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 homepage. Today, we released the statement for the first quarter of financial year '21, '22. We are going to discuss the highlights of this period and revisit our full year group guidance for business year '21, '22. 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.

Thank you, Nikolai. Ladies and gentlemen, also a warm welcome from my side to all of you. As mentioned, I would like to give you a brief overview about the business performance in the first quarter financial year '21, '22 and details about the guidance for financial year '21, '22. Let me start with the highlights of the first 3 months results on Page 4. First of all, let me point out once again that, unfortunately, Corona pandemic is not over and still shows different issues and dynamics in regions as well as in business areas every day. As we enter the second pandemic business year, we are not just facing current pandemic influences but also facing [ pre-year ] pandemic-driven comps. Sometimes they are challenging, sometimes they are easy to be exceeded. But in total, with no homogeneous pattern neither in quarter 1 nor in the following quarters. Our overall quarter 1 performance, in particular, is no exception in this regard. Group revenues came in moderately above previous year's level. Group EBITDA was down by 10%. Group operating result was down 20% or in absolute terms, EUR 12 million. Cash flow decreased to EUR 96 million. EPS came in at EUR 0.07 against EUR 0.12 the year before. Net financial debt end of May '21 came in on prior year's level and EUR 86 million lower against end of business year 2021. Now let's have a first look into the segmental performance on Page 5 before we get into more detail segment by segment. For starting, let me flag a reporting change. Südzucker will begin reporting 5 segments: sugar, special products, special products, CropEnergies, starch and fruit as of fiscal '21, '22. The starch division, which was so far included in segmental special products was split up. Südzucker AG's sugar-related starch activities has now been assigned to the sugar segment whose operational management remains the responsibility of the Sugar division of Südzucker. AGRANA's starch activities are now reported as new segment starch. Special products segment continues to bundle with the division's BENEO, Freiberger, PortionPack consumer-oriented products. We have included adjusted previous year's numbers for all quarters in the appendix of this presentation. In quarter 1, group revenues increased moderately, while special products segment revenues declined moderately. They were up moderately in the sugar and fruit segment and rose significantly in the segments CropEnergies and starch. Group EBITDA was EUR 13 million lower than the previous year at EUR 121 million. Group operating result decreased by EUR 12 million. Beyond even quarterly business development caused by the pandemic since quarter 1, 2021, distorted results within the quarters and affected the entire 2021 fiscal year. The distortions may now lead to some opposite effects during the current '21, '22 fiscal year. The operating result in the sugar, special products and starch segments fell sharply in the first quarter, but rose significantly in the CropEnergies segment. And fruit segment operating result was on par with last year. Let's continue with segment sugar on Page 7. Let me quickly revisit our view on the global sugar market. Its latest update in July '21, IHS Markit, formerly F.O. Licht has increased its deficit outlook for running sugar market in year 2021 from 3 million to 4.3 million tonnes, which confirms another deficit year. The stock-to-use ratio is expected to drop from 40.2% to 37.8%. Our next sugar market year '21, '22, the forecast shows a balanced market with another drop of the stock-to-use ratio down to 37.3%. This confirms a positive fundamental global market environment for at least the next 18 months. Now let's have a look at the European sugar market environment on Page 8. EU has changed into a net importer status since campaign 2018, which has led already 2 steps of price increases in the last 2 sugar marketing years. There are several reasons for the positive European spot price development since end of last calendar year. First, the world market price as the fundamental pricing starting point has increased significantly. Second, so far, we monitor frost damages in the spring sugar sowing season and overall good growing conditions, overall, resulting only in a modest increase in sugar production, which confirms EU net importer status also in '21, '22. This environment up to 100% of our sugar volume of the campaign '21 is up for negotiation, predominantly representing sugar contracts for the period October '21 to September '22. Let's have a look into the concrete development in segment sugar in the first 3 months on Page 9. Sugar revenues increased moderately. The improvement was driven mainly by higher sugar sales prices since the beginning of the new 2021 sugar marketing year with sales volumes at the previous year's level. The first quarter of last financial year initially benefited from hoarding effect at the start of the Corona pandemic in spring 2020. In the course of the last fiscal year, these benefits were strongly overshadowed by weaker demand from industrial sugar customers. Operating loss was significantly higher than last year. Higher sugar sales prices were offset by increased production costs from the 2020 campaign and lower retail sales volumes. Because sales volumes were still high in last year's first quarter, it was not yet possible to achieve higher sales volumes in the first quarter of the current fiscal year. Let me continue with segment special products on Page 10. Following a very successful year 2021, even better than originally forecasted, we are now facing high comps. In the first 3 months, revenues decreased moderately. Overall, lower sales volumes impacted negatively as the previous year was characterized at the beginning of the first quarter by the partly sharp increase in demand, for example for frozen pizzas. Operating result decreased significantly, reflecting the revenue development. Lower sales volumes and higher raw material costs could not be compensated. Let me now turn to segment CropEnergies on Page 11. Revenues in segment CropEnergies were up sharply. Following pandemic-related distortion in fuel demand in the same quarter of the previous year, higher volumes and sales prices contributed to revenue growth. The previous year's volumes in the first quarter were significantly lower due to the extended shutdown at the Wanze location caused by the pandemic. Moreover, previous year ethanol prices had temporarily fallen to historically low levels as a result of the collapse in demand caused by strict mobility restrictions in the first wave of the Corona pandemic. In line with the revenue growth, operating result also improved significantly. Higher sales prices and volume growth had a positive effect, more than offsetting the increase in raw material costs. The average ethanol price in the first 3 months was at EUR 587 per cubic meter, around EUR 100 per cubic meter above last year's quarter. The average ethanol price in June was EUR 675 per cubic meter against EUR 566 per cubic meter in June 2020. Also in July, we see so far a promising level at around EUR 650 per cubic meter. Let's move on to segment starch on Page 12. Revenues came in significantly above previous year's level. Revenue growth was driven in particular by a very good volume trend and higher ethanol prices. Operating result significantly decreased. Higher raw material costs, in particular, but also lower sales prices overall resulted in a declining margin. Let's move on to segment fruit on Page 13. Revenues came in moderately higher. Revenues from fruit preparations rose mainly due to higher volumes, while revenues from fruit juice concentrate were slightly lower despite stable volumes as a result of marginally lower sales prices. Operating result reached last year's level. Moderate volume growth with stable margins led to a significantly higher contribution to results in the fruit preparations division. Significantly lower margins attributable to lower sales prices at higher costs and unchanged volumes overall were the results of the fruit juice concentrate division. Let me now turn to the main point in the P&L on Pages 15 and 16. The equity result was slightly negative, which was driven by the development of ED&F Man. The overall group performance of the commodity trading business was still not strong enough to compensate for the charges related to the strategic realignment delays caused by the pandemic. The financial result came in at minus EUR 10 million. It contains the net interest expense of minus EUR 8 million and the other financial result of minus EUR 2 million. Let's continue on Page 16. Taxes on income came in at EUR 9 million after EUR 14 million in the same period last year. It is again distorted by the development in segment sugar, for which there was still no recognition of deferred taxes. Earnings per share came in at EUR 0.07 against EUR 0.12 in the prior year. Let me now turn to the cash flow, working capital and investment development on Page 18. Cash flow decreased by EUR 22 million to EUR 96 million, representing 5% of revenues. The cash inflow of EUR 55 million from decline in working capital was mainly due to the sale of sugar inventories during the first 3 months. CapEx reached EUR 55 million against EUR 52 million in the last year. Let me now move forward looking at the balance sheet on Page 20. Net financial debt end of May reached prior year's level and is down EUR 86 million against end of February 2021. Total investments and earnings distribution were fully financed from cash flow and the cash inflow due to the reduction of the working capital. Gearing is at 40% against 38% one year ago. Equity ratio is unchanged at 46%. Let me now turn to the outlook on Pages 22 to 26. First of all, I want to clearly stress that our first forecast of May as well as today's confirmation does not anticipate a fourth Corona wave. Having said that, Group revenues should come in between EUR 7 billion and EUR 7.2 billion and operating result in a range between EUR 300 million and EUR 400 million. Despite the first quarter with lower earnings against last year, we stick to our group guidance. So it is obvious that it will be a bit more challenging to reach the midpoint of the range. Now to the segments in particular. Segment sugar should still see a negative H1 and a positive H2 operating performance. On a full year basis, we expect an earnings range between EUR 0 and EUR 100 million, which would be an increase of EUR 180 million against last year. This improvement is the main driver for the increase in group profitability. As stated on group level, also midpoint of the sugar segment's guidance will be more challenging in light of quarter 1 performance. To reach the sugar guidance of H2 and full year, we still assume a moderate sales price increase for sugar market in year '21, '22. Now to segment special products. Here, operating result is expected to come in moderately below the high pre-year level. Segment CropEnergies operating result is expected to range between EUR 50 million and EUR 80 million. Segment starch operating result is expected to decline significantly. Segment fruit should be able to realize a moderate earnings increase. Let me continue with Page 23. Group EBITDA should follow the positive operating result development. CapEx should stay on a modest level. Net financial debt is expected to be significantly reduced. Leverage ratio are expected to improve further. Ladies and gentlemen, let me summarize the overall outlook in the presentation on Page 25, with some statements also in regard to the midterm development. First, turnaround sugar is due to continue driving group earnings improvement; second, started deleverage phase gains further momentum; third, Strategy 2026 PLUS sets the basis for sustainable successful group development; fourth, the most important key driver is structural cash flow that clearly shows the way; and lastly, the development confirms the expected enlargement of Südzucker's room to maneuver. It secures the way to actively shape Südzucker's future, especially in conjunction with Strategy 2026 PLUS. Thank you all for your attention.

Thank you, Mr. Kolbl. We are now ready to take your questions.

[Operator Instructions] The first question is from the line of Anton Brink with [ Antaurus Capital Management. ]

I would have 2 questions. First of all, a question on the beet cultivation. Looking at the comments there in the statement, it seems there's a 3% increase in beets planted. Well, I think you've taken out 15% of the production capacity. To what extent do you expect you to return to, let's say, normal utilization levels, which should return our result in a very significant uplift in the operational results of the sugar segment?

And the second question.

The second question is you -- well, basically, you indicated that after this Q1, you see more difficulties reaching -- or at least it has become more difficult to reach the midpoint of the sugar segment guidance. But implicitly, I mean, I see a very favorable rise trajectory. And I'm wondering to what extent -- we should already have expected a weak H1 and a stronger H2. And to my knowledge, it seems that sort of the strength of H2 only seems to increase given the price trajectory and the comments on yields in Europe.

Thank you, Anton, to your 2 questions. First question to the overall, let me say, beet cultivation in Europe and our expectations, let me say, for the yields and what that mean for our capacity utilization. Clearly, we see overall a slight increase in the cultivation areas in Europe. So far, what we can monitor in our regions, we had frost damages in spring. But over the last, let me say, weeks and months, we have seen so far good cultivation conditions there with good rainfall, warm weather. So what we can say today, and we are at the beginning of July that we see a normal yield development for the campaign 2021, and that will bring a clearly higher capacity utilization in our factories. And we forecast, let me say, a campaign length with the current knowledge of around 115 days for Switzerland Group. That means that is still not, let me say, our goal of, let me say, a steady normal capacity utilization of 125 days. So clearly, also from the campaign 2021 improvement against last year, yes, but still not the level what we are heading. So looking forward for '22, '23, there is some room for improvement in the capacity utilization. Yes. And then to the, let me say, sugar guidance, clearly, we have an extreme volatility month by month, driven by the -- also by the pandemic. We said at the beginning, let me say, some assumptions for all divisions, then -- and one of the main assumption was, let me say, the easing of the Corona-driven restrictions starting at the beginning of June. And here, let me say clearly, we have, in some regions some delays -- let me say, the reopening are delayed. And so we were slightly behind our volume assumptions in sugar in the first quarter, to be very clear. But we have to wait and to see June numbers how the development has been in June. And therefore, we only want to flag. This is challenging, yes, to reach the sugar operating profit guidance for '21, '22. And we clearly flagged that this -- to reach this guidance, there is also a second precondition or a second assumption in this moderate price increase. And clearly, with the current framework we have globally as well as in the EU, it seems to be clearly feasible, yes. But also to say here also clear at the current state, we have not, let me say, comfort in the volumes we could so far contract that we have to say clearly, there is some way to go. But the framework is still very positive for us.

So implicitly, you opt to be -- or to have a cautious approach when it comes to both pricing and factory utilization. But it -- if things turn in the right direction, there should be more upside, right?

Let me say, this is a realistic approach with the current framework we have.

The next question comes from the line of Oliver Schwarz with Warburg Research.

I've got several. I will try to ask them one by one, so that we'll get kind of a flow in here. Firstly, coming back to what you just stated on campaign length, Mr. Kolbl. Seems like the market as such is quite good. Prices for sugar, obviously, mostly the spot prices in Europe have started to increase again. And the weather is also providing at least some tailwind in comparison to the last year. So basically, what's holding you back from reaching your campaign target of 125 days. What has to happen for Südzucker to achieve on a sustainable basis an average of 125 days for campaign length that then translates to a very favorable capacity utilization? That would be my first question.

Clearly, we are back in our goal in acreage, yes. This is a difficult framework for farmers, yes, especially for beet-growing farmers. We have high prices for alternative crops. And so we haven't reached for the campaign 2021. Our acreage goals, let me say, is the main driver, and we work very hard on that topic to increase acreage across all regions.

Yes. But you just said that the acreage target as such has been reached, if I didn't hear you incorrectly. So is it really a question of acreage? Or is it a question of yield? Or is it a question of sugar prices versus alternative crop prices that's holding you back from reaching your campaign length target?

It is clearly a starting point. It's the acreage figure we are heading for, and then the normal yield. And for the campaign '21, we haven't reached our acreage goal and with the current knowledge we have starting -- we are -- in the beginning of July. We see, let me say, the possibility to have normal yields in the campaign '21. The main point is the lag in acreage. But it's a good development from last year's capacity utilization up to this 115 days. It's a good development.

Yes, I think we can...

Also clearly, we had also increased acreage against campaign 2020 because also success -- '20 was a really disappointing campaign, yes.

Yes, absolutely. We both share that view. I'm just wondering for the -- not for this year's campaign but for next year's campaign. Basically, let's say, if prices remain the same like they do both in regards to alternative crops. And in regards to the then, let's say, increased level of sugar that you are projecting, would that enable you to go for, let's say, an increase in acreage already in the next campaign that brings you up to the 125 days? Or are there other factors that have to become more positive for Südzucker to reach that goal in the next year's sugar campaign?

Clearly, Oliver, this is our goal for the campaign 2020, yes. We are in the middle of the contracting season for 2020. Let me talk about the campaign in autumn 2020 to make it clear for everybody in the call. And this is the goal, yes, to improve further. Acreage, yes, to come to our clear goal to have utilization capacities of 125 days.

Excellent. Next question would be in regards to the -- I think your sugar price negotiations with your customers from the beverage and the food industry might have already started. It's still early in the negotiation period, but still -- have first contracts been signed? And if so, let's say, at what level of prices have those contracts been signed? Are we talking about the increase that you think is required to reach your -- the midpoint or basically the bracket that you're giving for operating result in sugar? Or is there still some way to go? And secondly, in regards to volumes, last year, you run into the problem that the sugar campaign yielded less sugar than you originally anticipated leaving you with most of sugar volumes produced contracted on an annual basis on prices, that's, let's say, in regards to spot prices might not be the most favorable mix that you could have achieved with the benefit of hindsight. Are you willing to contract the same or less levels in annual contracts and [ bank ] more on the spot market this year or is the pattern to be -- will the pattern remain the same basically?

To the first one, the assumption for fiscal year '21, '22 operating profit guidance is to have a moderate price increase, yes, from 1st of October, '21, onwards against last sugar marketing year. And this is a moderate one. And what we have contracted so far is absolutely in that corridor moderate price increase. So this is a confident development. And clearly, as Anton said before, we have some backwind with the spot price development we have seen over the last 4 to 6 weeks clearly. So we are absolutely in line with the price assumption, moderate price increase, sugar market in year '21, '22 against 2021. And this is, let me say, the main assumption for the profit increase in sugar, so fully in line. And let me say about the operational tactics of our sales departments. Clearly, we have some positives that we have some sugar also available from 2021 for the next 5 to 6 weeks in the summer months. And about the tactics for '21, '22, it depends clearly also of the final outcome of campaign '21. And this is clearly a long way to go. Oliver, think back, on the campaign '20 went from starting from end of September up to December. Clearly, we had to reduce our volumes by 500,000, 600,000 tonnes our former assumptions. And so it is really too early to say what is the outcome of campaign '21. And then this drives also, let me say, the split, but clearly is we want to fix as much as we can in that environment, but not to over pace.

Understood. I have one last question before I go back to the line, and that would be -- the targets of the segment sugar has been unchanged in regard to operating profit, which is from basically EUR 0 to EUR 100 million. The segment composition, however, has changed a bit because it's now including some of the starch activities that were formerly reported in the specialty segment. And if I did do my math correctly, using also AGRANA's reported results from this year and last year, it seems like the assets that have been moved to the sugar segment have been loss-making. So is that implicitly an increase in the outlook for the sugar segment? Or have I done my math simply badly?

Now this is, let me say, you are right. The unit which operates with losses in fiscal 2021 and is now included in the current fiscal year in the sugar segment. And we assume also for -- with the current framework, high grain price, et cetera, also on loss in '21, '22 for that business unit starch sites. But this is included, let me say, in the operating profit guidance for '21, '22 in sugar.

[Operator Instructions] The next question is a follow-up from the line of Anton Brink.

Yes. I'm coming back to the question of the starch with regard to the comments on the beet campaign period because in all fairness, I don't think I fully understand the moving parts. Basically, there's a 3% increase in acreage, and I think you've taken out 15% of your European production capacity at the end of October 2020. Yet, you only guide for an increase in the campaign period of less than 10% i.e., from 106 to 115. And I'm not entirely sure I understand that in the context of the more positive wording about the potential for yields this year. Would you mind explaining me what am I missing here?

Let me say, Anton, also on our side, some problems to get the [indiscernible] -- to cause the question really.

Should I rephrase it.

Anton, maybe one piece you're missing here is that you're comparing, let's say, taking out 4 factories. This one has been taken out 1 year before already, that also last year, yes, you're comparing, let's say, a basis that does not take into account that all of the factories, including those factories were fully, let's say, utilized. So we have to be careful to compare here apples and peers and maybe that is the missing piece in your calculation. That's maybe one of the points.

Maybe Anton, you can clarify also that after the call to go in that more detail, but [indiscernible] to separate the numbers or figures you have here clear, let me say, calculation framework.

Okay.

But really for all other participants, yes, there was an increase in acreage and a normal yield, and this is a better one than last year. And these are the 2 drivers to bring the campaign length from 107 days 1 year ago to 115 days. And we work hard, our beet departments to increase acreage further, yes, that we can reach with normal yields our capacity utilization goal of 125 days.

The next question is a follow-up from the line of Oliver Schwarz.

Firstly, ED&F Man, why has the loss in the equity result increased. Obviously, that should be attributable to the performance of ED&F Man. Is that going from bad to worse or is that the peak of the negative performance we are likely to see in the current fiscal year?

Oliver, you're right that we have seen also in quarter 1 [ bad ] development. On the one hand, we have good development of the agri commodity business. This is still profitable in a challenging environment, but we have still, let me say, negative burden from the agri industrial assets they own. And here, we have delays, let me say, in the restructuring also due to Corona. And then, let me say, also this new financing period, they have reached -- has also brought higher financing costs, which also weighed on the profitability of ED&F Man. And we clearly, as also in the -- our annual analyst conference, we clearly have to flag that we see still high volatility in ED&F Man earnings. And if -- the longer, let me say, the industrial assets weighed on the company, the longer we have the situation that the agri commodity business, which is profitable cannot compensate, let me say, these losses, and this higher burden from the financing costs.

Okay. In regards to starch, when we had the last call, you alluded to, let's say, a time lag in raw material costs rising and selling prices increasing of, give or take, 3 months. So obviously, we have seen as a result of the increase in raw material prices in Q1 with margin pressure as a result. My question is, would you say we have reached the peak in margin pressure already in Q1? Or is this process to get even more pronounced in Q2 and then probably petering off depending on the raw material price development in future weeks and months? Or is Q1 already, let's say, the peak of margin pressure and rising selling prices will start to compensate the increase in raw material prices from Q2 2021 onwards?

Let me say we see with the current knowledge of today and that we say in phasing out of that pressure, quarter 2, starting with quarter 3. Clearly, we have also seen how the growing price development over the next month with the new crop year. And so we still see a margin level also at the beginning of quarter 2 on that level we have seen in quarter 1. But clearly, phasing out [indiscernible].

There are no further questions at this time. I hand back to the company for closing comments.

Okay. Then ladies and gentlemen, thank you all. And I hand over to Nikolai, sorry, I think what is perfect.

Thank you all for participating today. And yes, as for Anton, it's also true for anybody else, if you have additional questions or more detailed questions, don't hesitate calling us. Thank you, and goodbye.

Thank you. Bye-bye.