Südzucker AG (SZU) Earnings Call Transcript & Summary

Thank you and good morning, ladies and gentlemen. We welcome all of you to our conference call this morning. The underlying presentation for the call has been published this morning at 7:30 a.m. CET on our home page. Today, we released the statement for the first 6 months of financial year 2020/'21. We are going to present the highlights of this period and reiterate our full year group guidance. Following the call, we are going to answer your questions. A recording of this call will be available on our home page shortly after the call. Now let me hand over to Südzucker's CFO, Thomas Kolbl.

Good morning, ladies and gentlemen. A warm welcome from my side. I hope you all are healthy. As mentioned by Nikolai, I would like to give you a brief overview about the business performance in the first 6 months of financial year 2021 and details about the full year guidance for financial year 2021. Let me start with the highlights of the first 6 months results on Page 4. First of all, let me point out that the corona pandemic is not over and shows different issues and dynamics in regions as well as in business areas every day, most recently with a more negative trend. Therefore, I will not get tired to talk about the fact that the diversified portfolio is helping Südzucker in such a situation. Also quarter 2 performance positively underpins the portfolio mix. The overall development in the first 6 months confirmed the good start in the business year 2021, especially in these exceptional times. Group revenues came in on previous year's level. Group EBITDA was up by 28%, totaling EUR 288 million for our nonsugar operations. Group operating result was up by 73%. Also, cash flow increased significantly by 34%. EPS came in at plus EUR 0.12 against minus EUR 0.07 the year before. Net financial debt end of August 2020 increased against August 2019 but decreased against 29th of February 2020. Now let's have a first look into the segmental performance on Page 5, before we get into more detail segment-by-segment. Group revenues came in on previous year's level. Revenues decreased significantly in segment CropEnergies, while segment special products showed a moderate increase. Segments sugar and fruit reached last year's level. Group operating results showed a strong increase. The increase was driven by a loss reduction in segment sugar and a significant earnings improvements in segments special products and CropEnergies. Continue with segment sugar on Page 7. Let me revisit our view on the global sugar market. Latest update end of September 2020 F.O. Licht has slightly increased its deficit outlook for sugar market in year '19/'20 from 5.3 million to 5.6 million tonnes, which is still reflecting a massive deficit. This deficit also reflect the corona-driven temporary lower consumption. The stock-to-use ratio is expected to drop from 43% to 41%. It is important to note that this expectation already partially contains the expected switch from ethanol to sugar production in Brazil. For the running sugar market in year '20/'21, F.O. Licht has decreased its deficit forecast from 2.4 million to 1.7 million tonnes, which would lead to another decrease of the stock-to-use ratio to 39%. This still confirms a generally positive fundamental global market environment for the next 18 months. Now let's have a look at the European sugar market environment on Page 8. The EU market has changed into a net importer status since campaign '18, which has already led with a time lag to a first positive price step in October 2019. The expectation of a continued net importer status also beyond October 2020 has led to a confirmation of the European spot price level. But in the last couple of months, we monitored some softness in light of the corona-driven weakness in demand, which was more than compensating for the difficult harvest season 2020 in light of the beet yellow virus and other factors negatively impacting sugar yields. As a result, and in combination with no world market price report over the last month, as of today, we expect not to fully achieve our price increase goal across the whole sugar portfolio. Especially in these exceptional times, as of today, we have not yet fully finished our contract negotiations for contract season starting 1st of October 2020 onwards. Out of the expected production volume, roughly 80% of contracts have been signed on a 1-year basis and roughly 20% are spot volumes. This leaves us with some flexibility also as the outcome of current campaign is not yet clear. Let me now turn into the concrete development in segment sugar in the first 6 months on Page 9. Revenues in segment sugar came in on last year's level. The development is marked by lower sales volumes, mainly due to the drought-driven lower sugar production in campaign 2009 (sic) [ 2019 ] and higher sugar sales revenues. During the course of the first 6 months of business year '20/'21, we have observed a lower demand from our industrial customers over time in light of the corona pandemic, which is more than offsetting the retail hoarding effect realized at the beginning of the fiscal year. Operating loss was significantly reduced from minus EUR 93 million to minus EUR 56 million. The improvement is mainly driven by higher sugar prices since October 2019. So far, these improvements more than compensate for lower sales volumes and higher production costs. Currently running campaign and resulting sugar output is again strongly influenced by the continued drought, additional influences from past damages. Beet growing area is reduced by 12% and we expect an average campaign length of about 107 days against 114 days of last year, strongly below our targeted utilization of about 125 days. Therefore, the resulting overall sugar output from beet is expected at 3.8 million against 4.3 million tonnes 1 year ago. Let me continue with segment special products on Page 10. Following a very successful year 2019/'20, our original target was to repeat this success. Following a good start into business year and the continuation of this performance in quarter 2, we decided to raise the outlook for segment special products. I will come back on this at the end of the presentation. Now to the concrete performance in H1. In the first 6 months, revenues grew by 6%, supported by higher sales volumes following the starch production capacity expansion. Effects from the corona pandemic varied in regard to the different product categories and timing during H1. In this slide, operating result increased by 25% in quarter 2 and 19% in H1 accumulated. Main drivers were higher sales volumes and partially lower raw material cost, whilst ethanol prices strongly recovered in the last month. Let me now turn to segment CropEnergies on Page 11. Revenues in segment CropEnergies were down by 8% in light of lower volumes, but prices recovered in quarter 2 to all-time high levels. This partially offsets the volume and by-product price decline. In light of an extraordinary Q2 earnings increase of 50% against an already strong previous year's level, operating result was up by 16% in H1 overall. Besides higher ethanol prices, lower raw material costs compensated for lower by-product prices. The average ethanol market price in the first 6 months was EUR 578 per cubic meter against EUR 606 per cubic meter last year. In quarter 2, EUR 664 versus EUR 620. And the average ethanol price in September was up to EUR 800 against EUR 567 per cubic meter in September 2019. Also, the first days in October has shown a promising level. Let's move on to segment fruit on Page 12. Revenues came in around previous year's level, fruit preparation showed an overall stable performance. Fruit juice concentrates came in above last year's level in light of higher sales revenues despite lower sales volumes. Operating results improved in quarter 2, but is still below last year's level on accumulated H1 basis. We observed a fruit concentrate margin decrease in light of higher raw material costs from the 2019 campaign. Burden from lower sales volumes in fruit preparations, lower sales volumes and lower margins have been compensated by cost savings. Let me now turn to the main point in the P&L on Pages 14 and 15. The equity result came in at EUR 1 million against EUR 2 million, 1 year ago. Financial results came in at minus EUR 26 million. It contains the net interest expense of minus EUR 12 million and the other financial result of minus EUR 14 million. The increase in the other financial results is mainly marked by a depreciation of a minority stake in a French sugar plant. Let's continue on Page 15. Taxes on income decreased to EUR 26 million after EUR 34 million in the same period last year, but the tax rate is again distorted by the development in segment sugar, for which there was no recognition of deferred taxes. Earnings per share came in at plus EUR 0.12 against minus EUR 0.07 in the prior year. Let me now turn to the cash flow, working capital and investment development on Page 17. Cash flow reached EUR 237 million, representing 7.1% of revenues. The cash inflow of EUR 130 million from decline in working capital was due mainly to the sale of sugar inventories during the first half year, which exceeded liabilities to beet farmers paid during this period. CapEx decreased by 15% in H1. Let me now illustrate the main movements in the balance sheet on Page 19. Net financial debt end of August is up by EUR 219 million against last year and down EUR 125 million against end of February 2020. Total investments and earning distribution were fully financed from cash flow and the cash inflow due to the reduction of the working capital. Gearing is at 40% against 33%, 1 year before. Equity ratio with 46% is still very solid. Let me now turn to the outlook on Pages 21 to 25. First of all, let me set the framework for our current projections for fiscal '20/'21. In April and May with the -- in the annual report communication, we informed you about the first indicative outlook for fiscal '20/'21. That outlook did not include effects from the corona pandemic as it was impossible to anticipate the impact and duration of this exceptional situation. At that time, we had promised to update this forecast alongside the development of the pandemic as soon as possible. Mid of June, together with the pre-release of quarter 1 numbers, we have converted the pre-corona outlook into the first outlook, including as much as we knew about the pandemic impact at that point in time, signaling the below midpoint guidance. Therefore, it is important to note that in view of the ongoing corona pandemic and the high volatility in all segments, the forecast is still marked by very high uncertainties. Having said that, group revenue should come in at EUR 6.9 billion to EUR 7.2 billion, and operating results should reach EUR 300 million to EUR 400 million. At this point in time, we see the earnings quality more towards the lower end of the range. This is mainly due to the segmental outlook changes, which I'm going to talk about in detail in the following. Firstly, in segment sugar. As a result of the poor sugar harvest in 2019, the plant shutdowns after the 2019 campaign and the overall lower demand caused by the corona pandemic, we expect sales volumes to drop again. Nevertheless, driven by higher sales revenues, we still anticipate an increase in revenues. So it is expected to be a slight increase against a significant increase so far. In this light, we have also adapted our operating result outlook. Now we expect an earnings range of minus EUR 100 million to minus EUR 50 million against the former forecast of minus EUR 40 million to plus EUR 60 million. As expected, H1 came in with a loss. We continue to expect the second half year result to improve significantly compared to the same period last year. Let me clearly stress that this would still mark a very strong earnings improvement against fiscal 2019/'20. And EBITDA will definitely turn into substantial positive territory. Uncertainties exist surrounding 3 topics: to what extent sales revenues can be increased for the still outstanding contract volumes; for the further volume development in the corona pandemic environment; and finally, the final capacity utilization in the just started campaign due to the continued drought and stronger pest infestation in some cultivation regions. So far, about the outlook for segment sugar, as mentioned earlier, in light of an excellent performance in H1, segment special product is now expected to show moderately higher revenues and a moderately higher operating result against the former expectation of only a slight increase of revenues and an operating result only on previous year's level. As mentioned in segment sugar, uncertainties related to the corona pandemic exists for the further development of volumes, sales revenues and raw material costs. CropEnergies had already adjusted upwards its revenues and earnings forecast on 15th of September, revenues are expected to reach EUR 790 million to EUR 840 million against a significant reduction expected so far. The operating result is expected to reach EUR 110 million to EUR 114 million against the significant reduction expected so far. CropEnergies was able to achieve a very good performance in the recent months due to the rapid improvement in sales revenues resulting from a rapid removal of mobility restriction. The first half year operating result was significantly above the previous year's level, as explained earlier. However, the precondition for further growth is that ethanol demand remains robust, and then there will be no renewed significant mobility restrictions in EU. Segment fruit should be able to increase revenues and operating results moderately. Per the improved performance in quarter 2, achieving this forecast remains still difficult. Let me now turn to Page 22. The EBITDA range of EUR 660 million to EUR 760 million mirrors the operating development. Investment in fixed assets are expected below previous year's level. On this slide, we see the level of net financial debt-to-EBITDA significantly improve against last year's figures. Let me now turn to Page 24. Ladies and gentlemen, let me summarize my presentation, highlighting 3 important points. Firstly, diversification strongly helped to successfully weather the corona storm. Secondly, we still expect a significant earnings improvement despite the reduced outlook for segment sugar and all uncertainties linked to the corona pandemic. And thirdly, the temporary corona-driven demand dent in segment sugar is bolstered by a strong nonsugar performance into the direction to a new record earnings level. We finish my presentation on Page 25. You might remember this structural cash flow chart already from our conference call in May repeated in quarter 1, but I would like to use it one more time. Despite all uncertainties, it illustrates the expected strong EBITDA improvement in sugar and nonsugar segments alongside the guided CapEx reduction. As mentioned, sugar returned into substantial positive territory and nonsugar is expected to show record results, in this slide, we clearly reiterate that this sets the starting point for a substantial deleverage phase in '20/'21, leading to a significant improvement of respective financial ratios. Ladies and gentlemen, Südzucker Group is going to deliver a massive earnings improvement in fiscal '20/'21 and, as of today, is confident to see further improvements going forward. Thank you all for your attention.

Thank you, Thomas. Let me hand back to the operator to open up for the questions.

[Operator Instructions] And the first question comes from the line of Michael Schäfer of Commerzbank.

Yes. Coming back to the sugar segment and the outlook you presented, Mr. Kolbl, you referred to 107 days in this year's campaign and basically you also indicating that at midpoint, you're generating still an operating loss of EUR 75 million despite improving pricing environment. So the question goes, should we think about another plant restructuring ahead in order to bring basically the operating profit at this segment to a structural breakeven point at least? So this would be my first question. And the second one is following up from what you said at your last sentence in your closing remarks basically that there are further improvement also expected going forward. I wonder whether you can shed some more light on what you think about the key drivers of this further earnings improvement going forward primarily when it comes to the outlook into next fiscal year on the back of what you have just contracted also on the sugar side.

Yes. Okay. Michael, to your both questions, I think there's a link together. First of all, I think we tried to describe the valid points why we have to delay, let me say, to come to breakeven in the sugar operations. Due to the harvest situation, due to the lower sales volume, due to corona and due to the fact that we need fully, at the current point, see that we can, let me say, match our price increases. So clearly, it's a delay to reach breakeven. And for your question to the -- let me say, to the structural point, clearly, it is the second year of disappointing harvest situation. And therefore, as in the past, we have fully look on the whole value chain. What can we do from -- starting from the farmer base down to the customers. And clearly, we evaluate here, all regions and one area is public. This is the situation in Austria, where we had over the last 2, 3 years, additional negative influences. And it is in evaluation how the thing is going forward with the plant in Leopoldstadt. So this is clearly a topic, and we have to monitor, let me say, going forward, how we charge this framework sustainable. And to the, let me say, the first view to '21, '22 clearly with the current framework with the operations and profitability we reach in the nonsugar area. And the view that there is room for further improvement for '21, '22 in sugar. Let me say, should be able in the current framework to increase profitability also in '21, '22. But it's clearly very, very early to make such, let me say, statement in these exceptional times in which we are looking also back over the last 3 to 4 weeks, how the pandemic is, let me say, evolving.

The next question is from Oliver Schwarz of Warburg Research.

I have some -- a number of questions on sugar. I was under the impression that the upcoming price increases this year were mostly due to multi-annual contracts running out and being replaced either by annual contract or by new multiyear contracts. And now with the split you gave in regards to annual contracts spot 80%, 20%, there seems to be little room for multiyear contracts. Can you please confirm that the amount or the share of multiyear contracts has come down quite significantly and possibly provide a number? And I'd like to ask if you compare the annual contracts of last year compared to the annual contracts that you closed already this year, whether there was on average, a price increase, a flat pricing or price decline. And I have some other questions, but I'll leave you with that for the moment.

As said in my presentation, the split is 80% annual contracts and 20% spot contract. So only a small phasing, really a small phasing over 2, 3 months in the new sugar market in year '20/'21. But let me say for -- it is only a marginal point. And to your question about a comparison of the annual contracts we renewed in October '20 in comparison to October '19, there was a slight price increase.

And I've got a question regarding the minorities. If I understood correctly, there was a write-down or an accelerated depreciation on some French company, if you could elaborate on that one. And also I'd like to know about the performance of ED&F Man in the -- in Q2, please? And as the last point, for the time being, the tax rate seems to have increased sequentially because in Q1, the result was almost double what -- before taxes -- the result before taxes was almost double the amount of what we have this quarter, but the tax charge was hardly different from Q1. So what's behind that one, please?

First, the question to the write-down. We talked here about the participation within the 44%, let me say, participation stake of our French subsidiary, SLS, in a single French sugar plant. And we made there a depreciation of the full value in that plant. That is -- let me say that is the background. This company is in some difficulties. ED&F Man had in the second quarter, let me say, it was a difficult quarter. We have here to differentiate the performance of core upgraded commodities trading space here. As in the former quarters, ED&F Man really run a good profitability. Problem in our quarter 2 or in the ED&F Man quarter 3 was clearly the delay of the sale of the industrial assets, which are running with the red numbers. And so this participation lasted longer than expected on the overall figures of ED&F Man. So on our accounts, on quarter 2 isolated basis, a loss from ED&F Man. And the last question was related to the tax rate. And here, we have some, let me say, hikes and volatility in the tax rate. But in principle, let me say there are one point that CropEnergies run an extraordinary good profitability, especially also in Great Britain with the plant and this plant has high tax carryforward losses, which we could use then also in quarter 2. And there are, as I said, some other points, which helps to have the tax rate on that, let me say, low basis. And for, let me say, for the forecast, we still see the tax rate for '20/'21 with the current outlook we gave around 30%.

The next question is from Stef Abelli of BNP.

I have a little bit of a broader question, if I may. I mean we have seen negative EBITDA in sugar for now 2 years. And I understand that you're looking at an improvement of this. The rest of the company brands cracking businesses with positive EBITDA and having a negative EBITDA in sugar is quite significant from a cash flow perspective. I mean like just a little bit of a tricky question here. But why are you staying in this business? Why not just exit and focus on what is really accretive to your company? Is there anything that sort of like makes you really sort of tied to this business? Is it important for the rest of the company? Or what is the reason for staying in a business that has clicked negative EBITDA at the tune of almost EUR 100 million for 2 years?

Yes. Good question. First of all, to set the broader context, looking on the company name, it's Südzucker. This is and was -- was and is core to the business and also related, let me say, to the shareholding position. The main shareholder is the South German association, which owns 58% of the company. And this is also what we have, let me say, explained also to investors, to analysts and to interested stakeholders that this is, let me say, a clear signal that sugar is, and will be also in the future, one big core of the company. And as we explained in our speech, we have had 2 difficult sugar years with higher cash outflows. But we are on a good way, yes, to turn the sugar operations. And as I said in the speech, clearly, in the second half year, we will run, let me say, a high and substantial positive EBITDA basis in our sugar operations. And also for the full year, for the full fiscal year '20/'21, we will deliver a substantial positive EBITDA basis. And going forward with all the measurements we said in the past, we are confident that we will see a further improvement with the current framework we have also in '21, '22. And the nonsugar operation, I think the direction and the strategy we said over 20 years ago to diversify subsidiary and -- in other business fields was the right one and paid off over the last 2, 3 years.

Okay. And I guess the question that the gentleman asked in the beginning, I mean, at least sort of like looking at reducing your footprint favor in this area, is that a possibility?

Yes. We substantially, let me say, decreased our footprint due to the restructuring program. 2019, we closed 5 factories in sugar to refocus more on the European space our operations, we are the market leader in Europe. And we adapt, let me say, our product structure to the focus on European markets.

The next question is from John Ennis of Goldman Sachs.

I have a follow-up question on the sugar guidance as well. I guess your guidance assumes that the losses are smaller in 2H versus 1H to get to the EUR 50 million to EUR 100 million loss for the full year. But the outlook you've given for sugar includes volumes being down this marketing year and pricing only slightly improving, and I just thought combining that with the fact that 4Q is always a seasonally low EBIT quarter, I just wondered if you could help us bridge why that's going to be better. Is it because you're assuming high spot prices? Or is it something to do with the cost for the beet premiums, et cetera? Can you try and give us a little bit more color as to why it's going to be better than the EUR 56 million you lost in 1H, when volumes are down?

Maybe there was a misunderstanding for my answer to Oliver Schwarz. Here, the answer of a slight increase was only the comparison of the annual contracts we renegotiate in October 2020 then October '19. But the overall, I would say, volume here, we have a good or a substantial price increase, and that is the main driver and that will kick in together with the cost savings from October 2020 onwards, I think that was the misunderstanding.

Yes, that makes a lot more sense. I thought you said slight increase before, in answer to a previous question. And then my second question was just on the minority interest. I wondered if you could provide some guidance on the minority payment, given that the composition of EBIT is now skewed to CropEnergies.

Clearly, we -- when the outlook on the minorities in the P&L, then we see, I mean, clearly increase of the minority stake to CropEnergies due to the excellent performance of let me say, CropEnergies. The rest, let me say, hybrid bond also the AGRANA participation should be more or less on the level we have seen in fiscal 2019/'20. So the -- we expect an increase, this is clearly related to CropEnergies and you convert it from your operating results back to the minority stake because there's not a lot of space in between operating profit to net profit of CropEnergies, less financial results, et cetera.

[Operator Instructions] And we have a follow-up question from the line of Oliver Schwarz of Warburg Research.

Sorry for that one. Mr. Kolbl, could you please elaborate about the, let's say, evolve, how the beet previous -- not previous but premiums, beet premiums are evolving over time, given that you're currently suffering from lower yields and lower acreage, it seems to be clear that if you want to head in a different direction that you have to offer more money to the beet farmers. And that also gives me the bridge to what's happening at Leopoldstadt. I mean we all saw the press release of AGRANA, stating that they will close down the site if they aren't able to contract enough acreage or enough beets from the farmers and highlighting that the current supply to Leopoldstadt is not sufficient to maintain the plant up and running, indicating that they want more beets. I mean an easy way to push the farmers to grow more beets and dedicate more acreage to beet growing, obviously, is giving them a higher price. But given what you said about profitability and the bracket that you are guiding into, I was wondering if -- whether there is some bridge or is there some brackets that you could share with us of how much you are willing to share with the farmers before you say, okay, this is not sustainable in the short and midterm, and we rather pull out of that and close sites like Leopoldstadt because we won't be able to get sufficient supply also in the midterm, given the current situation that's likely to continue in the future. That will be my question.

I think I elaborate on that point earlier. Clearly, we have 2 pieces of that point. One is the profitability. And the other is to keep, let me say, high capacity utilization in the factories. And if that is not matching together, we have then to evaluate what to do maybe also to lower capacity structure. And this, let me say, exercise we did for Leopoldstadt. And if there is not enough, let me say, acreage out with the current pricing, that means at minimum 38,000 hectares, then it is a definite closure of the Leopoldstadt plant. And in our areas, clearly, it is a very difficult situation, the drought, corona, yellow virus, et cetera. And so we decided on Südzucker for the next year to change the formula and to offer the farmers to -- here a floor price and beet price of EUR 30 a tonne. And so going forward, that is, let me say, the pricing, which will kick on in our P&L. And we have clearly to see what is around then, how is the acreage development in the different region areas and how is, let me say, the cost curve of our factories to be -- to follow here clearly the development. Nevertheless, the current pricing with a normalized utilization, as said before, we see further improvements in operations also to be then operating profit positive.

Coming back to the EUR 30 per tonne per beet you just mentioned, is that a flat price or -- so is that including all current beet premiums? Or are there other surcharges coming on top of them for early delivery, for extra clean beets and the like? Or is that a flat price that's offered to basically everyone?

Let me say this is the price offering to everyone, including all, let me say, points, normal points, early, late delivering, et cetera. But clearly, we have to see how the final output of the campaign will be, yes. What are the volumes? What are the yields of the farmers? How is -- how motivated, how eager they are also to plant '21. And then we have to make a judgment, but this is that what we offered, yes, to calm down, let me say, this disappointing situation on farmer side. And this is -- this, let me say, pricing should cover by our sales revenue impact.

And there are no more questions at this time. I hand back to Nikolai for closing comments.

Thank you. Ladies and gentlemen, thank you for your interest in Südzucker AG. And in case of further questions, don't hesitate calling us. We wish you a good day. Goodbye and stay well. Thank you. Bye-bye.