Ahead of the publication of its half-year results in November, the British-based group said it has had to slash prices for its sucralose sweetener to counter fierce competition from the Chinese market.
Tate & Lyle now expects a full year profit of £230m to £245m - around 20% lower than analysts had expected. The firm now predicts prices of its Splenda Sucralose will fall by around 25% in the 2015 financial year, compared with previous guidance of a 15% drop issued in February.
Shares in the food ingredients group plunged more than 17% in response to the warning, meaning that shares are now down by around 25% this year.
“The Group’s performance in the first half has been extremely disappointing as we have faced significant manufacturing and supply chain challenges, and intense competition in Splenda Sucralose,” said chief executive Javed Ahmed. “I have instigated an immediate review of our planning and supply chain processes, led by our Chief Financial Officer, to ensure they fully reflect the needs of the business going forward.”
“Despite current operational challenges, I continue to be encouraged by our robust innovation pipeline, the strength of the Speciality Food Ingredients business excluding Splenda Sucralose, and continued growth in emerging markets,” added Ahmed – who said the firm remains ‘firmly focused’ on taking actions to improve its performance and deliver on strategy.
Competition, supply chain, and unexpected costs
Tate & Lyle first warned of increasing competition in the market for sugar alternatives in February, pointing to a flood of low-cost products sold by Chinese competitors.
Price pressures from a 25% drop in sucralose prices will hit profit to the tune of £20 million, according to Toby McCullagh, an analyst at Citi, who added that the fact that the situation is worsening is a ‘greater worry’ for investors.
Meanwhile, the company said that it continues to suffer because of the severe winter in the USA last year - which left it running low on corn at the start of the year.
Such supply chain issues have since been exacerbated by the extended closure of its Splenda factory in Singapore after two workers died in an accident. The bill for sorting out its supply problems, including the extra costs of delivering by air instead of shipping, has spiralled to £40 million for the first half of the year to September 30, as well as an expected £10 million in the second half, said the firm.
"Whilst these are likely non-recurring costs, the fact that disruption from last winter is still being resolved is surprising and disappointing," McCullagh wrote.