Nothing sour about Tate & Lyle

Investors Chronicle published a feature earlier this month called Britain's Best Boards, based on a scoring system that ranked the best and worst management teams in the FTSE 350. And it's management quality that prompted us to take a look at Tate & Lyle. Over the last 18 months, the food producer has undertaken a major board shake-up, replacing its chief executive, chairman and finance director. The outgoing board had been roundly criticised for the strategic missteps that culminated in falling profits over three years, followed by 2008's two profit warning and, ultimately, relegation from the FTSE 100.

Hopes are particularly high for Tate's new boss, Javed Ahmed - the appointment of this highly respected Reckitt Benckiser veteran saw the shares jump on the day the market learned of his imminent arrival. In his most recent role as European head, Mr Ahmed was responsible for over half of the fast-growing household products company's sales, nearly two-thirds of its profits, and is widely credited as the marketing brain that took brands such as Vanish and Harpic and transformed them from tired local brands into international powerhouses.

The task he has at Tate & Lyle presents a trickier challenge, though, and not everyone is convinced that Mr Ahmed's experience in the packaged consumer goods industry will translate into a bulk ingredients business. However, the chief executive must be confident in his own ability after having just bought shares worth £414,000.

And, certainly, the far-reaching plan he's putting in place looks to have ticked all the right boxes. Strategically, he's continuing the work begun by his predecessor to transform the group from its traditional bulk commodity focus into one selling higher-margin value-added food ingredients, and add greater exposure to emerging markets.

That has already seen Tate start to turn its back on its sugar heritage, selling its marginally profitable European sugar business - which included the world's oldest brand, Lyle's Golden Syrup - in July to American Sugar Refining. Although expected, analysts were impressed with the speed at which the deal was completed and the £211m price-tag, higher than the £150m-£175m analysts had expected. The disposal of its molasses trading and Vietnamese sugar businesses are expected to follow later in the year and net another £70m or so.

That deal helped reduce debt, which is expected to have fallen to £490m by the year-end, from £814m in March and £1.2bn a year earlier, as the group took a more hard-line approach to working capital management. Disposals could reduce this further still and add even more fire-power to fund acquisitions in the value-added ingredients space, which offer more stable demand patterns than the more volatile commodity-based businesses - as demonstrated by the current depressed state of the industrial starches market. But a careful balance is needed, because these mature bulk ingredients businesses generate high levels of cash.

Mr Ahmed also plans to make significant operational changes and, in his candid assessment of the business he inherited, he pulled no punches as to the inadequacies of the group's processes. "It's a legacy model that's complicated and inefficient, that constrains the delivery of performance rather than enhances it," warned Mr Ahmed when he presented to the City in May, and said that problems such as "siloed" research and development and "patchwork" IT systems could take two years to fix.

That's not to say that Tate is a total basket-case. Its laboratories have produced many innovative and widely-used products over the years, despite the lack of commercial focus, including the artificial sweetener Sucralose and other dietary ingredients including modified food starches and fibres. These branded speciality ingredients now account for nearly a third of sales and over half of operating profits. Mr Ahmed was also keen to stress that Tate has "world-class facilities" at its disposal, including a newly consolidated Sucralose manufacturing facility. Current trading looks steady, too, with decent demand for speciality sweeteners and starches, and a rising demand for the bulk corn sweetener, High Fructose Corn Syrup - and analysts think bulk ingredients margins of 7.8 per cent could mark a cyclical low.