Pre-tax profit falls for Tate & Lyle on higher costs

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Related tags: Tate, Lyle, High-fructose corn syrup, Tate & lyle

Annual pre-tax profit falls for UK sweetener and starch group Tate
& Lyle as higher costs and a one off lawsuit charge eat into
turnover for the year, reports Lindsey Partos.

On a 5 per cent lift in sales for the year to £3.34 billion (€4.95bn), profit before tax fell to £197 million (€291m), down from £224 million (€331m) the previous year.

A net charge for exceptional items of £45 million included a charge of £55 million for settling a US lawsuit over alleged price-fixing of high fructose corn syrup, a popular sweetener used extensively by US soft drink firms.

But the UK sugar refiner and ingredients group said profit before exceptionals had risen 12 per cent to £255m in the year to March 31, boosted by a stronger demand for its sucralose sweetener product Splenda.

The year was marked for the supplier of the popular sweetener sucralose by an increase in net debt from £388 million in 2004 to £451 million by the end of March 2005.

Tate & Lyle's chief executive Iain Ferguson says the rise reflects "the investment in the realignment of the sucralose business."

The firm's Splenda brand of sucralose has, in recent years, made a significant contribution to sales and profit for the company. Earlier this year soft drink giants Coca-Cola and PepsiCo announced Splenda would be used in the formulation of specific new coke brands to hit the shelves.

And in 2004 the significant lift in sales for sucralose helped Tate & Lyle nudge into the FTSE100 index after a seven year hiatus.

Indeed, so successful has been the product that supplies are running short, hence investments by the company to bring more of the ingredient on stream by extending its current Alabama, US factory by mid-2006 and building a new plant in Singapore for January 2007.

But overall for the year the ingredients segment in the US saw higher energy costs, lower sweetener volumes, and lower sweetener gross margins knock results.

Although starches improved on higher volumes and increased gross margins, the firm said, increasing the contribution from value added products.

In Europe, profits fell with prices failing "to recover all of the cereal cost increase."​ Looking ahead, Tate & Lyle warned that total sweetener and starch net margins are expected to fall, knocked by "disappointing pricing round in 2005".

Also casting a shadow is imminent sugar reform. Later this month the European Commission is expected to lay out plans to reform its sugar regime, which is widely expected to result in lower sugar prices within the trading bloc.

Some analysts warn Tate's European sugar business (refining of sugar cane, not Europe's sugar beet), which accounts for around 30 per cent of group earnings, might lose its annual subsidies that run into millions of pounds.

"Reform will adversely affect the future performance of our European sugar and Food & Industrial Ingredients businesses, although we cannot quantify the consequences at this stage,"​ said Sir David Lees, chairman of the UK firm, opting not to expand on the repercussions.

Although they will be published after the Commission formally tables reform, expected on 22 June this year.

A second threat faces the firm, and that is the expiry of key patents for its sucralose Splenda brand.

Analysts say the pressure of generics is creeping up behind Tate & Lyle.

"It is virtually impossible to patent a food: ultimately generics will destroy the pricing structure,"​ a London food analyst tells FoodNavigator.com.

Recent reports reveal investment bank Goldman Sachs downgraded Tate & Lyle to 'underperform' from neutral with the bank suggesting the artificial sweetener will face competition from alternatives soon as important expiry dates in 2006 and 2009 for patents could motivate the competition.

Tate & Lyle filed the original product sucralose patent in 1976, this recently expired, opening the product up to competitors.

Tate & Lyle declined to comment on the 'individual patents', but said to FoodNavigator.com that the firm is "confident in the patents we have".

The UK sweetener company currently has 32 different patents (from commercial blends and products to processing) protecting Splenda; but it is not just the patents that are supporting the market leadership, says Tate & Lyle.

"The product is well established, we have a 3rd generation plant, we're the leaders and we are expanding,"​ says the Tate & Lyle spokesperson.

But despite this market armament, one day, possibly soon, the firm will face competition (likely from China); heralding lower costs for food and beverage makers as sucralose makers compete for market share.

Related topics: Market Trends

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