Südzucker AG (SZU) Earnings Call Transcript & Summary

Ladies and gentlemen, we welcome all of you to our conference call this morning and wish you a happy new year. 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 9 months 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 homepage shortly after the call. Now let me hand over to Südzucker's CFO, Thomas Kirchberg.

Thank you, Nikolai. Ladies and gentlemen, also from my side, a warm welcome. We wish you all a successful and sound 2022. As mentioned, I would like to give you a brief overview about the business performance in the first 9 months of financial year '21, '22 in details about the guidance for financial year '21, '22. Let me start with the highlights on the first 9 months results on Page 4. Let me point out, once, again that unfortunately, the corona pandemic is not over and shows different issues and dynamics in regions as well as in business areas every day. Heading towards the end of the second pandemic business here, we are not just facing current pandemic influences, but also saving pre-pandemic drilling comps. Sometimes they are challenging. Sometimes they are easy to be exceeded. But in total, with no homogenous pattern neither in quarter 1, quarter 2, nor in quarter 3 or the remaining fourth quarter. We took a strong quarter 3 performance was driven by the continued turnaround in our sugar business is strongly supported by the continued success for our CropEnergies. Group revenue showed an increase of 17% in quarter 3. EBITDA was up by 33% in quarter 3 and grow operating results by 91%. Cash flow increased by 34% in quarter 3. After 9 months, cumulated group revenues were up by 11%. And group operating profit increased by 34%. EPS after 9 months came in at plus EUR 0.33 against minus EUR 0.56 last year. Net financials at end of November 21 came in EUR 108 million below prior year's level and EUR 259 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 details segment by segment. First of all, let me flag again that Südzucker started to report 5 segments: Sugar, Special Products, CropEnergies, Starch and Fruit as fiscal '21, '22. We continue to include adjusted premiers number for all quarters in the appendix of this presentation in all Investor Relations presentation for your reference. Group revenues increased significantly. By the special products segment revenues increased slightly, developed moderately in segment fruit and significantly in the segment sugar, CropEnergies and starch. In [ PH ] came in 14% above previous year's level, which was helped by a significant increase in quarter 2 and quarter 3. Group operating result increased by 34% in the first 9 months and 91% in quarter 3. The earnings growth in the third quarter is mainly due to the significantly improved results in the sugar and CropEnergies segment. For the reporting period as a whole, the group's earnings growth was also driven by the significant earnings increases in the sugar and CropEnergies segment. The special products segment's operating profit fell significantly, and the fruit segment was down moderately. In the starch segment, after good 3rd quarter, the overall profit of the reporting period is now moderately above the prior year. Let's continue the development in segment sugar on Page 7. Let me repeat our view on the global sugar market. Its latest update in December 21, one of the leading market consultancies have confirmed the outlook for sugar market in year '21, '22 of 3.4 million tonnes, the third global [ CTLA ] in a row. The stock-to-use ratio is expected to drop from 42.1% to 36.8%. The lowest ratio since more than 10 years. We still strongly underpin 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 increases in the last 2 sugar marketing years. There are several reasons for the positive European spot price development since end of calendar year 2020. First, the world market price as the fundamental pricing starting point has increased significantly. Second, currently running campaign and expected output confirms the net importer status also in '21, '22. In this environment, up to 100% of the sugar volume, the campaign '21 was up for negotiation, predominantly representing sugar contracts for the period of October '21 to September '22. In order to achieve our original bright goal for moderate contractual price increase, reaching the midpoint of our sugar earnings guidance. It was our priority to constantly sign contracts whenever matching our underlying goal since spring '21. This has been achieved, we leased out on the sugar bright hike for the contract signing. Therefore, we've seen a positive market environment of further potential for another price increase for sugar market year '22/'23. Now let's have a look into the complete development in segment sugar in the first 9 months on Page 9. Sugar revenues increased significantly. It is mainly due to higher sugar sales revenues since the beginning of the last 2021. Sugar mark year and also since the beginning of the new '21/'22 sugar market year. In addition, the higher sales volume since quarter 2, '21, '22 also had a positive effect. Operating results show the continued expected significant improvement whilst quarter 1 came into the loss significantly below last year. Since quarter 2, we see a positive result and significant improvements compared to the previous year. As a result, the cumulative 9-month results also showed a significant improvement compared to the previous year. Initially, higher sugar sales revenues were offset in particular by raw material price-related increases in production costs from the 2020 campaign. Since quarter 2, the increase in sales and volumes and better utilization of production capacities have had a positive effect. Since quarter 3 further in some cases, drastic cost increases for energy, packaging and raw materials have had an increasingly negative impact. We expect for the still running sugar campaign a length of about 120 days against 108 days in 2020. The resulting overall sugar output from beet is expected at 4.2 million tonnes, against 3.5 million tonnes 1 year ago. Let me 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. In the first 9 months, the revenues have turned into growth territory in light of a good third quarter performance. In the previous year, the beginning of the financial year was positively influenced by the party sudden increase in demand, for example, for frozen pizzas. Operating results decreased significantly broken by rising raw material, energy and logistic costs. Also additional burdens were passed on to customers to a certain extent through price increases. The cost burden can be seen in the development of the operating margins. Let me now turn to the outstanding development of segment CropEnergies on Page 11. Revenues from segmental balances were up sharply, higher sales volumes and sales revenues contributed to the increase in revenues. Operating results developed in line with the development of sales volumes and sales revenues and increased significantly in the reporting period despite considerably higher raw material and energy costs. As a result of the strong increase in ethanol sales revenues in recent months, a record operating result of EUR 56 million was achieved in quarter 3. The average ethanol price in the third quarter was in 2019 against EUR 667 per cubic meter in quarter 3 last year. The average ethanol price in the first 9 months was at EUR 757 per cubic meter, again, EUR 609 per cubic meter after 9 months in 2021. The average ethanol price in December was EUR 1,061 per cubic meter. Again, EUR 519 per cubic meter in December '20. In January, we see so far a price level of about 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. The positive development of sales volumes and the overall increase in sales revenues had a positive effect. In line with the development of sales volumes and sales revenues, operating profit after 9 months increased moderately despite significantly higher raw material and energy costs. The positive development of ethanol prices in recent months had a positive effect on earnings development, especially in quarter 3. Let's move on to segment fruit on Page 13. Segmental revenues came in moderately higher. Revenues from fruit preparation rose mainly due to higher sales prices. Due to higher prices in quarter 3 compared to the prior year quarter, fruit juice concentrated revenues overall was at the prior year level operating result moderately decreased through preparations, higher sales revenues could not fully compensate for higher costs. Earnings were also impacted by higher costs and a slight decline in sales volume despite slightly higher sales revenues from fruit juice concentrates. Let me now turn to the main point in the P&L on Page 15 and 16. The equity result was negative, mainly driven by the burden from the development of ED&F Man. The losses of ED&F Man are related to impairments of industrial holdings, combined with high financing costs and are based on the still preliminary financial statement information for ED&F Man financial year ended September 2021. Due to the participation book value of ED&F Man was reduced to EUR 34 million end of November 21. The financial results came in at minus EUR 31 million. It contains the net interest expense of minus EUR 23 million and the other financial result of minus EUR 8 million. Let's continue on Page 16. Taxes on income came in at EUR 64 million after EUR 61 million in the same period last year. Earnings per share came in at plus EUR 0.33 against minus EUR 0.56 in the prior year. Let me now turn to the cash flow, working capital and investment development on Page 18. Cash flow increased in the first 9 months to EUR 415 million. The cash flow against revenues ratio improved in quarter 3 to 7.4% against 6.3% in quarter 2. The cash inflow of EUR 152 million from decline in working capital was mainly due to the sale of sugar inventories. CapEx reached EUR 203 million against EUR 205 million last year. Let me now move forward looking at the balance sheet on Page 20. Net financial debt end of November was reduced by EUR 108 million against prior year's level and is down EUR 259 million against end of February 2021. Total investments and earnings distribution were fully financed from cash flow and the cash inflow due to a reduction of the working capital. Earnings at 34% against 39% 1 year ago. Equity ratio is almost unchanged at 44% against 43% in the prior year. Let me now turn to the outlook on Pages 22 to 26. Ladies and gentlemen, as we are now heading into the last quarter of fiscal '21, '22. Let me clearly point out that we did not foresee a fourth corona wave, no additional variants like Omicron. On the one hand, we are confident to confirm once again in our original earnings guidance of May '21. And on the other hand, we continue to point out that we cannot rule out further unexpected implications from the pandemic, neither for the remaining 3 months in business year '21, '22 nor for the new fiscal year '22, '23. Besides this, we are still 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. Consider this and the overall market volatility in mind when looking at the earnings quality and confirmation of our full year earnings target in particular. Having said that, group revenues are now expected between EUR 7.3 billion and EUR 7.5 billion and operating results in a range between EUR 320 million and EUR 380 million confirming the original midpoint of EUR 350 million, and we have the ongoing challenging and difficult to predict environment. Segment sugar following many loss-making quarters has reported positive earnings in quarter 2 and quarter 3 with a huge earnings sell against last year. On a full year basis, we now expect an earnings range between EUR 0 million and EUR 30 million, which would be an increase of about EUR 140 million against last year. This improvement is the main driver for the increase in group's profitability. So there's 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 supported by improved sugar contract reaching our original target for moderate sales price increase for sugar marketing year '21, '22 but also challenged by the mentioned cost inflation and especially the uncertain further pandemic development. We expect implications from the new corona wave, but we don't have numbers for the running fourth quarter. Segment special products operating result is expected to come in significantly below the high per year. As mentioned before, especially the segment is burdened by additional raw material, energy and packaging costs. Segment CropEnergies operating result is now expected to range between EUR 110 million and EUR 140 million, mainly reflecting the continued favorable ethanol price development. Segment starch operating result is now expected to increase significantly. Also within the starch segment, the positive outlook change is driven by the ethanol price development. Segment fruit is now expected to confirm prior year's earnings level. 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 around 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 in the presentation on Page 25 with some statements also in regard to the midterm development. First, our turnaround in sugar is due to continued driving fruit earnings improvement. Second, started to leverage trade gains further momentum. Third, the most important key driver is structural cash flow will further increase into a range of EUR 350 million to EUR 410 million. Ladies and gentlemen, this regainment of the diversified structural cash flow quality in a challenging environment clearly secures the way to actively shape into the future, especially in conjunction with strategy '23 plus. Thank you all for your attention.

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

[Operator Instructions] And the first question is from the line of Michael Schaefer from Auto BHF.

And also Happy New Year from my side as well. A couple of questions. Maybe to start with is on your sugar segment outlook, which you have lowered by EUR 35 million compared to the second quarter at the midpoint. So can you help us understand basically how kind of annualized cost headwinds may look like? Is the EUR 35 million reduction. Is this related to the second half cost inflation? And should we read that this may look like EUR 70 million on a full year basis when we head into the next fiscal year. So any color on the cost headwinds you face on an annual -- annualized basis given current prices sugar would be helpful. The second one also sticks to sugar. Mr. Kirchberg, you elaborated on the pricing opportunity, which you might see heading into the next negotiation round if current market price environment sustains. So I wonder whether you already today are basically in talks with potential customers on those prices on maybe multiyear contracts already forwarding or conclude forward contracts basically with your clients on this one? And related to this one, maybe a bit of a hint how your campaign planning looks like for the next campaign, given that you are facing also significant, let's say, competition for acreage from stronger crop prices. So this is all on sugar. And last not least, on this special products side. So how should we think about the path on higher raw mats and higher energy and packaging costs, which you elaborated on in terms of higher prices. Where are you there in price initiatives? And what is still to be done in the quarter, maybe also next fiscal year?

Yes. Thank you for your questions. Starting with the Q1 to sugar. You mentioned the lowering of the midpoint of the sugar guidance. We are, let me say, a lot of parameters which influence this lowering -- slightly lower campaign volumes, slightly lower volumes against forecast. And the third one you mentioned is the cost increases we see and this is the biggest part to be clear. And the ratios you mentioned, it is higher, only on this cost inflation in the current fiscal 2020 '21, '22. And roughly 2/3 will effect the following sugar market, fiscal year '22, '23. To the second part of your question is the price environment for the next contract around '22, '23. Clearly, this is fruitful environment globally as well as in the European community. And then we are confident about the next bright form, but it's too early to give here any advice we will start, let me say, in spring as every year, the next contract season. This is a challenging environment. And so -- but we are confident in this environment. And the third point to the average. It is a challenging environment also for farmers to keep them on board. There's a lot of pressure in the whole value chain for our industry, et cetera. And our goal is to do everything to keep acreage of the level we had in the last campaign. And to special products. Clearly, this is an extraordinary situation that input factors, we have price increases, and this is still the case. And clearly, we do everything in our sales organization to put this higher cost forward to customers. But this depends, let me say, and to do that it needs time. It depends on the contract phase. And so I think we see starting from the second half of fiscal '22, '23 in somewhere the turning point, increasing margins.

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

Firstly, I'd like to head to the balance sheet and ask why we didn't see a material change in inventories in -- after 9 months of 2021, 2022 when compared to basically the same period of last year, given that prices for sugar beets have expanded. So is that due to lower volumes? And why are we seeing -- and if so, why are we seeing lower volumes in your inventory? That would be my first question. Second question would be on receivables, EUR 160 million, give or take, less receivables booked this year compared to the same period of last year. Can you please elaborate on that development as well? I will post 2 other questions, but I think it's better to take them one by one. So if you could just answer the ones I just posed, and then we continue from there on.

The inventory, the reason why we are more or less on the same level on group inventories is that we have in comparison to last quarter, higher volumes, sales volumes. You are right with the assumption that we have some slightly higher campaign volume with higher prices, sugar beet prices and therefore total costs, but this was overcompensated by the higher sales volumes. And the second question to the receivables, could you please repeat it. Oliver?

Yes. I saw that the receivables -- the number of receivables is EUR 1,160 million as of 9 months in 2021, 2022 when compared to EUR 1.014 million. So give or take, EUR 165 million less. sorry, more than the spend...

Now I get it. This is driven by the sales process, yes.

Okay. So basically, same reason here, right?

Yes, sales growth.

Okay. My second question is on the result of -- from participation, which was only...

Oliver, coming back to the first one, yes, the status for quarter 3, looking on quarter 4 that means maybe there will be a change due to lower sales and the full payment of the beets in quarter 4.

Understood. Understood. Okay. Well, I'll take that into account. The second question would be on the results in participation, which, especially in Q3 of this fiscal year, was incurring a high double-digit negative number. Is that all attributable to ED&F Man? Or is there some other, let's say, impact of other developments also included in that number?

No, it's completely with development of ED&F Man.

And if so, when can we expect some -- at least some turnaround of the creation of ED&F Man? I mean, this is clearly a disappointment to you, I guess. And given the higher sugar prices on the global -- when talking global numbers, I would have expected a less negative impact from ED&F Man here. Is there hope for the next fiscal year? Or is that likely to drag on regardless of how market prices develop, is that only related to the asset base and the of the asset base of ED&F Man or is there something else behind that number?

Oliver, first of all, to clarify for all other participants in the call, we talk about the equity participation, which is not included in our operating profit development to clarify that very clear and also the burdens we have are not cash relevant from that write-down of the participation in ED&F Man. And now coming to the question. ED&F Man managed still in a very difficult situation. The core trading business is really doing well with positive results also in the last ED&F Man fiscal ending September '21, but there have been problems in the restructuring process of selling their industrial assets and also the burden of higher financing costs from the last restructuring of the financing lines of ED&F Man. And so this difficult situation will stay also in the upcoming quarters.

Okay. Understood. And last question, at least for the time being, would be on your guidance. I'm trying to put together your, let's say, group targets and compare that with the outlook you gave for the 5 segments you did. And basically, I have no problems to come to the low point of your group guidance when employing the lower end of the guidance for the respective segments. However, I run into a problem when I'm trying to aim for the high end of the guidance. So for the EUR 380 million, when I'm employing, let's say, the max number you've given for sugar, for CropEnergies when taking into account that fruit might be stable. That would require either, let's say, the specialties to perform above the negative segment guidance for specialties or it would require such results to basically explode in Q4 2021, 2022, which after 9 months, an increase of 4.3% here. It's probably possible but I don't think very likely to -- for them to come up with, let's say, a [ 20%, 30% ] increase for the full year after 9 months showing a 4.3% increase here. So can you talk me through how you come up with the high end of your guidance.

When we say put together?

Yes.

When we put together, let me say, the high end, these are clearly indications on ranges. Taking the sugar the third year. Say taking special products with 110, 115 million, taking the 50 of the fruit, taking 140 of CropEnergies and 130 sugar, yes, and then an increase and a significant increase in starch to 50, 55 in that area than you are in that range of 380.

Yes. Let me talk you through what I did. maybe I did a massive mistake here. So apologize in advance for that. I took the 30 of sugar, I took the 140 for CropEnergies, I included 53 for fruit. And I -- basically, on the top of my head, I took 50 for starch, which would be a good improvement compared to last year. And so I come up with 223, and that would require for strategies, 157 to go to 380.

Taking 30 of sugar, yes?

[indiscernible]

Yes, 50 for food. Yes? Then we are at 220 right, yes. And then taking a [ 100 ] for the special products, we are at 3 30. And then the starch, we are [ 380 ]...

Okay. I just wanted to -- okay, 130 for specialty, so that should be the upper end of the guidance range than for specialty?

110 for specialties without starch.

Is the upper end of the specialties guide?

No, is the -- if you get to the upper end of the group guidance, you take 110.

[Operator Instructions] The next question is from the line of Alex Sloanee from Barclays.

Yes, a few questions from me. I think if I heard correctly at the start, you said 1/3 of the cost inflation pressure in sugar is being felt this year and 2/3 impact next year. I wondered if you could kind of quantify that in euro million terms, in terms of the headwind that you're facing for next year on the cost side. And I think last time out, you said that you were 80% hedged on gas for fiscal '23, if I understood that correctly. I just be interested in terms of at what point do you need to make the decision to rehedge. And are you comfortable doing that at kind of the current levels. And then finally, just in terms of the longer-term strategy 2026, I think back in May, when you presented that strategy you talked about maybe coming back to the market with some accompanying financial quantitative targets over the next 12 months. Just wondering if that's still something that we should be expecting.

Starting with the last one with the financial figures around strategic 2026 plus. You are right. We clearly guided in analyst conference that we will do that in the current fiscal. But I mentioned it in there, that is really challenging environment with extreme high volatilities. And so we decided to do that exercise to share financial figures with the knowledge of today in the next analyst conference in May '22. To your second question, the hedging of gas needs is right also for '22 campaign as well as for the campaign '23, we are hedged with more or less 80% of our needs. And so this is a very comfortable situation for our sugar business. And to the indication for the current cost inflation absolute terms, it is very difficult to do so, especially with not having the concrete final numbers of the still running campaign the final booking of cost of inventories, et cetera. And therefore, we don't disclose, let me say, concrete numbers. But taking the -- let me say, the figures Baltruschat raised, I think it's a good indication for everyone to use that number.

We have a follow-up question from Oliver Schwarz from Warburg Research.

CropEnergies, since the [indiscernible] projects moving up the value chain, converting a part of this it's ethanol to, let's say, the material for the pharmaceutical and the chemical industry. So basically, starting to diversify its customer groups. Your -- versus Südzucker's long-term strategy seemed to imply also, let's say, a diversification verification of the product, converting some of the products you currently generate, namely sugar to product further up the value chain. So basically, my question would be, can we expect something from Südzucker as well similar to what CropEnergies just did in the press release from yesterday. Or are you still in the planning phase? And what do you think you'll require some additional time before you can come up with, let's say, announcements in regards to which way you want to go when it comes to the diversification of your product portfolio?

No, it is completely in line with the group strategy 2026 that CropEnergies plan to make the first step in bio-based chemicals. And Südzucker, on the sugar side also evaluating to 2 further steps in that new business field bio-based chemicals. And clearly, we will more color also, as I said before, in the analyst conference in May '22 latest. Maybe if there are options earlier, we will also disclose the market.

There are no further questions at this time, and I hand back to Mr. Baltruschat for closing comments.

Yes. Thank you all for your participation today and your interest in Südzucker. In case of further questions, you can reach us all the time. And yes, we wish you all the best again for the current running here. And yes, please stay well and tuned and we will see each other very soon, hopefully. Thank you. Goodbye.

Bye-bye.