UK: Tate & Lyle cautious on corn prices
Tate & Lyle takes GBP7m hit on corn fungus
Tate & Lyle plc has said it expects "modest" full-year gains as an increase in corn prices dented third-quarter results.
The ingredients group announced its third-quarter profit before tax was "broadly in line" with expectations, but down on last year due to a "step change" in fixed costs.
The firm said its speciality ingredients business gained market share, while bulk ingredients saw "solid" North American drive and sales in Europe were "in line" with last year.
However, corn supplies in the US and Europe remained tight and the company now expects prices will remain high, with some volatility, in the coming months. The company said that it will take a GBP7m (US$11m) hit related to a fungus - aflatoxin - that has affected grain crops.
"The group has made a solid start to the final quarter. Despite facing a number of headwinds and before the impact of exchange rate movements, we expect to make modest progress this financial year," the company said.
Tate & Lyle issues the following interim management statement covering the period from 1 October 2012 to 31 December 2012.
OPERATING PERFORMANCE - CONTINUING OPERATIONS
Group adjusted profit before tax1 for the third quarter was broadly in line with our expectations before the impact of exchange rate movements. As expected, adjusted profit before tax was lower than the comparative period as a result of the step change in fixed costs associated with our business transformation initiatives2.
Within Speciality Food Ingredients, we achieved good sales growth with volume growth ahead of the wider speciality food ingredients market. In starch-based speciality ingredients, we achieved good sales growth with volume growth in all regions. In high intensity sweeteners, while we saw a return towards more normal sucralose volume growth and expect this to continue in the final quarter, the level of growth was not as strong as anticipated in November and we now expect sucralose volumes for the full year to be slightly lower than last year. In Food Systems, sales were broadly in line with the comparative period on lower volumes. Operating profit3 for the Speciality Food Ingredients division for the full year is now expected to be broadly in line with the prior year.
Within Bulk Ingredients, overall demand for North American liquid sweeteners was solid during the third quarter. In Europe, margins for liquid sweeteners were broadly in line with the prior year period. The markets for industrial starches in both Europe and the US were relatively stable while the environment for US ethanol continued to be challenging.
Corn and co-products
Corn supplies in the US and Europe remained tight and with the latest projections from the USDA for the stocks-to-use ratio at 5.3%, prices are expected to remain high with some volatility over the coming months until the new harvest.
As announced in November 2012, we have taken a number of steps to mitigate the impact of aflatoxin, a fungus caused by the unusually hot and dry conditions last summer. The impact of aflatoxin from the new harvest corn was felt particularly in the third quarter while we implemented a number of actions including adjustments to our corn sourcing programme.
We expect a further small increase in net corn costs in the final quarter of the financial year and estimate the impact of aflatoxin will be to reduce operating profit by around £7 million for the full year. We will continue to take action to manage the risks posed by aflatoxin during the first half of next financial year up to the new harvest.
BALANCE SHEET AND WORKING CAPITAL
Net debt at 31 December 2012 was £395 million. In light of continuing tight market conditions in both the US and Europe, we continue to hold high corn inventories for security of supply. As usual, we have paid for a significant amount of this corn in January, and at higher prices than the prior year. As a result, and based on current corn prices and exchange rates4, we currently anticipate that this will drive a net cash outflow in the final quarter of the financial year.
The 2013 calendar year sweetener pricing round in North America for the Bulk Ingredients business is now substantially complete. As in the previous year, this pricing round has been conducted against the backdrop of materially higher corn costs.
In North America, after recovering these higher input costs, we achieved a modest increase in corn sweetener unit margins across our sweetener customers reflecting a continuation of high levels of industry capacity utilisation. Bulk Ingredients sweetener volumes are expected to be broadly in line with calendar year 2012.
In Europe, we continue to contract over shorter periods to partially mitigate corn cost volatility. Despite sugar prices remaining high, sweetener margins are expected to be lower as a result of higher corn costs.
The Group has made a solid start to the final quarter. Despite facing a number of headwinds and before the impact of exchange rate movements, we expect to make modest progress this financial year.
Original source: Tate and Lyle
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