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Fiscal year 2016/17

Letter to the shareholders

Mannheim, 24 April 2017
Dear shareholders,
Südzucker Group is now "Strong for the future", and we are pleased to be able to present you with a positive set of 2016/17 financial statements. Revenues at € 6.5 (6.4) billion are, in line with planning, slightly higher than last year, operating result increased significantly to € 426 (241) million.
We want you, our shareholders, to partake in this result and at the annual general meeting, we and the supervisory board will recommend paying a dividend of € 0.45 (0.30) per share. This recommendation is consistent with our sustainable dividend policy, which also takes into consideration the long-term development of the company.
In our strategy discussion, we evaluated what Südzucker makes special. On the previous pages, we used the terms "diverse", "competent" and "sustainable" to characterize the company and give you a first impression of what we are all about. In the rest of the report, we provide you with a wide range of information about the fiscal year just ended, about our activities in the area of sustainability, as well as future developments.
We have especially ambitious plans for the sugar segment. In the past few years, we have had to make and overcome a number of cuts that were required due to changing general conditions. Last fiscal year, we were more successful again, with revenues of € 2,776 million and a result of € 72 million. The sugar segment is in a transition phase, so the result is still below our long-range expectations.
At the end of September 2017, after being in place for almost 50 years, European regulations governing minimum beet prices and production quotas will expire. The elimination of production quotas offers an opportunity to produce considerably more sugar, which will result in significantly improved production capacity utilization in future. We will exploit this to strengthen our European market position and specifically target new export opportunities that arise.
Of course expanding our sugar production is largely contingent upon having an adequate supply of beets for our factories. That is why we started very early to work with beet growers on a new, flexible beet contracting and compensation system, that shares between both parties the risks and opportunities arising from future sugar market developments. However, a pivotal factor will be that both beet growers and Südzucker Group will have to be able to ride successfully through periods of low sugar prices.
This is a reason our cost reduction and efficiency improvement programs along the entire value chain – from the field to the customer – play an important role: We are aiming for cost leadership. The commitment of our employees combined with beet growers’ readiness to jointly tackle these challenges sends a clear message.
We have already signed contracts for the beets required for the upcoming campaign. This is extremely important, given that sugar inventories to the end of the actual current 2016/17 sugar marketing year will sink to a minimum, both at Südzucker and throughout the entire EU. An earlier campaign start and significantly expanded production capacity should ensure a smooth transition.
An important part of expanding into the global sugar market is the setup of our "Global Markets" sales organization, which will be able to supply customers that conduct business internationally from a single source. We have established a branch office in Antwerp as part of our "Global Markets" organization, to ensure we are prepared to handle the many times over higher export volumes we expect starting in October 2017. As part of our plan to penetrate new markets, we founded a sales company in Israel last year.
Overall, exports to regions outside the EU will once again play a greater role. Interesting markets include the Near and Middle East, Africa and Southeast Asia. We have made significant progress on preparing the sugar logistics we will require after the 2017/18 campaign. We have signed long-term contracts with warehouse operators located near harbors and other external logistics partners. We can use special railcars and seagoing container transshipment via our logistics partners to service practically any market across the globe.
We have introduced a common brand and standard communications messages for all sales channels for the granulated sugar/sugar syrup and special products groups to generate synergies in the B2B area.
We will take advantage of additional world market sugar sales opportunities through our interest in British trading company ED&F Man Holdings Limited. We have had an interest in this company since 2012, and last fiscal year our holdings increased by 10 % to about 35 %.
Global population growth and rising incomes will support our sugar sement. The continuing steady trends will increase global sugar consumption by about 2 % annually, which after all corresponds to about 3-4 million tonnes of additional sugar demand annually.
In addition to these positive aspects, we must unfortunately also contend with negative headlines about our product, sugar. The message is being broadcast that sugar is responsible for all of our modern society’s ills – especially obesity. For example, in some countries, a sugar tax that is supposed to counter obesity in the general population has already been introduced. Yet it has been proven that a sugar tax has no slimming effect. Weight gain for healthy people is easy to explain: More calories are consumed than are expended. It does not matter whether the source of the calories is fat, proteins, sugar or other carbohydrates. That is why the latest considerations to reduce the amount of sugar in products in favor of other ingredients will not produce a breakthrough in the struggle with obesity. In fact most of the time such reformulated products, contrary to what consumers assume, have almost no fewer calories. We work very hard to combat this type of consumer deception.
One of the strengths of isomalt, part of the special products segment’s very diverse portfolio, is to sweeten products while at the same time reducing the number of calories they contain. We can supply a wide variety of customers with our diverse range of products – from functional ingredients for food and animal feed, to frozen and chilled products, portion packs and starches for food and non-food applications. The various trends toward foods with health benefits, clean label, vegetarian or vegan, as well as convenience products, remain unbroken, which is why almost all of our divisions were able to report higher volumes.
The special products segment was able to increase its operating result to € 184 million as revenues climbed slightly, despite exchange rate fluctuations and charges from the startup of the new starch factory in Zeitz. We are pleased that we were able to successfully complete the testing of the Zeitz plant and that we are now in a position to supply customers with glucose syrups that meet their quality specifications.
The development of ethanol prices continues to be the determining factor for the CropEnergies segment. As recently as the beginning of last fiscal year, low ethanol prices weighed massive on our businesses. We took advantage of the subsequent trending moderate recovery to significantly increase production of bioethanol, as well as food and animal feed, by restarting the factory in Wilton, Great Britain. This enabled us to end the fiscal year with revenues of € 726 million and a result of € 98 million, more than 10 % higher than the already excellent results of the previous year.
During the temporary shutdown in Wilton, we took various steps to optimize the production plant and reduce its specific energy consumption. We have thus established the prerequisites for operating the plant flexibly according to market and orders received conditions in future, which is important because again we expect strong volatility in bioethanol market prices.
The policy direction on the issue of fuels produced from renewable raw materials in Europe makes no sense to us. We are critical of the recommendation to reduce the use of fuels from normal crops from a maximum of 7 % in 2021 to maximum 3.8 % in 2030, despite the fact that our bioethanol now cuts emissions by over 70 % in comparison to fossil fuels. We assume the elimination of the target of a renewable energies share of 10% in the transportation sector even more critically.
We can be satisfied with the fruit segment's growth. We were able to boost revenues by 7 % to € 1,155 million and the result by even more. It was up 16 % to € 72 million. It is especially gratifying that we were able to improve the fruit preparations division’s market position by capturing additional market share. We will steadfastly continue along this path. Last fiscal year, we acquired the company Main Process S.A., a producer of fruit preparations headquartered in Argentina, with the aim of strengthening our market presence in the Latin American growth market. The company’s wide range of products is an ideal fit for our existing diversified product portfolio. In addition, AGRANA Fruit founded a company in India, which is scheduled to start operations in fiscal 2017/18. We expanded our capacity at the fruit preparations factory in Lysander in the United States to supply the American market.
This concludes my review of the key developments in our segments. . Let us now look at the capital market measures that will financially flank Südzucker Group’s growth: In November 2016, we successfully placed a corporate bond valued at € 300 million with a term of seven years and a 1.25 % per annum coupon. Its purpose was to finance the 2016/17 campaign and to refinance the 2011 bond prior to it maturing in March 2018. The latter had a 4.125 % coupon.
In February 2017, we have increased the free-floating share of AGRANA from only 7 % to just under 19 % by way of a capital increase, the issue of 1.4 million new AGRANA shares and the concurrent placement of 0.5 million AGRANA shares from Südzucker's directly held shares. The € 189 million generated by the capital increase and the placement will support the financing of further growth.
Our new 2017/18 fiscal year started well, which makes us confident that we will achieve the planned revenue growth to between € 6.7 and 7.0 billion and operating result to between € 425 and 500 million. As we have stated several times previously, the volatility of the sugar and ethanol markets will continue to be a factor with which we must contend.
We can only tackle the future with strength together with our employees. They are diverse, competent and act sustainably – and thereby are the key to our success. We thank our employees for their commitment and dedication during the fiscal year just ended.
Ladies and gentlemen, as shareholders you also expect your company to sustainably boost shareholder value. We want to fulfill these aspirations and accordingly, have firmly embedded commensurate fundamentals in our corporate strategy and our guidelines. In the following report, you can read up on how we meet our ecological, business and social responsibilities. We continue to prepare these reports on the basis of the Global Reporting Initiative (GRI) guidelines.
We thank you for your commitment and solidarity. Südzucker will tackle the future on the basis of strength. Stay with us.
Yours truly,
Südzucker AG
Executive board