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Tate & Lyle - margin expansion helps offset volume weakness

Tate & Lyle reported a 4% rise in first half revenue to £857m, when ignoring the impact of exchange rates.

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Tate & Lyle reported a 4% rise in first half revenue to £857m, when ignoring the impact of exchange rates. Growth was entirely driven by pricing, with volumes falling across all business segments as consumer demand came under pressure. Margin expansion helped underlying operating profit rise 8% to £143m.

Free cash flow rose £15m to £77m, reflecting an improvement in cash conversion. Net debt rose 4.6% to £249m, or 0.8 times cash profit (EBITDA).

Revenue guidance has been marginally lowered, now expected "slightly ahead" of the prior year. There was no change to cash profit expectations, for growth of 7-9%.

A dividend of 6.2p was announced, up 0.8p.

The shares were broadly flat in early trading.

View the latest Tate & Lyle share price and how to deal

Our view

Half-year results were mixed for Tate & Lyle, who create ingredients like sweeteners and fibres to improve the nutritional value of food and drinks. Markets had already prepared for volume weakness as peers who reported earlier in the season gave a preview of what to expect. Customers are destocking, and demand for some end products is softening. That's before any impact from new weight loss drugs, though we remain sceptical about whether these will move the dial.

On a positive note, the Group's making good on its promise to streamline operations and focus on the most profitable parts of the business. The margin benefits are coming through, and an underlying cash profit (EBITDA) margin of 20.8% over the half was a step up from last year, which itself saw an improvement.

The core business is in food & beverage solutions, with smaller units focusing on European sweeteners and the sugar alternative Sucralose. But it's in the core business, specifically solution-based partnerships, that we see as a key growth driver. This is where it partners with customers to create bespoke solutions to their dietary and nutritional needs. Deeper relationships and closer ties add an element of stickiness to the business, and enable Tate & Lyle to leverage its technical expertise.

Acquisitions and expansions are a key part of this plan, and we've seen a ramp-up in internal and external investment. Cash flows are also strong enough to support some well-timed debt repurchases, bringing down interest costs, which is helping to support the margin expansion. The balance sheet is strong enough without these actions, but it's refreshing to see some prudent capital allocation supporting longer-term goals.

The sale of Primary Products last year, now in the form of a joint venture called Primient, was part of the solutions led revamp. Retaining a large stake means Tate still has interests in North and Latina America, where it operates. Last year was tricky, with performance hurt by operational challenges and higher costs. But demand looks robust, and a successful round of price hikes means the outlook is promising. This'll be a key driver of cash flow as dividends from Primient get passed on to Tate.

The renewed focus on speciality ingredients and solutions, strong management team and a balance sheet with enough firepower to expand all give scope for optimism. In the short term, volume challenges and the potential impacts from new weight loss drugs loom heavy overhead. It'll take some knockout performances for sentiment to shift.

Tate & Lyle key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 9th November 2023