Shares in Food Ingredients Producer Tate & Lyle (LSE: TATE) fell 1% in early trading this morning after the company reported on-going supply chain difficulties and further pricing pressure to Sucralose brand SPLENDA.
The unusually long winter in the US caused operational difficulties resulting in a low level of inventory going into 2015. To make matters worse, the SPLENDA sucralose facility in Singapore was shutdown for an extended period following an industrial accident. While Tate did everything it could to meet demand from customers, including air freighting stock, buying-in additional products and making sub-optimal production runs, some sales were still lost due to product unavailability. The total cost of this operational and supply chain disruption was 31m, and management expect a further 10m cost to arise in the second half.
Management have begun a comprehensive end-to-end review of their supply chain, led by the Chief Financial Officer Nick Hampton. The investigation aims to find any potential weak spot in the demand, supply and planning processes to ensure there is not a repeat of the aforementioned incidents.
The company reported a difficult first half for SPLENDA Sucralose, after the Singapore Facility shutdown and price erosion combined to impact sales by 18m. Management warned that the average price of SPLENDA over the full year was expected to fall 25%. While sucralose continues to be a widely used ingredient, the global market continues to be extremely competitive and management are reviewing how best to maximise returns from this product.
Volumes for Specialty Food Ingredients increased 2%, but the department suffered exchange rate impact and the aforementioned SPLENDA and operational issues, resulting in adjusted profit falling 41%. Bulk ingredients suffered the same problems, with sales decreasing 16% at constant currency.
Looking forward, the company expects the attractiveness of global markets and the strong growth platform the company has developed for their Specialty Food Ingredients department to drive long-term returns for shareholders.
Adjusted operating profit for the first half came in at 117m, down from 187m for the same period last year.In spite of the temporary problems, the board approved a 5.1% hike to the interim dividend.
Management expects a solid performance from Specialty Food Ingredients and Bulk Ingredients in the second half, although this will largely be offset by a softer performance in SPLENDA, leading management to predict group adjusted profit of between 230m and 245m, below last years 290m.
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Zach Coffell has no position in any shares mentioned. The Motley Fool UKrecommends shares in Tate & Lyle. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.