Chief Executive’s review

Our objective remains to build a platform on which we can deliver steady and sustainable long term growth and value for shareholders. We remain on track to deliver on this objective.

Javed Ahmed – Chief Executive (photo)
Javed Ahmed
Chief Executive
In Speciality Food Ingredients, adjusted operating profit increased
by 26% (25% in constant currency).

Results for the continuing operations are adjusted to exclude exceptional items and amortisation of acquired intangible assets. Except where specifically stated to the contrary, this commentary relates only to the adjusted results for the continuing operations. A reconciliation of statutory and adjusted information is included at Note 43.

Overview of Group’s financial performance

Tate & Lyle performed well in the year achieving steady volume growth across a number of our markets, very strong returns from co-products and lower sucralose manufacturing costs.

Sales for the year were £2,720 million (2010 – £2,533 million), an increase of 7% (5% in constant currency) on the prior year. In Speciality Food Ingredients, sales increased by 2% (2% in constant currency) to £805 million (2010 – £788 million) with sales volumes up by 7%. The rate of sales growth was impacted by reduced selling prices for SPLENDA® Sucralose reflecting our strategy of securing long-term volume incentive contracts with our customers. Within Bulk Ingredients, sales increased by 10% (7% in constant currency) to £1,915 million (2010 – £1,745 million).

Adjusted operating profit increased by 20% (17% in constant currency) to £321 million (2010 – £268 million). In Speciality Food Ingredients, adjusted operating profit increased by 26% (25% in constant currency) to £206 million (2010 – £163 million), driven by increased sales volumes, operational leverage, improved product mix and lower SPLENDA® Sucralose manufacturing costs. The effect of exchange translation was to increase adjusted operating profit by £2 million. In Bulk Ingredients, adjusted operating profit increased by 15% (11% in constant currency) to £157 million (2010 – £136 million), driven by volume growth, very strong returns from co-products and an improved performance from ethanol offset by lower margins in sweeteners and industrial starches. Higher corn prices, particularly in the second half of the year, resulted in an additional £16 million of co-product returns compared to the prior year. The effect of exchange translation was to increase adjusted operating profit by £5 million.

Central costs, which include head office, treasury and reinsurance activities, increased by £11 million to £42 million reflecting the costs associated with strengthening the Group’s senior management team, costs associated with our financing portfolio and one-off costs of £6 million in the first half relating to the review of the Group’s activities.

The net finance expense from continuing operations decreased from £72 million to £58 million principally as a result of lower pension interest expense. Adjusted profit before tax was up 34% (32% in constant currency) to £263 million (2010 – £196 million) reflecting the strong operating performance and reduction in net interest charge.

Adjusted diluted earnings per share increased by 36% (34% in constant currency) to 45.7p benefiting from improved operating performance and a lower effective tax rate of 18.5% (2010 – 20.8%).

Exceptional items on continuing and discontinued operations totalled a charge of £48 million (2010 – £276 million). Within continuing operations there was a net £10 million gain on the sale of the Fort Dodge facility and £15 million of costs associated with the business transformation programme. Within discontinued operations a loss of £55 million was booked on the disposal of the EU Sugar Refining Operations (EU Sugars), which remains subject to closing adjustments and adjudication as discussed in Note 35, and a gain of £12 million on the disposal of Molasses.

Balance sheet

We continue to focus on managing our working capital closely resulting in our average quarterly cash conversion cycle falling from 45 days to 34 days.

The key performance indicators (KPIs) of our financial strength, the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) and interest cover, remain well within our internal targets. At 31 March 2011, the net debt to EBITDA ratio was 1.1 times (2010 – 1.8 times), against our target of 2.0 times. Interest cover on total operations at 31 March 2011 was 6.9 times (2010 – 5.8 times), again ahead of our minimum target of 5.0 times.

The Group’s balance sheet was strengthened significantly during the year. Net debt reduced by 43% to £464 million at 31 March 2011 (31 March 2010 – £814 million). This improvement in net debt, which builds upon the considerable reduction achieved in the prior year, was driven by the disposals of EU Sugars, Molasses and Fort Dodge, resulting in a net cash inflow of £316 million, and the underlying cash generated by the business.

Return on capital employed increased from 13.6% to 20.6% as a result of increased profits, a reduction in operating assets reflecting the writedown of Fort Dodge, the reduced average levels of working capital within the business and exchange rate effects.

Dividend

The Board is recommending a 5% increase in the final dividend to 16.9p (2010 – 16.1p) making a full year dividend of 23.7p (2010 – 22.9p) per share, up 3.5% on the prior year. Subject to shareholder approval, the proposed final dividend will be due and payable on 5 August 2011 to all shareholders on the Register of Members at 1 July 2011. In addition to the cash dividend option, shareholders will also be offered a Dividend Reinvestment Plan (DRIP) alternative. The DRIP replaces the scrip alternative that was previously available to shareholders.

Safety

We have no higher priority than safety and are committed to providing safe and healthy working conditions for all our employees, contractors and visitors. Whilst we are pleased that the safety performance at most of our locations improved in the 2010 calendar year, and that our safety performance continues to compare favourably against the industry, the Group’s overall safety performance (as detailed in the KPI table in the Key performance indicators section) deteriorated in 2010. Having set ourselves very high standards, we take any reduction in performance very seriously. A detailed plan has been put in place to drive an improvement in safety performance which our global safety teams, employees and contractors are working hard to embed across the Group.

"Our new operating model is simple and transparent and provides an efficient platform for future growth. "

Focus, fix, grow: update

As we set out in May 2010, Tate & Lyle’s strategy is to grow our Speciality Food Ingredients business supported by cash generated from Bulk Ingredients. To deliver on this strategy, and to reinvigorate Tate & Lyle, we have taken a number of steps during the year to ‘focus, fix and grow’ the business.

Focus

We have disposed of a number of businesses and assets to ensure that our resources are focused on delivering our strategy and maximising returns to shareholders. During the year we sold EU Sugars, Molasses, Fort Dodge and, after the year-end, we announced the conditional sale of our Vietnam sugar interests. As a result of these disposals, Tate & Lyle is a more focused, less complex business with a reduced exposure to commodity markets.

Fix

The new operating model implemented on 1 June 2010 based on two global business units, Speciality Food Ingredients and Bulk Ingredients, supported by a global unit dedicated to driving growth, Innovation and Commercial Development, and shared support services is being embedded. This new operating model is simple and transparent and provides an efficient platform for future growth, both organically and through bolt-on acquisition. We have also taken steps to strengthen the customer-facing areas of our business – for example, the commercial organisations of the speciality and bulk businesses have been separated and are now fully focused on serving their different end markets.

In May 2010, we announced two major two-year initiatives to transform our operational capabilities – firstly, to implement a common global IS/IT platform and secondly, to provide global support services through the use of shared service centres. After a detailed and thorough planning process, both initiatives were launched on 1 January 2011 and are making good progress. Following an evaluation of a number of different locations, the decision was made to locate our global Shared Service Centre in Łódź, Poland. The new centre is expected to be operational by the end of 2011 with the various services to be provided migrated to the new centre in a phased process over a 12- to 15-month period. The new IS/IT platform will also be implemented via a phased process starting in the first half of 2012.

Building a high-performance culture is a key part of the ‘fix’ phase. To help achieve this, during the year we put in place a new global performance management system, a new global sales incentive system and established common global metrics in areas such as working capital, customer service and quality. Ensuring we have the right skills and talent in the business is also very important. We are developing our high potential employees by providing them with more training and opportunities to learn, particularly with international assignments, and are also recruiting new staff both to fill skills gaps and to refresh our talent base.

The new process for capital investment planning and implementation has now been fully embedded within the organisation. All new investments are now evaluated against clear strategic and financial criteria with greater scrutiny and clear execution milestones for approved investments.

Grow

The Innovation and Commercial Development (ICD) group, which was formed on 1 June 2010, has made good progress during the year working closely with customers on product development and innovation initiatives. ICD is responsible for the innovation pipeline and, during the year, the processes used by ICD to manage and review the pipeline, and the way it launches new products, were completely overhauled. During the year we launched RESISTAMYL™ 140, a bakery cream starch in Europe, and PROMITOR™ Soluble Corn Fiber 85 in the USA and Latin America. We also recently announced a five-year strategic partnership agreement with BioVittoria Ltd for the exclusive global marketing and distribution rights for BioVittoria’s monk fruit extract, marketed under the PUREFRUIT™ brand name. PUREFRUIT™ is the only fruit-based calorie-free sweetening ingredient available today and is a good addition to our sweetener and wellness portfolios.

To enhance how we engage with our customers, and improve our access to them, in October 2010 we announced that we would be establishing a new Commercial and Food Innovation Centre in Chicago, USA. The centre, which is due to be operational in early 2012, will be the global headquarters of ICD and will feature laboratories, a demonstration kitchen, sensory testing, and analytical and pilot plant facilities.

The underlying global consumer trends of health and wellness and convenience continue to underpin long-term growth in the speciality food ingredients market. Customer demand for both new and existing products that meet consumers’ needs in these key areas remains strong, particularly for products that can help address rising levels of diabetes and obesity in the developed and, increasingly, the developing world. Cost optimisation in the face of high and volatile commodity (e.g. sugar) prices is also driving demand. In light of the strong pipeline of demand for SPLENDA® Sucralose both from existing and new customers, and having carried out a comprehensive review of the available options, we have decided to restart sucralose production at our mothballed facility in McIntosh, Alabama, USA. The restart of production, which we expect to take place during the first half of financial year 2013, reinforces our commitment to the sucralose business, provides further resilience in our supply chain and further strengthens our position as the leading global manufacturer and supplier of sucralose.

We are also looking to build our business and capabilities in two areas where we see long-term growth – new customer segments and emerging markets. Dedicated resources have now been put in place in Europe and the USA to serve small and medium enterprise (SMEs) and private label customers. In emerging markets, we have changed our senior management team in Asia Pacific to provide fresh impetus to our efforts in that region. We are also building new application laboratories in Mexico and Brazil to add to our global network, and have strengthened our sales teams in both Latin America and China.

"The grow phase
is beginning to
yield some small
but tangible
benefits. "

In our Bulk Ingredients division, we are looking at ways to diversify our business by leveraging our fermentation expertise and facilities to partner with businesses in the bio-based materials industry. In November 2010, we signed an agreement with Amyris under which Tate & Lyle will produce farnesene at its facilities in Decatur, Illinois, USA with the end product being distributed by Amyris. Then in March 2011, we signed an agreement with Genomatica under which we will dedicate a demonstration-scale production facility in Decatur for exclusive use by Genomatica for the scale-up of the Bio-BDO process.

Costs

The total costs associated with the delivery of the new Commercial and Food Innovation Centre are expected to be £37 million and the common IS/IT platform and global support services to be £57 million. Of the total amount of £94 million, £40 million is expected to be treated as exceptional costs within the income statement and £54 million as capital expenditure. During the financial year 2011, £6 million of capital and £10 million of exceptional costs were incurred and we anticipate around £65 million of expenditure in relation to these projects during the year ending 31 March 2012. The remaining expenditure relating to IS/IT and global shared services will be incurred in the year ending 31 March 2013. We expect the investment made in the common IS/IT platform and global support services to pay back over a period of three years.

Risk management

We have embedded a framework of risk management into the various programmes undertaking the initiatives to focus, fix and grow the business, to address the execution risk associated with them. This framework has been supplemented by internal and external risk and assurance activities over the life of the programmes.

Conclusion

We have taken a number of important steps during the year to deliver on our commitment to focus, fix and grow the business. The focus phase is now largely complete and the fix phase is progressing well, although there is still more work to do. Whilst the grow phase is beginning to yield some small but tangible benefits it is still early days. Our objective remains to build a platform on which we can deliver steady and sustainable long-term growth and value for shareholders. We remain on track to deliver on this objective.

Javed Ahmed
Chief Executive

26 May 2011