Tate & Lyle's (TATYF) CEO Javed Ahmed on Q1 2017 Results - Earnings Call Transcript

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Tate & Lyle, PLC (OTCQX:TATYF) Q1 2017 Earnings Conference Call July 21, 2016 3:00 AM ET

Executives

Javed Ahmed - CEO

Nick Hampton - CFO

Analysts

Warren Ackerman - Societe Generale

Charles Pick - Numis Securities

Jeremy Fialko - Redburn Partners

Adam Kindreich - Morningstar

Martin Deboo - Jefferies

Adam Spielman - Citi

Operator

Welcome to the Trading Updates for the Three Months ended June 30, 2016. My name is Tom and I will be your coordinator for today's conference. [Operator Instructions]. I am now handing you over to Javed Ahmed to begin today's conference. Thank you.

Javed Ahmed

Thank you Operator and 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. The Group made a strong start to the year with profit ahead of the comparative period in constant currency. The encouraging start to this year supports our confidence that we will continue to make progress, at constant currency, in the full year. Specialty food ingredients performed solidly, with profit for the division overall ahead of the comparative period. Excluding Splenda Sucralose, profit was slightly ahead of the comparative period, reflecting good margin improvement, benefiting from a mix of higher margin sales and lower costs.

Volume was slightly lower than the comparative period, with good growth in Europe, Middle East and Africa which benefited from the acquisition of the Slovakia facility and stabilization in Latin America, more than offset by softer demand in North America, Asia Pacific and food systems. In North America volume was softer than the comparative period, as lower customer offtake from some larger customers, mainly for sweeteners, more than offset new business gains. We remain focused on accelerating volume growth in this important market specialty food ingredients. Profit for Splenda Sucralose was significantly higher than the comparative period, benefiting from strong volume growth, from the sell-down of inventory carried into the financial year, following the consolidation of the sucralose manufacturing footprint.

While the performance of sucralose in the period was pleasing, with inventory now returning to normal levels we expect volume for the balance of the financial year to be lower than the prior year, as indicated in our full year results in May. Turning to bulk ingredients, this division performed strongly, with profit well ahead of the comparative period, due to solid demand at the start of the U.S. summer beverage season, robust U.S. bulk sweetener margins and strong manufacturing performance. In commodities, performance was broadly in line with the comparative period.

Before I finish on performance, I want to touch briefly on the impact on the Group of the recent weakness in sterling. By way of context, the Group generates less than 2% of its revenues in the United Kingdom, with most revenues being U.S. dollar based. If current exchange rates were to prevail for the remainder of the financial year, our reported earnings would increase strongly, due to U.S. dollar and other currency movements.

Turning to the balance sheet, net debt was lower than the position at March 31, 2016, including the currency translation effects of a weaker sterling and the Group's largely U.S. dollar denominated debt.

So to conclude then, the encouraging start to the year supports our confidence that we will continue to make progress at constant currency, in the full year. And with that, Nick and I will open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We have our first question and it comes from the line of Warren Ackerman from Societe Generale. Please go ahead, Warren.

Warren Ackerman

Just one question from me this morning, volumes in SFI in Asia and North America, down. You say, Javed, lower customer offtake for sweeteners offsetting business gains. Can you maybe elaborate a bit on that and why Asia is now down after having previously shown good progress? My understanding, I guess, was that as capacity comes on stream in SFI we'd start to see the volumes beginning to improve. And the patterns just -- I'm a bit confused by the pattern here, LatAm getting better, Asia getting worse, North America getting worse. It seems to be going in the wrong way. Can you maybe just elaborate on that for me? Thanks.

Javed Ahmed

Yes. Let me give you a little bit of color on this. Let's start with North America. I think North America, the pipeline conversion for new business and the new projects has actually been very good and that's driven some very high quality, high margin volume for us. I think the somewhat frustrating thing, from my point of view, is that some of our larger customers, their own businesses are showing some weakness and that's reflected in their pull through from us. But overall I'm pleased with the direction.

The book of business, I'd say, is higher quality right now. I would expect this business to start growing volume steadily over time. I would not expect this to be sort of an overnight flipping a switch, but I expect steady volume built and we're winning new business which is very good which talks to some of the capacity, actually, that you just alluded to.

In Asia, as you mentioned, very strong double-digit growth last year, especially the second half. One quarter, I'm not too fussed about at the moment. We've seen some dairy softness in China. If that starts becoming a pattern we'll obviously talk to you, but right now, talking to the region, I think we're just looking at a little bit of softness in the quarter, but nothing structural, as far as I can tell. But in North America, I mean just to be clear also, the margin was actually quite nicely ahead, because, as I said, the book of business is high quality at the moment, but North America, my view is we're gradually going to bring that back into steady growth over time.

Operator

Our next question comes from the line of Charles Pick. Please go ahead, Charles.

Charles Pick

Two questions, please. Is it possible please to quantify the magnitude of the sell-down in respect of inventory for the Sucralose operations from the site consolidation and also quantify the impact of the weaker sterling effect on the net debt situation in the first quarter?

Javed Ahmed

The first answer, I'll take the sucralose. I'm going to hand over the FX to Nick in a second, Charles. It was a one-off benefit. Let me just give you a little bit more color around that. We don't quantify that, as you know. But what we had done, obviously, because we were transitioning from sucralose to McIntosh, bringing McIntosh up to speed, to just ensure ourselves against any customer service disruption we had built up some inventory on that.

In the event, I think the guys actually did a fantastic job bringing McIntosh online very, very smoothly, so as a result we didn't really need that inventory and that was a one-off benefit in the quarter and that's behind us now. So, outlook for sucralose -- no different than what we told you in May, double-digit decline for the balance of the year in volume as we sell to our capacity. Nick?

Nick Hampton

Charles, on net debt, if you look at the exchange rate shift between year-end and the end of the quarter it had about a GBP30 million impact on net debt.

Operator

Our next question comes from the line of Jeremy Fialko. Please go ahead, Jeremy.

Jeremy Fialko

It's Jeremy Fialko, Redburn here. Just one question, on the commodities side, you talk about performance broadly in line. Is that in line with your expectations, in line with where it was last year? Can you just talk about that side of things and what you're seeing in terms of co-products, bioethanol returns, et cetera, et cetera? Thanks.

Nick Hampton

Jeremy, the answer to your question, very simply, is it's in line both with prior year and with our expectations. Though we're seeing co-product markets perform broadly as we anticipated. Ethanol margins have improved modestly. But they were on the way down this time last year, so you're sort of seeing the two come together.

Jeremy Fialko

Right, okay, so you think that the drag from that business is probably now stopped?

Nick Hampton

That's certainly what we saw in the first quarter and we'll continue to update you as we go through the year.

Operator

[Operator Instructions]. Our next question comes once again from the line of Charles Pick. Please go ahead again, Charles.

Charles Pick

Just going back to Warren's initial points, is it possible to provide a bit more color, please, on the volume decline in Asia Pacific? Was it more or less across the board? And is it possible to give any degree of magnitude for that? And can you say a little piece too on the food systems volume decline, what's been behind that, please?

Javed Ahmed

Right. In Asia Pacific, actually, it was relatively -- I would say mostly China in the dairy sector and I think the key reason here is we've been used to such strong growth coming out of Asia Pacific -- it was slightly behind our expectations, but as I said, I'm not really too fussed about it, based on the internal outlook that I'm -- the views that we have in terms of the depth of the business -- understanding of the business there.

In terms of the food systems, a couple of very specific issues, Charles, one was a Russian credit situation, where we held some shipments for a very specific customer over there. And the second, we saw some softness in our Middle East Africa region, a region which we've been pushing quite aggressively into since last year, so we saw some softness there, but again nothing structural that I would highlight or point to and say that we're beginning to see a pattern here.

Charles Pick

Okay. And the Russian situation is simply a temporary phasing issue, is it? Or will you cease supplying to that customer?

Javed Ahmed

Yes, we've held shipments. We've held shipments for the customer. We had expected to ship to the customer. Make sure that we don't expose ourselves, so we held shipments.

Operator

Our next question comes from the line of Adam Kindreich. Please go ahead, Adam.

Adam Kindreich

My question relates to the bulk ingredients performance which seems relatively strong and I'm just wondering if you could maybe highlight the capacity situation in the U.S. market? Because I believe some of your competitors have been closing plant and therefore I'm guessing that this would be a structural shift in the bulk ingredients profitability. Maybe if you can just touch on that and confirm that, if that's possible?

Javed Ahmed

Right, we talked quite a bit -- I'll reprise what we have said earlier in the year. The plant that you're referring to, Adam, was I think one of -- a Cargill plant, I think about a year and a half ago which they took offline. So the capacity situation in the industry, I'd say it's pretty balanced at the moment and that was reflected in, as we discussed in January, in the contracting round that we had where we had unit modest unit margin gains on that.

So at this point the industry situation, the capacity is a pretty balanced situation. How that unfolds obviously depends on a number of factors, including what's happening in the carbonated soft drinks market, the beverage season, et cetera, so it's very -- we'll give you a much better update on that towards the end of the year, as we usually do, once we go back into the contracting season again.

Adam Kindreich

Sure. So do I conclude that really the first three months is not really very significant, because the second quarter is really where you're going to have the large beverage sales?

Javed Ahmed

Well, I would say we're halfway, roughly, through the beverage season, so a good start to the beverage season. We've seen the pulls that we would have expected from our customers on that, but we've still got, as you say, some more to go. So we'll have a much better idea at the end of half one how that business is shaping up, but encouraging start.

Operator

Our next question comes from the line of Martin Deboo from Jefferies. Please go ahead, Martin.

Martin Deboo

I was late on the call, so if my question's already been asked, just tell me to go away. But the question is, the key disclosure to me seems to be the tone on the sweetener margin commentary has changed from modest to robust.

I think my question is, given that pricing on annual sweetener contracts has been visible to the business probably since the autumn of 2015, what has driven that change in commentary? Is it a cost efficiency issue that you're just making more efficiently or is it the fact you're beginning to see tolling contract renewals coming through at higher rates of margin or is it something else I don't understand? Just anything on that, if it hasn't already been asked, would be helpful.

Javed Ahmed

No, Martin, let me just summarize that for you and try and be as clear as possible. I think there's a few things at play here. It's been solid demand at the start of the beverage season, as I have just mentioned to someone else, so the volume seems to be coming through that we had expected.

As we told you earlier in the year, we had modest unit margin gains as we came out of the business that -- the contracting round on the business that we had contracted. The manufacturing performance has been very, very strong. It's been very good, so clearly we've got some advantages on the cost side over there. And we continue to benefit from lower energy prices. So it really is no more complicated than that.

Operator

Our next question comes from the line of Adam Spielman. Please go ahead, Adam.

Adam Spielman

I actually joined this call on time, but I somehow dropped off, so again, my question may have been asked before and like Martin, tell me if it has been. For me, one of the big changes of tone or not changes of tone but reassurance, was that the supply chain seems to be working in a much more robust way than it did sort of in 2015. And I was just wondering, because it seems to me that a lot of the margin gains have come from cost efficiencies. And, Javed, I was just wondering if you could talk to that, about how much you really believe the supply chain is really sorted out, relative to the problems of, let's say 18 months ago?

Javed Ahmed

I think, Adam, let me put things in perspective. The summer of 2014, that's when we -- and then continuing -- there were really two issues we had on the supply chain and one of them was obviously circumstantial. You remember the winter.

Adam Spielman

Yes.

Javed Ahmed

It was a brutal winter. That affected us and to me that was something that was just a one-time event. It unfortunately happened at not a good time. The second issue that we had with the supply chain was a capacity constraint. And both of those -- the winter, obviously can be a variable. But structurally the supply constraint has been solved, so we've got a much more flexible supply chain situation on our hands.

And the third thing is, as we have discussed over the last 18 months or so, the processes and in terms of our sales and operations planning, the demand planning side, putting demand planners in all our regions, having much better information to deal with, with the IS, IT platform, those have all been process improvements and I think our execution and operating performance is reflecting that now. We're executing much better and the operating performance is reflecting that. So a lot of internal blocking and tackling, put aside the winter, but structurally, it's always been a good supply chain.

As I said, we ran into some supply constraints and then the business growth put pressure on our processes. They've all been addressed. So I would expect us to continue to just keep on strengthening on that front.

Operator

There are currently no more questions in the queue. [Operator Instructions]. Okay, we have no further questions in the queue, so I will now turn back to your hosts for any concluding remarks. Thank you.

Javed Ahmed

Thank you, Operator. Well, thank you all for your questions. I'll summarize again then. We've had an encouraging start to the year. That really supports our confidence that we'll continue to make progress at constant currency in the full year. Thank you everyone. Thank you, Operator.

Operator

Thank you for joining today's call. You may now replace your handsets.

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