profit increased by 26% (25% in constant
In food starches, increased demand for starch derivatives and the poor availability in Europe of potato-based starches due to the poor harvest, has tightened European industry capacity resulting in increased demand for corn-based starches and a firming of starch margins overall. A short supply of tapioca-based starches in Asia resulted in an increase in corn-based modified food starch sales in the region. In the USA and Europe the continuing, albeit gradual, recovery from the recession has seen a strengthening demand for modified food starch in the convenience food industry with innovation in snacks leading the recovery.
Continuing high and volatile sugar prices have had a positive impact on demand for starch-based speciality and high-intensity sweeteners. Increased regulation in some markets, notably Latin America, where some countries are now mandating stricter labelling of sugar levels in foods or restricting the use of competing sweeteners, further contribute to this trend.
Rising levels of obesity and diabetes in both the developed and emerging markets as well as the high and volatile price of sugar continue to support the market for high-intensity sweeteners. Sucralose again increased its value share of the high-intensity sweeteners market, increasing from 27% to 28%. SPLENDA® Sucralose’s share of the global market for sucralose remains approximately 90%.
The increased focus on healthier lifestyles is also driving demand in the health and wellness space and we have seen robust growth in this area driven by new product launches during the year. In addition, the favourable opinions granted by the European Food Safety Authority (EFSA) for polydextrose and sucralose in April 2011 are expected to increase the focus on these ingredients as key contributors to healthy diets.
Within Food Systems, a key driver of growth continues to be the need for customers to develop and formulate more cost effective solutions against a backdrop of high commodities prices.
Sales volumes increased by 7% with volume growth across all value-added product categories. Sales increased by 2% (2% in constant currency) to £805 million (2010 – £788 million). Adjusted operating profit increased by 26% (25% in constant currency) to £206 million (2010 – £163 million). The increase in operating profit and margin was driven by higher volumes, operational leverage, improved product mix and lower sucralose manufacturing costs. The effect of exchange translation was to increase adjusted operating profit by £2 million.
This division comprises three broad product platforms namely: starch-based speciality ingredients, high-intensity sweeteners and food systems.
Starch-based speciality ingredients
In starch-based speciality ingredients sales increased by 4% (2% in constant currency) to £434 million (2010 – £418 million). Margins increased by five percentage points and our aim is to hold on to most of these margin gains during financial year 2012. The benefits of operational leverage derived from selling additional volumes of higher margin products with only a relatively small uplift in our fixed cost base was the key driver of the profitability growth of this product segment.
In modified food starches, sales volume increases were driven by increased demand across all regions. Steady growth in developing markets, especially the Asia Pacific region, was driven by the demand for more convenience and manufactured foods. During the year we launched RESISTAMYL™ 140, a bakery cream starch, in Europe and the initial sales response has been encouraging.
Speciality corn sweeteners benefited from higher sales volumes in Europe, the USA and developing markets, particularly Latin America on the back of high and volatile sugar prices.
The successful launch of our high-fibre, low-sugar and low-calorie prebiotic fibre – PROMITOR™ Soluble Corn Fiber 85 – in the USA and Latin America has driven growth in our health and wellness platform which we expect will continue to benefit from the consumer trend towards healthier lifestyles. During the year we also commissioned the first polydextrose fibre manufacturing operation in Europe, providing our European customers with a shorter supply chain and a broader product range. We are very pleased with the customer reaction to our fibre product range. As high-value products, their growth has improved product mix leading to an improvement in margin.
Whilst sales to developing markets increased strongly across this product category during the year, they are building from a low base and thus the contribution to operating profit remains modest.
Within high-intensity sweeteners, we saw good sales volume growth during the year. As expected, average selling prices were lower than the comparative period, reflecting our strategy of securing long-term sucralose contracts with volume incentive arrangements. As a result, sales by value decreased by 1% (3% in constant currency) to £185 million (2010 – £187 million). Looking forward, we expect the decline we have seen in selling prices for SPLENDA® Sucralose to moderate towards the end of this financial year as contracts renew. A reduction in SPLENDA® Sucralose manufacturing costs was an important driver of increased profitability in this product segment and Speciality Food Ingredients overall.
We have seen continuing strong growth in demand for SPLENDA® Sucralose. This growth has come not only from more mature markets such as Europe and the USA but also emerging markets, particularly Asia and Latin America where, as in developed markets, obesity and diabetes is becoming more prevalent. These markets provide an excellent opportunity to expand our footprint where the taste preferences of consumers for beverages and other products are less well established and where the heat stability of SPLENDA® Sucralose make it well suited to less well developed supply chains. In addition, we have also seen increased demand for SPLENDA® Sucralose from customers looking to use more cost-efficient alternatives in an environment of volatile and high-priced sugar.
We expect these long-term structural drivers to sustain the growth levels achieved over the last few years, supported by a strong pipeline of demand for SPLENDA® Sucralose both from existing and new customers. This means that we will need further capacity to meet future demand and as a result we are going to restart production of SPLENDA® Sucralose at McIntosh, Alabama, USA during the first half of the year ending 31 March 2013. The decision to restart production at McIntosh, which was taken following a comprehensive review of alternative options, 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 anticipate the current steady demand patterns to continue and a year of good sales growth. "
In restarting McIntosh, we will incur approximately £3 million of additional costs which will reduce profit in the year to 31 March 2012 and the loss for the plant will be around twice that amount the following year as fixed costs increase. The increase in fixed costs includes the impact of additional depreciation as the plant is brought back into operation. We plan to operate the two plants in such a way as to minimise the additional fixed costs incurred and expect to achieve good levels of operational leverage as volumes increase.
In May 2009, following the significant increase in manufacturing yields achieved during the 2009 financial year, we announced the mothballing of the McIntosh facility and that production of all SPLENDA® Sucralose would take place at our Singapore facility. At that time, we recognised an impairment of £97 million and took a provision of £55 million to cover the cash costs associated with mothballing McIntosh, in anticipation of cash payback over three years. In restarting McIntosh we expect to reverse approximately £50 million of this impairment this financial year, adjusting the original amount by the notional depreciation over the last two years and for some equipment which needs to be replaced. We expect to incur a further £13 million of capital expenditure this financial year to bring the plant back into operation and will employ more working capital once we restart production. We have achieved the annual savings from the mothballing as anticipated but expect to be able to release approximately £20 million of the original £55 million provision this financial year once we re-commission the facility. This saving more than covers the cash costs of the restart.
During the year, sales from Food Systems increased by 2% (3% in constant currency) to £186 million (2010 – £183 million) impacted by weaker second half volume on the back of tougher trading conditions in some markets, notably Russia. Volume growth of 4% was driven by increases in Asia Pacific, the USA and South Africa. We continue to leverage our product formulation expertise to provide cost-effective solutions for our customers against a backdrop of high and rising prices in raw materials.
In Speciality Food Ingredients, we anticipate the current steady demand patterns to continue and a year of good sales growth. The lower sucralose manufacturing costs are now reflected in the performance of this division and, accordingly, the level of profit growth in the coming financial year is expected to be more modest than the strong result achieved in financial year 2011.