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Edited Transcript of TATE.L earnings conference call or presentation 21-May-20 10:59am GMT

Full Year 2020 Tate & Lyle PLC Earnings Pre-Recorded Presentation

London Jun 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Tate & Lyle PLC earnings conference call or presentation Thursday, May 21, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Imran Nawaz

Tate & Lyle plc - CFO & Director

* Nick Hampton

Tate & Lyle plc - Chief Executive & Executive Director

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Presentation

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Nick Hampton, Tate & Lyle plc - Chief Executive & Executive Director [1]

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Good morning, and welcome to the presentation of Tate & Lyle's results for the year ended 31st of March 2020. I hope everyone listening to this presentation is safe and well.

Before Imran and I talk about our results, I want to say a few words about COVID-19 and our response to this unprecedented crisis.

COVID-19 is, first and foremost, a human tragedy. And on behalf of every one at Tate & Lyle, I want to send our deepest condolences to everyone who has suffered loss as a result of this pandemic. And to all the health care and frontline workers across the world, we salute your incredible courage and resilience and are truly grateful for everything you are doing.

I will talk more later about our response to the pandemic, but for now, I want to say how proud I am of the incredible way our people have dealt with the many personal and professional challenges they have faced over the last few weeks. The care they have shown each other, their commitment to keep our operations running and our customers served and their immense hard work has been truly inspiring. It is one of the most amazing things I have seen in my entire business career, and I thank them all from the bottom of my heart.

Turning now to an overview of the results for the 2020 financial year. The group delivered a year of strong performance. Food & Beverage Solutions delivered 5% revenue and double-digit profit growth. Sucralose performed well, and profits from Primary Products were higher despite difficult market conditions. Our 3 priorities to Sharpen, Accelerate and Simplify our business continue to support performance, and our productivity program is delivering ahead of expectations and is being extended. The balance sheet remains strong, and the culture of the organization is increasingly dynamic, with people getting things done with greater pace and agility.

Underpinning all of this is our purpose. Today, we are announcing new long-term commitments to demonstrate how we will live our purpose and to measure our progress. These include ambitious new sustainability targets. In the face of COVID-19, we have put in place a series of measures to support our employees and customers and to maintain our financial strength.

Looking briefly at the financial results. They show the good progress we are making executing our strategy. Food & Beverage Solutions grew revenue by 5%, with 6% growth in North America. Profits in Food & Beverage Solutions grew by 10%, while Primary Products grew profit by 3%.

For the group as a whole, adjusted profit before tax was 4% higher and ahead of our guidance at the start of the year. Earnings per share were 8% higher, helped by a lower effective tax rate, and adjusted free cash flow was GBP 35 million higher. The Board is recommending that the final dividend is maintained, delivering an increase in the full year dividend of 0.7%.

So overall, I am delighted with the strong financial performance and the progress we made on delivering our strategy last year.

Looking at the agenda for the rest of the presentation, I will start with a brief update on the business, Imran will run through the financial results, and then I will return to talk about our response to COVID-19 and equal trading. Finally, we will take your questions.

I want to begin with purpose. In these unprecedented times, our purpose of Improving Lives for Generations has never been more important. It is at the heart of our response to COVID-19 and was a key driver behind our strong performance last year. As I talk to people around the company, it is amazing how motivated they are by our purpose and their belief that through our purpose, we can successfully grow our business and have a positive impact on society. It also resonates strongly with many of our customers.

We live our purpose through 3 main pillars. Firstly, we support healthy living by using our ingredients and expertise to help people make healthier and tastier choices when they eat and drink and to lead a more balanced lifestyle. Secondly, we build thriving communities where we operate and support people to achieve their potential. Thirdly, we care for the planet we live on and help protect its natural resources for the benefit of future generations.

During the year, we looked closely at our impact on the world and what we need to do to truly live our purpose over the next 5 to 10 years. We also considered which of the UN Sustainable Development Goals we could most impact. From this, we developed a set of new long-term commitments for each purpose pillar.

Firstly, caring for our planet. Other than the outbreak of COVID-19, if there is one issue that has come even more to the forefront over the last 12 months, it's climate change. The climate isn't changing. It has changed. And we are committed to playing our part in tackling this critical issue.

Today, we are announcing a series of ambitious new environmental targets for 2030 to reduce our carbon footprint, beneficially use 100% of the waste we generate, reduce water consumption and to continue supporting sustainable agriculture. We are also committing to eliminate coal from all our plants by 2025 and to make our Scope 1, 2 and 3 carbon emission targets science-based. This will ensure we play our part in limiting global warming in line with the goals of the Paris Agreement on climate change. Sustainability is an integral part of our decision-making processes, and many of the projects to deliver our new targets are already underway, in planning or will be included in future capital plans.

We have also set out commitments for 2025 for the other 2 pillars of our purpose. These cover areas such as programs to help 0.25 million people lead a healthier lifestyle and to achieve gender parity in leadership roles by 2025. Currently, 27% of leadership roles are held by women.

For all our new purpose commitments, we will be reporting on our progress annually, and our ambition is not only to meet these targets but to exceed them.

Turning to how we delivered our strategy in the year. Food & Beverage Solutions continues to benefit from consumers seeking healthier alternatives from their food and drink, particularly to reduce sugar in their diets. Consumers also continue to look for greater transparency with cleaner labels and more natural ingredients. And the increase in vegan, vegetarian and flexitarian diets is driving demand for more plant-based options. With the onset of COVID-19, food which helps build immunity and digestive health is also increasingly important.

Our portfolio of products and technical expertise all help our customers deliver on these trends. Revenue from sales of products supporting sugar reduction were up 16%, with sales of our natural stevia sweeteners up 23%. Our range of clean-label texturants performed particularly well, with revenue up 51%. Revenue for our soluble fibers which allow the amount of sugar in a product to be lowered and provide nutritional benefits such as digestive health and low glycemic response, grew by 13%.

In Primary Products, we faced some challenging market conditions. Demand for carbonated soft drinks in the U.S. declined a little faster at 2%, and U.S. exports to Mexico were lower. The industrial starch market was particularly challenging, with higher paper imports into the U.S. and weaker demand for paper and packaging. Our Primary Products team navigated these headwinds effectively by continuing to execute our strategy to manage each portfolio to maximize margins, optimize product and customer mix, drive operational efficiency and diversify capacity towards new and growing end markets. For example, the volume of bulk sweeteners sold during the year, ex high-fructose corn syrup, increased by 4%. For Primary Products to deliver profit growth in such challenging markets is a testament to its strong leadership team.

Turning now to our 3 priorities of Sharpen, Accelerate and Simplify. To Sharpen, we continue to focus on supporting customer growth with a 26% increase in the number of monthly customer calls focused on growth, and we opened expanded labs in São Paulo and Singapore to support joint customer development. We are also collaborating with customers in new ways, for example, our innovative fiber symposiums and Healthink workshops. And we simplified the way our customer-facing teams are organized to bring them closer to our customers in their local markets and speed up decision-making.

To Accelerate, we increased the value of our innovation pipeline by 18% during the year and launched 11 new products. These included CLARIA EVERLAST, the latest in our line of clean-label starches, and our new TEXTURLUX starches targeted at the personal care market. We also continue to expand our global open innovation network, announcing a new partnership and investment in Zymtronix, a developer of revolutionary enzyme immobilization technologies.

On Simplify, we continue to make good progress. During the year, we made capital investments to reduce energy costs and increase efficiency, like a $75 million investment in a new natural gas-fired cogeneration system at our corn wetmill in Lafayette, Indiana. We also introduced new tools to automate processes and reduce bureaucracy, such as the implementation of Workday, a single global HR system, replacing 9 legacy systems.

Our productivity program continues to deliver ahead of expectations. For example, the value of savings delivered from continuous improvement projects increased by 20% during the year. Imran will talk more about the productivity program later.

So to summarize, this was another year of clear progress. Financial performance was strong, operational execution remains excellent, customer focus is sharper, and the organization is more agile. Our purpose is a powerful motivator. Our strategy is working well, and we entered the new financial year with real momentum.

So the fundamentals of our business remain sound, and this gives me great confidence in our future despite the challenges of COVID-19. Our high-quality portfolio of ingredients and solutions give consumers healthier and tastier products when they eat and drink. Demand for these products is growing, and this trend is here to stay. If you add to that our financial strength, we are well placed to emerge from this period as an even stronger business.

With that, I will hand over to Imran.

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Imran Nawaz, Tate & Lyle plc - CFO & Director [2]

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Thank you, Nick, and good morning, everyone.

Before I start with the financial review, can I add to what Nick said earlier and pass on my sincere gratitude to all our people for their amazing work responding to COVID-19. It has really been very special and makes me proud to be a part of the Tate & Lyle team.

Turning now to our financial performance for the year. In line with previous presentations, I will focus on adjusted measures. Items in percentage growth are in constant currency unless I indicate otherwise.

Overall, as Nick said earlier, we have had another strong year. Group sales were up 2%. Profit before tax was up 4%, with each trading division ahead of the prior year. Adjusted diluted EPS was up 8%, benefiting from a lower effective tax rate. Free cash flow continued to be strong at GBP 247 million, up GBP 35 million. The Board is recommending an unchanged final dividend, meaning the full year dividend is up 0.7%.

I will now go through the key factors driving profit growth. Food & Beverage Solutions' operating profit was up GBP 14 million driven by both good price and good mix management. Sucralose performed solidly, with operating profit in line as lower volume was offset by good cost management. Primary Products' profit was up GBP 5 million, reflecting higher profits in both Sweeteners and Starches and Commodities. Productivity and cost discipline have been strong, positively impacting performance in each division.

Central costs and interest were GBP 5 million higher. COVID-19-related costs drove central costs higher, while the adoption of IFRS 16 pushed interest higher. The share of profit after tax from joint ventures was GBP 3 million lower, reflecting weaker demand at our Bio-PDO joint venture. And finally, the impact of foreign exchange was to increase profits by GBP 11 million to GBP 331 million.

Turning now to our divisional performances. Let's start with Food & Beverage Solutions. Volume was up 1%. Good price and mix management led to revenue growth of 5%. And as we saw in the first half, strong operating leverage, together with the benefit of cost discipline, led to profit growth of 10%. This leverage is really pleasing to see, and it shows the good returns we are making from our investments.

Let's take a look at our regions. In North America, top line momentum was strong, with volume up 2% and revenue up 6%, driven by good progress across the beverage, the bakery and dairy categories. In Asia Pacific and Latin America, volume increased by 1% and revenue by 7%. In Asia Pacific, we saw revenue growth soften in the second half as demand in China was impacted by COVID-19. This was partially offset by firm demand in Southeast Asia. Latin America delivered double-digit revenue growth in the year, with a strong performance in both Brazil and the Andean region. In Europe, Middle East and Africa, volume was 1% lower with revenue 1% higher as we continue to exit lower-margin texturant business to improve our mix.

In October, we also completed our project to double capacity at our high-grade maltodextrin facility in Slovakia for use in categories such as baby food.

Sales of New Products were up 15%, with good growth in clean-label and non-GMO texturants, fibers and stevia. New Products now represent 12% of Food & Beverage Solutions sales.

Turning to Sucralose. Volume and revenue were both 4% lower, reflecting the lapping of actions taken in the prior year to optimize inventory levels. The underlying volume growth was actually 1% higher. The operating profit was also 1% higher, with cost discipline more than offsetting the lapping of a GBP 3 million one-off gain from a supply contract in the prior year.

Moving to Primary Products, which also includes Commodities. Total volume was 2% lower with operating profit 3% higher. Sweetener volume was 2% lower, reflecting the lower demand from our Bio-PDO joint venture. Excluding this, sweetener volume was slightly higher than the prior year. That's despite a decline in carbonated soft drinks consumption in the U.S. Industrial starch volume was 8% lower, mainly due to the closure of capacity at a customer's facility, higher paper imports into the U.S. and market declines in paper and packaging. Our performance improved in the second half, reflecting our strategy to diversify product mix and a recovery of domestic paper production.

Profit from Sweeteners and Starches was 1% higher, with productivity gains in manufacturing offsetting weaker volumes in industrial starch. We also lapped a GBP 4 million insurance recovery in the prior year. Profit from Commodities was up GBP 3 million, with good corn gluten meal and corn oil recoveries more than offsetting a decline in ethanol cash margins, which moved sharply lower at the end of the year.

On this slide, we show the remaining components of the income statement. Central costs were up GBP 4 million, mainly due to incremental costs for our COVID-19 response. Net finance expense was GBP 1 million higher, principally following the adoption of IFRS 16. The effective rate of tax was 310 basis points lower at 17.9%, primarily reflecting increases in deferred tax assets following both the pension buy-in transaction and the reversal of the U.K. government's previously enacted decision to reduce the standard rate of corporation tax. The rate was also lower due to the expiry of the statute of limitations on a number of uncertain tax provisions. We expect the adjusted effective tax rate for the 2021 fiscal year to be at the 17% to 19% range.

Turning to exceptional items. We recognized net exceptional costs of GBP 24 million. This has 2 elements: one, a GBP 19 million charge for our productivity program; and two, a GBP 5 million charge for closure costs of our non-core savoury business in Primary Products. This now closed business contributed operating profits of GBP 7 million to Primary Products in fiscal 2020.

In May 2018, we started the program to deliver $100 million of productivity benefits over 4 years. Two years in, and we're ahead of expectations having already delivered $87 million of benefits. Examples of productivity projects completed during the year include optimizing the liquid syrup line at our plant in Slovakia, improving the efficiency of trucks usage in the U.S. and reducing starch yield losses in our plants. As we execute this program, we continue to identify additional savings opportunities. For that reason, we have decided to extend it by $50 million in 2 years, so that it delivers a total of $150 million over the 6-year period ending 31st of March 2024. The total cash exceptional costs to deliver the program has been increased from $40 million to around $75 million.

Turning to the balance sheet. During the year, we took 2 actions to strengthen and derisk our balance sheet: first, we raised $200 million of long-term debt to refinance a maturing debt facility at lower cost; second, we completed a GBP 930 million bulk annuity insurance buy-in to meet the future obligations of our main U.K. pension scheme creating from 2021 fiscal year onwards an annual cash benefit of GBP 20 million. And then after the end of the financial year, we extended the maturity of our revolving credit facility by 1 year to 2025 and linked its pricing to the delivery of our new environmental targets. We also priced an additional $200 million debt private placement at an average coupon of 2.96%. Following these actions, we will have access to liquidity in excess of $1.3 billion from August onwards after the drawdown of the recent private debt placement.

Turning to cash flow, which continued to be strong. The adjusted free cash flow was GBP 35 million higher at GBP 247 million, GBP 1 million higher on a like-for-like basis, excluding the impact of IFRS 16. This increase was despite capital expenditure being GBP 36 million higher as we invested in new capacity, safety, efficiency and sustaining projects.

Capital expenditure for fiscal 2021 is expected to be in the range of GBP 140 million and GBP 160 million. Our net debt increased by GBP 114 million to GBP 451 million. The adoption of IFRS 16 increased net debt by GBP 162 million, and therefore, underlying net debt was actually GBP 48 million lower. Our leverage remains low, with net debt-to-EBITDA of 0.9x, or 0.6x on a covenant basis.

Overall, I continue to be very pleased with the strength of our balance sheet and financial position, which is actively supporting the business in these difficult times.

As Nick said earlier, the 2020 financial year was another year of strong performance. Stepping back a bit further, if you look at business performance over the last 3 years and how we're delivering against the investment case that we set out in May 2018, it is a story of consistent growth. Profit before tax is up by a compound annual growth rate of 6%, diluted earnings per share by 8% and the return on capital employed by an average of 65 basis points each year. This consistent level of performance and the financial discipline now installed within the business gives me confidence that while there are clearly some near-term challenges, we will navigate this period successfully and protect our strong balance sheet.

With that, I will now hand back to Nick.

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Nick Hampton, Tate & Lyle plc - Chief Executive & Executive Director [3]

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Thank you, Imran. As I said earlier, COVID-19 is foremost a terrible human tragedy, and is something we will continue to live with for some time to come. In early March, as the pandemic was unfolding, we acted decisively to ensure we manage our response to COVID-19 effectively. A global pandemic response team was formed with leaders from across the business and local response teams put in place at every site to focus on the safety of our people and to ensure business continuity. We also implemented an extensive customer and employee communication program, and I chaired a daily call to review progress and ensure we move quickly and decisively.

From the outset, our priorities were clear: to look after the health, safety and well-being of our colleagues and local communities; to keep our operations running; to serve our customers; and to maintain our financial strength. Thanks to the amazing commitment and skill of our people and their desire to live our purpose every day, we have successfully delivered on each of these priorities so far.

Let me briefly take each one in turn. A key pillar of our purpose is to look after our people and support our local communities, and this has never been more important. In the face of COVID-19, we took a series of actions to protect and support our employees, starting by implementing strict hygiene protocols at all our facilities and labs, including social distancing, sanitization and wearing appropriate protective equipment. Employee support initiatives were also implemented, including full pay for colleagues ill or in isolation, and a program focused on keeping people connected, productive and active during lockdown and also to support their mental well-being. As part of the program, in a very short period of time, we rolled out Microsoft Teams to over 3,000 colleagues in over 30 locations. This is just one example of a significant acceleration in digital technology across the group, which we will benefit from well into the future. We also increased internal communications, including weekly e-mails and video messages from me and other senior leaders to all employees.

Many of our local communities have suffered significantly from the pandemic, and we are committed to helping them in any way we can. For example, the crisis has significantly increased the level of food insecurity amongst some of the most vulnerable people in these communities, with many families no longer having access to nutritious food. Last month, we leveraged existing relationships with more than 20 food banks across the world to provide around 0.5 million nutritious meals to people in need in our local communities. We also donated PPE to health workers and found a way to reformulate our ethanol so it can be used in hand sanitizer. This is now helping in the fight against COVID-19.

Our manufacturing network and supply chain have been put under intense pressure since the pandemic began. As a key player in the food supply chain, we recognize the importance of keeping our plants running and ensuring a reliable supply of ingredients. The fact that all our plants have remained fully operational and customer orders fulfilled throughout the pandemic is an outstanding achievement. We have had to operate highly flexible production and planning processes to adapt to the rapidly changing needs of customers. At the same time, our people are operating with a minimum number of people on shifts and reconfigured layouts to ensure safe working for colleagues and contractors.

Customer communication has also been a key priority, and I have received many messages of thanks from customers for our support in these difficult times. Staying close to our customers and continuing to support their growth has been another priority. In the current environment, we are finding new creative ways to support and connect with our customers. Many of these have been so successful that we will continue to use them well after the pandemic is over. Let me give you 2 examples. Firstly, started by our Asia business and now being used all over the world, we are hosting regular virtual tasting sessions for customers, with prototypes being prepared and sent in advance. We are also holding virtual product training sessions. In April, a joint team from applications, innovation and sales delivered a virtual starch seminar for one major customer to over 160 of their staff from across the world. I doubt we would have been able to get 160 people from one company in so many countries to attend such a seminar pre-COVID-19. This is a great example of turning adversity into advantage and provides yet another route for future customer collaboration.

Over the last few years, we have significantly strengthened our balance sheet, meaning we are well placed to navigate through this period. Our leverage is low with significant headroom on borrowings. We have strong liquidity with access to over $1 billion through cash on hand and a revolving credit facility, and no debt matures until 2023. Despite our financial strength, as we saw the pandemic unfolding, we recognized the need to take actions to reduce costs and preserve cash. These included freezing salaries, including for the Board and senior management; stopping nonessential discretionary spend; freezing recruitment; and reprioritizing capital commitments. We have also instituted a daily cash war room to protect our cash position.

As we set out in our trading update on the 4th of May, the imposition of lockdowns in many countries across the world throughout April, most notably in our largest markets of the U.S. and Europe, led to significant changes in demand patterns for our products.

This slide summarizes the key changes we saw in each division in April. By way of reminder, Food & Beverage Solutions and Sucralose continue to perform well, with volume for Food & Beverage Solutions in line with the comparative period and Sucralose 18% higher due to phasing of customer orders. Earlier in the month, demand was strong for ingredients used in packaged and shelf-stable foods as consumers in North America and Europe filled their pantries for consumption at home. As the month progressed, this was offset by lower demand for products consumed out of home, which represent between 15% and 25% of sales for this business.

In Primary Products, volume was significantly impacted by the first full month of lockdown in the U.S. Sweetener volume was 26% lower from reduced out-of-home consumption, which represents about 30% of the division's sweetener sales. Industrial starch volume was 9% lower, and Commodities were also impacted as ethanol prices decreased sharply. We continue to work closely with our customers to meet their changing needs, and all our manufacturing facilities remain fully operational.

The duration of the pandemic and the depth of its impact remains uncertain. It is not yet clear how consumer behavior will evolve as countries exit from lockdown, what future government actions will be and when we will see demand return for out-of-home consumption. In light of this uncertainty, we are not issuing guidance for the 2021 financial year. To keep all stakeholders informed of our progress, we will issue a first quarter trading update on the 23rd of July 2020. For now, our focus is on supporting our employees and local communities, maintaining the integrity of our supply chain, staying very close to our customers and on reducing costs and preserving cash.

As we look ahead into the 2021 financial year, our priorities are also clear: continue to look after our people and communities, build stronger relationships with our customers, continue to progress our strategy and maintain the strength of our balance sheet. While no one knows exactly what the near-term future holds, the companies that will emerge stronger are those that will adapt fast to and embrace the new business environment and ways of working. This is a key focus for us. And I believe that with our well-balanced business and the momentum we have built over the last 2 years, we are well placed to emerge from this period as an even stronger and more agile business.

The last 2 months have been truly extraordinary, and it has been incredible to see the passion of our people living our purpose every day. I can't say enough times how proud I am of all of them.

Looking back over the last 12 months, we have a lot to be positive about. Our strategy to grow Food & Beverage Solutions is delivering. And we have built a strong financial position, which is not only helping us navigate COVID-19, but also provides us with the flexibility to invest for growth. Our purpose continues to inspire and motivate our people, and our new long-term purpose commitments will help to demonstrate our progress. We have a highly committed and experienced management team and increasing depth of talent in the business driving us forward with determination and ambition.

As I said earlier, the fundamentals of our business remain sound despite the challenges of COVID-19. Our high-quality portfolio of ingredients and solutions give consumers healthier and tastier products when they eat and drink. Demand for these products is growing, and this trend is here to stay. Combined with our financial strength, this gives me confidence we will navigate this period successfully, and that our future prospects remain strong.

I would like to finish by thanking everyone at Tate & Lyle for their hard work that made last year's results possible and for their unbelievable resilience in these exceptionally difficult times. So many have gone beyond the ordinary call of duty, and for that, I am truly grateful.

I hope everyone listening to this presentation remains safe and well. That completes our presentation for today.