Tate & Lyle's latest trading update is encouraging, but it underlines how challenging life is in the shadow of the EU's new sugar regime.
In addition, fears over the threat to the company's sucralose monopoly have again resurfaced.
The update, issued this week before the company enters its closed period for the year ending 31 March 2006 and prior to its meeting with stockbrokers' analysts, nonetheless sees the British ingredients giant in bullish form.
"Since the update on 25 January 2006 Tate & Lyle's trading performance has been generally encouraging," said the company in a statement yesterday.
But the conditions in which Tate & Lyle finds itself operating remain daunting. EU sugar reforms, which come on line in July, will see the price of the commodity cut by 36 per cent. This will likely result in a substantial impairment charge on some of its related assets, currently valued at £ 750 million.
And though the firm's flagship sweetener Splenda has continued to perform well despite increased energy and ingredient costs, reports have re-emerged that Bangalore-based Pharmed Medicare is working on its own sucralose plant.
Food Navigator first broke this story in January. A similar report this week in the Economic Times of India has coincided with a dip in the price of Tate & Lyle shares.
Shares slipped 2.4 percent to 572 pence by 0810 GMT to be the FTSE-100's biggest loser on Wednesday.
One reason for such jitters is the fact that Tate & Lyle makes a fifth of its profits from its zero-calorie Splenda sucralose product. If Pharmed Medicare succeeds in developing an alternative, it would put the firm into direct competition with the UK ingredient giant.
This could see sucralose prices slashed.
"We believe that the combination of our patent portfolio with the existing Tate & Lyle portfolio will pose a significant challenge to any third commercially viable non-patent infringing manufacturer," Pharmed president Sundeep Aurora told FoodNavigator earlier this year.
Nonetheless, the interim report is mildly positive. It reveals that Food & Industrial Ingredients, Americas has performed strongly, benefiting from higher selling prices since the beginning of the calendar year, and from volume growth in value added food ingredients.
But favourable raw material costs and improved selling prices in Food & Industrial Ingredients, Europe only partially mitigated the impact of higher energy costs and significantly lower sweetener prices.
The company says that these lower prices were caused by an oversupply of sugar in the market and impending changes to the EU sugar regime, as reported in the firm's November 2005 and January 2006 trading updates. However the company claims that a decline in earnings for Sugars, Europe has been offset by a strong performance from Tate & Lyle Sugar Trading.
In addition the company says that Sugar operations in Sugars, Americas and Asia continue to perform in line with its expectations. At the year end the Canadian sugar business is likely to benefit from a more substantial mark-to-market gain on raw sugar inventory than in recent years due to the prevailing world sugar price.
The fixed assets and goodwill of those business units affected by the EU sugar regime are expected to total approximately £ 750 million at 31 March 2006, before any impairment. The review is likely to result in a substantial impairment of these assets, the quantification of which will be contained in the preliminary announcement of results on 25 May 2006.
Finally, net debt at 31 March 2006 is expected to be significantly higher than the £ 612 million reported at the half year. Tate & Lyle says that this is due to continuing high levels of capital expenditure in excess of depreciation as we invest for growth, and a further increase in the working capital outflow relating to sugar trading activity and increased world sugar prices.
The working capital movement relating to sugar trading is expected to reverse in the financial year to 31 March 2007.
The preliminary announcement of Tate & Lyle's results for the year ending 31 March 2006 will be made on 25 May 2006.