Interim report 1st quarter 2007/08
The figures in brackets refer to the same period in the previous year
This interim report was prepared to inform you about business developments in the first three months of the current 2007/08 business year (March to May 2007).
Business results to date have fully met our expectations.
2007/08 first quarter summary
EU sugar market regulation reform
There have been delays in implementing the EU sugar market regulation reforms that came into effect on July 1, 2006. Actual sugar quota renouncements only reached 2.2 million tonnes in the 2007/08 sugar marketing year (2007/08: October 1, 2007 to September 30, 2008) versus the EU's target of 5 to 6 million tonnes of reduction in sugar production.
In order to reduce the quota backlog for the 2007/08 sugar marketing year, the EU commission has decided about an early withdrawal. This will be implemented for each member state in relation to the quota renouncements to date. Subsequently totaling 13.5 % for member states that have not yet surrendered quotas to the restructuring fund. For the Südzucker group's sugar companies, this preventive withdrawal amounts to approximately 13 %, or about 530,000 tonnes. The EU commission has announced further withdrawals for the 2007/08 sugar marketing year if it is not apparent that the market has sufficiently stabilized by October 2007.
To accelerate the restructuring process, the EU commission submitted a proposal to the European Council of ministers on May 7, 2007, which is intended to provide new stimulus to the reform process for the 2008/09 sugar marketing year. The proposal is designed to further increase the incentive for sugar producers to renounce quotas to the fund in 2008/09. Furthermore, fixing the beet growers' share of the restructuring premium payments will establish a clear basis for decision-making in the future. Considering the impending non-compensated quota renouncements for the 2010/11 sugar marketing year, the receipt of partial credit for renouncing quotas eligible for compensation to the restructuring fund is a further incentive to renounce quotas in the 2008/09 sugar marketing year. The new proposal makes it considerably more attractive to surrender quotas, particularly for beet growers. Furthermore, individual farmers will have the right to sell up to 10 % of their quota to the restructuring fund. Overall, Südzucker welcomes this proposal to "reform the reform". The EU commission aims to have this proposal approved by the European Council of ministers in September 2007 so that the necessary quotas could be surrendered before the end of January 2008.
During the Economic Partnership Agreement negotiations with the ACP countries on April 10, 2007, the EU commission offered free market access for all products other than sugar and rice as of January 1, 2008. During the transition period to 2015, sugar imports will be restricted by an automatic safeguard volume clause in order to ensure alignment with the reformed market regulations already enacted.
On June 21, 2007, the G4 WTO Ministerial Conference, where further elimination of trade barriers related to industrial goods, services and agriculture was being negotiated, ended prematurely without tangible results. This makes a WTO agreement in 2007 increasingly unlikely.
Group revenues fell by EUR 130.2 million during the first quarter of fiscal 2007/08, coming in at EUR 1,338.3 (1,468.5) million. The drop occurred because growth in the special products and fruit segments was only sufficient to offset about one-third of the decline in the sugar segment.
The sugar segment's revenues were lower by EUR 199.5 million, falling to EUR 781.4 (980.9) million. Although last year a record harvest made it possible to export a considerable amount of C-sugar, this export opportunity has now been almost completely eliminated due to the lost WTO panel case. Added to that are the restrictive export policies of the EU for quota sugar exports.
The special products segment reported revenue growth of EUR 35.4 million or 11.6 %. Despite the closure of the inulin fructose business, which had contributed EUR 19 million to revenues last year, results came in at EUR 340.1 (304.7) million. The revenue increase was driven by growth in the starch and bioethanol divisions, as well as the functional food division's core products . In contrast to the prior year's quarter, the French bioethanol business, which contributed EUR 15 million to revenues in first quarter 2007/08, was completely consolidated.
The fruit segment's revenues climbed substantially, rising EUR 33.9 million or 18.5 % to EUR 216.8 (182.9) million (P.Y. January to March 2006). Both the fruit preparations and fruit juice concentrates businesses contributed to the increase. The 50 % share ownership in the Chinese company Xianyang Andre Juice Co. Ltd., which was not reflected in the prior year's quarter, added EUR 2.7 million to the result. Revenue was about 8 % higher than the comparable prior year's period (March to May 2006).
As forecast, the group's operating profit dropped to EUR 53.6 (127.6) million during the first quarter of the 2007/08 financial year. The decline was the result of the current framework in the sugar segment.
The sugar segment was forced to accept a substantial year-over-year drop in operating profit - it plummeted to EUR 9.1 (94.7) million. It was not possible to offset the high level of C-sugar exports recorded a year earlier by revenues from the new industrial sugar business. This shortfall, together with the prorated accrual for the restructuring levy on the high withdrawal forecast of at least 20 % for the 2007/08 sugar marketing year, weighed on profits. The first stage of the reduced factory margin in the first year of the new market regulations was offset by cost cuts.
Operating profit in the special products segment rose EUR 8.5 million or 30.3 %, coming in at EUR 36.3 (27.8) million. Growth was driven by the bioethanol and starch divisions. In comparison to the prior year's below-average first-quarter, the bioethanol division was able to report significantly higher profits, primarily due to better ethanol revenues. The starch division also posted very positive profit growth thanks to significant volume and sales improvements. The functional food, Freiberger and PortionPack divisions performed in line with budget expectations.
The fruit segment's operating profit came in substantially higher than in the prior year's first quarter, rising to EUR 8.2 (5.1) million, an increase of EUR 3.1 million or 60.8 %. The improvement is primarily due to very satisfactory sales growth in the fruit preparations division. The above-average increase over the prior year's equivalent quarter also stems from the contribution associated with the 50 % interest in the Chinese company Xianyang Andre Juice Co. Ltd., which was consolidated for the first time. Furthermore, the results are compared to the traditionally low profit-generating months of January to March in the previous year, prior to shifting the financial year-end.
Income from operations of EUR 30.2 (120.2) million comprises of an operating profit of EUR 53.6 (127.6) million and the results of restructuring and special items of -EUR 23.4 (-7.4) million in 2006. The loss arising from restructuring and special items in the sugar segment stems from costs associated with planned closures of sugar plants and optimization of the packing concept in France. One-time earnings generated by the sale of the Ryssen group's end-user bottling business boosted revenue in the special products division. Income from associated companies rose to EUR 16.8 (5.8) million. The financial result improved due to foreign exchange gains and the lower average debt of EUR -15.2 (-34.3) million. The group's net earnings fell to EUR 26.1 (75.4) million last year because of lower operating profits in the sugar segment and higher expenses related to restructuring and special items.
The lower group net income caused cash flow to drop by EUR 41.9 million, or 36 %, to EUR 74.3 (116.2) million in 2006.
The company was able to cut its net financial debt to EUR 1,191.3 (1,296.9) million. Despite higher capital spending by the bioethanol division, the reduction in net financial debt is attributable to the previously generated cash inflows from operations and selective financing measures.
For the overall 2007/08 financial year, we are currently continuing to forecast a decline in group revenues to EUR 5.1 billion to EUR 5.3 (5.8) billion.
The majority of this downturn is attributable to the sugar segment , which expects a drop of up to EUR 600 million. The shortfall is due to the missing C-sugar exports enjoyed for the last time in 2006/07; the expected high withdrawal will also contribute to lower sales. In contrast, sales in the special products segment will grow by approximately EUR 100 million in spite of the closure of the inulin fructose business, because of substantially higher sales from starch, bioethanol and the functional food division's core products. Full consolidation of the entire year's contribution from the ethanol business in France for the first time and the startup of the bioethanol plant in Pischelsdorf in fall of 2007 will also impact the result. We expect higher sales in the fruit segment versus the prior year's comparable period (approximately EUR 780 million for 12 months in 2006/07). Because the fruit companies' year-end was aligned with that of Südzucker last year, the results were based on 14 months for one time only. The segment's sales will therefore be lower than last year's.
As previously announced, the group's operating profit will fall dramatically from 2006/07 levels and will come in between EUR 120 million and EUR 160 (419) million. Forecasting continues to be difficult because of the ongoing restructuring of the EU sugar market.
We continue to expect a circa break-even operating profit within the sugar segment. This dramatic profit deterioration is mainly the result of the hesitant reform process and continued weak quota sugar exports. Because of the expected high withdrawal of at least 20 %, production capacity is underutilized and the margin contributions from quota sugar production are missing. An additional burden is that the highest ever restructuring levy of the restructuring phase will be charged in the 2007/08 sugar marketing year. The EUR 173.80 per tonne compares to EUR 126.40 per tonne and is based upon the non-produced quota sugar. In addition, although industrial sugar sales are rising, they are not yet high enough to offset the missing C-sugar exports . The second stage of reduced factory margin in the fall and the new production levy, which will be charged for the first time, will also weigh on earnings, although it has been possible to offset both factors by continuously improving the cost structure.
As expected, operating profit in the special products segment will be higher than last year. Overall volume and sales growth in the bioethanol division despite higher raw material prices in comparison to last year is very satisfactory. However, the percentage profit increase in the first quarter was substantially above the expected full year average. This is mainly due to the prior year's weak first quarter and the substantially stronger subsequent quarters. Despite strong profit growth in the starch division during the first quarter, we are forecasting lower growth for the year in total due to anticipated rising raw material prices for the remainder of the year. We are forecasting profit improvements driven by rising sales in the functional food division during the current financial year following the production startup difficulties in Chile last year.
Operating profits in the fruit segment will rise on a comparable year-over-year basis. Because of the alignment in year-ends, the prior year's results were based on 14 months. Weather-related harvest shortfalls due to frost damage in key crop areas and the resulting raw material shortages in the European agricultural regions will be addressed by corresponding price adjustments and further efficiency improvements.
The executive board
Forward looking statements/forecasts
This quarterly report contains forward looking statements based on assumptions and estimates made by the executive board of Südzucker AG. Although the executive board may be convinced that these assumptions and estimates are reasonable the future actual developments and future actual results may vary considerably from the assumptions and estimates due to many external and internal factors. For example, matters to be mentioned in this connection include current negotiations relating to the world trade agreement (WTA), changes to the overall economic situation, changes to market regulations, consumer behavior and state food and energy policies. Südzucker AG takes no responsibility and accepts no liability for future developments and future actual results achieved being the same as the assumptions and estimates included in this annual report.
This interim report is also available in German. This translation is provided for convenience only and should not be relied upon exclusively. The German version of this interim report is definitive and takes precedence over this translation. The interim report (in German and English) can be downloaded from our homepage at www.suedzucker.de/downloads.