Hello and welcome to the Tate & Lyle Q3 trading statement call. Please note this call is being recorded. You will be in a listen-only mode throughout the call and have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. I will now hand you over to Nick Hampton, Chief Executive, to begin today's conference. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to Tate & Lyle's third quarter conference call. I will make some brief introductory comments and then Dawn and I will be happy to take your questions. The group's performance in the third quarter was consistent with the first half of the financial year, with revenue 16% higher than the comparative period. Revenue growth was driven by top-line momentum in Food & Beverage Solutions, which delivered another strong quarter of double-digit revenue growth. Revenue growth of 19% benefited from mixed management, the pricing through of input cost inflation, and acquisitions. In North America, we saw continued revenue growth despite some limited supply chain disruption. Both the regions of Europe and Asia, Middle East, Africa and Latin America delivered strong double-digit revenue growth, reflecting good commercial performance.
As expected, Sucralose revenue was lower, reflecting the rebalancing of orders phased into the first half. The 2023 calendar year pricing round has been completed successfully with strong customer demand and the recovery of higher input cost inflation. Turning to the outlook for the year ending 31st of March, 2023. We continue to expect revenue growth reflecting current top-line momentum to offset input cost inflation through strategic mix management, pricing, productivity and cost discipline. adjusted profit before tax to be in line with the current market expectations, with stronger profits in Food & Beverage Solutions offsetting lower profits in the minority holding of Primient. With that, I will open up the call for questions.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. That is star one for your questions today. Our first question today comes from Alex Sloane of Barclays. Please go ahead.
Morning, Nick. Morning, Dawn. Thanks for taking the questions. From my side, just on the calendar pricing round and the positive outcome, you indicate that the Primient unit margins can get back to pre-inflation levels. I wonder if you can help us kind of give a ballpark in terms of what that means in terms of the improvement in unit margins, maybe percentage-wise, or is the right way to think about that the ongoing EBIT for that joint venture business could get back maybe towards March 2021 levels, all else equal.
I'd just be interested in terms of that pricing round, obviously most relevant to Primient, but, you know, to what extent does it impact the FBS business? Could you maybe remind us how much of that division is relevant when it comes to this renegotiation process? Thanks.
Sure. Let me take those two questions in turn. On Primient, what we saw in our conversations with them was as the pricing round comes to completion, it's gone very well with positive demand and good return to cover of inflation. What that would imply, Alex, as you think about the future, of course volume depending and operational performance depending, is a return to, you know, similar levels to the prior financial year. Obviously there's a lot to go through over the next few months as we look at demand patterns and the return to normal pricing margin levels. I think, I would think it's reasonable to think about it in those terms at this stage.
When we look at our contracting round for calendar year 23, I'd say there are three things really. Firstly, we saw strong demand and have recovered inflation as we built new contracts with customers for the new calendar year. That's clearly predominantly across North America and Europe, but there is some contracting in our markets in Latin America, Asia, Middle East and Africa as well. Secondly, as we've done those contracts, we've looked to be more dynamic and flexible in the way that we allow customers to take their own view of inflation and attitude towards inflation. What does that mean?
To be fair to customers, and to balance cost recovery with increasing prices, we've provided them with the flexibility to choose whether they lock input prices for the full year, and we cover as best we can those forward prices, or we leave pricing open for the second half and take a more dynamic approach through the year. Net-net, what it means is, we've got a good look at the margin profile as we go through the next financial year.
Very helpful. Thank you.
Thank you. We now move on to our next questioner, which is Leora Mlodsky of Citi. Please go ahead.
Hi, morning Dawn and Nick. Thanks for taking my questions. I was just wanting to talk a bit more, if you could, around the elements of this SBS revenue growth and maybe give us more of an idea how to have that split between volume pricing and mixed growth. Any more details kind of around that volume growth, because I remember at H1 there was some underlying and adjusting factors in that volume growth. Some more color there would be quite helpful. I also wanted to ask around what you're seeing across the different regions in terms of SBS and how the market's evolving, and whether you're seeing any kind of changing customer behavior or any kind of the de-stocking that we've heard called out by some ingredients teams. Thank you.
Okay. Let me let Dawn and I take the first question collectively, and I'll come back to the regional discussion at the end. You know, as we said, we saw revenue growth similar to the first half, at 19% on SBS. Underlying volume trends were similar to the first half. What that means really is the facts driving revenue growth ahead of volume in half one continued to play out in quarter three. You know, we saw the pass through of inflation, and that was similar, a similar contribution as sort of roundabout double-digit volume to revenue leverage. Positive mix is also a significant factor. Although as we said in the half one call, a slightly lower impact.
That impact comes from three things: positive customer mix, progression on new products and the continuing cycling out of some low margin business. Then you've got a little bit of contribution from acquisitions with Quantum Hi-Tech. The trend, the shape is effectively very similar to the first half with a little bit of change in the moving parts. Dawn, do you want to add anything to that?
No, I mean, I think you covered it, I think you covered it really well. The only thing to say is obviously quarter three, we are lapping the quarter three last year where we started to see accelerated inflation in the comparative period. I think from a volume perspective, the drivers that we talked about in the first half, they've also continued into quarter three, as well. What we have seen on that is that, you know, demand continues, to be strong in the quarter.
Let me move on and talk about the regional demand picture that you asked about. I think it is important you look at it on a regional basis because you're seeing, you know, different inflationary impacts around the world. Let's start overall, kind of on a region by region basis, we're seeing pretty consistent customer demand. It's remained robust through the third quarter. In North America that would be true, with a little bit of noise around things like transport availability in the supply chain, both inbound and outbound, with customers sticking up and some noise around the Christmas period with the impacts of the Arctic storm. You know, offsetting that, we're seeing improved economic sentiment in North America as we enter the new year.
In Europe, I'd say although demand has remained good, we're a bit more cautious because energy and living costs are most pressured in Europe, and the impact of these on consumer sentiments and therefore growth into the fourth quarter, we'll have to see what happens post-Christmas. In Asia, on the other hand, we continue to see robust demand and actually the relaxation of COVID restrictions in China should be positive for the medium term. You know, it's less clear what the short term impact will be post the Chinese New Year. Through the, you know, the wave of COVID in China this time round, we saw continued demand because there wasn't shutdown, so people were still shopping.
I think overall, we're seeing similar trends to the ones we saw in the first half, and it'll be key what happens in quarter four as we think about looking into the next financial year. You know, we're still confident with guidance for the full year at this stage.
Thank you.
Thank you. Up next, we have John Ennis of Goldman Sachs. Please go ahead.
Hello. Good morning, everyone. I had a bit of a broader question coming back to your medium term outlook, where you, I guess, always sort of guided for the sort of 4%-6% revenue growth ambition, which in the current environment of course, is hard to really use given a lot of inflation and pricing pass through. I guess, is it fair to assume that target is migrating increasingly to a volume mix target? Is sort of the first part of the question.
The second part related to that, are you from a volume mix standpoint for the first 9 months of this year on track to be within that 4%-6%, which I suppose links back to the earlier question around deconstructing the 19% revenue growth between maybe volume mix versus inflationary pricing? Thank you.
Yes. Great question, John. so I would say that you clearly have to adjust the revenue assumption for the extraordinary inflationary environment we're seeing. You know, the 4-6 number you quote, would be in a more normalized inflationary environment. If you, if you look through that and then look at the sort of volume revenue dynamic in the first half, you can see clearly from the breakdown we gave at the first half that we would remain on track to be within that range or slightly better, actually, if you look at the first half numbers, because we did deconstruct, if you remember, from the inflationary impact, I think, we said it was about half of the impact for volume for revenue in the first half.
Clearly the mix and the positive impact of MPG took us above that range. As we said on the call, that impact and that balance was similar in quarter three. I think you can read into that we're absolutely on track against the ambition we set for ourselves for the first three quarters of the year. As I said, you know, we're tracking very, very carefully what happens in, from a demand perspective post-Christmas and through the fourth quarter, and we'll give a clearer view of the short-term outlook for the following financial year when we get to the full year results.
Alongside that, of course, you've got the capital markets event coming up in a couple of weeks. We'll lay out a new set of financial targets for Tate & Lyle for the next few years. Okay, perfect. Thank you, Nick.
Thank you. Now we're moving on to Martin Deboo of Jefferies. Please go ahead.
Morning, everybody. My questions have mainly been answered, I just want to mop up a couple. First of all, just in FBS, Nick and Dawn, you've seen the trends more positive. There was quite a stir caused by Givaudan yesterday had a very weak Q4 on what looked like weak demand and an inventory unwind in the US. I'm detecting a more positive tone from you and not seeing an inventory unwind in the US. Would that be correct? The second question, Nick, just to clarify what you said about the restoration of Primient profits. I think you'd expect something like the prior financial year, which I take to be FY22. I'm asking the question because FY22 was already impacted, I think, to some extent by inflation and also an interruption at Lafayette.
What's the right sort of reference year to think about Primient profits relative to?
Yeah. Okay, let me take those two questions in turn. On your first question, we haven't seen anything significant in North America from a destocking perspective. I mean, there's always a little bit of noise December, January as some of our customers have closed their financial year. We also had a disruption because, you know, effectively transporting things were shut for a week through the Arctic bomb. There was nothing significant for us in our sector. I mean, obviously, different companies see different impacts based on the sectors they're operating in. As I said, you know, we'll continue to track what happens in the fourth quarter and give a, I think, a much clearer view in our full year results when we close the year.
There was nothing significant that we saw in the quarter three. On Primient, I would say, look, fiscal 22 I think is a good starting point. As you know, there are so many moving parts on this. You know, the demand picture, not just the margin picture. I would say as a base reference point, that wouldn't be a bad place to start.
Okay. Very clear. Thank you very much.
Thank you. Our next question comes from Patrick Higgins of Goodbody. Please go ahead.
Thanks. Good morning, everyone. Two questions from me if that's okay. Firstly, just on Primient, could you just give us an update on how, you know, the operational issues that were seen in H1, has there been much progress in addressing some of those issues during the quarter, or how long should we expect that to kind of take to improve? Then secondly, I guess more of a high level question just around, you know, M&A pipeline. How should we think about, you know, flow of deals just given, you know, the interest rate environment now? Have you seen, you know, conversations around M&A a bit more challenging than perhaps a year or so ago? Interested to hear your thoughts on that piece. Thanks.
Operation is improved in Primient. Things are settling down. We're seeing for us to add a Primient to relatively low supply, and I think the team there are making good progress. I'd say, there's more work to do going into the fourth quarter and into next calendar year. Alongside Primient, the team together are working hard to address the challenges. Obviously the positive momentum from the pricing round and what they're seeing from a demand side is going to be helpful as well as we enter the fourth quarter and the next calendar year. Things are looking more positive. From the M&A pipeline, I don't think the sort of financial markets had a huge impact on the conversations that we're having.
I mean, we're blessed by having, you know, a strong balance sheet with firepower, so financing isn't an issue. I think the question is gonna be, as we think about the deal flow and the conversations we're having, how do you balance off the right deals at the right value in the current financial market environment? As with any deal, you look very carefully about value creation and the strategic merits of a deal you're thinking about doing.
Understood. Thank you.
Thank you. As a brief reminder, that is star one for your questions today. I will now take Chris Pitcher from Redburn. Please go ahead.
Good morning. Thank you, Nick. Thank you, Dawn. A couple of questions for me. Firstly, on Sucralose, in the first half, you mentioned challenged global supply. I'm wondering if the relaxation of China restrictions are impacting.
Some of your volumes there rather than just perhaps the unwinding of earlier orders in the first half. Is the customer mix still positive in Sucralose or has price mix come under a bit of pressure there just to get the volume price mix balance in the Sucralose number? Then a more basic question, I'm afraid. In terms of the positive mix within customers and FBS, what's driving that? Is it the customer that's driving the mix? Or is it the mix of the products you're selling that's improving? Can you give an idea of how much the FBS is now solutions and how much is sort of stand-selling standalone ingredients? Thanks so much.
Let me take the second question first. The customer mix point is a combination of us choosing to do business with those customers who value what we do. It's a positive choice on customers, and obviously an improvement in the mix of the products we're selling at the same time. The incremental mix between selling an ingredient and selling a solution is a little bit difficult to measure quarter on quarter. I'd say it's the first two factors primarily. On Sucralose, I mean, clearly, China opening up will rebalance somewhat the Sucralose supply-demand picture. There's nothing that we saw in the third quarter that was beyond just the rebalancing of orders with some of our bigger customers, actually.
Our mix of business didn't really change versus our expectations, and we'll see as always have Sucralose involved going forward. We're, you know, we're right on track with where we expect it to be at the end of the third quarter with a, you know, a stronger first half rebalancing in quarter three. That phasing we talked about over the half year.
If I look at sort of the benefit perhaps in your FBS business from China reopening, would that benefit perhaps offset the impact on Sucralose? Is that, is that a fair way to think about it, or?
I mean, look, I mean, China opening up is obviously positive for us from a China perspective in its own right. I would think about Sucralose totally separately. You know, what we're doing with Sucralose is continue to focus on those customers who want to do business with us. We've always said, you know, we expect Sucralose long term to be a, you know, relatively stable cash generative business for us. That remains the focus.
Great. Thank you very much.
Thank you. Now we're moving on to Alicia Forry of Investec. Please go ahead.
Hi. Good morning, Nick and Dawn. Most of my questions have been answered, too. I was just wondering if you could perhaps provide some guidance on what the duration of this Sucralose, you know, phasing related weakness might look like. Is this sort of, you know, likely to only impact Q3, or will it also drag into Q4 as well? I don't know if you confirmed this earlier in the call, but if you did, I missed it. What % of your FBS business is now locked in with the new higher prices for 2023, and what is sort of floating or not locked in, as it were? Thank you.
Let me take the first question first. We're substantially cycled out of the phasing on Sucralose now, so we should see a return to kind of a normal level of business in the fourth quarter. It was a sort of Q2, Q3 impact. On contracting, I mean, a high level of our contracts across Europe and North America are on annual contracts, although, as I said, you know, we've got more dynamic pricing built in this time around. The number is lower in Latin America, Asia and Middle East and Africa, where we've got more, you know, monthly type business.
If you go back to the sort of mix of the business, you'd say, you know, you've got 60%-70% of your business locked on an annual basis at the end of the contracting round. It certainly depends a little bit on the nature of the contracts with the dynamic pricing that I just talked about.
Thank you.
Thank you. Once again, to ask a question today, please signal by pressing star one. We will pause for a brief moment. As there appears to be no further questions at this time, I would like to hand the call back over to you, Mr. Hampton, for any additional or closing remarks.
Okay. Thank you, operator, and thank you all for your questions. I suppose to summarize the call, Food & Beverage Solutions continue to deliver strong top-line growth, and we saw encouraging contracting for the 2023 calendar year. Despite ongoing economic uncertainty, we continue to deliver successfully against our strategy as a growth-focused specialty Food & Beverage Solutions business. I look forward to hosting a capital markets event on Wednesday, the 8th of February at 2:00 P.M. UK time. At the event, we will outline our strategy, business model, portfolio, markets and the science-led approach which puts us at the center of the future of food. I sincerely hope you will all join us for the event. Thank you everyone for your attention on the call today and have a good day.
Thank you. Thank you, ladies and gentlemen for joining. You may now disconnect.