Interim Report 3rd Quarter 2006/07
The figures in brackets refer to the same period in the previous year
The first three quarters 2006/07 at a glance
This interim report informs you about the development of business in the first nine months of the current 2006/07 financial year (March to November 2006).
EU Sugar Market Regulation
The new sugar market regulation, with an effective period until September 2015, came into force on 1 July 2006. The political objective is to satisfy WTO rules and at the same time strengthen the competitiveness of the EU sugar sector. This requires a reduction of quota sugar production by a total of 5 - 6 million tonnes. To this end the EU has set up a restructuring fund which offers inefficient sugar producers the opportunity to surrender their quotas at an attractive price. The European Commission is committed to do everything within its powers to make its restructuring offer a success.
In the 2006/07 sugar industry year the restructuring fund started off in line with expectations, with the surrender of 1.5 million tonnes of quotas. The time limit for the surrender of quotas for the 2007/08 sugar industry year ends on 31 January 2007. So far the restructuring fund has declarations of intent for the surrender of 0.7 million tonnes. As market leader, the Südzucker Group is making its contribution towards reducing quotas by surrendering the quotas for ORAFTI in Belgium and Eastern Sugar in Slovakia, the Czech Republic and Hungary. Nonetheless, the restructuring fund»s present position, with a total of 2.2 million tonnes, is still not sufficient. Consequently, on 21 November 2006 the European Commission appealed to the EU member states and the sugar industry to surrender further quotas to the restructuring fund. If no further quotas are surrendered, this will already give rise to a need for temporary quota restrictions in the 2007/08 sugar industry year which could exceed the 2006/07 level of 2.5 million tonnes and, together with the again rising restructuring levy, would lead to a significant strain on earnings in the Sugar segment.
It can be assumed that the European Commission will deliver on its commitment to see that the restructuring fund is a success so that the desired adjustment and concentration of production on the most efficient locations is achieved. By itself, the threatened linear reduction of quotas for all EU sugar producers is not a suitable means to this end.
The European sugar industry is demanding that in the present transition phase the European Commission should allow exports of quota sugar to the full extent permitted by WTO rules and in this way support the market stabilisation process. The aim must be to keep the necessary quota restrictions as low as possible in the transition phase in order not to weaken the earning power of the most competitive sugar producers. The restrictive export policy still practised by the Commission, with few export permits and low export volumes, is not helpful.
Südzucker is seizing upon the new possibilities offered by the sugar market regulation to cushion the burdens from the price reduction. We will continue developing the new market segment of industrial sugar for bioethanol production as well as for chemical and pharmaceutical applications. 550,000 tonnes of sugar from the 2006 campaign are available for marketing as industrial sugar. We have therefore taken a leading position as a supplier of industrial sugar in the EU.
The BioFuels Quota Act which came into force in Germany on 1 January 2007 and sets mandatory quotas for the admixture of bioethanol in conventional motor fuels will be a driver for the fast-growing bioethanol market. For the coming 2007 campaign we have therefore offered beet growers in Germany additional contracts for the production of 300,000 tonnes of ethanol beet. Implementation of the EU Biofuels Directive in other countries will open up additional market potential. Together with the rising demand for industrial sugar as raw material for the production of specialty products in the chemical and pharmaceutical industry, this presents a market potential which can compensate for the previous C sugar business.
Together with the beet suppliers, Südzucker has also used the possibility created by the EU to buy additional production quotas of around 250,000 tonnes of sugar, and thus increase the sugar quota to a total of approximately 4.1 million tonnes.
The exploitation of the opportunities arising from the new sugar market regulation, coupled with the cost-cutting measures initiated, will place Südzucker in a position to offset the effects of the price reduction in the medium term. The transition phase at the start of the new market regulation will give rise to earnings burdens, especially if there are high temporary quota restrictions because the restructuring fund is not sufficiently used. In the event of a lasting linear quota reduction Südzucker will have to undertake additional adjustment measures. Nonetheless, Südzucker is adhering to its goal of emerging strengthened from the reform process.
New sugar markets
Romania and Bulgaria joined the European Union on 1 January 2007. Romania was allotted a sugar quota of 329,600 tonnes of cane sugar and 109,200 tonnes of beet sugar. In Romania, we stand to profit from the growing importance of these markets through the production and sales company AGRANA Romania S.A. We will be addressing the Bulgarian market with a newly established trading company and a joint venture which is currently being set up with a local partner.
Through a distribution partnership in Italy Südzucker will be further expanding its market share in this future deficit market.
The sugar refinery with a capacity of 150,000 tonnes which is currently under construction as a joint venture project in Brcko/Bosnia-Herzegovina will be coming on stream in 2007.
Sugar production 2006
Beet acreage in the Südzucker Group was reduced by 8.1 % in the 2006/07 sugar industry year owing to the need for temporary quota restrictions; owing to weather conditions the sugar yield was lower than in the previous year at 10.6 (11.2) tonnes per hectare.
The again good beet quality and low soiling had a favourable impact on the campaign. Including the refining of cane sugar, the Südzucker Group produced a total of 4.6 (5.2) million tonnes of sugar.
The beet processing at the 40 beet sugar refineries began from the second half of September 2006 and was completed at the beginning of January 2007. Owing to the smaller volume of beet the campaign was shorter than in the previous year, averaging 86 (90) days.
Group revenues rose by EUR 351.2 million, or 8.8 %, to EUR 4,360.4 (4,009.2) million in the first three quarters of the 2006/07 financial year.
Revenues in the Sugar segment were level with the previous year at EUR 2,739.9 (2,720.4) million. Lower sales of quota sugar due to the temporary quota reduction and lower export volumes were offset by higher revenues on the home markets in Eastern Europe.
Revenues in the Special Products segment were up by 13.4 %, or EUR 122.5 million, to EUR 1,036.9 (914.4) million. This is primarily due to the growth in revenues from the CropEnergies Group»s bioethanol business and the integration of the Ryssen Group. The functional food and starch businesses also posted higher revenues.
The Fruit segment achieved revenues of EUR 583.6 (374.4) million. The increase of EUR 209.2 million versus a year earlier is mainly due to the fact that in the previous year the Atys Group was only included for six months. In addition, selling prices could be increased owing to higher raw material costs. The fruit preparations business continued to generate strong organic volume growth as well.
Income from operations was increased in the Group in the first nine months to EUR 359.1 (349.1) million. While operating profit was slightly lower than in the previous year at EUR 354.7 (357.7) million, there was an improvement in net restructuring costs and special items to EUR 4.4 ( -8.6) million.
Operating profit in the Sugar segment in the first nine months fell short of the previous year»s level at EUR 231.4 (259.2) million. Earnings performance in the third quarter in Western Europe was affected for the first time by the EU»s restrictive export policy. The positive market development in Eastern Europe since the beginning of the financial year continued in the third quarter. In the Special Products segment operating profit was increased by 15.6 %, or EUR 12.7 million, to EUR 94.2 (81.5) million. The growth was driven by the good earnings development in the bioethanol business where, after the start-up losses the previous year, a clear earnings swing has been achieved on the back of the much improved level of capacity utilisation at the production plant in Zeitz. As expected, operating profit in the functional food business was well below the previous year level. This is partly due to the absence of the earnings contributions from the business in inulin fructose produced from chicory. With the reform of the sugar market regulation, Südzucker has decided to discontinue these activities and sell the quota to the restructuring fund. At the same time, the sustained strong growth in sales in the core functional food product lines was not able to offset cost increases and burdens from the production capacities in Chile not yet being fully utilised. In the starch business operating profit fell short of the good previous year»s level owing to the unsatisfactory price level for isoglucose and the significantly higher cost of maize from the 2006 harvest. In the Fruit segment operating profit was up EUR 12.1 million to EUR 29.1 (17.0) million. This increase is partly due to the Atys Group being included for nine months as compared to six months in the previous year. Another contributing factor has been strong organic volume growth, especially in Russia, the USA and France. In the course of the third quarter it was possible to pass on the higher raw material and energy costs through price increases.
Net restructuring costs and special items were affected by further measures to strengthen our competitive position. In the Sugar segment there were charges of EUR -28.7 million from write-offs on old sugar quotas in France and the closure of the Lubna sugar factory in Poland. In the Special Products segment a positive balance of EUR 33.1 million was achieved. In the functional food business we allowed for the cost situation in chicory production in Chile with a one-off impairment charge against goodwill and for the discontinued inulin fructose production at the Oreye location with plant and equipment retirements and related redundancy plans. These charges were more than offset by income contributed by the sale of the inulin quota to the restructuring fund and the flotation of CropEnergies AG.
Group net earnings in the first nine months rose to EUR 255.7 million from EUR 250.5 million in the previous year. After other minority interests and hybrid capital, net earnings attributable to Südzucker shareholders were level with the previous year at EUR 193.3 (193.6) million.
For the full year 2006/07 we expect double-digit growth rates in revenues in the Special Products and Fruit segments. Accordingly, Group revenues should increase by 6 %, from EUR 5.3 billion to around EUR 5.7 billion, despite lower revenues in the Sugar segment. In the Sugar segment revenues are expected to decline by approximately EUR 150 million to EUR 3.4 billion as a result of the high declassification in 2005, the temporary quota reduction in the 2006 campaign, the absence of C sugar exports from the second half of the 2006/07 financial year and the EU»s restrictive quota export policy. Revenues in the Special Products segment will be up by about EUR 150 million to around EUR 1.4 billion on the back of the strong growth in bioethanol sales. In the Fruit segment, we expect revenues to rise by a good EUR 350 million to around EUR 900 million, driven above all by organic volume growth in fruit preparations and also due to the change in the financial year of the fruit companies with the inclusion of two additional months.
We expect in the group income from operations slightly above the previous year»s level of EUR 397 million. While operating profit will fall short of the previous year»s figure of EUR 450.0 million, the negative impact from the restructuring result (previous year: EUR -52.6 million) will be much lower.
Operating profit in the Sugar segment will be hurt by the EU»s restrictive export policy. As a result of the European Commission»s drastic restriction of export possibilities which took effect in the third quarter we had to cut our planned quota sugar exports; operating profit will therefore be below the 2005/06 level. The rationalisation measures resolved in the previous year, with the closure of three sugar factories, the again good C sugar business from the 2005 campaign and the gratifying sales of industrial sugar already from the 2006 campaign compensated in full for the first-time impact of the restructuring levy; however, the absence of exports and the weaker than expected price level create burdens which cannot be offset.
In the Special Products segment, the positive development of operating profit in the bioethanol business will be reinforced by the rising demand over the full year. In the functional food business, the gratifying development of sales in the core product lines will not be able to compensate for the burdens arising from production in Chile not yet running at full capacity and the absence of the earnings contributions from the inulin fructose business following the sale of the quota. In the starch business we will not match the previous year»s result since it has only been possible to pass on cost burdens from higher maize prices and energy costs to customers since the end of 2006. All in all, operating profit in the Special Products segment will therefore be slightly lower than in the previous year. However, this shortfall will be more than offset by a significantly improved result in the Fruit segment. Earnings quality has been enhanced both in fruit preparations and in fruit juice concentrates; additionally, operating profit will benefit from the consolidation of the Atys Group now for the full year and the change of the financial year.
The development in the Sugar segment in the 2007/08 financial year will depend very largely on how effective the restructuring fund is in bringing about adjustments in the market. Delays in the implementation of the restructuring inevitably lead to surplus production which will accelerate the restructuring process but will also give rise to temporary earnings burdens. In the event of a lasting quota reduction Südzucker will have to undertake additional adjustment measures. However, in the medium term the essentially performance and market-driven orientation of the EU measures will strengthen the competitive position of the Südzucker Group.
The Executive Board
Events after the interim reporting period
On 22 December 2006, Südzucker AG signed an agreement to acquire a 50 % interest in Italian sugar distributor Maxi S.r.l., Bozen/Italy. This ownership interest is intended to underpin the long and successful distribution partnership with this company. With this investment Südzucker aims to expand its market share in Italy, which has become a deficit market as a result of quota surrenders and discontinued production. The acquisition has still to be approved by the Italian antitrust and competition authorities. This is expected in the first quarter of 2007.
With Bulgaria»s entry into the EU on 1 January 2007 this market has become more important for the Südzucker Group. We are launching our own sales activities in Bulgaria at the beginning of 2007 with the establishment of a trading company under the name AGRANA Trading EOOD. With this move, AGRANA will be able to offer a wide range of sugar and starch products in the Bulgarian market.