Tate & Lyle, is focused on the increasing use of alternative ingredients in food and beverage to remove unhealthy components

Business Strategy & Outlook

Tate & Lyle, or T&L, is focused on the increasing use of alternative ingredients in food and beverage to remove unhealthy components (sugar, fat, salt), improve nutritional credentials through added fiber, and increase the shelf life of products. The company has a narrow moat, as the efforts over the last few years to optimize the portfolio, culminating with the sale in 2022 of a controlling stake in the commoditized primary products business unit, have improved the company’s pricing power and competitive position. The company is a market leader in sweeteners, with ingredients that range from high intensity to natural sweeteners, supported by the need to cut calories in food and beverages. The opportunity is substantial as sugar still accounts for 80% of all sweeteners. As the replacement of sugar with more concentrated alternatives comes with significant challenges regarding the product’s mass, stability, and texture, the company’s complementary offering in mouthfeel and fortification is perfectly placed to provide comprehensive solutions for customers.

T&L plans to continue building its expertise in these somewhat niche and interconnected segments of the specialty ingredients market, since other segments such as flavors are already dominated by large players such as Givaudan and IFF, with T&L unlikely to garner any competitive advantage. The above-average revenue growth as T&L steps up its research and development investment and expands the share of revenue coming from integrated solutions—its service-led platform where the company works closely with customers throughout the product development process, combining multiple ingredients to derive a customized solution that best addresses the customer’s needs. The company’s sucralose segment—with business-to-business sales of the Splenda brand—has seen pricing pressures following the entrance of Chinese players, which has led the company to reduce its capacity. The segment’s top-line growth prospects are likely inferior to the remaining business, but given its brand-related intangible assets, the segment can maintain its operating margin above 30%.

Financial Strengths

Tate & Lyle is in strong financial health. The company has low financial gearing, with net debt to adjusted EBITDA expected to be maintained below 1 time following the disposal of the primary products (commodity ingredients) business unit and a USD 800 million undrawn credit facility. Tate & Lyle will continue to generate healthy free cash flows, similar to other ingredient companies and the consumer staples sector as a whole. Acquisitions form an important part of T&L’s strategy as it looks to expand its portfolio and capabilities within its key areas of expertise of sweetening, mouthfeel, and fortification, with the company aiming to provide an even broader portfolio of solutions to customers as well as gain exposure to fast-growing natural ingredients. These acquisitions are primarily financed from free cash flow, which will enable T&L to maintain its solid financial position. Maintaining a relatively conservative balance sheet is wise as it enables the company to weather potentially volatile earnings and affords capacity for future acquisitions should the right opportunities arise.

Bulls Say

Tate & Lyle’s portfolio is well positioned to benefit from secular trends that see consumers demanding healthier, safer, cleaner-label products.
The company has undergone extensive reorganization in order to improve profitability and returns on capital, such as withdrawal from the sugar business and commodity ingredients, allowing management to focus on high-value-added specialty ingredients.
The company’s focus on niche, complementary areas of the food ingredients market could make it the supplier of choice for certain highly specified applications in food reformulation.

Company Description

Tate & Lyle is a global provider of food and beverage ingredients and solutions. Following the sale in 2022 of a controlling stake in its commodity ingredients business, as well as its exit from the sugar business a decade earlier, Tate & Lyle is now focused on specialty ingredients—sweeteners, starches, and soluble fiber. It has 2,700 employees and operates in over 140 countries, with most of its revenue generated in North America.

(Source: Morningstar)

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