A share buyback may have sweetened some investors but underlying problems remain at Tate & Lyle. Ben Cooper analyses the latest performance at the UK-based food and ingredients group.

Ostensibly yesterday was not a great day for UK-based food and ingredients group Tate & Lyle, which posted yet another profits warning and announced the disposal of its European starch businesses for less than it had expected.
 
And while yesterday also saw the return of some GBP275m (US$563.3m) to investors via a share buyback, which drew a positive response from some analysts, there is some way to go before Tate & Lyle can put the woes of the last year or so behind it.
 
Tate & Lyle said trading in the current financial year has started in line with expectations with total operating profit - after stripping out the effects of currency fluctuations - for the first three months similar to the prior year. However, profit from continuing operations at constant exchange rates was below the first quarter of last year.
 
More worryingly, Tate & Lyle said its results for the year to 31 March 2008 would be "slightly lower" than the reduced forecast it issued in May, with market weakness in its sugar, ethanol and citric acid businesses, a challenging European cereals market and the strength of sterling cited as prime factors. The company's shares have fallen by 30% since December 2006, and slipped again yesterday following publication of the trading statement.
 
While the restructuring of the EU's sugar regime has hit the company, it is the underperformance of its artificial sweetener Splenda which may have most disappointed investors. Given the constant stream of better-for-you products hitting the food and beverage sectors, the Splenda order-book should arguably be bulging. 
 
In January, the company said that sales and profit from Splenda would be lower than expected. Yesterday brought slightly better news with Tate & Lyle saying that Splenda sales were up in the first quarter on the same period last year, customer de-stocking having less of an effect than anticipated. However, although profits for the quarter were ahead of last year, Tate & Lyle said it expected nothing more than "satisfactory" sales growth for the year and that any increase in operating profit is likely to be "modest and second-half weighted".
 
The company said that sales to the US carbonated drinks sector were below expectations, though the food and still beverage sectors had seen good demand for Splenda.
 
But even with the growth in better-for-you products, it may have been over-optimistic for investors to rely too heavily on an alternative sweetener, and by its own admission Tate & Lyle itself has been too optimistic in its forecasts for Splenda.

As Investec analyst Martin Deboo told just-food: "It (Splenda) is a very profitable product with solid growth prospects but it's not what it was thought to be six months ago, which was a very profitable product with stellar growth prospects."  Sucralose accounts for around 20% of the company's EBIT, while US food and industrial ingredients represent 50%.
 
"One shouldn't think of T&L as just a sucralose/Splenda company," Deboo continues. "Over half the profits are in US food and industrial ingredients - that's the engine for the business. Splenda is the turbo-charger; it's nice to have but you can already go a long way on the engine."
 
However, the news from Tate & Lyle's engine-room yesterday was not all that encouraging. The company said that profits from continuing operations in the ingredients divisions for the quarter were "somewhat below" last year, with growth in earnings in the Americas more than offset by lower returns from ethanol and citric acid. However, profit from continuing operations at its European ingredients business was better despite higher raw material prices.
 
While pressure on corn prices in the US, partly caused by rising demand for bio-fuel, has eased with the promise of a good harvest, prices for both wheat and corn in Europe have significantly increased. Tate & Lyle said European sales prices will be increased where possible in order to offset these higher costs. 
 
Profits from continuing operations in the sugar division as a whole were significantly lower than the comparative period, principally due to a return to a more normal level of profitability in sugar trading and continuing difficult market conditions in the EU and Vietnam, Tate & Lyle said.
 
In keeping with a long-term strategy dating back to 2000, Tate & Lyle has looked to reduce its exposure to volatile markets, while growing its value-added ingredients business, resulting in a number of disposals over the last year. The latest of these, the sale of its European starch businesses to French sugar company Tereos for EUR310m (US$428.2m), was completed yesterday.
 
"The sale of these starch facilities marks another important step in focusing Tate & Lyle's business on its value-added strategy and reduces the impact of our exposure to volatile markets and to the EU sugar regime," said Tate & Lyle CEO Iain Ferguson.
 
In the context of the steady turnaround the group is trying to negotiate, the disposal may be viewed as positive. However, the fact that Tate & Lyle only received GBP209m for the business rather than the GBP220 some analysts had been predicting, will have been a disappointment. The disposal is also expected to result in an exceptional loss of around GBP20m after restructuring costs. Nevertheless, the sale has allowed the company to undertake the share buyback that has been welcomed by the City.
 
The disposal programme, which has also seen the sale of a business in Canada, is not over, with Tate & Lyle also looking to offload its participation in Mexican joint venture Occidente. On balance, the disposals have been welcomed by analysts and are seen as positive measures to put Tate & Lyle back on an even keel. But the measures are taking their time to produce improved results, and investors are growing impatient. With that in mind, the share buyback was a sensible move and it is no surprise that it was warmly welcomed by analysts.