AGRANA Beteiligungs-Aktiengesellschaft (AGR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining AGRANA's conference call on the First Half 2020/'21 Results. [Operator Instructions] I would now like to turn the conference over to Hannes Haider, responsible for Investor Relations. Please go ahead, sir.

Yes. Good morning, ladies and gentlemen, and welcome to AGRANA's conference call presenting the results for the first half. As announced in our invitation, the presentation is in reference to our call. You can find this presentation in the IR section of our website. You already got some insights when we published a talk announcement on the 16th of September. At that time, we published an outlook, including COVID-19 effects. Today, we will provide you with details on all segments for the outlook, but also presenting the most important parts of the H1 financial statements. With us today are 4 out of 5 members of the management board. Our CEO, Mr. Marihart, will start the presentation with an overview on the results and highlights for the first half. Our CTO, Mr. Harringer, will provide you afterwards with an investment overview and outlook. Mr. Gattermayer, our CSO, will continue then and give you more color on all segments. Our CFO, Mr. Buttner, will present then the financial statements in detail. And finally, again, the CEO will conclude with an outlook for the full year. After the presentation, the management board will be glad to answer your questions. And now, I may pass over to Mr. Marihart.

Thank you, Mr. Haider. Good morning, ladies and gentlemen, thank you for joining our telephone conference on the half year's results '20/'21. The figures, the key figures you know already. The revenue is EUR 1.309 billion. It's 4.7% up versus last half year. The EBIT is EUR 55.8 million, after EUR 51.7 million, so 7.8% up. And the EBIT margin is 4.3% versus 4.1% last year. Characteristic for this half year is that the COVID-19 pandemic, unfortunately, continued to be a defining issue also for AGRANA in the financial second quarter. Nevertheless is our EBIT in the first half year, moderately above prior year. And it shows that much of the stability of AGRANA's business performance can be credited to its diversification. And good news is also that despite of corona, we ran all our 56 production sites successfully. Now a look on our revenues by segment. The additional EUR 59 million revenues coming from EUR 1.25 billion to EUR 1.31 billion come mainly from the Sugar side. Fruit is a little bit above with EUR 6 million coming to EUR 602 million. And Starch is stable. And Sugar increased from EUR 247 million to EUR 300 million. This, of course, changes the picture in favor of the -- of Sugar concerning the shares of revenue. So Sugar increased to 22.9% from last's year 19.7%, of course, decreasing the shares of Fruit to 46% and Starch to 31%. EBIT-wise, the split shows a significant improvement in Sugar from minus EUR 18.7 million to minus EUR 9 million; and stable EBIT in Starch, EUR 34.7 million, plus 1%; and a decrease in the Fruit segment from EUR 36.1 million to EUR 30.1 million, minus 16%. So Sugar overcompensates the decrease in the Fruit. And on the Fruit side, it's mainly the fruit juice concentrate side, while the fruit prep side is stable. So if we look to the EBIT margins, then Fruit is at 5%; Starch at 8.5%; and Sugar, unfortunately, still in the rate with minus 3%, but much better than last year. All in all, the EBIT margin increased from 4.1% to 4.3%. Now I hand over to Mr. Harringer to give you an investment overview...

Thank you, Mr. Marihart. Also from my side, a very warm welcome to our conference call. Now I would like to give a short overview about investments in the first half of the current business year. In the first 6 months of business year 2020/2021, we invested about EUR 28 million group-wise, about EUR 13 million in our segment Fruit. Most important projects are new wastewater treatment plant in Mexico; the expansion of the warehouse for finished products in South Korea; and 2 additional product lines, 1 in Lysander, U.S. and the second 1 in Central Mangrove in Australia. In our segment, Starch, we invested at about EUR 9 million. For example, for the expansion of the corn starch derivatives plant in Aschach in Austria; measures to increase specialty corn processing capacity in Aschach; and some optimization work at the wheat starch Dutch plant in Pischelsdorf. In our segment, Sugar, we invested at about EUR 5 million. The most important project there is the conversion of the energy supply to natural gas in Sered in Slovakia. In August 2020, our new plant for the production of crystalline betaine was successfully commissioned and the market launch of the new product has begun. The new so-called Beta Pura GmbH is a joint venture between our partner, the Amalgamated Sugar Company and us. With an investment of approximately EUR 40 million, we trained 16 new jobs. The production capacity of the new factory is 8,500 metric tonnes of crystalline betaine per year. Ladies and gentlemen, in the current business year, the total investment across the 3 business segments will be at approximately EUR 73 million. This will be significantly below both the capital expenditure of the last business year of about EUR 150 million, and this year's budgeted depreciation of about EUR 120 million. We have now entered an implementation phase after the completion of major projects and capacity expansion in the last 3 years. Now I'm glad to hand over to my colleague, Fritz Gattermayer [indiscernible].

Thank you very much. A very warm welcome from my side, too. I will start with the Fruit segment. The main market of fruit yogurt seems slightly negatively influenced by the COVID situation. The current forecast by Euromonitor show global growth rate for yogurt of 1.8% in the calendar year 2020. And the products boosting the immune system have great short- and medium-term market potential, but we have to realize that and despite these opportunities, the global recession due to all this, of what happened due to COVID is negative -- has a negative impact to our lower-priced and simpler products on the other side. Concerning the fruit juice concentrate, the demand for apple juice concentrate is stable this spring and was able to be met from the 2019 crop. For most of the berry juice concentrate volumes produced from the 2020 harvest, the contracts were successfully concluded with customers. Market environment was challenging. The revenue of the Fruit segment is above the level of the year before. Concerning the fruit prep business, the revenue remained stable despite lower sales volumes. On the other side, concerning the fruit juice concentrate activities, the revenue was up from a year ago, higher prices for apple juice concentrate from the 2019 harvest. The EBIT is lower than the year before. The reasons for this decline is linked to the fruit juice concentrate business. We see a lower contribution margin of the apple juice concentrates produced in 2019. The EBIT in fruit prep is more or less in the same level as the year before. On the one hand, we are seeing an improvement concerning EBIT in Mexico, North America and also savings in administration. On the other side, we see earnings decreases in South America and partly in Europe. Continuing with the Starch segment. The effect of the lockdown, global changes in consumer behavior were the impact, were evident for all our Starch sales markets. There is a lower demand in the food sector, mainly in the starch, glucose starch business. Concerning technical starches, production cutbacks in the graphic paper industry and lower demand of the packaging paper sector led to reduced Starch sales. Concerning bioethanol business, very positive development. European fuel alcohol market saw consumption fall by more than 40% during the lockdown in late March and early April. The ethanol quotation came under pressure, EUR 350 to EUR 370 per cubic meter. But these volume losses in the first quarter were offset by the early maximizing of alcohol sales into the disinfection sector. And after the end of the lockdown, the ethanol demand also rose again significantly. And combined with delayed ethanol imports due to lower production in Brazil and the United States, there was a shortage in Europe, and the quotations went up to a historic high of over EUR 800 per cubic meter in August. Now we are around EUR 750. The next chart shows you the development, the graph of the petrol and the ethanol, and you see more or less, when the lockdown as of mid end of March was stated, it went down both. But then there was an increase of demand, mainly in the ethanol business, due to the situation, which is linked to the lockdown situation or the COVID situation in all of the European countries. And therefore, we are positive that this ethanol business will still be very positive in this business year. The revenue is in line of the Starch business as the year before level, with full operation of the new second wheat starch plant, the sales volumes and the revenues of the products manufactured in-house went up significantly. A decline in revenues from merchandise caused by charging sugar byproducts, beet pulp and so on sales on a commission basis. The ethanol quotations, after having collapsed in March 2020 and early April 2020, the COVID-19 lockdown, the significant drop in the demand for petrol, it has recovered again in the second financial quarter, as I said before. And the EBIT is slightly up to EUR 35 million. The earnings were driven by higher selling prices for ethanol during the last months and also lower market demand, but compensated by the that. The savings in energy and material costs were positive for the EBIT. On the other side, the significant increase in depreciation had a negative impact. The contribution of HUNGRANA, our equity accounted company, rose from EUR 7.2 million up to EUR 9.6 million. The main earnings driver was also the ethanol business. Continuing with the Sugar segment, it's the most challenging one. Concerning the world sugar market, the world market sugar quotations moved in parallel with the oil prices and remained at low absolute levels during the reporting period of the last 6 months. Brazil has increased its sugar output, the same in India. The ethanol production from sugar cane is less competitive when oil prices are low. Considering the European sugar markets, the main issue and framework for us according to the estimates by the European Commission, the European sugar production, the sugar marketing year 2020/'21 is expected to be around 16 million tonnes, in line with the year before. The impact of the COVID situation, we expect a decrease in consumption for both human nutrition and also industrial use on a lower level. Concerning the Sugar quotation, the next chart shows you the development of the raw sugar and white sugar quotation. You see on the right side, the quotation of the white sugar and the raw sugar. And more or less, during the -- since 2017, we are in a tranche of -- as you can see between for raw sugar, between EUR 220 and EUR 260 per tonne; similar to white sugar, but the highest when you go on the left side of this chart, we had in 2011, 2012, 2 years that were high prices to market, so sugar also, white sugar price. The question is, of course, how will the development in the next weeks and months? We expect it will be -- go up slightly, but of course, it's a challenge. The next one shows you the sugar price reporting of the European Commission. You see on the right side that -- you see the red line of the reference price of the European Commission stated in 2011 for around EUR 404 per tonne. And both the average price for white sugar and the reference price of London #5. Quotation is below. On the other side, in some of our areas, mainly in the eastern parts, we have higher prices. We had it in the past and we do have this year. Concerning the financial results, the revenue went up to EUR 300 million. This was significantly up from the year before. This is due to higher sugar selling prices and increased sugar sales volumes. The EBIT has improved, but it's still negative. The EBIT in the first 6 months of the 2020/'21 business year was a deficit of EUR 9 million but improved compared to the same period of the year before due to the better sales price environment. Thank you very much, and now I give over to Mr. Buttner.

Thank you, Mr. Gattermayer. Ladies and gentlemen, I'll start with the consolidated income statement. As already mentioned, we had an increase in the revenues up to EUR 1.309 billion in the first half of 2020/2021. This is mainly due to the increasing sugar prices and also higher sales volumes in sugar. EBITDA amounted to EUR 101.1 million, also an increase by more than 10% versus the prior year. Operating profit, EUR 47.4 million, also improved the share of results of equity accounted joint ventures. Here is mainly included our joint venture in Hungary, HUNGRANA, also with a better performance in the first half year versus the last first half year. The exceptional items with Europe, minus EUR 0.5 million due to restructuring expenses in the Fruit segment, concerning mainly cost reduction programs, leading to an EBIT of EUR 55.8 million, an improvement versus the EUR 51.7 million in the last year. The EBIT margin amounted to 4.3%, also slight improvement versus H1 '19/'20. Net financial items, minus EUR 9.1 million. The profit for the period, EUR 34.4 million, a significant increase versus H1 '19/'20. And the earnings per share amounted to EUR 0.54. The net financial items, the net interest expense increased to minus EUR 4 million. This is mainly due to higher average gross financial debt. Currency translation differences were stable with minus EUR 3.4 million. So in total, we had a net financial result of minus EUR 9.1 million. This is a worsening of minus 15.2% versus H1 '19/'20, mainly due to higher net interest expenses. The tax rate shows a normal development. So we have profit before tax of EUR 46.7 million and a tax rate of 26.3%. This is in a normal range. The consolidated cash flow statement, we had a better operating cash flow before changes in working capital with an amount of EUR 112.8 million. Changes in working capital and total of interest paid received and tax paid net result in a net cash from operating activities of EUR 71.5 million, an improvement of nearly 20% versus the prior year. And when we look at the net cash used in investing activities of minus EUR 32.3 million, we end up with a positive free cash flow, which is a good development and, of course, due to the lower CapEx amount. The consolidated balance sheet, we see a reduction in the noncurrent assets. This is triggered by the CapEx of around EUR 30 million. We had depreciation of around EUR 50 million and negative currency translation differences of around minus EUR 20 million. So they account the reduction from of minus 3.2%. In the current assets, also, we have a reduction of nearly EUR 100 million, mainly due to the decrease in inventories in sugar and the juice business. This is -- refers to our business model, where we decrease our stocks during the first half of the business year. The equity reduced by minus 4.1%. We have a positive effect in the equity from the profit after tax of around EUR 34 million. And the negative effect is a dividend of around EUR 48 million. And also translation -- currency translation differences also of around minus EUR 40 million, resulting in this a EUR 1,329.9 billion. The equity ratio is slightly increasing up to 55.2% in relation to the reduced total assets. Net debt with EUR 479.6 million. So despite the dividend payout of nearly EUR 50 million due to the lower Capex, we had a slight increase of net financial debts, leading to a gearing of 36.1%. These were the financials. And so I give back to Mr. [indiscernible].

So thank you then. Let me give you a short update on the closure or the possible closure of our sugar factory Leopoldsdorf in Austria. The current low sugar beet area in Austria necessitates a streamlining of our sugar production in Austria if it cannot be changed and consequently, on the 25th of August, the management Board proposed and the Supervisory Board of AGRANA approved the closure of the sugar factory at Leopoldsdorf in December 2020 after this year's beet campaign if there is no assurance that at least 38,000 hectares of beet will be contracted in Austria for the 2021 campaign by mid of November. From today's perspective, the restructuring costs associated with the permanent closure would amount to EUR 35 million, of which up to EUR 15 million would be cash out for social plans. So we are in midst of the contracting process, and we will have certainty how to go forward mid of November. So then let me come now to our outlook for the full year '20/'21 for AGRANA group. So based on an adjusted internal planning that best reflects the potential economic and financial impact of the COVID-19 pandemic, AGRANA expects its group EBIT for the full year to at least match the prior year's level. The group revenue is projected to show a slight to moderate growth. Due to the ongoing COVID-19 pandemic and the associated high volatility in all business segments, the forecast remains characterized by a very high degree of uncertainty. The forecast does not yet include the financial effects of a possible closure of the sugar plant Leopoldsdorf, what I have mentioned before, after this 2020 campaign. More precise for each segment, separate the outlook. So in the Fruit segment, we expect a slight increase, between 1% and 5% of the revenue and a stable situation on the EBIT in comparison to last year. But we have to differentiate for fruit preparations business and for fruit juice concentrate business. In the fruit preparations business, we are projecting a stable revenue despite negative COVID-19 effects is to be achieved by full utilization of the capacity already created. And the EBIT raise comes from higher margins by smaller cost increases than '19/'20. In the fruit juice concentrate business, we expect a significant increase in revenues for the full financial year, but the earnings situation will deteriorate significantly, as already in the first half year, due to lower average juice concentrate margins. Concerning the COVID-19 risk factors, we think, especially in the Fruit segment, which is global -- with its global production operations, we have 41 sites in 21 countries, the forecast is subject to substantial uncertainties regarding the short- and medium-term demand situation in many regions of the world. Coming to the Starch segment. There, we expect, revenue-wise, a slight increase also and the EBIT moderately reduced, minus 1% to 5%. The reasons sales price for native starches and wheat gluten are expected to be reduced as a result of increased supply in the European market, which means also COVID-related lesser demand. Then starch-based saccharification products, no major recovery in prices can be expected, owing to the persistently challenging market environment. And so the Starch segment EBIT is projected to decrease moderately as a consequence of foreseeable margin reductions resulting from lower selling prices. The business performance in Starch segment overall will continue also to depend on the further trend in the currently very strong ethanol prices. And especially this ethanol is also the main COVID-19 risk factor because restrictions on business activity and mobility may have very huge negative impact on demand and on the price trend in the European ethanol markets. Last. Not least, the Sugar segment. Here, we expect a significant increase in revenue and a significant improvement in the EBIT, as already given in the half year -- first half year. AGRANA expects a continuous improvement in the sugar market. On the sales side, we predict rising sugar prices in the EU and the continued shift in -- continued shift from industrial to reseller demand. The positive evolution in the EU sugar market environment, like a moderate growth for instance, combined with rigorous cost management leads to the expectation of a significant improvement in EBIT, although the absolute value will still be negative. Concerning COVID-19 risk factors, the sales volume gains and the revenue growth in the first half year were encouraging but we are also due to the pulling forward of sugar purchases by many consumers at the beginning of the COVID-19 pandemic. So it remains to be seen how the demand situation will unfold over the next few months, especially in the industrial sector. So thank you, and I hand over now to Hannes Haider for the financial calendar.

Before we go on with the Q&A session, I just wanted to inform you that today, as part of the half-year report, we also published a new financial calendar for the next financial year. So you can find from today, all important investor events also on our website. And now the management board is glad to answer your questions.

[Operator Instructions] The first question is from the line of Stefan Maxian from RCB. The next question comes from the line of Vladimira Urbankova from Erste Bank.

Can you hear me?

Yes.

Yes. So I can continue. Yes, my first question would be related to COVID. As you said, it's a defining issue. And I would be interested what is, in your opinion, the total COVID impact on your company in absolute terms this year, which segment is mostly hit by COVID, and of course, which segment will maybe having highest recovery potential once the pandemic will be hopefully over. And the next question would be related to your CapEx in coming years. You said that you'll finish some investment cycles, so it will definitely go down. If you have any rough estimates to which levels where it should be seen in forthcoming years? And of course, if you maybe will potentially also use this opportunity for some deleveraging and if you have any targets here regarding, for example, net debt level or something similar?

Concerning the sales or the market situation and link to COVID, I would say, the segment which you asked for is the Starch segment because we see impact of the COVID situation, economic development -- the negative economic development of a lot of these countries, we see here potential for a recovery. But it depends when it will come that this pandemic will end. Concerning impact, we, as food industry, we are not so certain like some other industry like the automobile industry or somewhere else. But we have -- more or less, we have a part in the food segment, everything which is linked to restaurants, concert, party, all these issues where we have lower sales demand. For example, the soft drink industry is suffering and the Sugar and then the Starch segment. But also within the food segment, we have also lower demand, which is linked to household income and all these issues. But we are -- more or less, we are able, and I think we can be optimistic that we are able to manage the situation. We keep our targets more or less. And therefore, of course, some rooms of improvement if the situation is solved or coming to a better end. So the CapEx question is answered by Mr. Harringer.

Concerning CapEx development, as I said before, we have now entered an implementation phase, in the phase where we have to chain efficiency out of the existing investments. We will do our continuous improvement process. And so we are planning for the next 2 years, not a higher CapEx, some lighting in this year.

And the question in the target for deleveraging some net debt level in coming years as you will have lower CapEx than depreciation. So...

Yes. Of course, one of the reasons is to bring the net financials down in the coming 2 or 3 years to be ready for a further step of growth. So currently, as I already mentioned, our gross financial debt and also the net financial debt increased significantly during the last 3 years. So now the target is to bring it down again for further growth.

But you do not have any quantification here?

The quantification is that we should come to, I would say, in the direction of net debt-EBITDA ratio of 1. So I would say this should be our target. But of course, this also depends on the profitability in the coming years. And this will be mainly influenced by the sugar profitability.

[Operator Instructions] Next question comes from the line of Stefan Maxian from RCB.

Hello. Does it work right now?

Yes.

Very good. Sorry, I was not able to unmute myself before. 2 questions on the Sugar. Actually, with regard to the EBIT development in the Sugar, like the weakest second quarter compared to the first quarter. In terms of EBIT, how much would you say is this related to the pull-forward effect that we have seen in the first quarter actually? So the idea here is to get a more like normalized level, where would we stand right now? And how close are you already to a breakeven in the Sugar in the current -- under the current price environment? And the second is with regard to, of course, with regard to Leopoldsdorf. I mean there had been several rounds of talks with stakeholders with regard to the additional quantities that you require to keep Leopoldsdorf open. If you could give us some additional color on that would be helpful.

Okay. I will start with your first question. So concerning the deviation between the results in the first and the second quarter, so of course, I think you are right. So we had this pull-forward effect in the first quarter where we see especially increasing volumes in the retail segment. But as well, we had negative impact in the second quarter because we already started to book idle cost. This is due to the lower beet volumes that we can -- we must expect in the coming crop. So these were the main effects, I would say. And concerning your question, how near we are already at the balanced result. So I would say the operative result in the first half of the year was minus EUR 4.4 million in Sugar compared with approximately minus EUR 12 million on an operated basis in the last year, so H1 '19/'20. The H1 '19/'20 was heavily influenced by the release of provisions with an amount of nearly EUR 18 million. So other -- when we look at the price development and the volume development, so the EBIT effect out of that in the first half year 2021 versus '19/'20 would be a net of approximately EUR 25 million better result. But this, of course, is offset by this not releasing of EUR 18 million provisions in the current first half of the business year because we simply did not have these provisions at the beginning of the year. And the idle costs amounted to EUR 4 million booked in Q2. So without the idle costs, we were more or less had a balanced result on an operative basis in Sugar.

So some more light on Leopoldsdorf was the question. Leopoldsdorf and Tulln now, our 2 Austrian factories, each have a similar capacity of beet slicing a day. So roughly Tulln is close to 13,000 tonnes. Leopoldsdorf, 12,000 tonnes. So together, it's 25,000 tonnes, a little bit less, 24,000 depends on the quality of the beet and so on. So there is, of course, a big difference having -- we're running 1 or 2 factories. Each factory needs more or less 20,000 hectares for its raw material for 130 days campaign. So with the 38,000 hectares, which we made condition -- made as a condition, we will have run roughly plus/minus 120 days, depending on the year's weather and hectare yields and so on. So this is the situation. Therefore, we have set this goal of 38,000 hectares as a contract goal. Depending on the seeding time and on the spring time, there is always sometimes acreage missing then. And therefore, this political package with a premium for reseeding of the beets should secure that we keep this 38,000 hectares even there are some adverse effects in spring time. Is this answering your question?

Yes. So from that perspective, it could be quite likely that you would achieve this target or that these contracted hectares would come from the current [ beet factory ]?

Of course, we are convinced that this is a goal which can be achieved with [indiscernible]. And we have contracted last year 34,000 hectares. And now with this kind of insurance, let me say, for replanting of the beet, it's a little bit more than 10% more acreage. So it's an achievable goal.

There are no further questions at this time, and I would like to hand back to Hannes Haider for closing comments. Please go ahead.

Yes. Thank you for your participation in the call. We wish you a nice remaining day and stay healthy. Bye.