Tate & Lyle continues to be dragged down by EU sugar reform, while additional challenges such as high corn costs have prompted the firm to view near term outlook "with caution".
The firm said profits from continuing operations in its Sugars division were "sharply lower" than in the comparative period, principally due to a forecast small loss in sugar trading for the first half compared to a profit of £15m (€21m) in the prior year. EU agriculture ministers on Wednesday adopted a number of changes to the sugar reform introduced in 2006. The aim of the legislation was to improve competitiveness and market-orientation of the EU sugar sector and guarantee its long term future. Reform rules now hope to further encourage voluntary quota reduction and as a new incentive, beet growers will be allowed to sell 10 per cent of the quota.
Tate & Lyle said it welcomed the announcement, adding: "Whilst these changes will have little direct benefit to our sugar refineries, which are not part of the restructuring fund, we believe that in the long term a balanced and stable market is good for the whole industry." The firm said it expects sugar trading to be profitable in the second half, following a "good start" to the year made by its Molasses business. The European refining businesses performed in line with expectations and are making good progress in improving efficiency and competitiveness, reported the company.
The trading update comes just before Tate & Lyle enters a closed period in advance of its interim results announcement at the end of October. In May this year, the group reported a strong full year 2007, with sales from continuing operations of £3.81bn (€5.6bn) for the 12 months ended March 31, up from £3.46bn (€5.09) the previous year. Operating profit was £333m (€490m).
The year was key in the firm's repositioning towards value added ingredients, and the growth story is said to have been driven by the food and industrial ingredients businesses, which achieved operating profit growth of 36 per cent on the prior year. But despite the positive results, several factors proved to be flies in the ointment, such as the effects of EU sugar reform, higher energy costs, and lower-than-expected demand from the US carbonated drinks sector.
In its trading update last week, the company said a weaker US market for high fructose corn syrup, a popular sweetener used in sodas, continued to impact its Ingredients, Americas business, offsetting improved sales and profits of value added starches. Operating losses and closure costs of Astaxanthin, which was announced on 16 August 2007, are expected to total £5m (€7m) in the first half year.
The firm's Ingredients, Europe business performed ahead of the prior year, with continuing operations in line with the prior year, said Tate & Lyle. The firm said the increase in European wheat costs further supports its decision to dispose of its interest in the facilities in the UK, Belgium, France, Spain and Italy to Syral SAS, a subsidiary of French cooperative group Tereos. The company expects this transaction to close in the next few days and the businesses concerned will be treated as discontinued operations in the interim results. Once this disposal completes, the company will have no exposure to wheat.
Profits from the company's Splenda sucralose product were similar to last year on a constant currency basis. Tate & Lyle said three major factors impacting its business have caused its board to view the near term outlook "with caution".
"Firstly, while our continuing Ingredients, Europe businesses have performed satisfactorily in the first half, as our cover on raw materials expires the significantly higher corn (maize) costs in Europe will, if sustained, have an increasingly severe effect on the profitability of this division. Sales prices will be increased where possible in order to offset these higher costs but we think it prudent at this stage to assume only modest profits from these businesses in the second half year," said the company. "Secondly, the ongoing dispute between the USA and the EU over genetically modified corn has resulted in US corn gluten feed exports to the EU being prohibited. This has caused oversupply in the USA and has depressed by-product prices and margins. It is not clear when this dispute will be resolved."
"Thirdly, the translation impact of weakness of the US Dollar will, if sustained, reduce pre-tax results in the second half of the year, although to a lesser extent than that forecast for the first half."
Tate & Lyle reaffirmed its strategy of building a stronger value added business whilst reducing its exposure to volatile markets and regulated regimes.