Tate & Lyle annual report 2003
operating and financial review
Simon Gifford Group Finance Director
Summary of Financial Results this, relating to interest received on tax Exceptional Items and Goodwill
Total sales decreased by £777 million refunds and exchange gains on foreign Amortisation
to £3,167 million. Discontinued currency balances, in the results for Exceptional items totalled a net charge
activities and exchange rate translation the six months to 30 September 2002. of £33 million. An impairment charge
on continuing activities reduced sales In the second half of the financial year of £39 million was taken as an
by £552 million and £111 million this was reduced by a £1 million operating exceptional item primarily
respectively. Sugar trading sales exchange loss on foreign currency. to write down the assets of the US
reduced by £154 million. Sales from The balance was a £7 million credit for and Mexican citric acid operations
other continuing activities increased a refund of duty in Mexico, of which to their recoverable values, following
by £40 million. £4 million was interest received. Profit continued global pressure on selling
before tax, after exceptional items and prices. The Mexican factory will be
Profit before interest, tax, exceptional goodwill amortisation was £187 million closed completely before the end
items and goodwill amortisation compared with £159 million in the year of the calendar year 2003.
increased by 18% from £216 million to 31 March 2002.
to £254 million due mainly to The balance was an exceptional
improvements at Amylum and the Diluted earnings per share before non-operating net profit of £6 million.
completion of the disposal of the loss- exceptional items and goodwill Included within this was a £14 million
making US sugar businesses early amortisation for the year to 31 March profit following the disposal of the
in the year. Profit before interest 2003 were 33.0p (2002 – 22.1p). US sugar businesses in November
and tax after exceptional charges Diluted earnings per share after 2001 and April 2002 and a £12 million
of £33 million (2002 – credits exceptional items and goodwill anticipated loss on a planned disposal,
of £8 million) and the goodwill amortisation were 27.7p which was after a £9 million charge for
amortisation charge of £8 million (2002 – 24.6p). goodwill previously written off to
(2002 – £8 million) was £213 million, reserves. Amortisation of capitalised
compared with £216 million in the The Board is recommending a 0.5p goodwill totalled £8 million in the year
year to 31 March 2002. per share increase in the final dividend (2002 – £8 million).
to bring the total dividend for the year
Interest costs reduced from to 18.3p per share. The proposed Segmental Analysis of Profit Before
£57 million to £26 million. Of this dividend is covered 1.8 times by Interest
reduction, £8 million was due to earnings before exceptional items and The following paragraphs refer to
unusual interest income on tax and goodwill amortisation, an improvement profit before interest and exceptional
duty. Interest cover improved from from 1.2 times in the previous year. items but after the amortisation of
3.3 times to 7.6 times, or 6.8 times Earnings after exceptional items and capitalised goodwill. The segmental
excluding the unusual credits. goodwill amortisation covered the analysis of continuing and
dividend 1.5 times (2002 – 1.4 times). discontinued activities for the year
Profit before tax, exceptional items and to 31 March 2002 has been restated
goodwill amortisation was £228 million, Net debt reduced by £168 million from to reflect disposals of companies
an improvement of 43%. Profit before £639 million to £471 million, assisted completed since the publication of
tax included unusual income of by £60 million proceeds from last year’s Annual Report. Exchange
£11 million. We reported £5 million of disposals. rate translation reduced Group profit
before interest by £10 million.
Tate & Lyle annual report 2003
Sweeteners & Starches – Americas: costs were reduced. Energy costs the near term, and we do not expect
continuing activities were lower and rising natural gas to make a profit from citric acid in the
Profits before exceptional items prices underscored the importance of year to 31 March 2004.
and interest fell by £4 million to our conservation programme. A small
£135 million. Exchange rate potato starch plant was closed. North American Sugar
translation reduced profits by Redpath, in Canada, had an
£11 million. Much of the process development on exceptional year, once again achieving
1,3-propanediol, which uses corn as record sales with strong growth in the
Staley a feedstock, is complete. We continue industrial sector. Food manufacturers
Despite continuing difficult market to work with DuPont to move this continue to relocate production from
conditions in Staley’s cereal sweetener fermentation project to the next stage the US to Canada, where the cost
and starch business, growth was of development, providing we can base is lower. Profits improved due to
experienced in nearly all major product anticipate an adequate return on higher sales volumes, lower energy
lines, particularly in higher value added further investment. costs and improved productivity.
food ingredients. The increase in the world price of
We are also building a xanthan gum raw sugar resulted in a stockholding
Higher corn costs were covered by production facility, scheduled for gain of £2 million compared with a
price increases, and cost reduction commissioning in 2004. £2 million loss in the previous year.
initiatives continue to enhance results.
In Mexico, high fructose corn syrup Occidente, our joint venture cane
Food ingredients generated improved (HFCS) sales were significantly lower sugar business in Mexico, achieved a
results, particularly through working at Almex, our joint venture, as the tax significant improvement in operating
closely with our customers on product on soft drinks containing HFCS profit despite an adverse movement
development. Increased sales were remains in place. Although the industry in exchange rates. Record sugar
made to export markets and benefits is suffering from inefficient plant production from the campaign that
were seen from further integration with utilisation, prices on the rest of the ended in June 2002 exceeded 340,000
Amylum in Europe, especially from product portfolio increased. A long- tonnes. Technical performance of all
unifying research and development. running dispute with the government three mills has improved under new
over import duties was resolved and operational management.
US sweetener market volumes a refund of £7 million has been
remained similar to the prior year, and recognised in the accounts for the In Mexico, sugar has replaced HFCS in
the trend continued of bottled water year ended 31 March 2003, of which soft drinks since the imposition of the
and fruit-flavoured beverage sales £3 million is included in profit before tax on HFCS-containing soft drinks.
increasing at the expense of interest, with the balance reducing the This has increased domestic demand
carbonated soft drinks. Price increases interest charge. Access into Mexico for for sugar, with the consequence of
for the 2002 calendar year resulted in US HFCS under the North American firmer pricing. The prospects for the
stronger overall sweetener margins. Free Trade Agreement remains coming year are good with the
The paper industry showed signs of unresolved between the Mexican and probability that most of the production
recovery towards the end of the year US governments. will be sold onto the higher price
and margins on industrial starches domestic market with very little
improved. There remains significant over-supply exported at world prices.
to the global citric acid market. Prices
Corn costs rose during the year continued to decline under pressure A new sugar blending operation in
following a drought which reduced the from Asian imports, and again we Mexico was commissioned, in
crop, but this was partially mitigated managed only a small operating profit, association with Redpath’s Canadian
by higher corn oil and corn gluten despite making further significant cost blending operation, and Occidente has
meal prices. In the 2003 calendar reductions. Our Mexican plant will begun to export sugar-containing
pricing round we recovered the higher close by the end of the calendar products to the USA.
net corn costs through selling price year, and an impairment charge has
increases. Ethanol selling prices fell been taken against this and the US Sweeteners and Starches – Europe:
sharply in the year both in response to operation. We anticipate a modest continuing activities
lower average gasoline prices and as exceptional charge for the closure, Profit before exceptional items and
the industry added new capacity. which will be booked in the year to interest increased by 23% from
Industry production has increased in 31 March 2004. Plant closures have £87 million to £107 million. Exchange
anticipation of increased demand from been announced by competitors in rate translation increased profits
the banning of methyl tertiary butyl Ireland, China and the Czech Republic. by £1 million.
ether (MTBE), the alternative fuel We announced that part of our UK
oxygenate, in California (now deferred factory will be converted to produce Amylum
until January 2004) and the impact of AstaXin®, a natural source of Amylum’s cereal sweetener and starch
the US Energy Bill. astaxanthin, which is widely used in business accounted for the majority of
the aquaculture industry. Despite these the improvement in the sector.
Manufacturing operations continued to signs of industry rationalisation, the
perform well, and both fixed and unit market is likely to remain difficult in
Tate & Lyle annual report 2003
operating and financial review
The integration and cost reduction Lyle’s Golden Syrup sales grew in new Sugar trading profits were exceptionally
project delivered benefits exceeding export markets and franchises with strong and improved mainly through
£35 million, well ahead of the United Biscuits for McVitie’s Lyle’s sales of Brazilian raw sugar.
£20 million target. Costs of £10 million Golden Syrup Cream Biscuits and Building on the successful
were in line with expectations. The McVitie’s Lyle’s Black Treacle Cream implementation of specialist trading
benefits were primarily generated by Biscuits were established. Lyle’s software in the previous year, a
lower manning levels, and purchasing Coffee Syrups consolidated their thorough review of sugar trading risk
and manufacturing efficiencies. leading position in the UK retail market management policies and procedures
and Tate & Lyle Sugars’ product range was undertaken and recommended
Volumes improved for both sweeteners was rationalised to concentrate on actions successfully implemented
and starches. Wheat costs fell higher added-value lines. towards the end of the year.
following good harvests and increased
imports into the EU from Russia and Capital expenditure was below Asian Sugar Businesses
the Ukraine. Maize prices were also depreciation with the businesses Nghe An Tate & Lyle (NAT&L), the
reduced due to improved crops and contributing strong cash flow to Group’s cane sugar business in
the initial impact of imports from the Group. Vietnam, achieved a further record
countries listed for the first wave of production of 95,870 tonnes of sugar
accession to the EU. By-product As part of the integration programme, in the financial year, 13% higher than
selling prices were also lower. Small an outsourcing agreement for the the previous year. NAT&L is now the
pricing gains in certain markets and provision of IT services in the UK was largest sugar producer in Vietnam
products (such as vital wheat gluten) terminated, and this function has been and its quality is recognised in the
were offset by price reductions re-absorbed by existing support marketplace. Selling prices were under
elsewhere. functions within the Group at pressure as Vietnam achieved surplus
substantially lower cost. production over local demand.
Monosodium glutamate pricing
continued to improve and even though Eastern Sugar The remaining investment in Chinese
Orsan reported a small loss for the The Eastern Sugar Group, our European sugar factories, which were sold
year, it was less than in prior years. beet sugar joint venture, experienced a during the year, did not have a material
Progress towards completing the sale difficult year and made losses overall. impact on operating profit.
of Orsan France, particularly as This was in contrast to a successful
regards obtaining competition authority previous campaign and profitable Animal Feed and Bulk Storage:
approvals, remains satisfactory. year to 31 March 2002. In the Czech continuing activities
Republic, the developing sugar regime Profits before exceptional items and
Manufacturing costs decreased despite collapsed in November 2002 following interest on continuing activities fell
increased local taxes and higher a successful challenge in the from £10 million to £4 million.
insurance and post-retirement costs. constitutional court and selling prices
Energy costs reduced and forward plummeted. The government is taking We announced in February 2002 that
cover mitigated price increases in steps to stabilise selling prices at more we would pursue the sale of the
the second half of the year. normal levels but the volume of sugar worldwide molasses and storage
in the hands of traders may hinder its businesses. However, negotiations
The Eaststarch joint venture effort. We do not anticipate a return did not produce an offer for the
businesses in Central and Eastern to profit in the short term prior to the business as a whole that reflected its
Europe had an excellent year with Czech Republic’s accession to the EU. contribution to the Group, and the
higher volumes and improved selling business was withdrawn from sale
prices aided by lower maize costs. The Slovakian business had a as a single entity in September 2002.
Greater stability in Turkey and satisfactory year. Domestic sales in We examined other opportunities to
improved operating efficiencies were Hungary were weak as imports of maximise returns from the business,
the primary drivers, including the sugar, sugar substitutes and sugar- including partial disposals, and sold
benefits of the integration programme. containing products took market share. the North American molasses and
The imposition of sweetener quotas in third party liquid storage businesses
Turkey will limit a repeat performance Hungary, Slovakia and the Czech during the year.
in the coming year. Republic will accede to the EU in May
2004 and will enter the EU sugar In the business retained, and in
Tate & Lyle Europe regime. Preparations continue in all contrast to the prior year, international
The UK and Portuguese sugar countries for accession. freight rates increased significantly.
businesses continued to perform This was as a result of the tensions
satisfactorily. The UK operations Sweeteners and Starches – Rest over Iraq and instability in Venezuela.
benefited from the strengthening of of the World: continuing activities The limited availability of Thai
the euro. Energy costs were higher Profits before exceptional items and molasses and difficult feed markets
following the expiry of a medium-term interest increased from £4 million to in both the UK and Germany were
contract in the year to 31 March 2002. £11 million. Exchange rate translation contributory factors to the reduction
reduced profits by £1 million. in profitability. The costs of the
Tate & Lyle annual report 2003
disposal process prior to withdrawing business and in particular our The interest rate for subsidiaries in the
the business as a whole from sale exposure to the terrorist attacks year when measured against average
were charged against operating profit of 11 September 2001. Conditions net debt was 5.5% (2002 – 6.7%).
in the year to 31 March 2003. improved in the third party insurance Interest cover based on profit before
market and, together with good results exceptional items, goodwill
Other Businesses and Activities: from internal exposures to the rest amortisation and interest of Tate & Lyle
continuing activities of the Group, led to a positive PLC and its subsidiaries improved
This segment, which includes head underwriting result. from 3.3 times to 7.6 times. Excluding
office activities, reduced costs the unusual interest receipts, interest
from £22 million to £10 million, The Company decided to discontinue cover was 6.8 times.
primarily because of the negative writing non-Group risks with effect
impact in the prior year on our captive from 1 January 2003 and is now in Profit Before Tax
reinsurance company of the terrorist the process of running-off the existing Profit before tax but after exceptional
attacks of 11 September 2001. third party liabilities. To date, a third of items and goodwill amortisation
Exchange rate translation reduced these liabilities have been commuted. was £187 million, compared with
losses by £1 million. The Group continues to believe it £159 million in the prior year.
can minimise the effect of higher Exchange rate movements reduced
Tate & Lyle Sucralose insurance costs as well as provide profit before tax by £9 million.
The global commercialisation of stability by continuing the policy of
sucralose, the no calorie sweetener retaining risk and premium in its own Taxation
made from sugar, continues with sales reinsurance company. The Group taxation charge was
growth exceeding expectations. £57 million (2002 – £39 million).
This business is operated under a Discontinued Activities The effective rate of tax, on profit
Global Alliance Agreement with McNeil During the year, the major operating before exceptional items and goodwill
Nutritionals, a Johnson & Johnson profit impacts were caused by the amortisation, was 30.7% (2002 – 32.1%).
company. Sucralose is now used as sales of Western Sugar and the North
an ingredient in over 2,000 products American molasses and third party Dividend
worldwide. It was introduced as an liquid storage businesses. A final dividend of 12.8p will be
ingredient to the UK market last year recommended as an ordinary dividend
and is being used in a number of The US sugar businesses lost to be paid on 6 August 2003 to
carbonated beverages, flavoured £18 million in the year to 31 March shareholders on the register on 11 July
waters, alcoholic beverages and 2002. Western Sugar was sold in 2003. This is an increase of 0.5p per
dairy products. April 2002 and contributed a small share. An unchanged interim dividend
operating profit in the year to of 5.5p was paid on 14 January 2003.
Meanwhile, national approvals were 31 March 2003. Earnings before exceptional items and
granted in the Republic of Ireland goodwill amortisation covered the
and Netherlands, in advance of the The US and Canadian molasses and proposed total dividend by 1.8 times.
anticipated adoption of the EU third party liquid storage businesses
Sweeteners Directive. made a loss prior to their disposal in Disposals
March 2003. We received £60 million proceeds
A £7 million (US$10 million) licence fee from the disposal of businesses and
was received from McNeil Nutritionals Interest, Tax and Dividend assets during the year to 31 March
under the Global Alliance Agreement. Interest 2003, compared with £137 million
The net Group interest charge was in the previous year.
Tate & Lyle Process Technology £26 million compared with £57 million
(TLPT) in the year to 31 March 2002. Interest The sale of Domino, the US cane
TLPT, the Group’s sugar technology income includes £4 million from the sugar refiner, was completed in
company, improved its profitability loan notes issued to the purchasers November 2001. Under the terms
having previously disposed of its of Domino and Western. During the of an earn-out clause in the sale
chemical and filter businesses. TLPT year, interest receivable and similar agreement, we received deferred
has developed technology for the income benefited from a number of proceeds of £8 million in the year.
transformation of raw sugar to liquid unusual items totalling £8 million.
sugar that could find a ready market These included recoveries of tax As reported in last year’s Annual
with the worldwide beverage interest and, in the joint ventures, Report, Western, the US beet sugar
manufacturers. from interest refunds on duty. business, was sold to the Rocky
Mountain Sugar Growers Co-operative.
Tate & Lyle Reinsurance Average net debt of Tate & Lyle PLC Sales proceeds total £51 million,
The Group’s Bermuda-based captive and its subsidiaries was £530 million, £17 million of which have been
reinsurance company reported an a reduction of £294 million on received. Loan notes are outstanding
underwriting profit for the year ended £824 million the previous year. of £34 million, which will be repaid
31 March 2003. The previous year’s The reduction in net debt accounted through instalments by January 2007.
results were adversely affected by for £20 million of the £31 million In anticipation of disposal, Western’s
increased claims from third party reduction in the net interest charge. assets were written down in previous
Tate & Lyle annual report 2003
operating and financial review
financial years, and £9 million of this The valuation of the fund at 31 March The total charge to profit under FRS17
was reversed as a profit on disposal. 2003 has still to be completed, but it would have been £23 million compared
is not anticipated that the fund will with £24 million under SSAP24.
The conditional sale of Orsan France, record a surplus. Accordingly, the
the monosodium glutamate business, Group has not recognised any Cash Flow and Balance Sheet
was announced in November 2002 and amortisation of the surplus indicated Cash Flow and Debt
satisfactory progress is being made to by the 31 March 2001 valuation, and Operating cash flow totalled
completion. The anticipated loss on this has increased the pension charge £323 million compared with
disposal charged in these accounts is by £6 million in the year to 31 March £445 million in the previous year.
£12 million, of which £9 million results 2003. From 1 April 2002, the UK There was an operating working
from goodwill previously written off defined benefit scheme was closed capital inflow of £36 million but, after
to reserves. to new members, and a defined the reduction in pension provisions
contribution scheme has been due to supplementary contributions
In December 2002, the Group sold established. of £42 million, there was a net
Well Pure, the Hong Kong holding £6 million working capital outflow
company for the Group’s majority SSAP24 spreads pension surpluses (2002 – £143 million inflow). A net
interests in two cane sugar factories in and deficits over the service lives £97 million (2002 – £140 million) was
China. The company was bought by a of employees. Under SSAP24 the paid to providers of finance as
group of private Chinese investors and net pension liability reduced by dividends and interest. Net taxation
a profit on disposal was made. £41 million to a net asset of £9 million paid reduced from £35 million to
and the US healthcare provision £7 million, reflecting a number of
In December 2002 and March 2003 reduced by £12 million to £118 million. refunds in the year in the UK and USA.
respectively, the molasses and third Contributions to the Group’s pension
party liquid storage terminals in the Under FRS17 the current service cost funds, both regular and supplementary,
USA and Canada were sold, but both charged against profit each year is increased from £3 million in the
still remain subject to closing balance calculated using corporate bond yields, previous year to £61 million.
sheet adjustments. Proceeds received and any change in yields generates
were £18 million and a further volatility in the pensions charge. Plant replacement, improvement and
£10 million was recovered from The use of market values in the balance expansion expenditure of £75 million
retained receivables. sheet is likely to give rise to volatile was below underlying depreciation of
changes in the amounts reported as £110 million. Investment expenditure
Retirement Benefits pension assets and liabilities. was £15 million, being primarily an
The charge for retirement benefits, injection of funds into the Tate & Lyle
calculated under SSAP24, was If the accounts had been prepared Employee Benefit Trust which
£24 million, an increase of £11 million under FRS17, the net position for purchases shares to satisfy options
over the prior year. The pension charge all Group defined benefit pension granted under the Executive Share
has increased by £6 million on the schemes at 31 March 2003 would Option Scheme. Disposals of fixed
assumption that the main UK scheme have been a deficit of £196 million, assets and businesses generated cash
will no longer record a surplus when a movement of £146 million from the of £60 million. Exchange translation,
the actuarial valuation at 31 March deficit of £50 million that would have and other non-cash movements,
2003 is completed. been recorded under the new standard increased debt by £21 million.
at 31 March 2002, but an improvement
The UK Tate & Lyle Group Pension of £54 million from the deficit of The Group’s net borrowings fell from
Scheme fund was valued at 31 March £250 million at 30 September 2002. £639 million to £471 million.
2001 and a valuation as at 31 March The potential US healthcare liability
2003 is currently underway. The would have reduced from £117 million The ratio of net borrowings to earnings
results of the 2001 actuarial valuation at 31 March 2002 and £111 million at before interest, tax, depreciation and
indicated no need to resume 30 September 2002 to £104 million amortisation (EBITDA) (before
contributions at that stage, but at 31 March 2003. exceptional items) has improved from
informal valuations were performed 2.1 times to 1.4 times and the gearing
during the year to 31 March 2003, all After taking account of deferred tax, the ratio reduced to 45% at 31 March
of which indicated that the fund had Group’s net assets at 31 March 2003 2003 (2002 – 59%). During the year,
gone into deficit. would have reduced by £138 million net debt peaked at £605 million in
from £1,044 million under SSAP24 to April 2002 (April 2001 during the year
Annual cash contributions of around £906 million if the financial statements ended 31 March 2002 – £959 million).
£8 million recommenced with effect had been prepared under FRS17.
from 1 April 2002, and £32 million of Funding and Liquidity Management
supplementary contributions have Profit before interest would have The Group funds its operations
been made in the year to 31 March increased by £5 million, compared with through a mixture of retained earnings
2003 to the fund to eliminate a £9 million reduction in the previous and borrowing facilities, including
estimated shortfalls, making a year, and the net interest charge would capital markets and bank borrowings.
total contribution of £40 million. have increased by £4 million.
Tate & Lyle annual report 2003
In order to ensure maximum flexibility years. At the end of the year after The Board of Tate & Lyle PLC regularly
in meeting changing business needs subtracting total undrawn committed reviews these risks and approves
the Group seeks to maintain access to facilities there was no debt maturing written policies covering the use of
a wide range of funding sources. The within 12 months and all debt had a financial instruments to manage these
Group has a euro medium-term note maturity of two and a half years or risks and sets overall risk limits. The
programme and a US commercial more (2002 – 0% and 51%). The last review was in April 2003. All the
paper programme. At 31 March 2003, average maturity of the Group’s gross Group’s material financial instruments
the Group’s long-term credit ratings debt was 5.4 years (2002 – 3.2 years). are categorised as being held either for
from Moody’s and Standard and Poor’s trading or risk management. Trading of
were Baa2 and BBB respectively. At the year end the Group held cash financial instruments within the Group is
and current asset investments of severely limited, confined only to tightly
Capital markets borrowings include £172 million (2002 – £135 million) and controlled areas within the sugar and
the €300 million 5.75% bonds and the had undrawn committed facilities of maize pricing operations. The derivative
€150 million Floating Rate Note which £348 million (2002 – £461 million). These financial instruments approved by the
mature in 2006 and 2007 respectively. resources are maintained to provide Board to manage financial risks include
During the year, the Group issued liquidity back-up and to meet the swaps, both interest rate and currency,
£200 million 6.50% Eurosterling bonds projected maximum cash outflow from swaptions, caps, forward rate
which mature in 2012, which further debt repayment and seasonal working agreements, financial and commodity
extends the maturity profile of capital needs foreseen for at least a forward contracts and options, and
Group debt. year into the future at any one time. commodity futures.
The Group ensures that it has Funding not Treated as Debt Control and Direction of Treasury
sufficient undrawn committed bank In respect of all financing transactions, Tate & Lyle’s group treasury function
facilities to provide liquidity back-up the Group seeks to optimise its operates within a framework of clearly
for its US commercial paper and other financing costs. The following items defined Board approved policies and
short-term money market borrowing are not included in net debt under procedures setting out permissible
for the foreseeable future. During the UK accounting conventions, although funding and hedging instruments,
year, the Group arranged committed disclosure is made in the notes to exposure limits and a system of
bank facilities of US$510 million with these accounts. authorities for the approval of
a core of highly rated banks. These transactions. Most of the Group’s
new facilities have a maturity date of At Amylum, the Group receives financing, interest rate and foreign
five years and they refinanced existing cash from selling amounts receivable exchange risks and other treasury
undrawn committed bank facilities with from customers (note 18). The facility activities are managed through a
shorter maturity dates. These facilities allows the sale of up to US$85 million central treasury company, Tate & Lyle
are unsecured and contain common (£53 million) of receivables and was International Finance PLC, whose
financial covenants for Tate & Lyle fully utilised at both 31 March 2003 operations are controlled by its Board.
and its subsidiary companies that the and 31 March 2002. Where financially The treasury company is chaired by
interest cover ratio should not be less beneficial, operating leases are the Group Finance Director.
than 2.5 times and the ratio of net debt undertaken in preference to purchasing
to EBITDA should not be greater than assets. Commitments under operating Group interest rate and currency
four times. leases to pay rentals in future years exposures are concentrated either in
totalled £209 million (2002 – £166 the treasury company or in appropriate
The Group monitors compliance million) and related primarily to railcar holding companies through market-
against all its financial obligations leases in the USA. related transactions with Group
and it is Group policy to manage the subsidiaries. These acquired positions
consolidated balance sheet so as Net debt of joint ventures and are managed by the treasury company
to operate well within covenanted associates totalling £60 million at within its authorised limits.
restrictions at all times. 31 March 2003 (2002 – £145 million)
was not consolidated in the Group Interest Rates
The majority of the Group’s borrowings balance sheet. Of Tate & Lyle’s The exposure to fluctuating interest
are raised through the Group treasury £29 million share of net debt of joint rates is managed by fixing or capping
company and are then on-lent to the ventures and associates, £9 million portions of debt using interest rate
business units on an arms-length basis. was subject to recourse to the Group. derivatives to achieve a target level of
fixed/floating rate net debt which aims
The Group manages its exposure to Control and Governance to optimise net interest costs and
liquidity risk by ensuring a diversity of Management of Financial Risk reduce volatility in reported earnings.
funding sources and debt maturities. The main financial risks faced by The Group amended its policy during
Group policy is to ensure that, after the Group are liquidity risk, interest the year, so that out-of-the-money
subtracting the total of undrawn rate risk, currency risk and certain caps are excluded in the determination
committed facilities, no more than commodity price risks. Tate & Lyle also of fixed rate debt. The Group’s policy
30% of gross debt matures within faces risks which are non-financial or is that between 30% and 75% of
12 months and at least 50% has a non-quantifiable, for example, country Group net debt is fixed for more than
maturity of more than two and a half and credit risk. one year and that no interest rate
Tate & Lyle annual report 2003
operating and financial review
fixings are undertaken for more than not represent more than 25% Commodities
12 years. At the year end the longest and other currencies should not Derivatives are used to hedge
term of any fixed rate debt held by exceed 10%. movements in the future prices of
the Group was until June 2012. The commodities in those domestic and
proportion of net debt which was fixed At the year end, net debt was split international markets where the Group
for more than one year at the year by currency: dollars 45%, euro 40%, buys and sells sugar and maize.
end was 49% (2002 – 66 %), which sterling 14%, and other currencies Commodity futures and options are
excludes £121 million of out-of-the- 1%.The weighted average exchange used to hedge inventories and the
money interest rate options capping rate used to translate US dollar profits costs of raw materials for unpriced
euro rates at 5.0%. was US$1.54 (2002 – US$1.43), and prospective contracts not covered
compared with the year-end rate by forward product sales. The options
If the interest rates applicable to the of US$1.58 (2002 – US$1.42). and futures hedging contracts
Group’s floating rate debt rise from the The only material risks from economic generally mature within one year and
levels at the end of March 2003 by an foreign currency exposures are all are with organised exchanges.
average of 1% over the year to March to UK sugar refining from sterling
2004, this would reduce Group profit appreciation against the euro. Credit Risk
before tax by £1 million. The Group controls credit risk by
Use and Fair Value of Financial entering into financial instruments only
Foreign Currency Instruments with highly credit-rated authorised
The Group has transactional foreign In the normal course of business counterparties. Counterparty positions
currency exposures arising from sales the Group uses derivative financial are monitored on a regular basis.
and purchases by subsidiaries in instruments with off-balance sheet
currencies other than their functional risk, and non-derivative financial Going Concern
currencies. The Group’s foreign instruments included on the After making enquiries, the directors
currency exposure management balance sheet. have a reasonable expectation that
policy requires subsidiaries to hedge the Company and the Group have
transactional currency exposures The fair value of Group net borrowings adequate resources to continue in
against their functional currency once at year end was £525 million against operational existence for the
they are known mainly through the use a book value of £471 million (2002 – foreseeable future. For this reason they
of forward foreign exchange contracts. fair value £649 million, book value continue to adopt the going concern
£639 million). Financial instruments basis in preparing the accounts.
The Group’s accounting policy is to used to manage the interest rate and
translate profits of overseas companies currency of borrowings had a fair value
using average exchange rates. It is the of £4 million liability against a book
Group’s policy not to hedge exposures value of £2 million asset (2002 – fair
arising from profit translation. value £3 million liability, book value
£3 million asset). The main types
The Group has significant investment of instrument used are banker’s
in overseas operations, particularly in acceptances, loans and deposits,
the Americas and Europe. Movements interest rate swaps, interest rate Simon Gifford Group Finance Director
in exchange rates between balance options (caps or floors), cross- 4 June 2003
sheet dates can affect the sterling currency interest rate swaps and
value of the Group’s consolidated currency loans and deposits.
balance sheet. The currency profile of
net debt is managed to mitigate the The fair value of other financial
effect of these translation exposures instruments hedging future currency
arising on the Group’s net investment and commodity transactions was
in overseas operations. This is £10 million asset against a book
achieved by borrowing in currencies, value of £9 million asset (2002 –
where practicable and cost effective, fair value £1 million liability, book
which provides a match for the value £5 million liability). In currency
Group’s foreign currency assets and exposure management the instruments
which can be serviced from foreign used are spot and forward purchases
currency cash flows. and sales, and options.
Given the current profile of the Group’s The fair value of financial instruments
net operating assets and operating held for trading was £2 million liability
cash flows, the Group aims to maintain (2002 – £3 million asset) arising in
a target currency profile of net debt the sugar trading. The net gain
such that US and Canadian dollars included in operating profit from
combined should exceed 40%, euro trading financial instruments was
should exceed 25%, sterling should £3 million (2002 – £4 million profit).