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 half year of financial year 2021/'22. We're going to present 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 mention, I would like to give you a brief overview about the business performance in the first half year financial year '21/'22, and details about the guidance for financial year '21/'22. Let me start with the highlights of the first 6 months results on Page 4. First of all, let me point out once again that, unfortunately, the corona pandemic is not over and still shows different issues and dynamics in regions as well as in business areas every day. As we are halfway in the second pandemic business here, we are not just facing current pandemic influences, but also facing pre-pandemic driven comps. Sometimes they are challenging. Sometimes they're easy to be exceeded. But in total, with no homogenous pattern, neither in quarter 1 nor in quarter 2 or the remaining quarters. The strong quarter 2 performance was driven by the turnaround in our sugar business. Group revenue showed an increase of almost 10%. Group EBITDA was up by 11% in quarter 2 and group operating result by 27%. Cash flow increased by 10% in quarter 2. After 6 months, cumulated group revenues were moderately and group operating profit slightly above last year's level. EPS in H1 came in at EUR 0.24 against EUR 0.12 last year. Net financial debt end of August '21 came in EUR 117 million below previous level and EUR 183 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. First of all, let me flag again that Südzucker has started to report 5 segments: Sugar, Special Products, CropEnergies, Starch and Fruit as of fiscal '21/'22. We continue to include adjusted previous year numbers for all quarters in the appendix of this presentation and in all Investor Relations presentation for your reference. Group revenues increased moderately, while the Special Products segments revenues declined slightly. They were up moderately in segment Food and significantly in the segments, Sugar, CropEnergies and Starch. Group EBITDA came in on previous year's level, which was helped by significant increase in quarter 2. Group operating result increased by 4% in H1 and 27% in quarter 2. This development is mainly driven by segment Sugar and a huge earnings seen of EUR 49 million into positive territory in the second quarter. Segment Special Products, CropEnergies and Starch show a significant earnings decrease in H1. Segment Fruit's earnings decreased moderately. Let's continue with segment Sugar on Page 7. Let me revisit our view on the global sugar market. In its latest update in September '21, market consultants have increased their deficit outlook for sugar market in the year '21/'22 from 0.5 million to 3.4 million tonnes confirming the third global deficit year in a row. Global stock-to-use ratio is expected to drop from 38.2% to 35.5%, the lowest ratio since more than 10 years. This strongly underpins our view of a tight global market environment and a positive fundamental market environment for at least the next 18 months. Let's have a look at the European sugar market environment on Page 8. The European sugar market has changed into a net importer status since campaign 2018, which has led already to 2 steps of price increase 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, the fundamental pricing starting point has increased significantly. Second, currently running campaign and expected output confirms the EU net importer status also in '21/'22. In 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. This will raise questions in light of the most recent sugar price hike in global and European sugar markets. I will spend some time already here to qualify this against the Südzucker contract development over time. In order to achieve our original price goal of a moderate contractual price increase reaching the midpoint of our earnings guidance, it was our priority to constantly design contracts whenever matching our underlying goal since spring. Despite a difficult quarter 1 performance and our assessment at that time that it would be a bit more challenging to reach those goals, we are now back on track in light of signed contracts on the way. But it's also important to note that available volumes taking benefit of the most recent significant sugar price hike were limited and therefore, offer more upside in sugar market in year 2023, in case of an ongoing favorable market environment. Currently, we have no signs that this could change. Now let's have a look into the complete development in segment Sugar in the first 6 months on Page 9. Revenues increased significantly. The improvement was driven mainly by higher sugar sales revenues since the beginning of the 2020/'21 sugar marketing year and has higher sales volumes in quarter 2. First quarter of the last financial year 2021 initially benefited from hoarding effect at the start of the corona pandemic. In the course the last fiscal year, these benefits were strongly overshadowed by weaker demand from industrial sugar customers. Operating results showed the expected significant improvement as quarter 1 came in with a loss significantly below last year's level, quarter 2 showed a turnaround back into black figures. The main influencing factors were, on the one hand, higher sales revenues. And on the other hand, especially higher raw material-driven production costs from last year's campaign as well as higher packaging costs. As mentioned, higher sales volumes in quarter 2, strongly supported results to currently running campaign and resulting sugar output is influenced by yielding rainfalls, but also by less sunshine duration over the summer period. We expect a campaign length of about 120 days against 108 days in 2020 campaign. The resulting overall sugar output from beet is expected at 4.2 million tonnes against 3.5 million tonnes one year ago. We continue with segment Special Products on Page 10. Following a very successful year 2021, even better than originally forecasted, we are facing high comps in fiscal '21/'22, especially in quarter 1. In the first 6 months, revenues were only slightly below last year's level. Overall, higher quarter 2 sales volumes helped to decrease the shortfall on H1 basis. Previous year was characterized at the beginning of the first quarter by the partly sharp increase in demand, for example, for frozen pizzas. Operating results decreased significantly, reflecting the overall sales volume in H1 as well as especially significantly higher costs for raw material, energy and packaging. 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 period of the previous year. Higher volumes and sales revenues contributed to revenue growth. The previous year's volumes in the first quarter were significantly lower due to the extended shutdown of the Wanze location caused by the pandemic. Operating result improved in quarter 2 significantly against quarter 1 performance fell short against last year outstanding record level. The development was strongly influenced by strongly increased raw material costs and energy pricing on record levels. The average ethanol price in the second quarter was at EUR 656 per cubic meter against EUR 662 per cubic meter in quarter 2 2021. The average ethanol price in H1 was at EUR 623 per cubic meter against EUR 578 per cubic meter in H1 last year. The average ethanol price in September was at EUR 793 per cubic meter against EUR 801 per cubic meter in September '20. And in October, we see so far a further strong increase to a record level of above EUR 900 per cubic meter. Let's move on to segment Starch on Page 12. Revenues in segment Starch came in significantly above previous year's level. Revenue growth was driven in particular by a very good volume trend in light of increasing utilization of installed capacities as well as supported by higher ethanol prices. Despite an improvement in quarter 2, operating result is still significantly below last year's level. Significantly higher raw material and energy costs resulted in declining margins. In addition, higher depreciation in light of historic investments weigh on results. Let's move on to segment Fruit on Page 13. Revenues came in moderately higher. Revenues from fruit preparations rose due to higher sales volumes and prices, while revenues from fruit juice concentrates were slightly lower in light of lower sales volumes and lower prices. Operating result moderately decreased. Moderate volume growth with slightly higher margins led to a significantly higher contribution to results in the fruit preparation divisions. Significantly lower margins attributable to lower sales revenues at higher costs and slightly lower volumes overall weighed the result of the fruit juice concentrate division. Let me now turn to the main points in the P&L on Pages 15 and 16. Debt equity result was negative, mainly driven by the still disappointing development of ED&F Man. The overall good performance of the commodity trading business was still not enough to compensate for the charges related to the strategic realignment delay caused by the pandemic. If you look at financial results, came in at minus EUR 20 million. It contains a net interest expense of minus EUR 15 million and the other financial result of minus EUR 5 million. Let's continue on Page 16. Taxes on income came in at EUR 28 million after EUR 26 million in the same period last year. The tax position is still distorted by the development in segment Sugar for which there was still no recognition of deferred taxes. Earnings per share came in at EUR 0.24 against EUR 0.12 in the prior year. If we now turn to the cash flow working capital investment development on Page 18, cash flow increased in quarter 2. Therefore, H1 cumulated cash flow of EUR 227 million falls only EUR 10 million short in comparison to last year's performance. Cash flow against revenues ratio improved in quarter 2 to 6.3% against 5.5% in quarter 1. The cash inflow of EUR 177 million from decline in working capital was mainly due to the sale of sugar inventories during the first 6 months. CapEx reached EUR 124 million against EUR 127 million in the last year. Let me now move forward looking at the balance sheet on Page 20. Net financial at the end of August was reduced by EUR 117 million against previous level and is down EUR 183 million against end of February '21. Total investments and earnings distribution were fully financed from cash flow and the cash inflow due to the reduction of the working capital. [Audio Gap] at 37% against 40% one year ago. Equity ratio is unchanged at 46%. So let me now turn to the outlook on Pages 22 to 26. Ladies and gentlemen, as we are now hitting into '21 autumn season, let me repeat that our forecast does not anticipate implication from a potential fourth corona wave. As a general remark, I would like to clearly point out that we are facing a highly negative cost momentum in the current market environment affecting most of our businesses. A very prominent example, amongst others, are energy prices in general and in particular gas prices tripling since June '21. Additionally, raw material as well as transportation and packaging costs are strongly up. Please bear this and the overall market volatility in mind when looking at the earnings quality and confirmation of our full year earnings target in particular. Group revenues should come in between EUR 7.1 billion and EUR 7.3 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 kept our group guidance at that time labeling it as a bit more challenging to reach the midpoint of the range now. And in light of a good quarter 2 performance, we see ourselves back on track to reach the midpoint of our unchanged earnings range. Segment Sugar, following many loss-making quarters, has reported positive earnings in quarter 2 with a huge earnings delta against last year of EUR 49 million in quarter 2. On full year basis, we expect an earnings range between EUR 0 and EUR 100 million, which would be in an increase -- an improvement of EUR 113 million against last year. This improvement is the main driver for the increase in group's profitability. As stated on group level, also midpoint of the Sugar segment's guidance is more or less taking in light quarter 2 performance. So there is still a way to go in fiscal '21/'22. And as always, the earnings impact of campaign fluctuation should not be underestimated. Our earnings goal is well supported by good -- great sugar contracts reaching our original target of a moderate sales price increase for sugar marketing at '21/'22. Segment Special Products operating result is now expected to come in significantly below the high previous level against our forecast of a moderate decrease so far. As mentioned before, especially discharge accounts for the -- change accounts for the additional burden of raw material, energy and packaging prices increases. Segment CropEnergies operating result is expected to range between EUR 65 million and EUR 90 million. Segment Starch operating result is expected to decline significantly. And segment Fruit should be able to realize a moderate earnings increase. Let me continue with Page 23. We expect a significant increase in group EBITDA following the positive operating result development. CapEx should stay on a modest level. Net financial debt is expected to be reduced by more than EUR 100 million. Higher EBITDA and lower net financial debt will significantly further improve group leverage ratios. Ladies and gentlemen, let me summarize the overall outlook and the presentation on Page 25 with some statements also in regard to the midterm development. First, turnaround in sugar is due to continue driving group earnings improvement in H2 and going forward, more than compensating for the temporary cost driven decline in nonsugar profits. Second, target deleverage phase gains further momentum. Third, Strategy 2026 PLUS as the base for sustainable successful group development. Fourth, the most important key driver, the structural cash flow does clearly show the way. And last, the development confirms the expected enlargement of Südzucker's room to maneuver. It should give us the way to actively shape Südzucker future especially in conjunction with Strategy 2026 PLUS. Thank you all for your attention.

Thank you, ladies and gentlemen, for your patience. Let's hand back now to the operator to open up the floor for your questions.

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

Yes. Firstly, I have a question related to the Sugar segment where I'm not entirely sure I understand your comment on the 120 days or the expectation of a 120 days campaign period because my understanding is that you've closed 15% of the production capacity and you expect to increase the output by 20%. So how does that only entail a or cause a lengthening of the campaign period of 12 days? That will be question one. And then second question would be on, obviously, the guidance for the group, you mentioned you expect midpoint EBIT now. But could you comment a bit on sort of what happened to the Sugar segment? How -- what sort of the recent contracting and also the strong output or expected output tells us for next, let's say, for the profitability that could be possible in the entire marketing year? I think that will be important for people to understand also for next year what to expect.

Okay. Anton, to your first question, yes, we reduced the capacity for the campaign '20 by shutdown of 5 factories. And in '20, we had really a bad yield. And that was the reason why the utilization of the factories measured in the campaign length was down to 108 days. And this year, we had a slight increase of acreage and a normal yield. We expect that. So the campaign -- factory utilization is expected to go up from last 108 to 120 days in the new structure of the factory. And then to your question concerning the sugar guidance for '21/'22, as mentioned, we are on a good way to deliver this expected moderately price increase for the sugar market year '21/'22. As mentioned in my speech, there, we have seen over the last 8 to 12 weeks, a good development of the spot price market in the EU. We have some strong support from the world market pricing. So let me say, the framework has improved, but to profit from that, let me say, better framework, we can only profit with open volumes so far. And so going forward, let me say, into the next -- to the market year '22/'23, assuming a still favorable market environment, there is a potential to, let me say, profit from this good environment further. This is the sales side. But also of the input side, we have this crazy commodity market development, energy packaging costs, logistics. So they are pitching really heavy burdens on the result. But nevertheless, as mentioned in the speech, adding all points together, we are still confident to reach the midpoint of the sugar guidance '21/'22.

Okay, clear. Then I would have a question on energy procurement. Because I mean -- and I guess specifically ex CropEnergies because CropEnergies has communicated on this theirselves basically indicating that their facility in the U.K. is dependent on spot prices or spot, yes, inputs. But how does that work for the Südzucker Group as a whole?

Energy cost is, let me say, some big input cost in our P&L structure clearly, especially in the business area, sugar, CropEnergies and starch. And these are, let me say, also the main energy consumers for -- and representing the energy mix we have today currently on group level, you can say, 60% to 70% is gas, 25% is coal and around 5% is biomass. And then we are, let me say, driving over years a very disciplined hedging strategy, depending, let me say, of the structure of the businesses, for example, to look on sugar, we can't hedge, let me say, 100% of the planned volumes for the next campaign because there's a lot of uncertainty about the average, about the yield, et cetera. So we can only hedge up to improve -- let me say, to improve position up to 80%. If you're still looking at the campaign '21, uncertain what will be the final output. And so we have limits, we can't hedge 100% of the position. And so clearly, when we are looking on '21, '22 to your complete question, roughly 80% of the gas volume we need are hedged for '21/'22. The rest of the energies, let me see, these are not material because they have a much lower price volatility year-over-year.

Okay, clear. That's very helpful. If I could, one follow-up question because basically on sort of additional volumes that come through due to better sugar count or better sugar yields versus sort of the requirement to buy gas at spot? I mean, what sort of -- how should we think of the NPV of additional volumes, net present value? So I mean do you make money on those volumes? Or is it very difficult in this environment?

No, we will make money clearly. Yes.

Okay. So higher volumes is still a clear possibility.

Yes.

[Operator Instructions] Next question is from the line of Michael Schäfer from ODDO BHF.

First one, I want to come back to your essentially open volume position in contracts and sugar. So Mr. Kolbl, you elaborated basically primarily next marketing year may see the full impact because you have already contract in spring. So I wonder whether you just can clarify what kind of volume is still open or indicate at least is still open for the current -- for the marketing year? So to what extent are you essentially benefiting from the most recent price hike in sugar? So this would be my first question. And the second one is on your lowered outlook for the Special Products segment. So I wonder what has basically changed on the costs? I know you can quantify this? From last quarter to this quarter, what are you now assuming in your lowered outlook for the Special Products. So what's the real driver if energy is not the major driver as we have just learned?

Okay. Michael, to your first question, given by all the uncertainty, nobody knows what would be the defined outcome of the campaign, yes, to keep a rough figure -- a rough number with accounts frame that we have 5% to 7% are open. And to Special Products, clearly, we have seen so far a reduction of sales volumes overall. We have a better, let me say, situation in quarter 2, which helped. But clearly, our side, we have really significant increases, think on grain prices, think on the other raw materials for frozen pizza. And also energy costs here, not to that extent, logistic costs and especially also packaging costs that they are the main driver. And there, we will be set after quarter 2, it is -- with the current range that we have today, not realistic to get on the moderate reduction, and so we lower to a significant reduction in Special Products. But clearly, it's temporary. That is important, it is a temporary development. We try hard to push these cost increases, let me say, forward to the contracts with the customers, yes. So it is a temporary situation.

Next question is from the line of John Ennis from Goldman.

My first is on the sugar contracting. Again, I think you said you'll have 100% volume contracted this year. So I just want to confirm, I guess, you're not expecting a major benefit from spot prices for this upcoming marketing year. I think you alluded to the fact that it will be the following marketing year you might be able to benefit from elevated spot prices, just a confirmation there. And then I wondered to -- and then are these contracts going to be negotiated under annual agreements? Are you trying to lock in multiyear contracts to really benefit from the fact that we're seeing an elevated sugar price? If you could give us a bit of a mix between multiyear versus annual, that would be helpful. And then my sort of last question is on, again, going back to energy and inflation there. Can you actually give us the detail behind the proportion of your costs that are linked to energy, just a rough sense either in terms of your sales or in terms of your cost base? It sounds given your hedging policy that this is going to be much more of an issue for FY '22/'23 rather than this fiscal year. So maybe you could also give us some magnitude of the headwinds you're roughly expecting for next year, that would be helpful.

Yes. To your first question, clearly, with the knowledge we have today, we contract almost the full portion 1-year contracts, up to 90%. And to your second question, energy. Clearly, we have different business units. In an average business unit, the energy relation is different. What we can say and that I think this is important also for '22/'23, we hedge 70% to 80% of the gas needs on group level. So good coverage in the time framework. And that to bright level, we have seen at the beginning of '21.

Okay. Understood. So only 10% of your contract this year will be multiyear contracts.

[Operator Instructions] Next question is from the line of Karsten Rahlf from SRH AlsterResearch AG.

Three quick questions. One to the special production -- Special Products segment. Could you mention when you expect to earn the productivity gains you are expecting with frozen food business? And what's the normal margin we could expect between the 6.8% and 9.4% in the second quarter mentioned in the current report? Then a question to ED&F Man. You mentioned that the business is again improving in profitability, but what -- or how long do we have to wait that the other segments do not last on the profitability? And the third question, what was the main argument to publish figures yesterday afternoon?

Last question, this is very easy. It was a technical problem. It was not planned really. And to special products, we have -- to squeeze in margin, there are a lot of points behind. This was the lower volume against the corona pandemic-driven good development in the -- especially in the quarter 1 2021. On the other side, we have, let me say, the higher input cost, I mentioned, raw material, logistic cost packaging. And clearly, you mentioned also our U.S. deep frozen pizza business there, we have the same let me say, the same influences, lower sales volumes in comparison to last year, to the corona year when we are looking back to 2019, H1 volumes, we are more or less put on track, yes. So this is, as I mentioned at the beginning, this is corona-driven comps we are facing in Special Products. Yes. And ED&F Man, this is, let me say, is a mix picture. The crop business, the commodity trading business is doing well in this environment. But the other businesses, industrial assets, sugar production, et cetera, brokerage are weighing on this positive commodity results. And in addition, the realignment of the strategy of ED&F Man is delayed also due to corona. And this realignment has main point to sell, let me say, these loss-making assets that are, let me say, the main points and as flagged, let me say, also in my speech, this is the case quarter-by-quarter.

Yes. One question still again, what can we expect as a normal margin in your special products segment?

Normal margin on operating profit level?

Operating profit, yes.

Yes. Normal margin should be at 8% to 9%.

We have a follow-up question from the line of Anton Brink from Antaurus Capital Management.

Yes. I would have a question related to sort of the previous communication on the sugar segment and the communication now, because obviously, the sort of the target for EUR 0 to EUR 100 million has been there since the beginning of the fiscal year. Yet, I think -- I mean, because sort of the communication now seems to be that you have not been able to improve prices whatsoever. But is that true? Or is there still, let's say, a small sort of maybe high single-digit increase in price levels in the new contracts? And then secondly, in terms of output, sort of the communication now seems to be that it's okay for, let's say, average. But isn't this -- I mean isn't -- all the sources that I read seem to indicate that actually the output is going to be substantially stronger than average. Is that also what you see or is it purely too optimistic?

No. We have to, let me say, to contemplate quite wise. We can say we reached our underlying goal of a moderate price increase, yes. This is fine. This is done. And this is unchanged also to our quarter 1. Let me say, communication and from the sales volume side, yes, we are also in track of our full year expectation. We had -- as a flat in quarter 1, we were slightly behind from the volume side in expectation and also behind quarter 1 2021 due to the hoarding effect. But in quarter 2, we have seen so far a strong volume development. So back on track also from the sales volume side.

And would it be -- would you be able to quantify sort of the percentage of expected volumes, so that's 4.2 million tonnes that has been contracted now, i.e., what volumes would still profit from these higher stock prices?

As I said before, only 5% to 7% are open to profit from these higher prices. But clearly, keep in mind that we have a heavy burden on the input side. As discussed before, energy prices, logistics and don't underestimate also the beet price situation with the high prices for alternative crops. So all in all, we have positives and we have negatives. But all in all, when we all put together what we know today, we still see the midpoint of the sugar guidance.

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

Thank you all for your participation today, and we're happy to talk to you at latest third quarter results. In the meanwhile, if you have further questions, you know where we are and just give us a call on additional questions. And so we wish you all the best, and have a nice day. Thank you. Good bye.