Südzucker AG (SZU) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. We welcome all of you to our conference call. The underlying presentation of 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 3 months of financial year '22, '23. We are going to present the highlights of the period and revisit our full year group guidance for business year '22, '23 that has been released or raised, let us say, on 15th of June. Following the call, we are going to answer your questions. A recording of the 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. As mentioned, I would like to give you a brief overview about the business performance in the first 3 months of financial year '22, '23 and details about the guidance for financial year '22, '23. Let me start with the highlights of the first 3 months results on Page 4. First of all, let me point out that we are facing additional challenges and uncertainties since the Ukraine war started end of February. And this situation will certainly impact on the rest of the fiscal year in many ways. Despite these challenges, we have seen a very good quarter 1 performance for almost all business areas. Group revenue showed an increase of 30%. Group EBITDA was up by EUR 115 million to EUR 236 million and group operating result followed that development by an increase of EUR 114 million to EUR 163 million. Cash flow increased by 91% and reached EUR 183 million. Earnings per share after 3 months came in at EUR 0.43 against EUR 0.07 last year. Net financial debt end of May came in EUR 67 million below prior year's level and EUR 108 million lower against end of business year '21, '22. 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 increased significantly by around EUR 500 million. All segments contributed to this increase. Group operating result increased by more than 100% while the operating result in the Special Products segment decreased significantly. All other segments contributed to the substantial increase in operating result. Let's continue with segment Sugar on Page 7. First of all, let me revisit our view on the global sugar market. This latest update in June 2022, IHS Markit has confirmed its deficit outlook for running sugar marketing in year '21, '22, 1.9 million tonnes, which confirms another deficit year. Stock-to-use ratio is expected to drop from 39% to 37%. For the next sugar marketing year, '22, '23, the forecast shows an almost balanced market with a stable stock-to-use ratio at 37%. This confirms a positive fundamental market environment for at least the next 12 months. Let's have a look at the European sugar market environment on Page 8. EU has changed to a net importer since campaign 2018, which has led already to some new steps of price increase in the last 3 sugar marketing years. Looking at the significant further spot price increase in the last 6 months, we monitor several reasons. First, the global market price as the fundamental pricing starting point has increased. Second, we expect another year of decreasing yield acreage. And third, overall cost inflation leads to higher procurement price for the whole industry. In this environment, close to 100% of our volume of the campaign 2022 is up for negotiation. Now let's have a look into the concrete development in segment sugar in the first 3 months on Page 9. Revenue increased significantly mainly due to higher sales volumes and sales revenues. Operating result shows a small positive number, reflecting an improvement by EUR 26 million against last year. It was burdened by a substantial rise in raw material, energy and packaging costs. Let me continue with segment Special Products on Page 10. In the first 3 months, revenues increased significantly due to an overall increase in sales volumes and sales prices. Operating result, as expected, came in significantly below last year's level. The main drivers were charges for significantly higher raw material, packaging and energy costs which so far could only be passed on to customers in part or with a time lag. Let me now turn to segment CropEnergies on Page 11. -- revenues in segment CropEnergies were up sharply. Higher sales volumes and sales revenues contributed to the revenue growth. Operating result developed in line with sales volumes and sales revenues and increased significantly in quarter 1. The higher sales revenues and sales volumes more than offset the significant rise in raw material and energy costs. The exceptionally good operating result was mainly due to price hedges for raw materials and energies, which were concluded before the start of the Ukraine war and the associated sharp rise in raw material and energy prices. The average ethanol price in the first quarter was at EUR 1,155 per cubic meter against EUR 587 per cubic meter in quarter 1 '21, '22. The average ethanol price in June was EUR 1,274 per cubic meter against EUR 657 per cubic meter in June '21. In July, this is so far still a high price level of about EUR 1,250 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 due to significantly higher ethanol pricing in line with the development of revenues, operating result after 3 months increased significantly to -- also here substantially higher raw material and energy costs were more than offset by significant sales revenue growth. Price-hedged raw materials had a positive impact in quarter 1. Let's move on to segment Fruit on Page 13. Revenues in segment Fruit were no exception in the general and positive segmental revenues development showing a significant increase, too. This price-related increase was supported by both fruit juice concentrates and food preparation. Operating result came in significantly above last year's level. The profit contribution from fruit preparations declined as a result of lower volumes and higher costs. By contrast, significantly higher margins for fruit juice concentrates led to a substantial increase in the operating result contribution. Here, sales volumes were slightly higher and significantly higher prices more than offset the increased costs. Let me now turn to the main point in the P&L on Page 15 and Page 16, starting with Page 15. The -- and equity result was almost driven by segments Sugar and Starch since quarter 1 of fiscal '22, '23 ED&F Man has been reported as other investments as the criteria for equity measurement are no longer met. As a result of this discontinuation of at equity consolidation, currency gains of around EUR 10 million previously recognized directly in equity were recognized in the P&L. The financial result came in at minus EUR 12 million. It contains the net interest expense of minus EUR 8 million and the other financial result of minus EUR 4 million. Let's continue on Page 16. Taxes on income came in at EUR 38 million, after EUR 9 million in the same period last year. Earnings per share came in at EUR 0.43 against EUR 0.07 in the prior year. Let me now turn to the cash flow and working capital investment development on Page 18. Cash flow increased in the first 3 months to EUR 183 million. The cash flow against revenues ratio improved in quarter 1 through 8% against 5.5% in quarter '22. The cash inflow of EUR 39 million from decline in working capital was mainly due to the sale of sugar inventories. Investments in fixed assets reached EUR 65 million against EUR 55 million in the last year. Investments in financial assets and acquisitions represent mainly the announced acquisition of Meatless in the Netherlands in the amount of EUR 49 million. Let me now move forward looking at the balance sheet on Page 20. Net financial debt end of May was reduced by EUR 67 million against prior year's level and is down EUR 108 million against end of February 22. Investments in fixed and financial assets and profit distribution were fully financed from cash flow and cash inflow from working capital. Gearing you said 33% against 40% 1 year ago. Equity ratio is at 48% against 46% in the prior year. Let me now turn to the outlook on Pages 22 to 25. After a successful start in the current fiscal, we have adjusted our initial full year forecast upwards June 15. Ladies and gentlemen, let me put this adjusted forecast in the context of the current environment, the war in Ukraine, which has continued from the beginning of fiscal '22, '23 to the present day has further intensified the already high volatility on the sales market and price increase on the procurement markets. The resulting economic and financial impact and the duration of this temporary exceptional situation remains difficult to assess. In addition, there are still risks in connection with the Corona pandemic. Therefore, the forecast continues to be based on the assumptions that the war in Ukraine will remain temporary and regionally limited, that despite the current developments, the physical supply of energy and raw materials is assured. And that the sales and procurement markets will return to normal to some extent in fiscal '22, '23. We also assume that the declaration of the gas emergency plan alert in Germany will not have any significant negative impact on prices. We expect a significant price increases, especially in raw material and energy to be passed on to new customer contracts. Ladies and gentlemen, having said that, now to the concrete numbers. Group revenues should now come in at EUR 8.9 billion to EUR 9.3 billion and operating result now in a range between EUR 400 million and EUR 500 million. Segment Sugar should see a breakeven result in H1 and an increasing operating result in H2. On a full year basis, we expect an earnings range between EUR 0 million and EUR 100 million. Segment Special Products operating result is now expected to come in slightly above the prior year level. Segment CropEnergies operating result is now expected to range between EUR 165 million and EUR 215 million and segment Starch should see a -- now a slightly higher operating result. Segment Fruit should be burdened by the charges from Ukraine war and therefore, continues to expect significantly lower earnings. Let me continue with Page 24. Group EBITDA should follow the positive operating result development. CapEx is expected to increase. Net financial debt is expected to be above prior year's level reflecting substantially higher investments in fixed assets against last year. Some investments in financial assets, entire working capital needs in light of the inflationary environment and disruptions in the supply chain. Finally, I would like to summarize our presentation with 3 statements on Page 26, first the Sugar turnaround is due to continue to drive improved earnings improvement. Second, our diversified portfolio will be able to help managing the additional challenges caused by the Ukraine war. And third, structural cash flow opens up new opportunities to shape it to the future. Thank you all for your attention. Ladies and gentlemen, thank you for your patience. I would like to hand over to the operator to open up for questions.

[Operator Instructions] The first question is from the line of Oliver Schwarz from Warburg Research.

Congratulations on your Q1 results, and a couple of questions from my side. I'd like to take them one by one so that we don't run into any confusion. It seems like the CapEx level for the full year has increased by EUR 50 million from EUR 400 million to EUR 450 million without the impact of M&A transactions. Is that due to your, let's say, expectations in regarding to inflation and hence, also higher prices for given projects or have you added CapEx projects to drive the number up to EUR 450 million?

Oliver, I think both parts are right. We have inflationary effects as well as new CapEx program to increase capacities.

Okay, very well. In Starch, it seems like the, let's say, the guidance of the company, AGRANA as well as the guidance of [ Südzucker ] seem to be a bit out of tune while you are expecting a result that is slightly ahead of last year's level. AGRANA expects its result in the segment Starch to decline slightly. So basically, that should be the impact of the German operations, which is now part of AGRANA Group. Can you talk me through the different mechanics that affect those 2 businesses to understand why AGRANA is more negative than you are?

You can't directly compare, let me say, these messages. The first [ Südzucker ] is guiding operating profit and AGRANA is guiding EBIT. And so there is the consolidation of the AGRANA activities, the starch and isoglucose and ethanol produced in Hungary. So you can't directly compare the numbers.

Yes. But still from what I'm seeing in regard to ethanol prices and profitability of the ethanol business, that business should and obviously has impacted AGRANA results positively in Q1. Obviously, I'm not quite sure what they are expecting for the remainder of the year. But so far, that would, let's say, make the discrepancy between your guidance and AGRANA's guidance even, let's say, larger rather than smaller.

Let us double check that. We will come back on that in the individual calls, which...

Yes, I appreciate it. No problem. And again, talking about prices. And this time, obviously, sugar is very high on the agenda. It seems like the spot prices in Europe has somewhat completely decoupled from firstly, contract prices, which is understandable, obviously, as they are fixed, but also from world market prices. It seems at the current threats, even imports, let's say, that are highly adversely punished by additional charges even, let's say -- even deliveries from Brazil should start to make sense at the current level. And I'm just -- obviously, there is logistic restraints. Obviously, there is a shortage on transportation vessels and so on and so forth. But how sustainable do you think is that discrepancy between the world market price and the EU stock price, which seems to, let's say, near almost double the level of the international market price?

Oliver, how sustainable that spread is, is hard to predict. It depends on, let me say, the further volume development, the volume balance on a global scale as well as the volume balance in the EU. We are facing, let me say, the fourth year in a row that the market's import, depending from import. Then this is supported by this high prices. And in addition, we see this cost inflation and so that is currently in mix, which strongly supports spot prices -- spot prices in the EU. And it's hard to predict how long that situation will stay clearly.

Yes. But let's just put your assumption that you presented for the global market into perspective. As you are expecting, let's say, sugar balance for -- on a worldwide basis of just, let's say, having just a slight surplus of 0 plus 9 million tonnes. So that should work rather, let's say, in favor of slightly declining global prices, and what we see in the EU after the steep ramp up to more than EUR 900 per tonne we are now sitting at an incredible high discrepancy. I don't think we've seen that before in any of the given years that I plotted that part.

Yes, Oliver, you're fully right. As said, this is a good framework globally, yes. The balance we have today with this extremely low stock-to-use ratio we have in that current situation. And clearly, there's war in Ukraine, there is disruptions in the supply chains. Customers are afraid to get enough volumes. So this is a very, very cloudy situation for the producer, yes, when we are looking the other things, I think we'll later discuss on that. Yes, and the needs of the customers to have safety in their supply chain to deliver those products. And that is, let me say, I think a combination of all these factors. When we are looking on the volume side -- balance side, as I said before, we have no signs that it could change over the next 12 to 18 months, and also clearly it will be a deficit market also in the next sugar market in '22, '23. We know -- everybody knows the acreage decrease on EU level, et cetera. So this is -- there are a lot of points which influence that we discussed about.

Okay. Understood. And lastly, in regard to your income on financial participation, if I understand [indiscernible] correctly, you referred to currency gains driving that result up to the level you reported. How sustainable is that? Is that, let's say, currency gains from hedges that reflects, let's say, the movements of the EU versus the U.S. dollar. And given the current exchange rate, are we likely to see that trend to, let's say, continue into Q2? Or is it more likely that these numbers will get, let's say, lower while we go into the additional quarters of this year.

Oliver, it's a classical one-off. Yes. It's linked to our participation in ED&F Man. So far, we accounted that as equity. And now, we accounted as other investments. And that is -- that brings a recycling of the [ FX ] result, the currency gains of roughly EUR 10 million, which previously was recognized directly in equity. And in quarter 1 was then booked in the P&L. But this is a one-off, a final profit.

The next question is from the line of John Ennis from Goldman.

I've got a couple of questions as well, and I'll stick with the format of taking them one by one. So my first is on CropEnergies. You mentioned that your hedges are, of course, going to fade as the year progresses. So can you maybe provide a bit more detail on the cost shape throughout the year. And on the sales price, what have you actually assumed as the ethanol price for this division on average to get to your guidance range? That's the first question.

Clearly, as said, in the first quarter, the profit from the hedges we did before the Ukraine war started. And we will also profit over the next quarter from that hedging, but not to that extent as we saw it in quarter 1. Clearly, the effect will slowdown. And from the ethanol side, we hedge to some extent prices. But clearly, we have a backwardation curve in the market. And in the guidance, clearly, the assumption is -- the price assumption is lower than the current market price.

That's great. And then my second question was on the sort of beet cost for the farmers within the Sugar division. Can you maybe give us a little bit of a view on how you see the beet cost developing for the next marketing year given the other agricultural commodity prices have, of course, risen. Are there any additional premiums in excess of the usual profit sharing framework that you use that we should be aware of? That's the second one.

First of all, clearly there is an extreme pressure in the whole value chain also for the farmers. Their costs are increasing, fertilizer, et cetera, and energy also. So on pharma side, there's the same pressure like on the industry factory side. Clearly is -- with our assumption of a strong increase in sugar prices, farmers will profit from the formula price that will bring beet prices along the formal up. And with the current view, and I would say that the potential for additional premiums and the current framework we have is limited.

Perfect. So just the usual beet formula. And then a follow-up question on, I suppose, the EU spot prices really. I guess when you're running into renegotiating prices, the chart on Slide 8 that you helpfully showed really identifies that the EU reporting price, I suppose, better matches the world price rather than the EU spot prices over a longer duration, which tend to be a bit more volatile. Is that a fair assumption to think of the world prices being a better proxy for your upcoming negotiations? Or do you think there's something different this time around where the EU spot price might be a bit more relevant?

Essentially, there are a Lot of points which drive EU spot prices as well as contract prices. World [ Bank ] price is let me say, the starting point, yes. And then, let me say on that, it's coming the import premium, and this is depending also in the situation then in the EU foreign exchange rates, et cetera, and logistic costs. And so there are a lot of points which come in play. But the starting point is, let me say, the World [ Bank ] price. But in the current framework with the shortage in the European market, there is clearly a room for an import premium.

Okay. That's helpful. So I mean, if you look at that chart since 2018, I suppose the EU reporting price has been much closer to the world price, but you're saying there's a chance here that it could be...

Yes, when you're looking back to 2018, '19, the time when the European market was a surplus market -- a heavy surplus market, the industry at that time to export on the market. And therefore, there was no room for premium in the European market. But over the last years, yes, the setup has completely changed there on the world market as well as on the European market, yes.

The next question is from the line of Alex Sloane from Barclays.

A little late to the call, so apologies if you've covered some of these already, but maybe just to pick up on a couple of those questions from John. The CropEnergies, I think, you said that your guidance is assuming a price that is lower than the current market price. So maybe could you sort of quantify that as to what price levels the guidance range does imply? And then the second one, just trying to go a bit further again on the Slide 8. I mean, I think previously, you talked about EUR 200 per tonne uplift is what you were aiming for in the upcoming contracting round. As I understand it, the sort of the last contracting round, you sort of achieved the mid-400s level. And obviously, the spot price that you show is a lot more than EUR 200 per tonne higher than that. So what is the reason that I guess you can't go for more? And is the EUR 200 million per tonne target still what we should be thinking about?

To the second question, the target is at least EUR 200 a tonne?

Sure.

Yes. And to your CropEnergies question with the ethanol price in the guidance, no further disclosure and that's what I said that the assumed price is below the current market price.

Okay. And then just on the EUR 900 per tonne, are you able to kind of -- I know that it's not necessarily quite like-for-like because it includes the transport cost. Can you actually break out what those transport costs would be roughly. So we sort of know what it is on a like-for-like basis at this point.

Yes. It's hard to predict, but the transport costs in the spot price with the higher cost we have today is truly close to EUR 80, EUR 100.

Next question is from the line of Michael Schaefer from ODDO BHF.

I'll also raise them one by one, if you don't mind. On your outlook statement, well, there is one condition you're setting basically that the whole gas situation in Germany. And I mean, we have seen the second level of emergency plan now raised a couple of weeks ago and you're assuming that this should not have any significant impact on prices. Well, the reality is that it's rather different. So we have seen the opposite since basically the Russian stopped delivering 100% via upstream. We have seen gas spot prices skyrocketing by 70% or something. So the question is, first of all, what makes us confident on the -- and what -- is this linked to your hedging situation? If you can just remind us, I mean, I recall basically back at the Q4 call that you're hedging for '22, '23 was around 70%, which leaves an open position, obviously. Do you see this as a threat to your outlook statement. This would be my first question.

Okay. Michael thanks for your question. This is an important one, clearly. And first of all, I would confirm the hedging rates we have for the group, group wide 70%. In the sugar -- for Sugar region slightly higher. That are the hedging rates and they are clearly above the current market prices. And now also for those who follow Südzucker not so in that detail, let me put that your question, let me say, in a broader context. Südzucker is present in many European countries, yes. And we face, for example, rather low risks in Belgium, France or also in the U.K., where we have access to LNG gas as really good alternative. In other countries like Poland, we have also alternatives, which are available, for example, coal. And now let's have a closer look at the German situation because this is a pure legislative German issue you raised. And as you know, this is a dynamic process, which has also changed several times in the past days. This is a new topic started -- the discussion started for 2 weeks. And I think we will also see certain changes in the next 2, 3 days. And we are watching the development closely and price possible to prepare for the different scenarios. And so far, different mechanisms have been discussed in Germany. One is price mechanism, which potential impact also in parts of our hedging positions. And on the other hand, pay-as-you-go mechanism is discussed that would affect all players equally. And overall, it is important to understand that there are both price and volume risks for us, which are difficult to assess, to quantify from today's perspective. And you will have also guarded from our disclaimer that we have not yet taken this effect into account in the forecast, we can't rule out that those could be material, but clearly, it is a German issue.

And if we look into just sort of a follow-up on this one, looking at your German hedging. So is this -- should we assume this above what you flagged as a basically group-wide hedging rate. Is that a fair assumption?

Sorry, could you repeat.

The German hedge ratio, should we assume this -- since this is very Sugar centric, is this -- should we assume this being above the 70% group-wide hedging rate? Is this a fair assumption? .

No, it's also -- maybe it's up to 80% hedged term. And clearly, also from the volume side, et cetera, pricing side, you would have to do also an individual factory by factory approach. Also to be clear. So this is very difficult to make here assessment. So we have to wait and see what will be the outcome.

Understood. The second question is on your Special Products segment outlook. I mean you have raised the earnings outlook for this segment. So I wonder whether you can shed some more light on what has essentially changed since you presented the full year outlook back a couple of months ago. So is there any kind of better visibility on cost path through or anything? So what has -- and if you could basically split this into the various bits and pieces in Special Products would be helpful. Where is the major change compared to your previous assumption?

The major change in our assumption is that we have seen in some areas a better-than-expected production and sales volume development. And that we are also confident now that the price increases which will be to the main part effect from the beginning of H2 will bring, let me say, margins in that Special Products segment up. That are the main drivers. They are strong. Also we have to -- in some areas, which were burdened from the Corona pandemic in last year, especially also in our functional food areas that we have seen then a strong basis effect. The sales volumes were up in the first quarter that will phase out because there are stocking effects also on customer base, but we did help also in quarter 1 and had therefore also for the full year guidance.

And this improvement is true for all the 3 subsegments you have there in Special Products? So for [indiscernible]?

The main effect that we have -- we assume in the functional food ingredients area.

Okay. Understood. Then my last question is coming back to sugar to let's say, current growing condition, let's put it that way. I mean we have seen rather dry weather over the past couple of weeks and months, saw reports in the Southern Europe of severe dryness. So I wonder whether you can shed some more light on how you assess basically beet quality right now, whether you see this as a threat already to the beet yield, which we should be aware of? So any color would be helpful.

So far when we put all knowledge from all the regions together, there is still the assumption valid that we will see an average yield in 2022. But clearly, Michael, the variance is big between the different regions. But in average, we still stick to the average yield of the last 5 years.

[Operator Instructions] We have a follow-up question from the line of Oliver Schwarz.

Look, I unmuted myself. Thank you for taking my 2 additional questions. In relation to what Michael asked us, could you perhaps flesh out the volume of gas you are using in your German facilities or have used, let's say, in the past financial years, so that we might be able to do some back-of-the-envelope calculations in regards to what the likely impact especially regarding prices might be, that would be helpful. That would be my first question.

Oliver, this is really not possible. We have really a different mix of energy sources in the different factories. And we are working really hard to bring alternatives to those factories, which would normally use gas to use some heavy fuel or light fuel. And so this is to -- we would do that exercise case by case, not only for the sugar factories, also for the other factories we have. And so we don't disclose these numbers.

Understood. And lastly from my side, I think that was the first time I haven't seen any, let's say, any part of your guidance alluding to possible Corona effect. Obviously, the shutdowns, the lockdowns in China have become less. But what I heard currently, they are on the rise again. And at least the German Minister for Health is sending a rather bleak picture for winter 2022, 2023. What makes you more positive today, let's say, in May or in the periods before?

We still have a disclaimer to Corona in our outlook, yes? So there is still some uncertainty, and we are fully right when we are looking on the late development. We are in the middle of the summer. And therefore, we still slack that Corona is an issue, especially in our business.

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

Yes. Thank you to all of you for all the questions, muted and unmuted. Muted questions were the best actually. So thank you. And if you have additional questions, you know that you can call us any time. Thank you. Bye-bye.

Thank you. Bye.