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

Ladies and gentlemen, welcome to the AGRANA results for the past 3 quarters of 2023/'24 conference call. I am Alice, the conference call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Hannes Haider, responsible for Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to AGRANA's conference call presenting our results for the 3 quarters, '23/'24 financial year. First of all, a Happy New Year, and all the best and good health for 2024. With us today are 3 -- 2 out of 3 members of our Management Board. Stephan Buttner, our new CEO, will start the presentation with an overview on the highlights of the last 9 months and he will also comment on the market environment in our 3 segments. CTO, Norbert Harringer, will tell you what is going on in the group regarding raw materials production and investment and he will report also on the Group's ESG news, and in the last part of the call, our CEO will present selected financial [ tables ] of the interim statement, and he will conclude with an outlook for the remaining business year. As announced in our conference call invitation, a presentation is available in reference to our call. You can find this presentation in the IR section of our website. The presentation will take about 30 minutes, and afterwards, the CEO and CTO will be glad to answer your questions. And now I may pass over to our CEO, Stephan.

Thank you. Good morning, ladies and gentlemen. So welcome to our conference call covering the first 3 quarters of our actual business year, '23/'24. So the main messages here, business is still very volatile as you can see in raw material prices, also in energy prices and overall market conditions. Our operating performance improved, or was improved in almost all our businesses. What we already published, we had write-off [ for ] an asset impairment in Asia in the Fruit segment. So this is mainly due to the challenging market environment, especially in China, but also in Korea after the Corona pandemic. So markets are recovering very slowly. We have stronger competition there. The markets are down. There is a lot of cost pressure and the outlook -- the midterm outlook is not so good as we expected. Therefore, we had to write-down assets with an amount of around EUR 16 million. Also, we had changes on the Management Board. I will come to this a little bit later. And our outlook for the full year '23/'24 is that we still expect a very significant increase in our EBIT, which is logical because of the write-down of the nearly EUR 19 million in goodwill and partly assets in the Fruit segment last year. What we also want to state here is that, of course, in the coming months we see an increasingly challenging business environment due to lower demand and price pressure, especially coming in Starch and also expected in the Sugar business. The key figures. Revenue, nearly EUR 3 billion in the first 3 quarters. This is an increase of 7.5% versus prior year. The EBITDA amounted to EUR 250 million, an increase of 18.5%. Also, the operating profit significantly up by 35.5%, up to EUR 165 million. And the EBIT was EUR 150 million, also significantly up. Earnings per share amounted to EUR 1.16. Quickly, as already mentioned, changes on the Management Board. So Mr. Muhleisen and Mrs. Arnold left the AGRANA Board in the last week. So therefore, we have a new Board structure here with my colleagues, Mr. Harringer, and Mr. Kolbl. So Mr. Kolbl was already a Board member for many years before Helen Arnold replaced him. Now he's back. Norbert Harringer, the CTO, and then I have now taken over the CEO position. You can see the resource and the responsibilities, and also can look at this on our website. So now let me hand over to Norbert. Sorry, market environment. Yes, so quickly, market environment. So for Fruit segment, we have the fruit preparations business with the fruit juice concentrate business. The fruit preparations business overall globally is very stable. We have stable volumes. The only problem that we see right now is in Asia. I already mentioned that. So this also led to this write-down for this asset impairment. So, again, volumes are under pressure there. We have the positive trends in Europe. We have the positive trends in North America. Mexico is doing very well. Also, Australia is doing very well, and North Africa is also performing very well. Still also some challenges we are facing in South America, especially here in Argentina and Brazil. The fruit juice concentrate business, we have good volumes, good margins in the commodities in the apple juice concentrate business. Berry juices performed a little bit weaker than prior year, but still okay. So overall, the market environment is very stable in the Fruit business, I would say. In Starch, we already reported in the last month that we see volume pressure here. This is mainly, I would say, also due to the lower demand from the paper industry. Also, we see -- and -- how shall I say this, prices are coming back to normal in certain areas, especially in the proteins. So the protein, we had a significant increase in prices last year. Prices nearly doubled, up to EUR 2,500 per tonne of wheat gluten. Now it's coming back in the direction of EUR 1,300, EUR 1,400 per tonne, which is, I would say, more or less a normal price level. Of course, also due to the lower energy and raw material prices, overall prices are coming down in the Starch segment. And we really have -- a big challenge is the ethanol business. So the operations there are very much under pressure, are in an area of EUR 600 per cubic metre. So this was a dramatic downturn in the last weeks, and this really puts our margins in the ethanol business even more under pressure. In Sugar, I already also mentioned, still we see high sales prices. Also, we contracted already significant volumes from our Sugar marketing campaign '23, which will give us stable revenues in the coming months. But -- and this also due to imports from Ukraine, but also driven, let's say, by lower world market prices, as we saw the expectations for the harvest in [ overall ] Sugar production in Brazil and partly also India are better now. We expect a higher surplus in the world markets of around 4 million tonnes overall. So this led to a significant price reduction in the world market quotations. Also, we see somehow that prices are a little bit under pressure now in Europe. So we will see how this further develops, but we expect that the prices will somehow come down in sugar in the coming months. So, Norbert, now it's your turn.

Thank you, Stephan. Ladies and gentlemen, also from my side a very warm welcome to our today's conference call. After looking at the sales and market environment, let's now turn to the front [ page ] in the supply chain and the value chain to raw material and production. Referring to our 3 segments, I would like to start with the Fruit segment. As you already know, strawberries are a cornerstone of our fruit preparation business. In the current season, the global demand volume was fully contracted in the Mediterranean growing regions. The average purchase prices were moderately below the previous years' level because there has been sufficient availability of raw materials. Moving on to fruit juice concentrate. As you know, the most relevant raw material here is apple. For the 2023 campaign, we noticed that the availability of raw materials was above last year's level, so slightly below an average campaign. This fluctuation is a reminder of the dynamic nature of agricultural production and the importance of adaptive strategies in our operations. In our Starch segment, we observed the decreasing trend in raw material prices on the spot market. I will elaborate on this shortly at the next slide. However, it's important to note that the HUNGRANA Group had a significantly poor performance, mainly due to utilization issues. This has led to an overall decline in our Starch segment EBIT for the first 3 quarters of this fiscal year. Regarding the Sugar segment, I'm pleased to report that beet processing in the running campaign has been quite successful so far. We've seen significantly better capacity utilization and higher sugar production volumes. By the way, negotiations for beet production acreage in the next year are still in progress. We are confident that we can achieve a further increase in the planting area. This will enable us to utilize our capacities even better in the future. As mentioned, in the ongoing business year, we are seeing a decreasing trend on the spot markets for our Starch segment. Prices on the Euronext Paris have continued to fall in recent months and have shown a slightly volatile sideways movement since the harvest 2023. The quotations in Paris were EUR 199.3 per tonne for corn and EUR 221 per tonne of wheat on the 30th November of 2023. These are significantly lower prices than the comparable figures from the previous year, EUR 300.1 per tonne for corn and [ EUR 326.5 ] per tonne for wheat. Although this development helped us with production costs, it also means that sales prices have to be adjusted as well.

Okay, so then I take over again and let me report about, first of all, the revenue by segment. So, as already mentioned, around EUR 3 billion revenue on the Group level. So in the Fruit segment, we see an increase of 7.7% up to EUR 1.178 billion revenue in the first 3 quarters of the business year. This is, of course, mainly due to price increases. We had stable sales volumes, especially in the fruit preparations business, and also in the fruit juice concentrate we saw price increases with more or less stable sales volumes. In Starch, the sales were moderately lower than in the same period of the previous year. Selling prices for ethanol, as I also already mentioned, fell significantly. And so on a year-on-year comparison, the prices decreased by 27% in average. So overall, a minus 8.1% decrease in revenue, down to EUR 907.4 million. And in Sugar, despite lower sales volumes, so here we really have a decrease of sales volumes by nearly 15% due to the significantly higher sales prices. Revenue went up by 30.6% up to [ a ] EUR 861.5 million. The EBIT by segment. So you see that the Fruit segment we had a negative result last year. This was due to the write-down in goodwill and assets of about EUR 90 million. So this year, we have EUR 50.1 million positive EBIT, despite the write-down of the EUR 16 million. So also, if we would not consider the write-down last year and this year, we are significantly -- we have a significantly better performance in the Fruit segment on an operative basis. So here, especially Europe and North America performed very well. Russia, still strong. Ukraine, stable. Australia, very well performing. And as already mentioned, the biggest challenge we face in Asia, especially in China. In Starch, so here we see that we went down from EUR 67.1 million EBIT to EUR 58 million EBIT. So this mainly really comes from the ethanol business. So we had a significant positive contribution here on EBIT level last year. Whereas this year, in the first 3 quarters, we had from ethanol a negative EBIT of minus EUR 4 million. In comparison to that last year, we had a positive contribution of EUR 29 million. Of course, the much lower performance in ethanol was not fully, but to a bit extent, let's say, compensated by the Starch business, but overall, unfortunately, it decreased down to EUR 58 million. And in Sugar, we saw an improvement up to EUR 41.3 million. This is an increase of 19% and mainly due to the higher sugar sales prices.

So ladies and gentlemen, I will provide you now with a short ESG update and we'll afterwards also comment on our current investments. Independently of the reasons, [ both ] changes our commitment to sustainability and environmental responsibility remains one of our guiding principles. We continue to invest in initiatives aimed at reducing our environmental impact, improving resource efficiency, and promoting sustainable agricultural practices. Thus, in the third quarter of the current business year, another regular round of verification of the Farm Sustainability Assessments, in short FSA, was successfully completed at the AGRANA's contract growers of beet, of potatoes, and of corn in Austria and of apples in Hungary, and the ISO 50001, our energy efficiency certifications of our sugar and starch factories were renewed. On Slide 14, you can find a compact summary of our FSA results split by the segments. Starting with the sugar beet in Austria, the Czech Republic, Romania, Slovakia, and Hungary, we have organized our contract beet suppliers into Farm Management Groups, in short FMGs. I'm proud to report that in 2023, all farms in Austria, the Czech Republic, and Hungary achieved at least FSA silver status. In Romania, this was also the case for 100% of FMG members, and in Slovakia, 97% achieved at least the silver rating. Looking to our Starch segment in potatoes and specialty corn now. In Austria, our contract growers of potatoes and specialty corn are also grouped into 2 Farm Management Groups. Similar to our Beet segment, these groups have undergone audits and reverifications in line with the FSA requirements. The results for 2023 are outstanding, with 100% of our potato growers achieving at least FSA silver status. So our corn group, the EZG Donautal, 98% has achieved at least silver rating. Finally, in our Fruit segment, assessments were completed for apples, for berries, and for carrots. Moving to our operations in Hungary and Poland, our contract growers of apples, sour cherries, elderberries, and carrots participated in mandatory FSA self-assessment and external audits. Since our initial audit in 2017 and subsequent reverifications, we've seen remarkable progress. In 2023, 100% of our Hungarian FMG members for apples, sour cherries, and elderberries achieved at least silver status. Even more impressively, our carrot growers achieved a [ 100% ] gold status. Ladies and gentlemen, let's continue now with our investment activities in the current business year. In the first 3 quarters of '23/'24, AGRANA invested a total of EUR 70.5 million or EUR 11.3 million more than in the earlier comparative period. In addition to our regular projects for product quality and energy efficiency improvement and for asset replacement and maintenance across all production sites, the following individual investments are worthy of note. In the Fruit segment, the expansion of the raw material storage in Mexico, the expansion of the Fruit service area in Centerville, in Tennessee in the U.S.A., and the new wastewater treatment plant in Ostroleka in Poland. In the Starch segment, measures to increase specialty corn processing in Aschach in Austria, the expansion of the company wastewater treatment plant in Aschach and in Gmund in Austria, and the upgrading of the cooling performance in Pischelsdorf in Austria. And finally, in the Sugar segment, the modernization of the control systems in Leopoldsdorf in Austria, the production process optimization through the replacement of the filter presses in Sered in Slovakia, and the optimization of the evaporator station in Kaposvar in our Sugar factory in Hungary. Total investment across the 3 business segments in the current financial year at approximately EUR 140 million is to significantly exceed both the amount invested in the last business year and this year's budgeted depreciation of about EUR 120 million. Around 14% of this capital expenditure will be for emission reduction measures in the Group's own production operations as part of the AGRANA climate strategy.

Yes. Thank you, Norbert. So finally, we will give you a quick overview of the financials. Consolidated income statement, we already mentioned or reported on the KPIs. So revenue nearly EUR 3 billion, EBIT, EUR 150 million, and profit for the period, EUR 78 million. Energy costs went down from EUR 264.6 million to EUR 216.6 million. So we see a significant decrease in Starch and in Sugar, whereas in Fruit we had an increase of [ 15% ]. This is mainly due to the very good [ hedges ] that we had in the Fruit concentrate business last year. Now we are more to market price levels here, whereas in Sugar and Starch, as I already mentioned, we had better prices. The net financial items. So this is not a very good development, I must say. So we have a total of minus EUR 37.7 million. Of course, interest rates are -- have increased significantly in average versus prior year, but also our net financial debts are quite high. So when you look at the KPIs on the same page, the income tax expense, EUR 33.6 million, and the tax rate then was [ the ] 30.1%, quite high, I think. This is mainly due to the write-off of the asset impairment in Asia, otherwise we would have more of a normal tax rate. The consolidated balance sheet with the EUR 3 billion total assets. So here we have no significant changes. Of course, non-current assets down by 2.5%, mainly the difference between investments and depreciation. The current assets are -- have increased again. This is, of course, due to the quite higher stocks mainly still here in Sugar, due to the high sales prices. Equity with EUR 1.273 billion, an increase of 1.3%. Equity ratio 41.9%, quite stable also in comparison with the end of the last business year. Net debt, EUR 717.8 million, still very high due to the high raw material and energy prices. So this is mainly reflected in our inventories. And the gearing is at 56.4%. Not critical, but also not very [ good ]. So outlook for '23/'24, as already mentioned, EBIT, we here still expect a very significant increase. Of course, also this is what we call a [ needed ] level because we had this write-down of EUR 90 million in the previous year. Revenue, so we expect a moderate increase. And the outlook per segment here improved. Revenue was slightly increased. EBIT, a very significant improvement. Starch, we expect the revenue to go down moderately, and the EBIT significantly down, which means more than 10%. And in Sugar, we expect a significant increase in revenue and a stable EBIT. So, Hannes, financial calendar.

Thanks. Before we go on with the Q&A session, I just wanted to remind you that our annual results for this full business year will be published on the 14th of May, and the annual general meeting will be held on the 5th of July. We will now go on with the Q&A session.

[Operator Instructions] Our first question comes from the line of Vladimira Urbankova, Erste Group Bank.

Yes. I would have some questions forward-looking, some backward-looking. So let's start with the backward-looking question, and this would be related to the 3Q performance where we have seen some development in the Starch segment and Sugar segment, which go against the 9-month figures. I mean, operating result in the Starch segment improved in 3Q, and while in the Sugar segment it deteriorated, and both quite sizably. Could you maybe comment what was the reason behind this? Next, backward-looking question would be the tax rate in the 3Q, which was effective tax rate of some 45%. I assume it was because of this impairment was not tax effective. That's my assumption. And -- But at the same time, I noticed that your receivables increased quite considerably. Is it something temporary or something -- where the [ source ] is for it? And then the forward-looking question. In your outlook you say that from the fourth quarter, '23/'24 and subsequent months, you see increasingly challenging business environment. Could you be more specific which segments are seeing the most of the challenges? And could you maybe fine-tune the outlook for the fourth quarter in terms of what to expect for the EBIT, for example in 4Q, '23/'24, in a year-on-year comparison?

Let me start with the backward-looking question. Performance, third quarter, Starch and Sugar. So in Starch, I -- we have different sectors. One, yes, important factor, of course, is the performance of HUNGRANA. So we had a very weak performance in the last month in Q1 and Q2 due to the very low utilization rate in the factory. This is now recovering, and HUNGRANA is slowly coming back on track, and therefore we saw a better performance in Q3, especially HUNGRANA. This is one of the major impacts why on EBIT level Starch performed better. Also, of course, we see a downward trend in energy, especially electricity and raw material prices still having in place some good contracts on the sales side, and I think this then in combination leads to the better performance in Q3 in Starch. In Sugar, let me tell you that we already, let's say, made some corrections, let's say, or put some corrections on our inventories in expectation of the price pressure looking forward, and this mainly led to this lower result in Sugar. So this is really mainly due to the fact that we made some, let's say, provisions for the expected price pressure or not sold quantities that we have on stock at [ that ] time. The tax rate, you already gave yourself the right answer. So this is due to the write-down of our assets in Asia which are not tax-effective. Receivables, yes, this is always in combination with our sales. Sales are still up and on a quite high level. Therefore, also receivables are higher, but I would not see there any extraordinary development. So this is then for a temporary effect, more or less. But, of course, as long as our revenues are on that level, I would expect a stable development also on the receivables side. But let me also tell you that we are constantly working on an improvement program for our working capital, which is very important for our future performance and also our ability to invest in additional businesses. Forward-looking challenging, yes, of course, and I think I already mentioned it today that we expect challenges, especially in Starch. Here, ethanol is very much under price pressure. So we cannot tell you when prices might recover. The quotation with EUR 600, [ EUR 620 ] per cubic meter is a big challenge in combination with the actual raw material energy prices, so there we hardly make any profit. Therefore, this is a challenge. On the other hand, still, paper industry and other industry are not on -- at the level that we had, let's say, in previous years. So therefore, we expect also here some price pressure due to lower demand. Yes, so overall, this is due to the macroeconomics in Starch. And in Sugar, I also already mentioned, yes -- I mean, we expect a different situation in the world market here [ surplus ]. I mean, stock-use ratio should go up somewhere to 38%. It is still a low number, but there are dynamics. There's a lot of speculation and expectation here, and we see already a downward trend in the sugar prices. So we don't know what will be the price level of the next sugar marketing campaign. But yes, I think it will be more difficult than the situation we had in the last month. Mrs. Urbankova, is this okay for you, or do you….

Yes. As I said, if you could be a little bit more detailed regarding your EBIT outlook for the fourth quarter, as you usually give us some kind of guidance.

Yes. So this also all refers to the different segments that I already mentioned. Let's say in the Fruit segment, we still see a stable situation. We expect stable results also in the coming months, also in the Q4. In Starch, as I already mentioned, prices are significantly down. So I think that especially January and -- December, January and February will be challenging months in Starch. Here, we'll see a downward trend. And in Sugar, yes, I mean, it really also depends on the development of the imports from Ukraine on one hand. It depends on the final evaluation of the stocks unsold that we will have in our inventory at the end of the business year. So these are the things which are, let's say, difficult right now to evaluate. So therefore, again, Starch and Sugar are -- so Sugar will still be stable from the sales side, I think, more or less, and the prices because the contracts we have in place, but we do not know what will be the development of the market prices and this in combination with our stocks at the end of the business year which are unsold. And in Starch, overall, a challenge, price pressure, volumes down, ethanol.

I was just thinking of overall EBIT guidance than the description of the situation in segments, but okay, nevertheless, thanks for the answer.

Our next question comes from the line of the Baptiste de Leudeville, Kepler Cheuvreux.

Most of the questions I had has been answered, but I have some left. On the debt and the cost of debt, net interest expenses are up. Can you tell us what is the proportion of debt that is at fixed rate and the proportion at [ variable ] rate, please? And what is the average cost of debt, basically, at the Group level? And I had a second question. On the working capital you said that it's an important focus for you. Maybe you could share some kind of consecutive targets you could have in terms of working capital, in terms of sales or things like that?

Yes, cost of debt, in average, around 3%, and the ratio, fixed and variable, is always [ depending ] on the total level of debt, but actually I would say it's around 60% fixed and the rest is variable. And your second question -- sorry, was…?

Working capital.

Yes, working capital. I mean, our target is around, I would say, 25%, 26% of revenue, yes, round about, but it's mainly driven by our [ overfill ] prices. So -- but again, we must come down here, and of course, mid-term target must even be lower, let's say, than the 25%, 26%. Currently, we are higher. I think we are 28%, 29%.

[Operator Instructions] We have a follow-up question from Mr. Leudeville, Kepler Cheuvreux.

Yes, me again. Can you elaborate on the difficulties in Asia for the Fruit preparation business? Because overall in Europe it is quite strong, also in Australia, North America. So -- I understand that China is a problem, also Argentina and Brazil. So can you explain those differences depending on regions?

Of course. So China is very special, yes. So it's a very dynamic market. We are heavily depending on 2 or 3 big customers there. As you might have heard that the business environment is very challenging there due to the -- let's say, the COVID pandemic. So there we had a dramatic downturn in consumption, especially also for fruit yogurt, yes. This is somehow comparable with the Fruit Service -- the decline of the Fruit Service business in Europe. The consumption habits in Asia are totally different than in Europe, yes. So many products are consumed on the way to the office or somewhere else. So these overall lockdowns really led to a dramatic downturn in consumption. The recovery comes very slowly, not as fast as we hoped and expected. And also somehow, we see a certain shift in consumption, more to fresh milk from yogurt. So this is also something which puts our sales volumes under pressure. Also, we see a rise of competition there. There are more players in the market now. Therefore, overall, due to our very enlarged capacity, let's say -- when we opened our second factory in 2019, we had a very low utilization rate of our factories. It's around 50%, 60% only. And this causes also very much price pressure on our side. So we have to fight for volumes. The markets were declining. So recovery comes slowly, more competition. Overall, the situation is not very positive there. So in Brazil, yes, I mean, this is not so important. It's not so relevant to our total [ Group ]. I mean, we have revenue sales around EUR 15 million. So it's slightly positive. Overall, I just wanted to mention that the macroeconomics, that the market development in Argentina, this hyperinflation is still ongoing there. Brazil also is quite a difficult market in terms of macroeconomics. So there we see slow growth. It's also a little bit a challenge, but it doesn't have this huge impact on our overall profitability also compared to the past. There China plays a much more important role.

Yes, last question, sorry, on the Ethanol business. What would be the spot market price for ethanol that will make you breakeven at the EBIT level for -- Can you -- Basically, can you give us some element of elasticity, sensitivity of your EBITs according to market prices? And you said the ethanol contribution to EBIT was negative EUR 4 million. Was for the 9 first months the negative EUR 4 million loss against EUR 29 million loss? That's it.

Yes. That's right. And with the falling trend of the raw materials in the last month and the falling energy cost, we have a full cost of about EUR 700 to EUR 750 per cubic meter.

[Operator Instructions] Ladies and gentlemen, there are no more questions at this time. I would now like to turn the conference back over to Hannes Haider for any closing remarks. Haider?

Thanks. [ Thank you ] for the questions. Thanks for the interest in AGRANA, and your participation in the call. We wish you a successful remaining day, and goodbye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.