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Raw materials squeeze margins at Tate & Lyle

07-Nov-2003

First half profits for UK sugar and sweeteners group Tate & Lyle slipped as US figures hit the bottom line but improved results from European operations helped add sparkle to a generally lacklustre performance.

Profit before tax, goodwill amortisation and exceptional items for the six months to 30 September 2003 is likely to disappoint as it fell 6 per cent from £126 million in 2002 to £119 million in 2003, sending diluted earnings per share down to 16.3p, from 18.8p in 2002.

In Europe, sales crept up by 4 per cent to £691 million, pulling in a profit of £71 million, up £12 million for the same period in 2002. Reporting higher profits despite testing raw material prices, Amylum - the company's European cereal sweetener and starch business - helped lift the figures.

However, reflecting an overall trend in ingredients company results at the moment, Amylum was also knocked by raw material prices, despite an improvement in volumes.

A hot summer in Europe has taken its toll on the company's first half. New crop expectations have been reduced and both wheat and maize prices have subsequently risen sharply, in the region of 15-20 per cent.

But the group is still on track to achieve £50 million in cost savings at Amylum by the end of the current year.

Despite this, a poor performance in Eastern Sugar - which showed a small loss - following the liberalisation of the sugar regime in the Czech Republic and the collapse of support prices offset the improved figures in Europe, and will likely continue to do so.

Across the Atlantic, US profits (including £2 million of goodwill amortisation) fell just under 10 per cent from £85 million for the first half of 2002 to £77 million for the same period in 2003.

At Staley, the company's US starch operations, profits came in lower on flat demand, reflecting higher corn and manufacturing costs, including energy and pension costs. Increased corn costs were partially mitigated through better by-product returns, in particular corn oil.

Value-added ingredients offered brighter returns - a growing phenomenon in the ingredients industry - with the company reporting that progress once again had been made in this segment.

"The industrial starch market benefited from improved selling prices and a better product mix," said Tate & Lyle in a statement yesterday.

Despite the Mexican government's 20 per cent tax imposed on soft drink manufacturers using high fructose corn syrup (HFCS) - against which US agri-giant ADM has recently submitted arbitration claims - Tate & Lyle's Mexican company Almex still remained profitable, although demand for corn-based sweeteners remained flat. Occidente, its Mexican cane sugar producer, improved due to higher selling prices as a result of the same tax on high fructose corn syrup.

Second half earnings for the British sugar and sweeteners company will depend on pushing through the challenging raw material price rises for its starches and sweeteners to the customer.

"While control of costs will always be a priority issue, the delivery of higher profits in the second half of this year than in the comparative period last year will be significantly influenced by our success in selling price negotiations," Iain Ferguson, chief executive of Tate & Lyle said on Thursday.

"Firstly to recover the prevailing substantially higher wheat and corn costs in Europe, and secondly to achieve a satisfactory outcome in the annual sweetener pricing round in the USA," he added.

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