INTERIM REPORT 1st Quarter Financial Year 2005/06, 1st March to 31 Mai 2005
The complete report you find in the Download area.
This interim report informs you about the development of business in the first three months of the current 2005 / 2006 financial year (March to May 2005) and gives us an opportunity especially to update you on the discussions concerning the reform of the European Sugar Market Regulation.
Proposals on the reform of the European Sugar Market Regulation
With its proposal for the reform of the Sugar Market Regulation presented on 22 June 2005 the European Commission wishes to reorganize the sugar market, strengthen the industry's competitiveness on a sustainable basis and meet its international commitments. The European Commission's aim is to have the new Sugar Market Regulation passed by the Council of Ministers before the WTO summit in Hong Kong in December 2005. The Sugar Market Regulation is to remain in force until 2014/15 and thus provide a long-term perspective for the competitive locations in Europe.
To implement this objective the Commission proposes a programme for purchasing sugar quotas in the market on a voluntary basis (Restructuring Fund), the partial conversion of C-sugar into quotas and drastic price reductions, with the sugar beet price to be lowered from EUR 43.63 to EUR 25.05 and the sugar reference price lowered in two stages by a total of 39% to EUR 385.50 per tonne of sugar. The price reduction is to be used partly to finance the purchase of quotas.
Südzucker supports the basic tenor of the proposal since it presents a reliable framework for the core areas of Europe for the years to 2014/15. We have traditionally focused on the beet-growing regions with favourable natural conditions. To maintain a viable sugar production industry in Europe it is also necessary for all imports to be systematically integrated into the Sugar Market Regulation quota system, sufficient external protection to be provided and agreement to be reached with the World Trade Organization (WTO) on a redefinition of the permitted export volumes. The Restructuring Fund should - as proposed by the Commission - provide adequate compensation to ensure a sustainable state of balance on the EU sugar market by purchasing all then still existing production surpluses.
We consider the proposed price reductions to be far too exaggerated. A less drastic price reduction would also accommodate the demands of the European Parliament, numerous non-governmental organizations (NGOs) and the third-world countries concerned.
Südzucker has focused the expansion of its activities in the Sugar segment on the competitive core regions of Central Europe and thus pursued a forward-looking strategy early on. We will examine the individual elements and especially the new instruments of the future Sugar Market Regulation carefully and make necessary adjustments. All in all, this will enable Südzucker to defend the Sugar segment's level of profitability.
Sales increased in Q1 2005/06
In the first three months of the 2005/06 financial year Group sales were up by 11.3 % year on year to EUR 1,252 (1,125) million.
Sales in the Sugar segment were up by 11.8 % to EUR 912 (816) million. Both the high level of sugar production in the 2004 campaign and the European Commission's decision not to reduce the 2004/05 quota led to a strong increase in sugar exports. The increase in sugar prices in the wake of the EU entry of the new Eastern European member states on 1 May 2004 affected sales for only one month in the year-earlier period but for the full quarter in the current year.
In our Special Products segment we were also able to grow sales in the first quarter by 10.0 % to EUR 340 (309) million. This increase was the result of our growth strategy in the fruit business, which we are expanding in successive and focused steps. On year-on-year comparison the Steirerobst and Wink groups of companies are included for the first time in the first quarter figures for 2005/06. The starch, functional food and Freiberger businesses managed to maintain sales at the year-earlier level despite difficult trading conditions. The new bioethanol plant in Zeitz which was brought on stream at the end of the first quarter did not yet contribute to sales.
Operating profit above last year despite start-up costs
In the first three months of the 2005/06 financial year Group operating profit was up by 3.3 % to EUR 126 (122) million.
The increase in the operating result in the Sugar segment by 14.3 % to EUR 96 (84) million is mainly due to higher exports after the strong harvest in 2004. In the first quarter this more than compensated for the burdens from the lack of a declassification of quotas in the 2004 campaign. The sugar companies in Eastern Europe, which now operated under EU conditions for the full quarter, also contributed to the improvement in earnings.
Set against the higher operating profit in the Sugar segment there was a decline of EUR 8 million to EUR 30 (38) million in the Special Products segment. This was due in the main to start-up costs for the bioethanol plant in Zeitz and cost increases in the functional food business, which are also attributable to enlarged capacities that were not yet fully utilized.
For the full year 2005/06 we expect sales growth of just under 9 % to over EUR 5.2 billion. This is on the assumption of slightly lower sugar sales of EUR 3.3 billion as a result of a decline in exports in the second half of the year. This decline in exports is a result of the declassification urged by the European sugar industry for some time, and now announced by the European Commission for September 2005, to stabilize the European sugar market. On the other hand, sales in the Special Products segment are expected to see growth well into the double digits to EUR 1.9 billion on the back of the consolidation of the Atys Group and the start of bioethanol production.
The growth in operating profit in the Sugar segment in the first quarter is well above our expectations for the full year. The boost from exports from the strong harvest in 2004 will fade in the further course of the financial year and the burdens from the lack of declassification in 2004 will have a stronger impact on earnings. However, we expect the declassification on an adequate scale now announced to provide relief on the market and cause the price situation to ease.
In the Special Products segment, on the other hand, operating profit will receive a strong boost above all from the first-time consolidation of the Atys Group and the start of bioethanol production which will reverse the weak first quarter performance into a double-digit increase in profit for the full year.
The Executive Board