TATYF - Tate & Lyle PLC (TATYF) Q3 2023 Earnings Call Transcript
2023-11-11 08:23:06 ET
Tate & Lyle, PLC (TATYF)
Q3 2023 Earnings Conference Call
November 09, 2023 05:00 AM ET
Company Participants
Nick Hampton - CEO
Dawn Allen - CFO
Conference Call Participants
Patrick Higgins - Goodbody
Karel Zoete - Kepler Cheuvreux
Lauren Molyneux - Citi
Joan Lim - BNP Paribas
Damian McNeela - Numis
Alicia Forry - Investec
Chris Pitcher - Redburn
Alex Sloane - Barclays
Presentation
Operator
Nick Hampton
Good morning, and thank you for joining us. I am pleased to present Tate & Lyle's results for the Six Months to the 30th of September 2023. The agenda for today's presentation is on the screen. I will begin with an overview of the first half, Dawn will run through the financial results, and then I will talk about our strategic progress and the outlook. Finally, Dawn and I will be happy to take your questions.
Starting then with the key headlines. We delivered another robust performance in the first half with good revenue and profit growth and strong cash generation. The strategic repositioning of Tate & Lyle as a growth-focused Specialty Food & Beverage Solutions business continues to progress well.
We are seeing positive progress from our focus on providing solutions to customers, and we continue to invest in the business to drive long-term growth. We remain focused on managing challenging short-term market dynamics and investing in the business to build strong foundations for future.
In the short-term, we are operating in a volatile cost environment with inflation and the cost of living crisis driving softer consumer demand and customer destocking. It is a sign of the quality and resilience of the business and a great credit to my management team that despite these challenging market dynamics, we still met our key financial measures in the first half.
At the same time, we continue to invest in the business to ensure we are well positioned to capture future growth opportunities. We are expanding our portfolio, increasing our investment in innovation and solution selling, investing in growth capacity, and significantly advancing our sustainability program.
These investments support our position at the center of the future of food helping our customers create healthier, tastier, and more convenient food and drink that is both more sustainable and affordable.
Turning to the financial highlights. Group revenue was up 4% and EBITDA was up 7%. Cash management was strong with free cash flow £15 million higher and we delivered $17 million of productivity savings.
We also made good progress delivering on our commitment to science, solutions, and society. Science and solution selling are at the heart of how we deliver our strategy. Our customers increasingly rely on our innovation expertise to solve the challenges of food reformulation and to deliver nutritional improvement and taste. That is why building stronger solutions-based partnerships with customers is critical.
In the first half, we increased investment in innovation and solution selling by 11%, and the mix of new business wins coming from solutions increased by four percentage points to 22%.
For society, we continue to make good progress against our purpose targets, including our sustainability agenda, which I will talk more about later and on our ambition to improve the diets of people across the world. For example, in the last three and a half years, our no and low-calorie sweeteners and fibers have helped to remove 7 million tonnes of sugar from the world's diets. That's 28 trillion calories.
As we build the new Tate & Lyle, it's also key that we really understand what our customers think of us, where we are seeing is strong and where we can continue to improve.
This year, we undertook our second annual brand equity survey in which around 500 customers and prospective customers ask what they think about Tate & Lyle. The results are very encouraging. 81% saw us as a leader in ingredient innovation with 80% also seeing us as a leader in sustainability. These scores were up by seven and 10 percentage points, respectively, from the survey in 2022.
Importantly, our Net Promoter Score, which is a measure used to gauge customers' loyalty satisfaction and enthusiasm about Tate & Lyle is also high at a very positive score of 61%, an increase of nine points.
These results give me great confidence that the new Tate & Lyle is increasingly being seen as a valued innovation and growth partner for our customers as well as an attractive partner for prospective customers and the way we have reshaped and focused the business is resonating strongly. I will come back to talk about our strategic progress and the outlook later.
But for now, I will hand over to Dawn to talk through the financial results. Dawn, over to you.
Dawn Allen
Thank you, Nick, and good morning, everyone. In line with previous presentations, I will focus on adjusted measures. Items with percentage growth are in constant currency unless I indicate otherwise.
As Nick said, the group performed well in the first half, delivering against our key financial measures. Revenue and profit growth was robust, navigating a tough external environment, we continue to invest for the long-term across all three pillars of science, solutions, and society. Cash performance was strong by significantly improved cash conversion. All of this resulted in a strong balance sheet, providing the flexibility for further investment.
In terms of financial highlights, group revenue was 4% higher. We delivered EBITDA growth of 7% with EBITDA margin 70 basis points higher at 20.8%. Profit before tax was 16% higher, reflecting strong performance from Tate & Lyle and improved performance in our minority holding in Primient and lower finance charges in the half.
Earnings per share were 19% higher, free cash flow was £15 million higher at £77 million. So, overall, a pleasing set of results.
Moving on to the performance of our three operating segments. Starting with Food & Beverage Solutions, This business is our growth engine and represents more than 80% of our revenue. Its role is to drive margin-accretive growth.
Revenue in the half was 5% higher with two percentage points decrease from volume and price/mix, which was more than offset by seven percentage points increase from the recovery of inflation.
The volume and price/mix decrease of two percentage points is driven by two factors; firstly, a six percentage points benefit from our focus on strategic mix management and solution selling. And secondly, eight percentage points volume reduction from the impact of consumer demand softness and customer destocking.
Looking at the performance of our three regions. In North America, revenue grew 2% despite some soft demand we saw good gains in the beverage, confectionery and bakery categories, particularly with our largest customers in Asia, Middle East, Africa, and Latin America revenue was up 1%, reflecting a mixed picture with pockets of growth and some regional challenges.
In Asia, revenue was broadly in line with the comparative period with robust growth in China, supported by the acquisition of Quantum. In Latin America, revenue declined driven by lower-priced imports from outside the region, especially in Mexico.
And in the Middle East and Africa, we saw good demand. In Europe, revenue growth at 19% was strong, reflecting the pricing through of significant input cost inflation.
We also continue to exit some low-margin business. EBITDA grew ahead of revenue at 10%, benefiting from increased solution selling, customer and product mix, as well as from contributions from productivity savings. As a result, the business delivered 90 basis points of EBITDA margin expansion.
As I said, at our Capital Markets event earlier this year, our five-year revenue growth ambition is on an underlying basis, excluding the impact of abnormal inflation and deflation.
Consecutive periods of high input cost inflation have significantly accelerated revenue growth with Food & Beverage Solutions, revenue 19% higher in each of the last two years, well ahead of our five-year overall ambition of 4% to 6% growth each year.
Following this period of rapid inflation, we are now seeing cost deflation across a range of imports while the renewal of customer contracts for the 2024 calendar year is still in its early stages, revenue in the second half is expected to reflect the pass-through of these lower costs.
Let's move to Sucralose. This is a strongly cash-generative business and its role is to provide attractive returns. The underlying performance of this business was steady after taking into account the phasing of customer orders into the first half of last year.
Revenue was down 5%, reflecting the more normal phasing of orders and inflation recovery. EBITDA at £28 million was 14% lower as multiyear contracts limited and near-term recovery of inflation.
Stepping back, industry demand for Sucralose remains robust, driven by growing consumer demand for both reduced sugar and calorie food and drink. In addition, we continue to see good demand from our larger customers.
Primary Products Europe is the smallest segment, comprising 7% of our revenue. We continue to optimize the financial performance of this segment as we transition capacity to higher-margin Food & Beverage Solutions ingredients.
Revenue declined by 2% with lower volume, partially mitigated by improved pricing for more favorable market conditions and the recovery of input cost inflation. EBITDA losses improved significantly to £3 million.
So, pulling this all together, Food & Beverage Solutions increased EBITDA by 10% or £40 million. Sucralose saw a decline in EBITDA of £5 million and in Primary Products Europe, EBITDA losses were £3 million lower.
Overall, this led to an increase in absolute EBITDA in constant currency of £12 million or 7%. The impact of foreign exchange was to decrease EBITDA by £6 million to £178 million.
Turning now to productivity. We delivered $17 million of productivity savings in the half demonstrating the strong productivity culture across the business. Savings came from a number of areas, including capital investments to increase efficiency and reduce energy costs, more efficiencies in our supply chain and cost savings in SG&A.
We expect to deliver productivity savings in the 2024 financial year of more than $25 million, and we are on track to deliver our target of $100 million productivity savings in the five years ending the 31st of March 2028.
Let's move on to talk through tax and exceptional items. The adjusted effective tax rate for the year was 21.9%, in line with the comparative period. We anticipate the adjusted effective tax rate for the 2024 financial year will be one to two percentage points higher than last year's full year rate, which was 19.9%.
The key drivers of this are the increase in the headline UK corporation tax rate from 19% to 25% and more profit being taxed in higher rate jurisdictions. In terms of exceptional items, net pre-tax exceptional charges were £8 million, most of which related to restructuring costs to drive organizational improvements and productivity benefits. From a cash flow perspective, this translated into a total exceptional cash outflow of £11 million.
Primient's performance improved in the first half. Our share of profit was 32% higher at £7 million as Primient benefited from strong commercial performance and sweetener demand alongside an improving operational performance.
This more than offset higher interest charges and a reduction in the share of profits from Primient-owned joint ventures. We received $17 million in cash dividends from Primient in the half with a further dividend of $37 million received in early November, bringing the total year-to-date dividend to $54 million.
Moving now to free cash flow. Adjusted free cash flow was £15 million higher at £77 million. A strong focus on cash generation delivered a £47 million improvement in net working capital compared to the comparative period. We continue to invest in long-term growth with capital expenditure, £20 million higher at £46 million.
For the 2024 financial year, we continue to expect capital expenditure to be in the £90 million to £100 million range. Cash conversion was strong at 69%, a 14 percentage points increase from the comparative period, and we are well on track to deliver our ambition to increase cash conversion to 75% over the next five years.
Moving on to net debt and dividends. Net debt was £11 million higher at £249 million. This was driven by two main factors. Firstly, strong cash generation; and secondly, the payment of the final dividend to shareholders of £52 million.
Our net debt to EBITDA ratio is 0.8 times. We continue to have strong liquidity headroom to invest for growth with access to more than £1 billion through cash on hand and our undrawn revolving credit facility. We have repaid $120 million of debt since the 31st of March 2023 for cash, of which $95 million was floating rate debt.
The Board has declared an interim dividend of £0.62 per share, an increase of £0.08 per share. As previously stated, this reflects the adoption of our approach to pay interim dividends equal to one-third of the prior year's full year dividend. The Board continues to operate a progressive dividend policy.
I want to leave you with three key messages. The first is that we are delivering on our growth strategy and successfully navigating a challenging external environment to deliver robust financial performance.
Secondly, we continue to generate strong cash flow and maintain a culture of productivity and cost discipline.
And thirdly, we are investing for the future across our pillars of Science, Solutions, and Society, more of which Nick will talk about shortly. These results are a sign of the strength and resilience of the business and the financial discipline we have instilled. This gives us flexibility to continue to invest for long-term growth, both organically and through M&A.
With that, let me hand you back to Nick.
Nick Hampton
Thank you, Dawn. I'm now going to give you a brief update on our strategic progress and talk to the outlook. Over the last two years, we have repositioned Tate & Lyle to be right at the center of the future of food, focused on creating solutions that meet growing consumer demand for healthier, tastier and more sustainable food and drink. This is starting to show real benefits.
Solutions revenue from new business wins is increasing and we are building progressively deeper solutions-based partnerships with customers. To further strengthen these partnerships and our customer offering, we are increasing investments in R&D, innovation, and sustainability, and also adding growth capacity.
As we detailed in our Capital Markets event earlier this year, we have repositioned Tate & Lyle to benefit from a number of structural megatrends which are driving consumer purchasing and consumption patterns.
The global population is growing rapidly. People are living longer and they are all much more knowledgeable about climate change and their impact on the planet. The rise of diseases like obesity and diabetes and concerns about digestive health and immunity are also causing people to increase focus on their health and well-being.
All these factors are leading consumers to demand food and drink, which is healthier, tastier, more convenient sustainable, and affordable, and that plays right into Tate & Lyle's area of expertise.
Through our capabilities in sweetening, mouthfeel, and fortification, we are experts in taking sugar and calories out of food, enhancing the texture and healthier experience as well as improving the nutritional profile by adding fiber and protein.
These capabilities mean we are well placed to benefit from long-term trends towards healthier diets and lifestyles. We believe that people who want to live healthier lives whether by taking more exercise, adopting a more nutritious diet, or even through some form of medication like weight loss drugs, or indeed a combination of all three, will look to consume healthier food and drink, particularly products that are lower in sugar and calories and with added fiber. That is exactly what Tate & Lyle does and why we are excited about the growth opportunities ahead.
To ensure we are in a position to capture those growth opportunities, we are investing in the business in a number of key areas. The first is innovation. New product revenue grew by 18% in the half on a like-for-like basis, with particularly good growth in the mouth field platform.
Our innovation pipeline remains strong, and we continue to launch exciting new products into the market. For example, in July, we expanded our natural sweetener portfolio by launching a new Stevia Sweetener called TASTEVA SOL. This new product represents a patent-protected breakthrough in Stevia technology. It is a premium tasting and clean label Stevia that has over 200 times the solubility of existing Reb M and Reb D products on the markets.
This means TASTEVA SOL has the ability to solve customer solubility challenges that are often found in applications such as beverage concentrates, dairy at high levels of sugar replacements.
A key part of our innovation approach is investing in new technology to improve our product offering and increase our speed-to-market. Let me give you three examples of how we are using technology to support our customers.
At our R&D hub in Chicago, our scientists see using AI to undertake predictive modeling of sensory and other data to develop targeted recipes for customers and accelerate the adoption of solutions.
In Singapore, we have installed a new robotic system with the ability to run characterization tests around 10 times the current rates and with enhanced predictive modeling capabilities. This system enables our scientists to assess the chemistry, performance and customer benefits of a new mouthfeel solution with much greater efficiency and increased speed to market.
And finally, we are enhancing our technical knowledge management systems to increase knowledge sharing and the pace of innovation across our regions.
Turning next to solutions. We continue to make good progress building stronger solutions-based partnerships with our customers, and we increased our investment in innovation and solution selling by 11% in the first half. Areas of particular focus were infrastructure and capabilities.
In June, we opened a new Customer Innovation and Collaboration Center in Jakarta and Indonesia bringing the total number of our centers globally to 17. These centers ensure our solutions can be applied to our customers' products in their local markets.
The center in Jakarta is already having a positive impact on customer relationships and generating new projects. On capabilities, we continue to strengthen our expertise in the key area of sensory and to increase our focus on open innovation as we look to work with partners to develop new technologies and ingredients.
We are also adding growth capacity. We continue to see strong customer demand for both fiber fortification and sugar reduction.
As a result, we are investing €25 million to add new capacity for Non-GMO PROMITOR Soluble Fibres at our facility in Slovakia. This new capacity will come online in the middle of 2024 and represents the first part of a program to add fiber capacity at this site over time.
Dietary fiber is an exciting growth opportunity as people become increasingly aware of the importance of getting more fiber in their diets. The World Health Organization recommends that adults eat at least 25 grams of fiber every day, but most people are not getting enough fiber, and in many cases, nowhere near enough.
This is important as low fiber intake is associated with higher levels of cardiovascular disease and diabetes and studies show that fiber can support gut health and promote calcium absorption.
As shown in the customer survey I talked about earlier, we are increasingly being seen as a partner for our customers for sustainability, and this is now an important part of our customer offering.
In August, our production facility in Brazil became our first site to be powered entirely by renewable energy, including using locally-sourced biomass. In addition, at our production sites across the UK, Netherlands, and Italy, we are now purchasing 100% of our electricity from renewable sources. 20% of global greenhouse gas emissions come from agriculture, which is why our sustainable agriculture programs are so important, both to us and our customers.
In China, our program for sustainable stevia farming is delivering double-digit reductions in greenhouse gas emissions. And in the US, our sustainable corn program is progressing well and we continue to invest in intervention programs to support local farmers.
This includes helping to manage nitrogen levels in the soil to increase crop yields, improve soil health and minimize the impact on local watersheds. Today, sustainability is at the front and center of our business, and I look forward to talking more about our progress in this area in the future.
Turning then to the outlook for the full year. We expect to deliver progress in line with our five-year ambition to the 31st of March 2028, with revenue reflecting both strategic momentum and the impact of the expected pass-through of input cost deflation in the second half.
Therefore, for the year ending the 31st of March 2024 in constant currency, we expect to deliver revenues slightly ahead of the prior year and EBITDA growth of 7% to 9%. We also continue to expect stronger profits from our minority holding in Primient.
In summary then, we delivered a robust financial performance in the first half, successfully navigating a tough external environment. We continue to deliver on our growth-focused strategy, increasing our solution-based business with our customers and investing for long-term growth across R&D, innovation, growth capacity, and sustainability.
Looking ahead, over the next 20 years, the world is facing a major challenge. How do we feed a rapidly growing population with healthier, affordable, and more nutritious food in a way that doesn't harm the planet and also suits modern lifestyles?
Tate & Lyle has been repositioned at the center of the future of food with a clear strategy focused on meeting that challenge. Our extensive portfolio and technical expertise in sweetening, mouthfeel and fortification enables us to create solutions which provide healthier, tastier, more convenient and sustainable food and drink.
That is what consumers want, and that is what Tate & Lyle is focused on delivering. As always, I would like to finish by thanking everyone at Tate & Lyle for their hard work in delivering these results and for living our purpose with great passion and belief. For all their support, I am truly grateful.
Question-and-Answer Session
A - Nick Hampton
Good morning, everyone, and thank you for joining today's half year results presentation. We are now into the live Q&A. As I said in the prerecording, we delivered a robust performance in the first half with good revenue, profit and cash delivery, successfully navigating a tough external environment.
The repositioning of Tate & Lyle as a business focused on creating solutions that meet growing consumer demand for healthier, tastier and more sustainable food and drink is progressing well. Turning now to your questions. And the first question comes from Patrick Higgins at Goodbody. Morning Patrick.
Patrick Higgins
Morning. Thanks for taking my question. Maybe if I could just kind of focus on the volume piece within Food & Beverage Solutions. Could you maybe just give us an idea of how volumes were across regions in terms of destocking versus consumer softness?
And then specifically on the consumer softness piece, could kind of go through end-use markets and where there's particularly pockets of softness? And if you could -- I guess this is maybe a bit challenging, but if you strip out the destocking piece how are you performing relative to that customer base or, I guess, relative to competitors?
Nick Hampton
Sure. There's a lot in that, Patrick. So, let me try and unpick it quite simply. As we tried to do in the statement, we laid out very clearly what we thought the drivers of revenue in the first half were. And of course, important to say that revenue growth was very robust, given the softness of the market environment.
If I look at it at a high level, the 8% of volume that we saw from consumer impact and destocking was roughly half and half and what that would say to us is that at a consumer level, we were performing pretty consistently with the consumer market environment.
Destocking slightly different across regions, although to be honest, quite difficult to read, probably a little bit more of a factory in North America than elsewhere, but not significantly different, actually, when we look at it. And as we looked to consumer behavior, the drivers of it was pretty consistent across the various markets. So consumer is more cash-trapped because of inflation, being more modest about purchases, probably more focused on value than normal, and that played out actually in most categories.
Inevitably, some categories more robust than others as consumers focused on essentials rather than discretionary purchases. But actually, most categories saw similar types of behavior, and you almost have to dig at a subcategory level to really understand any trends. So, what we're seeing is actually quite consistent across the world.
And the only thing I'd add to that is that behavior has been quite consistent across the first half as well. We're seeing quite a consistent trend. There's no significant sign of consumer improvement, but it looks more steady to us, I guess, would be the way of summarizing it. Hopefully, that gives you a little bit more color.
Patrick Higgins
Thank you.
Nick Hampton
So, our next question comes from Karel Zoete, Kepler Cheuvreux. Karel, good morning.
Karel Zoete
Yes, good morning. Thanks for taking the questions. I have one on capital allocation and then the other one on EBITDA growth in H2. Regarding capital allocation, you announced the buyback of expensive debt instruments. The dividend is up nicely.
The question from my side, why not consider a buyback, given the balance sheet you have, but also the valuation of the stock? Is that based on M&A that's between the pipeline? Or what would be considerations not to do a buyback?
Then the question -- because the second question is the drivers for EBITDA growth in the second half of the year. You basically say it's going to be at least 7% year-on-year EBITDA growth on a difficult base. H2 last year was strong. What will be the drivers there because volumes will be a bit softer? Is that really margin expansion and efficiency? I guess more insights on that, please.
Nick Hampton
So, let me take the capital allocation question, and then maybe Dawn will talk about the EBITDA in the second half. So, you're right, we took some actions in the first half of the year to further optimize the balance sheet and funding, which is good. And having the flexibility to do that because of the strength of the balance sheet is clearly important in today's higher inflationary environment.
I mean our capital allocation priority is very simple, and they're consistent with what we said at the Capital Markets Day last year. Firstly, to invest in organic growth. And we're seeing that flow through in the revenue and the EBITDA performance and return on capital.
Secondly, to fund M&A; and thirdly, to maintain our progressive dividend policy. And those are absolutely the near-term priorities for us.
We've already demonstrated the willingness to give cash back to shareholders as we did when we completed the transaction to separate the two businesses. But absolutely today, our focus is on organic growth and M&A.
And the M&A pipeline looks promising, and that's where we're going to focus for now. The question on share buybacks will come back to at another time, I guess. Dawn, do you want to talk about EBITDA in the second half?
Dawn Allen
Yes, sure. So, thanks, Karel. I mean, we're really pleased with our EBITDA performance in the first half. So, 7% up year-on-year, 10% up in terms of FBS performance.
And if I just drill down in the drivers of the FBS performance, that improved 90 basis points in the half. The biggest driver was coming from mix management, which more than offset the headwinds in terms of volume and inflation.
And then actually, a very strong performance on productivity so $70 million delivered in the half, and that enabled us -- that strong productivity performance enabled us to continue to invest in Science, Solutions, and Society.
And you've seen that our investment in solution selling is up 11% in the half. As we look to the second half of the year, I'd expect those drivers to continue. So, I'd expect continued strength in terms of price/mix. We've taken up our productivity target for the full year up to $25 million.
And I think on volume and inflation, as we move through the year, we'd expect to see destocking in terms of slowing down. So, we would expect the volume drag to be less because of that.
But also, as we talked about in our outlook statement, we expect inflation to move from an inflationary environment to a deflation environment. But I do expect we've reiterated it in our guidance in terms of full year EBITDA growth between 7% to 9%.
Nick Hampton
So, Karel, I'd add only one point to that, just a point of emphasis, really, which is the guidance on revenue in the second half is not really a reflection of a concern about further volume challenge. It's more a reflection of the impact of deflation in the fourth quarter.
And in fact, as we go into the fourth quarter, we start to lap the destocking impact that we saw in the fourth quarter of last year. So, we should see some sequential improvements in volume as well.
So, let's move on to the next question, which comes from Lauren Molyneux, Citi. Lauren, good morning.
Lauren Molyneux
Morning. Hi Nick and Dawn. Thanks for taking my questions. Just -- I just wanted to follow up kind of where that last question finished off just on the kind of revenue outlook for the next year. So, Nick, you talked about the pricing impact being what's really kind of dragging down maybe the outlook on the revenue side of things. So, I guess what level of pricing are you expecting to need to -- in order to pass through the input cost? And do you have visibility on your cost inputs into the second half?
And then my second question would be also on the topline around the solutions. So, obviously, quite a strong improvement in solutions of new business wins. So, I was wondering if you could add more color on what's driving this here in terms of platforms or categories where you're seeing strength or solutions resonating with customers and also types of solutions potentially will be quite interesting around cost reformulation versus kind of demand for healthy alternatives, et cetera? And how does this pipeline look into the second half? And how confident are you on that? thank you.
Nick Hampton
So, good questions, both of them. Let me start on the solutions setting side actually and talk a little bit about the pipeline because that gives us huge confidence in the future of the business. So, solutions as a proportion of the pipeline up to 22%, above 20% for the first time as we look forward.
Importantly, part of that as well, a future pipeline is 38% new products. And that's important if you think about managing mix. In terms of the nature of those solutions, it's really a window on what we're seeing both in the market today and into the future.
So, it's a good balance between customers focused on cost reduction and on providing healthy alternatives for consumers. And those are the things we're very much focused on.
When I was in China three or four weeks ago, I did a top-to-top with one of our major global customers. And they talked about the need for five things. They talked about nutrition precisely where our portfolio is focused. They talked about the need for cost because of inflation in the current environment. They talked about sustainability and wanting to do business with suppliers who really have sustainability credentials.
And those three things are really all three things that we're focusing on and the kind of things we're seeing in our pipeline. And that goes across mouthfeel, sweetening solutions and it grows across added fortification with things like fiber, hence the acquisition in China being so important. So, that's sort of a rough summary on the nature of future pipeline.
When I look at the revenue outlook for the second half. Very clear visibility on cost because of the forward cover we've taken and a very clear understanding that we're seeing some deflation as we go into the fourth quarter.
And as we did as we went through the inflationary environment of pricing inflation through, we will clearly give customers the benefits of deflation while trying to manage unit margins as pricing comes down.
And that's really the balance in our forecast for the second half. As we think about the next calendar year, we'll give much more clarity on that when we've been through the pricing round, which is currently in very early stages. You want to add anything?
Dawn Allen
No, I think you covered it.
Nick Hampton
So, hopefully, Laurent that gives you a good sense. So, if we move on then to our next question, which comes from Joan Lim from BNP Paribas. Morning Joan.
Joan Lim
Morning. Thanks for taking my questions. I have two questions. So, the first one was you adjusted FBS volumes and price/mix by five percentage points to exclude the impact from mix management and margin expansion.
I guess this is from the margin reset you took in Q4. So, I -- how have you estimated the impact of this on volume and price/mix, the split of those two? And is this an -- of your strategic mix on top of this margin reset? That's my first question.
Nick Hampton
So, Dawn, you might want to take that one.
Dawn Allen
Yes. So, I think what we've tried to do in terms of the FBS revenue performance in the half, so 5% growth, we've tried to clearly lay out the critical drivers for that growth, the revenue drivers, of which there are three.
The first one is inflation. So, the negative impact in -- sorry, in terms of volume, first one is the negative impact of volume in terms of consumer softness and customer destocking at eight points.
The second point, as you point out, is strategic mix management at positive six points. And then we've got inflation pass-through at seven points and we really see those as the critical drivers.
What we've also done, as you've said, we've also made really clear choices on exiting low-margin business. We called out particular pockets of that business that we've exited. And what you see is the impact of that is to reduce volume, but also it has an equal and opposite impact on price/mix. And both of those are five points.
So, we've been really clear in terms of how much that impact is and we believe it gives a better representation of the three revenue drivers that I've described, which is why we've pulled the five points out because essentially, it's just an offset for the two numbers.
Joan Lim
Okay, that's helpful. Thank you. And then I guess this leads to my second question, which is your topline guidance. So, you expect revenues to be slightly ahead of the prior year. Are you expecting this to be entirely driven by price/mix?
And does this guidance also exclude the impact from this margin resets? Is it going to be also roughly about five points equal for volume and price/mix for the full year?
Nick Hampton
So, let me take that very simply. So the guidance we've given for the full year is netting out all of the impacts of volume, price/mix, inflation and deflation. And the difference in the second half versus the first half really is the impact of deflation on revenue.
The other factors we're expecting to see continue in a sort of similar fashion into the second half with sequential improvement in volume as we hit the fourth quarter and start to lap the destocking last year. So, that's effectively the summary of how we've put the guidance together.
Joan Lim
Okay. So, but you're still expecting volumes to improve and destocking improved through the year?
Nick Hampton
So, we're expecting to see some improvement as we go into the fourth quarter, yes.
Joan Lim
Okay, that’s helpful. Thank you.
Nick Hampton
So, with that, our next question comes from Damian McNeela, Numis. Damian, good morning.
Damian McNeela
Hi. Morning everybody. One for me. Just following on from that around sort of second half pricing or price/mix expectations first half, you delivered six percentage points of growth from strategic mix management. Is that the sort of number that we should expect to see in the second half going forward?
And then perhaps just sort of -- on the customer survey, the improved Net Promoter Score, I mean, are you able to sort of quantify how that -- how your new business pipeline look compared to where you were last year? Is there anything you sort of give us on that?
And I guess one -- final one maybe for Dawn. Just looking at net interest costs. Is there any reason why we shouldn't expect the £4 million in the first half to be the same in the second half the sort of cash balances and less do M&A be the same and you've paid down some of the USPP debt?
Nick Hampton
So, three questions. Let me take the first two and then Dawn can follow-up on that just to maybe add some color on the price/mix. I mean, in broad terms, we're expecting the price/mix effect in the second half to be similar. And longer term, the balance between volume and price/mix will clearly shift over time, but no significant change in the second half, I would say.
But to your question on the Net Promoter Score, I mean, let's start with very encouraging because it tells us that our customers believe we're doing the right things for them and the shift in the score, so up close to 10 points is quite significant, actually. And we are seeing that in the quality of the pipeline.
If you think about the numbers I just shared with you, the proportion of solutions selling up to 22% above 20% for the first time, the proportion of the future pipeline being MPD, close to 40% is really, really encouraging. And overall, the pipeline is growing rather than declining.
So, all of those things demonstrate positive view of the future of the business. As always, the question is how fast the pipeline translates into business, but that's normal. So, that's all very encouraging in the round in what has been quite a tough market environment in the last six to 12 months. Net interest?
Dawn Allen
Yes. So, in terms of net interest, I'd say we're in a really strong position because when you look at our debt, more than 90% of that debt is on a fixed rate which obviously will continue.
And the second part of that is clearly the cash balance that we have. Now, assuming that interest rates remain at the level that they are then I would expect you've got the fixed interest costs from the debt and then you've got the positive impact in terms of the cash balances. So, I think you're right, Damian. I would expect a similar run rate second half to first half.
Damian McNeela
Okay. Very clear.
Nick Hampton
thank you, Damian. So, our next question comes from Alicia Forry at Investec. Alicia, good morning.
Alicia Forry
Hi, good morning and thank you for taking my question. My first one is on the consumer softness. I'm just wondering if I could press you a bit on kind of what gives you the confidence that you can continue delivering the better mix of your products and the better integrated solution selling that I know is your priority because -- your products do, of course, take out some unhealthy things and can be cost effective. In some cases, you are trying to trade the customer up to a more sophisticated and premium solution. So, yes, just a bit of color on how you're thinking about that?
And also, I don't think you mentioned it, but could you confirm whether or not some of this consumer softness that you're experiencing maybe in your view related to the weight loss drugs or whether it's purely economic-related softness?
And then sorry, just a final quick one on the working capital inflow, was that all efficiency driven? Or were you already starting to see some cost deflation in the period? Thank you.
Nick Hampton
So, let me give you a high level on your first two questions. I think they are interrelated. So everything we see tells us that the consumer softness we've seen in the first half and more recently, is all driven by consumer concern about cost of living. And it's all about making tough decisions about disposable income.
And if anything, that is a trend that is probably going to continue for a little bit, but will, of course, change over time. And the confidence in the future of our ability to continue to grow our business beyond short-term economic challenges into the medium term is actually reinforced by things like GLP- 1. So, it's another example of the growing need to deal with the global challenge that's growing about obesity and diabetes.
It's another sign of consumers being concerned about healthier living and of course, a healthier diet being connected to a healthier lifestyle as well. And that's where we've positioned the company.
So, our ability to take sugar out, take fat out but still tasty, healthy alternatives that are affordable and are sustainable is key to the future of Tate & Lyle. And that's what gives us confidence that the consumer trends that we're seeing will play out in a growing business model for us as things normalize from an inflationary perspective. So, those two are sort of connected.
And in terms of the confidence in the near term, it's in the strength of the pipeline that I just described. We continue to see a strengthening pipeline with customers on doing those things. And as the economy starts to recover, there's no doubt that the trend towards healthy living, healthier eating will continue, and therefore, what we do will become more relevant in the world going forward. So, working capital?
Dawn Allen
Yes. So, thanks, Alicia. I'd say we're really pleased with our cash performance this year. So, we're up in the half £15 million, and our cash conversion has increased 14 points to 69%.
And as you point out, a key driver of that is the working capital improvement, and it is driven by a combination of efficiency and inflation, a lot more weighted to efficiency, which is good to see.
And I think as we move through, we expect to see a continued focus on cash and continual optimization of working capital as we move towards our long-term target of 75% cash conversion.
Alicia Forry
Great. Thank you.
Nick Hampton
So, our next question comes from Chris Pitcher at Redburn. Chris, over to you.
Chris Pitcher
Hello. Thank you. Couple from me. On Primient modeling, apologies for going back there again. But could you just confirm how much of their debt is now fixed. And could you give a bit more detail? I can't believe we're digging into this, but on their joint ventures, from past Almex was the largest of the two, and therefore, is it just a currency issue? And have they not been able to take price to offset currency. And could you give us an update on what's going on with Covation PDO. I apologies if I missed that.
Then secondly, if you could just give us a quick minute on your new Chair, David Hearn, with this PE background could we infer that maybe the pace of M&A is going to pick up? I know there's a limit that you can say that.
And lastly, sorry, you said you met with a customer, and they said there were five things that they were interested in. I only wrote down to three. I don't know if anyone else missed the other two. You said nutrition costs and sustainability. I'm intrigued where the other two were?
Nick Hampton
Okay. Let me cover that off. The other two were pace and local. Pace was we need you to help us quickly to help us reformulate quickly and the local is do it in our local markets. We sort of links to the point about our local presence and the increasing breadth of customer innovation centers across the world.
We opened another one in Jakarta and Indonesia in the first half. So, it was just a reinforcement for me of the direction we're taking the company in is absolutely the direction our customers need.
If I come back to Primient. I mean firstly, very, very encouraged by the performance of Primient in the first half. Despite all of the challenging market environments, they delivered good performance, improved operating performance. And obviously, that led to a stronger set of results that we're expecting to see continue into the second half.
In terms of the JVs, the marketplace was tougher in Mexico. Almex is still the biggest JV. And I think the same for Covation, some of the product -- some of the sectors they sell into had a tougher first half than the prior year, driven by the consumer challenges that we're seeing in Food & Beverage as well. But overall, very happy with the progress on Primient's.
And of course, in the first half, we received $54 million of dividends. Sorry, we've received $54 million of dividend this year. The second tranche came just after the close of the first half book. So, that's all very encouraging. And the relationship is strong.
In terms of the debt position, I'll probably defer to Dawn's better understanding of that.
Dawn Allen
Yes. So thanks, Chris. So, I mean, similar to us, Primient actually have strong cash delivery in the half. In terms of the debt piece, remember, they've got around $1 billion term loan, half of which is fixed, half of which is floating, which I think is a good position to be in and they also have access to more liquidity should they need it. But as I said, their cash flow in the half is also very strong. So, I think they're well placed status in terms of financing.
Nick Hampton
So then coming back to your last question about David. Firstly, Dawn and I and the Board are delighted that David is joining us as the chair. He brings a wealth of experience from the food and beverage industry that can only be hugely helpful for us as we continue to focus on growing the company.
His balance between public company, PE, international was all the factor in our excitement about bringing him on Board. And I'm sure he'll play a key role in helping us navigate through both organic and organic growth and M&A. It's not a signal. It's just that he's got a perfect background to come and be a very, very strong share of the taking all over the future.
Chris Pitcher
Excellent. Thanks very much.
Nick Hampton
And our last question comes from Alex Sloane at Barclays. Alex, good morning.
Alex Sloane
Morning Nick, morning Dawn. Thanks for squeezing me in. I've got two questions, if that's okay. The first one, just on some of the comments in the presentation. I mean, you flagged, I think, previously lower cost Chinese imports into Europe as a competitive challenge. I think if I heard you right, you were talking about some challenge on that front in LatAm, especially Mexico.
So, I mean is this a concern that we should be thinking about into the pricing round? And maybe could you frame the scale of that? I mean what percentage of the market is being served by those imports currently versus the historical reference maybe?
And then just the second one, I mean, obviously, we're sort of six months or so on from that WHO guideline on non-sugar sweeteners which was obviously somewhat controversial. But has that had any impact on customer demands from your perspective?
I mean I noted some customers like Nestlé have talked about enzyme solutions to unlock sweetness in dairy naturally without using sweeteners. I mean how are you thinking about that? Could that be an opportunity to get more involved in enzyme solutions? Thanks.
Nick Hampton
So, let me take your second question first, and then maybe Dawn, you can take the question on Chinese imports. So, I mean as you rightly say, it's -- we've moved on from the WHO announcement a few months ago. And look, frankly, we're seeing no change in demand for our sweetening solutions, whether they be nonnutritive artificial or natural.
There's a huge strong demand for what we do because fundamentally, all of the research out there tells us and tells consumers that sugar reduction and lower sugar products are a critically important part of alongside a healthy lifestyle managing weight.
It's not a silver bullet, but it's part of a solution, and that's not going to change going forward. And these products have been tested and are safe and are accredited by the world's most eminent safety bodies, FSAR and the FDA. And that's reflected in still robust demand.
In terms of your point about enzymes, using enzyme technology to create novel solutions to the healthier darts people need is something we're already doing. And something that will be -- is part of our current arsenal and we'll continue to provide of our solution set going forward. So that probably gives you a sense of where we are on that debate. And Dawn would you want to cover off the pricing--?
Dawn Allen
Sure. So, you're right. We have seen we have some imports coming -- we have seen some imports coming across from China. Our view on that would be, if you remember, China was in locked down for a longer period and therefore, there's a kind of almost a buildup of inventory that's clearly needs to be sold through. So, we would see this as a short-term impact.
We're only seeing it in pockets that we've talked about in the statement. I think clearly, what we're focused on is driving solution selling and partnering with our customers in the Net Promoter Score and the brand survey results that we highlighted in the presentation is a really good indication of the strength of relationships that we've got with our customer base.
Alex Sloane
Thank you.
Nick Hampton
So Alex, hopefully, that covers your two questions. And I think we've got one more from Joan Lim at BNP Paribas. So, Joan, back to you.
Joan Lim
Sorry, just one last question and thank you for squeezing this in. On Sucralose, you had an 8% volume decline due to order phasing. What are you seeing in terms of the impact from China reopening? And do you expect volumes to recover in H2? Thank you.
Nick Hampton
I mean, I think as we said, in the presentation and the statement. The volume decline in the first half was more driven by the phasing of orders into the first half of last year. So, we're not seeing a fundamental change in demand. It's more just a half-on-half to order phasing, and we're expecting to see that reflected in the second half of this year. So, nothing significantly different on Sucralose to be honest.
Joan Lim
Okay. But technically, that will be easier comp because the order fees in last year was benefit at H1?
Nick Hampton
That’s correct.
Joan Lim
Okay, that’s helpful. Thank you.
Nick Hampton
Great. Well, thank you all for your questions and for watching the presentation today. So, in summary, we delivered a robust performance in the first half with good revenue, profit and cash delivery, and we continue to progress our growth-focused strategy. We remain well-positioned to benefit from long-term trends towards healthier, tastier, and more sustainable food and drink.
So, thank you for your time, and I wish you all a very good day.
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Tate & Lyle, PLC (TATYF) Q3 2023 Earnings Call Transcript