, continues to go well for us. Core SFI, operating margin, Nick, do you want to take that?
You'll remember in the first half we saw very positive progression year on year, on margins which was clearly a big plus for us. Although some of that was somewhat flattered by the lapping of a tough first half last year.
I would say what we're seeing on SFI margins on the core is continued solid progress. The year-on-year numbers will look different in the second half, because it's a different comparable, but on a run-rate basis, we're seeing the king of progression we were hoping to see.
And our next question is from the line of Charles Pick from Numis. Please go ahead.
Four questions I'm afraid, please. Firstly, there's no mention of North American industrial starches in the statement today and you did have quite a big volume decline in the first half. I wondered if that's remained dull in the third quarter. Secondly, is it possible to be specific, please, about what you think the peso and real devaluations will cost you this financial year?
Thirdly, I think back in November you were talking about hedging your natural gas needs, on the BI side and locking in at current levels. I wondered if you've made any progress on that front. And finally, are you expecting your corn silos to be nice and full at the end of this financial year? And what's the corn book looking like generally?
Let me pick up the first one and I'll pick four as well. And Nick will pick up two and three questions. Industrial starch volumes were somewhat better actually in Q3, but nothing out of expectation, because the volume decline that you saw in half one, in large part is planned. Because as we diversify the grind and we reallocate that grind into our SFI business, that is our whole game plan.
So you will continue to see that, but the margin of that business continues to be good. And so that's nothing - I would not say that would be anything, volumes going down there, that's of concern to us, is actually expected and planned. In terms of the corn silos, we would by and large, all else being equal, with a good crop which is - it's hard to say at the moment the way the crop is shaping up.
Yes, I would expect that. That's historically what happens. But obviously the proviso there is let's see the crop come in, the new crop come in and then we'll have to see at that point. Because we've got a whole long summer to go through and having been around this business for a while, I know things can happen in the summer. Nick?
So Charles, just to pick up on your two other questions. Clearly, the final outtake on the impact of the real and the peso, as it will on the dollar, will somewhat depend on how we evolve through the fourth quarter. But I think it's, as we said in the statement, it's a moderate drag versus our dollar constant currency rates. I'd say it's a handful of millions plus or minus, when we look to close out the year.
On your second question on natural gas hedging, as we said, we're taking advantage of the very favorable gas prices in North America. And we're extending cover out into the next fiscal year, to make sure we're maintaining advantageous gas prices in the plants for the foreseeable future.
And our next question is from the line of Robert Waldschmidt from Liberum. Please go ahead.
I have three questions, if I may. In terms of food systems, you've called out higher ingredients' costs or sharply higher ingredients' costs, in particular on the egg side, with avian flu. Can you give us an update in terms of where those ingredient prices are trending now? Are we past the peak and are we past the avian flu influence or is there more to run there?
The second question would be, all things considered, if we stripped the currency impact out, what we're hearing, in my book, still sounds like it's an in-line performance. There's some puts and takes across the different business units.
But could you just confirm that ex currency, we're very much in line and if anything, volumes in SFI continue to be trending in the right direction, full stop? And then in terms of the new capacity for SFI, can you just clarify whether we're booking the new depreciation charges, as that's now, as you say, fully online or nearly fully online? And yet we haven't really seen the full benefits coming through from the actual sales, going through those machines. Thank you.
Nick, do you want to take that?
Yes, so Robert, let me take your three questions. So as you rightly pointed out, the ingredients' costs on food systems were predominantly driven by egg powder. We saw it spike in pricing, over three times the norm, in quarter 3 which happens to be our peak season for egg powder as well. And we saw some supply challenges.
We're now seeing prices back down in more - in a normal range. They are inflated versus the historical, but we're talking about 20% to 30%, rather than three to four times. So it's a very different position and we expect that to normalize over time.
As to your second question on in-line performance, that's absolutely right. Ex an adjustment for the currencies in Latin America, I'd say that - and with some puts and takes across the business, commodities, Sucralose, core performance very solid, we're very much in line with where we were at the half year and encouraged by the progress we're making.
On the depreciation on new capacity, the answer to that question is it depends. Some of it is coming on-stream now. The full depreciation load will actually hit us in the next fiscal year, but it's all factored into the guidance we've already given for this fiscal year.
And our next question is from the line of Jack Gorman from Davy. Please go ahead.
Two very brief questions, please. I just note that there isn't much commentary within the statement on new product and new product progress, so if you could give us a little bit of a flavor for what the relative rate of growth you're seeing in that particular group of products, that would be great. And second question to Nick; so specifically if you could update us on guidance for full-year net debt, just in light of obviously FX changes, if they have any particular influence on that. Thanks.
Jack, on your question on new products, we didn't put it in the commentary, but very solid double-digit growth continued into Q3. So again, new products getting traction, particular successes we're beginning - we're seeing again on a lot of our fibers lines and CLARIA, the new clean label starch that we took out about a year ago now.
So all going well there and there's nothing that stands out to me which says that we would be rethinking the 2020 ambition that we have of about $200 million from new products. So that's well on track. I'll hand it over to Nick for the second question.
Jack, on net debt, at the half year we indicated that we'd be about GBP100 million lower at the full year than we were at the half. So, that would take you to about GBP420 million on a constant currency basis. If you look at current currency rates, so the dollar's running roughly at $1.45. I didn't look at the number this morning, but it's not far off that number. You'd add another GBP20 million to GBP30 million to that broadly in terms of net debt simply driven by the balance of assets being held in U.S. dollars.
[Operator Instructions]. And we have a follow-up question from the line of Warren Ackerman. Please go ahead.
Just a follow-up on the Sucralose Singapore plant, we know it's closing in the spring of this year. I was just wondering whether you have actual dates on that closing and how you're going to manage that transition back to McIntosh, because presumably I imagine that you're going to lose some volume net-net overall. I know it's all about profitable growth, but just in terms of how you manage that and what it will look like optically in terms of the Sucralose numbers, that would be quite useful. Thanks.
Warren, that plant is - we've already started the shutdown process on that and that's a very, very detailed project that's going extremely well, I must commend the team for that, because there's obviously a number of operationally - a few things that we've taken over to McIntosh instead of having to buy new equipment.
It's gone extremely well and the capacity in McIntosh is coming online very well. So the transition is well thought through. Obviously we're going to be carrying a little bit of inventory as we go through the specific transition, but that's going to be a, I would say, a phased approach.
Clearly as we follow the value-based strategy, we would expect to see volume and we fully expect that. I will give you much more guidance on that in May, but you would expect volume, going into next fiscal, to be down, double digits I would say. But we'll give you much better guidance on that next - I would say some time at our prelims.
And our next question is from the line of Julian Lakin from Mirabaud. Please go ahead.
Just thinking a little bit about the ethanol situation and I can't help but feeling that ethanol which is in terms of scale is pretty small for you, still rather spoils the overall narrative. It always seems to be that little bad penny that pops up. Is there anything you can actually do about it? Is it actually technically feasible to shut down the line or does it just have to be there for a balancing process?
I think you've just answered your question, Julian. What we've got is - let me put things in perspective. It's relatively a small part of our business and we've managed to get it down as much as we can. It's just in one plant at the moment which is a very large integrated corn wet mill and these things, I know you've been around some of these, are fairly complicated pieces of kit.
So we're using this mostly to have an optimized mass balance on this, so to re-engineer or re-configure an integrated corn wet mill is not a trivial exercise, as I'm sure you'd appreciate. However, that said, we continue to look at it and if the economics at some point don't improve or get worse, we'd have to look at this obviously through the lens of what creates most value long term for the Company and for shareholders, but that would involve CapEx.
So this would not be a decision we would take lightly, but we would certainly look at it and nothing to me says that it's impossible, but there's a cost involved in re-engineering that and we'd need to ensure that it was the right decision if we would ever go that route.
[Operator Instructions]. And we have a follow-up question from the line of Alicia Forry. Please go ahead.
Just one quick follow-up, I'm wondering if you can say anything about what sort of cash inflow you're planning for the sale of the plant in Morocco. I think in my head I was thinking low single-digit millions, but maybe it's a bit more. Any clarity would be useful, thanks.
We're not disclosing the final sale price for Morocco, but it's a very small plant and it's not a significant item either way, to be honest.
Thank you. We have no further questions coming through. So I'll hand you back to your hosts.
Thank you, operator. Well thank you everyone for your questions. So in summary then, we're very much on track to deliver full-year guidance and the longer term outlook for the business remains positive. And with that, I think we conclude our session today and thanks very much for joining the call. Goodbye.
Thank you for joining today's call. You may now replace your handsets.
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