Interim Report 1st Quarter 2006/07
This interim report informs you about the development of business in the first three months of the current 2006/07 financial year (March to May 2006).
Reform of the European Sugar Market Regulation
The European Council of Agricultural Ministers adopted the new single market regulation for sugar on 20 Feb-ruary 2006. Despite the severe price reductions the new market regulation gives us a long-term perspective. Südzucker is positioned in the best beet-growing regions of Europe and is therefore competitive. Based on our good reference volumes we can capture over one-fourth of the new additional quota of 1 million tonnes and increase our quota from 3.8 to 4.1 million tonnes. We will also fully exploit the new possibilities for industrial sugar business for chemical and pharmaceutical applications and for bioethanol production outside quota pro-duction. All in all, we anticipate a higher production volume for the Südzucker Group than at present, although, as things stand at present, export potential will largely fall away as a result of the negative WTO panel decision. With industrial sugar production, the volatile C sugar business will be replaced by stable EU business.
The rising quota proportion provided for in the new market regulation and higher stable intra-European sales of quota and industrial sugar instead of world market exports will enable Südzucker to offset the negative impact of the price reduction by its own efforts through the cost-cutting measures that have been initiated. Südzucker will therefore emerge strengthened from the reform process.
The necessary transitional arrangements have been adopted meanwhile. To achieve market adjustments and ensure a good start to the new market regulation era, the Commission temporarily reduced the EU quota for the 2006/07 sugar industry year by 2.5 million tonnes in good time before the seed sowing in 2006. Less sugar will therefore be produced, which will take pressure off the market. At the same time, we expect quotas in the region of 1.5 million tonnes to be sold to the Restructuring Fund already in the first year of the reform. We assume that the market balance that was restored by the high declassification in 2005/06 will be further stabi-lised and strengthened. In these circumstances, we expect the price level to pick up again.
No progress was achieved again in the WTO negotiations at the end of June 2006. No further concessions have been made on opening the European agricultural markets. The aim is to reach an agreement by the end of July, as otherwise the conclusion of the world trade round as a whole is threatened.
New Fruit segment
A separate Fruit segment has been created in response to the growing importance of the fruit business in the strategic focus of the Südzucker Group. The reporting now comprises the segments Sugar, Special Products (bioethanol, Freiberger, functional food, PortionPack, starch and Surafti) and Fruit (fruit preparations and fruit juice concentrates).
Integration of fruit business proceeding according to plan
At the beginning of July AGRANA completed the sweeping restructuring of the fruit business. The fruit compa-nies Atys, DSF Deutsch-Schweizerische Früchteverarbeitung GmbH (DSF), Steirerobst, Vallø Saft and Wink, which had previously operated independently in the market, transferred their operating activities to AGRANA Fruit S.A., based in Paris/France, on the fruit preparations side and to AGRANA Juice GmbH, based in Gleisdorf/Austria, on the fruit juice concentrates side. The companies in the fruit business acquired in the last three years have therefore been absorbed into these two holding companies. The restructuring creates two powerful, market-oriented organisations, streamlines internal processes, cuts costs and further improves cus-tomer service. Research and product development capacities are also expanded by this integration. The new organisation is also designed so that further operations, as a result of acquisitions or organic growth, can be integrated into AGRANA. Finally, the "AGRANA" brand will now be internationally positioned in the fruit busi-ness. The concept of a global raw material sourcing strategy was also developed further in the first quarter of 2006.
Group revenues rose by EUR 216.2 million, or 17.3%, to EUR 1,468.5 (1,252.3) million in the first quarter of the 2006/07 financial year, with growth witnessed in all three segments.
Revenues in the Sugar segment in the first quarter of 2006/07 were up by EUR 49.2 million, or 5.4%, to EUR 961.0 (911.8) million. This growth was on the back of the positive market development in the East European EU mar-kets, which was reinforced by intervention sales in Hungary and the Czech Republic. Exports grew again versus 2005/06 but, owing to a strong shift from quota to C sugar exports, this was not reflected in higher export revenues.
Revenues in the Special Products segment were up by 10.4%, or EUR 30.6 million, to EUR 324.6 (294.0) million mainly due to the first-time contribution from the bioethanol plant in Zeitz.
The Fruit segment posted revenues of EUR 182.9 (46.5) million in the first quarter of the calendar year 2006 (1 January to 31 March) , whereby the Atys Group and DSF, Konstanz, were not yet consolidated in the year-earlier period.
In the first quarter of the 2006/07 financial year Group operating profit rose to EUR 127.6 (126.0) million in an again difficult environment. The operating margin came to 8.7%.
Operating profit in the Sugar segment was just short of the year-earlier level at EUR 94. (96.0) million. The again higher exports had a positive impact on the segment result. Despite the high declassification in autumn 2005 the consolidation of the European sugar markets has made only slow progress to date. While market adjust-ments are clearly taking effect in Eastern Europe, the situation in Western Europe remained difficult in the first quarter.
As expected, operating profit in the Special Products segment fell to EUR 28.1 (29.8) million. The bioethanol busi-ness achieved first significant profits after start-up losses the year before. In the functional food business oper-ating profit was well below the year-earlier level as expected. In the Isomalt/Palatinose, Inulin and Oligofruc-tose core product lines the past growth trend was sustained. However, the earnings contributions from Inulin-fructose, which is produced from chicory under the EU quota, declined. With the reform of the Sugar Market Regulation Südzucker has decided to discontinue these business activities at the end of the year and to sell the quota to the Restructuring Fund.
Operating profit in the Fruit segment came to EUR 5.1 (0.2) million. The sharp rise is mostly due to the full con-solidation of the Atys Group and DSF for the first time.
Income from operations, amounting to EUR 120.2 (122.2) million, consists of operating profit of EUR 127.6 (126.0) million and restructuring costs and special items of minus EUR 7.4 (-3.8) million. The restructuring costs and spe-cial items relate in the Sugar segment to the closure of the Lubna plant in Poland which was resolved in the first quarter of 2006/07. In the Special Products segment start-up losses were incurred in the Orafti product line on the functional food side in both the reporting period and the year-earlier period.
Group net earnings for the year rose from EUR 69.7 million in the year-earlier period to EUR 75.4 million.
Cash flow rose strongly by 27.8%, or EUR 25.3 million, to EUR 116.2 (90.9) million.
For the full year 2006/07 we expect Group revenues to rise by 5 % from EUR 5.3 to 5.6 billion due to a double-digit increase in the special products and fruit segments despite a slight decrease in sugar segments revenues.
Revenues in the Special Products segment will grow by over EUR 100 million on the back of strong growth in bio-ethanol sales. In the Fruit segment we expect revenues to be up by about EUR 300 million as a result of the Atys Group now being consolidated for the full year, the first-time consolidation of DSF and the switch in the fruit companies' financial year from the calendar year to the Südzucker Group's financial year. Additionally, in light of past experience the consumption of fruit yoghurts is higher in the warmer months than in the first quarter, which should have a positive impact on both revenues and operating profit in the further course of the year. The campaign in fruit juice concentrate production in Europe runs from September to December, so the large industrial customer replenished their stocks in the last quarter of 2005. It is expected that the markets will pick up and there will be stronger restocking from the second quarter of 2006.
We expect an improvement in Group operating profit. We thereby assume that the Sugar segment will post at least an operating result at the previous year level already in the first year of the new market regulation - de-spite the burdens from the IP price reductions, despite the first-time impact of the restructuring levy and de-spite the high temporary quota reduction for the 2006/07 sugar industry year. Given a more stable market bal-ance market prices, which fell last year, will rise again. The result in the Sugar segment will also benefit from the cost-cutting measures initiated and earnings contributions from the sale of the large C sugar harvest in 2006 at rising world market prices. In the Special Products segment the positive result from the bioethanol business will improve still further on a full year basis. In the functional food business the gratifying develop-ment of sales in the core product lines will not be able to compensate for the burdens from production in Chile not yet running at full capacity and the effect of the earnings contributions from Inulinfructose falling away following the sale of the quota. All in all, operating profit in this segment will be slightly lower than last year. The Fruit segment will see significant earnings growth as a result of the improved earnings quality on a full year basis, the consolidation of the Atys Group now for the full year and the change of financial year.
Judged from today's vantage point, there will be a positive swing in restructuring costs and special items, which showed a high negative amount last year. Income from operations will therefore see a significant im-provement.
Südzucker AG Mannheim/Ochsenfurt
The Executive Board
Events after the interim reporting period
In June 2006 the fruit group acquired 50% of Xianyang Andre Juice Co. Ltd, a subsidiary of Yantai North Andre Juice Company Ltd, a leading Chinese producer of apple juice concentrates. The factory is located in the Shanxi province in the heart of China's biggest apple growing region. The present capacity of 30,000 tonnes per year is to be doubled in 2007, with revenues rising to EUR 24 million. The joint venture still requires approval from the relevant authorities.
AGRANA and Südzucker are setting up a raw sugar refinery in Brcko/Bosnia-Herzegovina as a 50/50 joint ven-ture with their longstanding distribution partner SCO Studen & Co. Holding of Vienna/Austria. Construction is due to start in 2006 and the sugar refinery is scheduled to come on stream already in 2007. The production capacity of 150,000 tonnes of sugar corresponds to the volume which the Südzucker Group already distributes in the region through SCO Studen in the form of EU export sugar.