Chief Executive’s review

Javed Ahmed – Chief Executive (photo)

Review of the year

Overview

Tate & Lyle delivered a solid performance in the face of challenging conditions in a number of our markets. Adjusted operating profits from core value added food ingredients grew strongly, increasing by 22% (14% in constant currency) to £131 million. Profits within primary ingredients in the Americas and Europe were 22% below the prior year at £98 million (27% in constant currency), as lower co-product income and weaker industrial profits adversely impacted results.

Sales for the year were £3,506 million, 1% lower (6% in constant currency) than the prior year. Adjusted operating profit of £298 million was in line with the prior year (7% lower in constant currency). Adjusted profit before tax was £229 million, 7% lower (14% in constant currency) than the prior year, reflecting an increase of £16 million in the net finance expense for retirement benefit plans. Adjusted diluted earnings per share of 38.9p were 2% higher (2% lower in constant currency), benefiting from a lower effective tax rate of 20.4% (2009 – 27.3%). Exchange translation increased adjusted profit before tax by £19 million compared to the prior year. Loss before tax after exceptional items and amortisation of acquired intangible assets was £61 million compared to a profit of £113 million in the prior year.

Total net exceptional charges before tax of £276 million (2009 – £119 million) have been recognised in the year.

With regard to our plant in Fort Dodge, Iowa, in the last few months we have conducted detailed analyses of the end markets which the plant would supply under our new capital management processes. The continuing depressed and volatile outlook for ethanol, and uncertain conditions in industrial starch and corn gluten feed markets, do not provide any basis to complete and commission the plant.

Changes in feed and energy markets, together with the reconfiguration of technology required following our experience of installing new equipment at our Loudon plant, along with remobilisation costs, would mean that, if we were to complete Fort Dodge, total additional costs would now be in the region of £70 million.

Factoring in the risks associated with future returns from the plant, including the length of time to complete, regulatory uncertainty and a continuation of the current market conditions, we have concluded that the plant is highly unlikely to be completed or commissioned in the foreseeable future. As a result, the facility has been mothballed and has been written down to £17 million, leading to an impairment of £217 million which has been recognised as an exceptional charge in the 2010 financial year. A further exceptional charge of approximately £25 million will be recognised during the 2011 financial year in respect of long-term contracts relating to the facility. We will continue to seek ways to maximise shareholder value from the Fort Dodge plant in these circumstances.

Net debt decreased by £417 million, or 34%, to £814 million, driven primarily by strong free cash flows from continuing operations. Before the effects of exchange, net debt decreased by £338 million. The impact of exchange movements during the year, which reduced debt by £79 million, was due principally to the strengthening of sterling against the US dollar by 6% year on year.

The Board is recommending a maintained final dividend of 16.1p (2009 – 16.1p), making a full-year dividend of 22.9p per share, in line with the prior year. The proposed final dividend will be paid on 30 July 2010 to all shareholders on the Register of Members at 25 June 2010.

During the year, we conducted a thorough, fact-based review of the Company’s current position and a detailed analysis of the opportunities and challenges we face. Based on this review, we are implementing a number of fundamental changes to the way we are organised, in order to refocus the Group to deliver sustainable long-term growth. These changes are described in greater detail below.

Safety

Safety remains the highest priority for us. We are committed to providing safe and healthy working conditions for our employees, contractors and visitors. Every year, we measure and report our safety performance and we aim for continuous improvement. In 2009, our Group safety index improved by 3% although our Group contractor safety index worsened after significant improvements in 2008. Safety, including that of our contractors, will continue to be a major area of focus for 2010 as we work towards our target of a safety index of zero for all our operations. In this regard, we were saddened to learn that last week, a fatality occurred at our joint-venture plant in Turkey. A full investigation is underway.

Delivering on our short-term priorities

At the beginning of the year, recognising the need to act decisively and quickly in the face of the global economic downturn, we set out our three near-term financial priorities for the business: to optimise working capital; implement tight capital expenditure control; and reduce our cost base.

I am pleased to report that, due to the outstanding efforts of our employees across the business, we have made significant progress in each of these areas. Working capital reductions generated £291 million during the year, with improvements delivered by each operating division and within each major area of the working capital base. Capital expenditure of £79 million represented 68% of depreciation, in line with our commitment stated at the beginning of the financial year to hold expenditure below the annual depreciation charge. Underlying costs reduced by £30 million in the year compared to the comparative period, including the cost savings achieved from rationalising the sucralose manufacturing footprint, with reductions achieved through our focus on all areas of the cost base.

A stronger balance sheet

The Group’s balance sheet has been strengthened significantly during the year. Net debt was reduced by 34% to £814 million at 31 March 2010 (from £1,231 million at 31 March 2009). This reduction has been achieved through a relentless focus on cash management within every area of the business. Tate & Lyle is a strongly cash generative business, and focus on cash management will remain an ongoing priority.

The key performance indicators of our financial strength, the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) and interest cover, remain within our internal targets. Consistent with the Group’s financial strategy at least to maintain our investment-grade credit ratings, during the year we tightened our maximum target for net debt to EBITDA to 2.0 times from 2.5 times. At 31 March 2010, the net debt to EBITDA ratio was 1.8 times (2009 – 2.4 times), within our new target and comfortably within our bank covenants. Interest cover on total operations at 31 March 2010 was 5.8 times (2009 – 6.1 times), again ahead of our minimum target of 5.0 times and well ahead of our bank covenants.

During the year we announced that, with a view to containing our pension costs and reducing balance sheet volatility, we had entered into consultation with employees who were active members of the UK Group Pension Scheme on the closure of that scheme to future accrual from April 2011. Following completion of the consultation process, the Company will close the Group scheme from April 2011. We also took the decision to remove the early retirement discretion from November 2009. We have recognised an exceptional gain of £42 million in the 2010 financial year arising from these changes.

Overview of divisional business performance

Adjusted operating profit at Food & Industrial Ingredients, Americas was £178 million, 2% below the prior year (10% in constant currency). Operating profits from value added food ingredients increased by 18% (9% in constant currency), reflecting firmer pricing and steadier demand patterns. Operating profits in primary food ingredients were below the prior year due to lower co-product income from the sale of corn oil. Performance from primary industrial ingredients, comprising ethanol, native industrial starches and animal feed co-products was below the level of the prior year due to lower animal feed co-product income and reduced industrial starch margins.

At Food & Industrial Ingredients, Europe, adjusted operating profits of £54 million were 6% above the prior year (4% in constant currency). Within Single Ingredients, profits from primary products were lower as reduced levels of capacity utilisation impacted unit margins, particularly in the second half of the year, although the business continues to benefit from the relative stability afforded by isoglucose quotas in Europe. Demand for value added food ingredients was steady, and unit margins increased with improved pricing. Food Systems performance was above the prior year, as demand in key markets proved relatively robust in the face of the economic downturn.

Adjusted operating profits within the Sugars division increased by 150% to £30 million (100% in constant currency) reflecting improved margins in our EU sugar business during the second half of the year following the final institutional price change on 1 October 2009. Performance also benefited from lower energy and distribution costs. Our molasses and storage business performed well in the year, with operating profit of £13 million, although this was below the exceptionally strong profits achieved in the comparative period when the sharp spike in cereal prices during the summer of 2008 led to very high demand and prices for molasses.

Sales of SPLENDA® Sucralose of £187 million were 11% above the prior year (4% in constant currency). Following the significant yield improvements achieved during the 2009 financial year, and the consequent decision to produce all sucralose at our fourth-generation facility in Singapore, the process of mothballing the plant in McIntosh, Alabama was completed ahead of schedule. Adjusted operating profits decreased by 7% to £67 million (9% in constant currency) due to one-off credits of £4 million in the prior year, certain costs in the current year associated with the rationalisation of the manufacturing footprint and the relatively high costs in opening inventory which impacted cost of sales in the 2010 financial year.

Central costs increased to £31 million from £18 million in the prior year. During the year, we incurred one-off costs of £5 million related to the review and reorganisation of the Group’s activities, while the prior year included one-off credits totalling £6 million.

Exceptional items

Exceptional items within our continuing operations during the year totalled a net charge of £276 million (2009 – £119 million).

Following a detailed analysis of end markets, in light of costs of around £70 million to complete and commission our plant in Fort Dodge, and factoring in the risks associated with future returns from completing and operating the plant, we have concluded that the plant is highly unlikely to be completed or commissioned in the foreseeable future. As a result, the facility has been mothballed and written down to £17 million, leading to an impairment of £217 million which has been recognised as an exceptional charge in the 2010 financial year. A further exceptional charge of approximately £25 million will be recognised during the 2011 financial year in respect of long-term contracts relating to the facility.

As reported at the half year, we recognised an exceptional charge of £55 million following the decision to mothball the sucralose manufacturing facility in McIntosh, Alabama.

The reorganisation of our food systems business in Europe will lead to exceptional cash costs totalling £7 million, of which £3 million has been recognised in the 2010 financial year, with the balance recognised in the 2011 financial year.

In the Food & Industrial Ingredients, Americas segment, following a review of the portfolio of research and development projects in the context of our new strategic focus, we have written off £28 million relating to a xanthan gum pilot plant and other related assets following the decision not to pursue these products to full-scale production.

Our sugar refining business in Israel continues to experience extremely challenging market conditions, with surplus refined sugar supplies placing considerable pressure on refining margins. Given the continued decline in the business’s commercial prospects, we have recognised a further impairment charge of £15 million in addition to the charge of £9 million recognised in 2009.

An exceptional gain of £42 million has been recognised following the decision to close the UK Group Pension Scheme to future accrual from April 2011 and to remove the early retirement discretion from November 2009.

The tax impact on continuing net exceptional items totalled a £112 million credit (2009 – £44 million credit). In addition, an exceptional tax credit of £15 million has been recognised in the year relating to the release of certain tax provisions following the resolution of issues with tax authorities.

Outlook

Looking forward, we anticipate that steady demand patterns for value added food ingredients will continue and, combined with the benefits of a single plant sucralose manufacturing base, we expect a modest improvement in value added food performance in the 2011 financial year.

Within our primary markets, we expect continuing modest decline in US domestic sweetener demand to be largely offset by increased demand from Mexico, and stable demand in other markets for primary food ingredients. Despite some improvement in demand patterns, industrial starch margins are expected to remain at lower levels, reflecting industry overcapacity putting pressure on pricing, and we see little near-term improvement in ethanol markets. Within Sugars, whilst unit refining margins have returned, profitability in the 2011 financial year will be constrained by short-term supply challenges.

Overall, we anticipate progress in the coming financial year as we maintain our focus on the disciplines necessary to continue delivering strong cash flows from our business.

"Through resolute focus on our financial priorities, we have significantly strengthened the balance sheet."