A sweet future for Tate & Lyle

The year has started well for Tate. Having reported volume growth in both its divisions - bulk ingredients and speciality food ingredients – in the first quarter, last week's first-half results showed the trends had continued. The bulk ingredients division was the star performer of the first half with adjusted operating profit up by more than a third to £93m. But the speciality food business also increased profits, albeit at a more modest rate of 4 per cent to £104m.

Growth in speciality food ingredients was in spite of challenging market conditions in North America, where large food producers are coming under pressure from smaller, more niche 'pure label' alternatives. Still, volumes in North America grew 1 per cent, primarily due to new business wins with large existing customers, a focus on high-growth areas such as bakery and snack bars, as well as health and wellness trends providing a boost to private labels.  

Despite the strong recent performance from bulk ingredients, the longer-term focus of the group is to move away from these lower-margin sales – the division accounted for 64 per cent of last year's sales but just 42 per cent of profit – and focus on the higher-margin, innovation-led speciality business.

Indeed, one of three strategic goals for 2020 is to take the proportion of operating profit generated by speciality food to 70 per cent compared with 58 per cent last year. Over the same period broker Liberum forecasts operating margins at the division will rise from 18.2 per cent last year to 20.8 per cent, suggesting the strategy should have noteworthy benefits for the bottom line.

A second 2020 target is to increase the proportion of speciality food ingredient sales from Asia and Latin America to 30 per cent of the division's total. Partly to this end, the company recently announced plans to double the capacity of its Maltosweet Maltodextrin product line, a corn-based sweetener used in a wide range of food and drinks, at its facility in Slovakia by 2019. Management reckons this will allow the company to supply growing demand for infant formula in the Asia Pacific and Europe, Middle East and Africa (EMEA) regions. Speciality volumes grew by 6 per cent in Asia and Latin America in the first half, with particularly strong demand from China and Mexico. The future of the North American Free Trade Agreement (Nafta) under the Trump administration is a concern in regard to trade with Mexico, but an existing agreement over sugar is expected to provide some protection.

The final element of the 2020 targets is that new product sales – defined as products still within seven years of launch – should hit $200m a year. At the full year new product sales exceeded $100m for the first time thanks to continued investment in product innovation. This trend also carried through to the half year with a 14 per cent increase in sales in this space to $58m, which the group put down to more consumers looking for ways to cut sugar, fat, and calories from their food and drinks.