LONDON — After a challenging first half, Tate & Lyle faced new problems in the third quarter of the fiscal year. Deteriorating U.S. ethanol margins, declining sugar prices in Europe and capacity constraints in the U.S. transportation network triple-teamed the company’s Bulk Ingredients division in the quarter ended Dec. 31, 2014.
“We expect these issues to continue to impact this division in the fourth quarter and beyond,” said Javed Ahmed, chief executive for London-based Tate & Lyle, in a Feb. 6 trading statement call. “The volatility we are experiencing in commodity markets only serves to underscore our strategy to dampen volatility as much as we can in our Bulk Ingredients business.”
Tate & Lyle said the weaker performance in Bulk Ingredients means company profits in the fiscal year will be “modestly below” the range stated in September 2014 of £230 million ($350.8 million) to £245 million ($373.7 million). Mr. Ahmed said Tate & Lyle, as it stated last November, expects to incur costs of £40 million ($61 million) in the financial year as a result of operational and supply chain disruption that took place in the first half of the year.
“This has been a very difficult year for the company,” he said. “We have been faced with two major issues: significant operational and supply chain disruption, and an extremely competitive market for Splenda sucralose. And then, in the last two quarters of the year, we have had to face increasing volatility in the commodity markets we operate in.”
The company progressively has repositioned Bulk Ingredients such that tolling contracts now represent about 75% of U.S. corn sweetener volumes, he said.
“In the current calendar year pricing round, we achieved higher unit margins on 25% of the bulk sweetener volumes we contracted,” Mr. Ahmed said. “However, the benefit for the overall division will be offset in the fourth quarter, and through the 2016 financial year, by a combination of lower volumes as grind is diverted to specialty food ingredients, and the margin pressures in the U.S. ethanol and European bulk sweetener markets.”
The transportation capacity constraints in the United States relate to a slow rail network, he said.
Third-quarter results for the Speciality Food Ingredients division, which includes the high-intensity sweetener Splenda sucralose, were in line with Tate & Lyle’s expectations. Splenda sucralose performed in line with expectations in the third quarter. The sucralose market continues to be competitive, Mr. Ahmed said. Tate & Lyle by the end of fourth quarter should have completed its evaluation on how to maximize returns for Splenda sucralose.
“We will choose, and have chosen, not to compete on contracts and on business where, frankly, we do not see any value at all,” Mr. Ahmed said of the sucralose business.
He said progress in specialty food ingredients is encouraging.
“Growth in emerging markets continues to be strong, the innovation pipeline remains robust, and new products are beginning to get real traction with many of our customers,” Mr. Ahmed said.He said Tate & Lyle has completed its review of the company’s global supply chain. A program to implement improvements has begun and will last 12 to 18 months.