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Edited Transcript of SZU.DE earnings conference call or presentation 10-Oct-19 10:59am GMT

Q2 2020 Suedzucker AG Earnings Call

Mannheim Oct 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Suedzucker AG earnings conference call or presentation Thursday, October 10, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Thomas Kölbl

Südzucker AG - Finance Director & Member of Executive Board

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Conference Call Participants

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* Anton Brink

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Christopher Anthony Ryan

BofA Merrill Lynch, Research Division - Analyst

* Marc Gabriel

Bankhaus Lampe KG, Research Division - Research Analyst

* Michael Schäfer

Commerzbank AG, Research Division - Equity Analyst of Chemicals

* Oliver Schwarz

Warburg Research GmbH - Chemical Analyst

* Roland French

Davy, Research Division - Food Analyst

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Presentation

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Unidentified Company Representative, [1]

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Thank you. Ladies and gentlemen, we welcome all of you to our conference call this morning. The underlying presentation for the call has been published this morning at 7:30 a.m. CET on our home page.

Today, we released the H1 statement of financial year 2019/'20. We are going to present the highlights of this period and reiterate our full year guidance. Following the call, we are going to answer your questions. A recording of this call will be available on our home page shortly after the call.

Now let me hand over to Südzucker's CFO, Thomas Kölbl.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [2]

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Thank you. Ladies and gentlemen, also a warm welcome from my side to all of you. As mentioned, I would like to give you a brief overview about the business performance of the first half year financial year 2019/'20 and details about the confirmed guidance for financial 2019/'20.

Let me start with the highlights of the first 6-month results on Page 4. The overall development in first half year was, more or less, in line with our expectations. Group revenues came in below previous year's level. As expected, group EBITDA and group operating results were significantly down. Nonsugar segments performed well. EBITDA and operating result in that area were significantly up. Cash flow decreased significantly in parallel to the EBITDA development. EPS came in at minus EUR 0.07 against plus EUR 0.14 the year before. Net financial debt end of August has been significantly up year-over-year.

Now let's have a first look into the segmental performance on Page 5 before we get into more detailed segment by segment. Group revenues decreased by 5%, mainly driven by a significant decrease in segment sugar. While segment fruit showed a slight decrease, segment special products and CropEnergies increased revenues. Operating result decreased by 47%, also mainly driven by the earnings drop in segment sugar. Segment fruit was also significantly below previous year's level. Special products and CropEnergies came in significantly above last year's H1 results.

Let's continue with the segment sugar on Page 7. Let me start off with a quick look at the global sugar market. As there have been no major changes in our assessment, let me repeat our main statements made back in May, alongside the analyst conference and in our quarter 1 reporting. According to the latest change in estimates about global sugar marketing year 2018/'19 ended in September 2019, F.O. Licht expects a deficit of 0.3 million tonnes. For current sugar marketing year 2019/'20, the so far expected deficit of 4.2 million tonnes is expected now to increase to a higher deficit of 5.5 million tonnes. Some analysts are expecting higher deficits. We all -- this all confirms a more encouraging market environment for the next 12 to 18 months. World market prices have started to increase from a very low level, so our guidance is still not taking into account any tailwind from this global development.

On the next, Page 8. We reiterate our continued positive EU market environment. You see the strong increase in the spot prices which is the basis for the contract price increases for sugar marketing year 2019/'20. The EU has become a net importer since January 2019. We have not yet fully finished our contract negotiations for contract season starting 1st of October 2019 onwards. So far, about 85% of contracts have been signed, which also leave us with some flexibility as the outcome of the current campaign 2019 is not yet clear. As of today, about 65% 1-year contracts, 20% multiyear contracts and about 15% are dedicated spot volumes, including the buffer for the mentioned campaign outcome. It is important to mention that, as last year, also within the 1- and multiyear contracts, there are sizable volumes with variable pricing linked to market prices. It leaves us with a reasonable absolute volume to participate in any market upside in the next 12 months.

Let me now turn into the concrete development in segment sugar in H1 on Page 9. Revenues in segment sugar decreased by 19%. This was mainly driven by, again, moderately lower sales revenues and lower sales volumes in light of low 2018 harvest. Operating result was, as expected, significantly down. The reported loss reflect the challenging pricing environment and due to low 2018 harvest, significantly lower sales volume, especially export volumes. As shown in the annual report 2018/'19, some relief accrued as there was an inventory write-down in fiscal year '18/'19 in the amount of about EUR 63 million. This helped H1 sugar performance in fiscal '19/'20.

Move now to the currently running campaign, we expect an average campaign length of about 106 days against 116 days for last year. The resulting sugar output is expected at 4.4 million tonnes against 4.6 million tonnes 1 year ago.

Let me continue with segment special products on Page 10. In segment special products, revenues grew by 6% supported by higher sales volumes and significant rebound of ethanol sales revenue. In this slide, operating result increased by 15%. Positive revenues development more than compensated the significant raw material price increase.

Let me now turn to segment CropEnergies on Page 11. Revenues in segment CropEnergies were up by 16% in light of higher ethanol sales revenues. Operating results totaled against H1 '18/'19 helped by a significantly higher ethanol sales revenues against the low previous year base. The average ethanol price in H1 was at EUR 606 per cubic meter against EUR 462 per cubic meter in H1 2018/'19. The average ethanol price in September was EUR 467 against EUR 491 per cubic meter in September '18. Also in the first days in October, we have seen a positive price development.

Let's move on to segment fruit on Page 12. Revenues came in slightly below previous year's level. This is due to stable sales revenues and sales volumes in fruit preparations against lower sales revenues in fruit juice concentrates. Operating result decreased by 23%. Fruit preparations earning were down in light of higher costs, one-off effects and volumes below our expectations. Fruit juice concentrates results were also down as the impact from lower sales revenues could not be compensated by higher sales volumes.

Let me now turn to the main point in the P&L on Pages 14 and 15. The results from special items contained a negative EUR 5 million effect in segment sugar. This is mainly due to the offer to beet growers linked to factories Warburg and Brottewitz to return their beet delivery rights. Both German factories will be closed following the campaign 2019. The equity result was burdened by losses of ED&F Man's participation in sugar factories, reflecting the difficult sugar world market environment. The main contributor in segment special products of EUR 7 million were the earnings from Hungrana Group's starch and ethanol businesses. Financial result came in at minus EUR 17 million. It contains the rather unchanged net interest expense of minus EUR 12 million and the other financial result of minus EUR 5 million.

Let's continue on Page 15. The tax rate came in at 62% against 51% 1 year ago. This again is brought by the development in segment sugar. Earnings per share decreased from plus EUR 0.14 to minus EUR 0.07.

Let me now turn to the cash flow, working capital and investment development on Page 17. Cash flow reached EUR 176 million, representing 5.3% of revenues. As usual, following the sale of sugar inventories towards the start of new campaign, a respective working capital inflow was realized in H1. CapEx decreased by 22% in quarter 2, leading to a 10% decrease in H1.

Let me now illustrate the main movements in the balance sheet on Page 19. Non-current assets have been decreased by roughly EUR 600 million, mainly due to the goodwill impairment in segment sugar. Net financial debt end of May is up by EUR 468 million against last year and EUR 97 million against end of February 2019. Since beginning of fiscal 2019/'20, IFRS 16 standards are applied, leading to recognition of leasing liabilities in the amount of EUR 136 million to net financial debt. Gearing is at 32% against 15% 1 year before. Equity ratio at 48% is still very solid.

Let me now turn to the outlook on Pages 21 to 25. Ladies and gentlemen, let me summarize our projection for fiscal '19/'20 for revenues and operating result. So H1 showed the expected profit decrease, the estimate for H2, a strong improvement in operating profit against last year. Group revenues should come in at EUR 6.7 billion to EUR 7 billion, and operating result should reach 0 to EUR 100 million. Since quarter 1, there has been an upward provision of CropEnergies earnings projections and a downward adjustment in segment fruit. Taking this into account, including all uncertainties, especially in segment sugar, and taking into account that there are still 6 months to go, we stick to our communicated operating result range and are optimistic to slightly outpass the midpoint of expected operating result range.

Despite the mentioned relief from already written down inventories, we realized in segment sugar further losses in H1 based on execution of low-price contract from sugar marketing year 2018/'19. From October '19, the beginning of sugar marketing year '19/'20, we will operate on the basis of increased sugar prices. Therefore, we continue to expect the price-based significant earnings improvement against H2 of fiscal '18/'19. This development will be supported by the inventory reduction out of campaign '18 and a stable production level in campaign 2019 in light of planning restrictions across the industry and yield expectation reduction.

Let me remind you about 2 important points. Firstly, for financial year 2019/'20, the earnings improvement potential will not be fully exploited as the price increase will concern not all sugar contracts. And secondly, significantly higher production costs are expected for campaign 2019, mainly influenced by higher beet prices in parallel to the higher sugar selling prices and the raw material security premium for beet deliveries campaign 2019. As you know, the announced restructuring program will improve earnings from H2 of fiscal 2020/'21 onwards but not in fiscal 2019/'20.

Segment special products is expected to show a slight increase in revenues and a moderate increase in earnings. The support from higher ethanol prices has increased since the beginning of the year.

Segment CropEnergies will see revenues in the range of EUR 740 million to EUR 780 million and operating results in the range of EUR 50 million to EUR 75 million. The increased earnings forecast in light of positive ethanol price development is in place since August 14.

Segment fruit will now show stable revenues and a significant decrease in operating result. This is mainly due to much lower result from division fruit preparations in light of stagnating sales volumes in combination with higher costs and a significant earnings decrease in division fruit juice concentrates due to lower-than-expected capacity utilization in light of smaller other harvest in the current campaign 2019 and therefore lower raw material availability.

Let me now turn to Page 22. The EBITDA range of EUR 360 million to EUR 460 million mirrors the operating development and the further increase in depreciation also reflecting accounting changes according to IFRS 16. Investments in fixed assets are expected below previous year's level.

Let me now turn to Page 24. Ladies and gentlemen, for our nonsugar activities, 2019/'20 is going to be another year of revenues and earning growth as well as another year of capacity expansions in our starch, functional food and pizza areas. Despite a rather difficult year in segment fruit, we are confident we'll be back on track next year. Segment sugar should show first signs of recovery from October 2019 onwards in light of a significant improved European market environment and respective increase in sugar prices. Overall, despite the depressed full year earnings level in segment sugar, we are confident to cope with the challenges which remain in the market, especially as we have set many measures to get our sugar business back on track. Let me remind you that the restructuring benefits from factory closures and additional measures will mainly kick in from October 2020 onwards. Diversification reflected strong cash flow contribution from our nonsugar activities as well as a conservative financial policy and a strong balance sheet will be very supportive in this environment.

Ladies and gentlemen, now let me finish today's presentation and look ahead on Page 25. As described already in our analyst conference in May, Südzucker invested a lot into the diversification areas outside of its core business sugar, which is paying off, but it will become even more important in the future. The nonsugar activities have reached an EBITDA level of about EUR 450 million last year, representing already a high cash quality. Despite some temporary headwind in segment fruit, we keep our midterm target for our nonsugar activities to reach about EUR 600 million. Together, the first step of recovery in segment sugar into positive earnings territory, increased group EBITDA level will improve financial headwind for Südzucker, going forward, as further growth steps are already financed via historic CapEx.

Ladies and gentlemen, thank you all for your attention.

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Unidentified Company Representative, [3]

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Ladies and gentlemen, thank you, and we are now ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Chris Ryan of Bank of America.

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Christopher Anthony Ryan, BofA Merrill Lynch, Research Division - Analyst [2]

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The first one is are you able to give any indication on the magnitude of price changes where you're seeing prices contracted right now in October for sugar?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [3]

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Yes. Go further with the second question.

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Christopher Anthony Ryan, BofA Merrill Lynch, Research Division - Analyst [4]

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And then the second question on the EU versus world prices, now that the EU is again a net importer, are you seeing a significant premium to world prices? And can you give any indication of how much that is?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [5]

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Okay. To the first question on indication of, let me say, the price increase, we can expect for fiscal 2019/'20 is that we foresee on fiscal year basis plus of around EUR 10 a tonne against last fiscal year. But clearly, this is due to the fact that we have also, let me say, a big portion of already in the past 6 contracts and looking forward to fiscal 2020/'21. There is a lot of phasing out of this in the past 6 contracts. So that going forward in 2020/'21, the prices will then slightly go up.

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Christopher Anthony Ryan, BofA Merrill Lynch, Research Division - Analyst [6]

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So that's kind of an average versus last year's price versus -- for, like, all of sugar sales, that is?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [7]

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That is the current status with the prices we locked in and is only for fiscal 2019/'20 in comparison to fiscal '18/'19, not for sugar marketing in '19/'20 to '18/'19. And for -- let me say, for your question what is, let me say, the pricing in the EU in comparison to the world market pricing, clearly, EU is in January 2019 a net importer. And therefore, prices have started to raise. And today, we see in the European market and premium up to EUR 150 to the current world market price.

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Operator [8]

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The next question comes from the line of Michael Schäfer of Commerzbank AG.

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Michael Schäfer, Commerzbank AG, Research Division - Equity Analyst of Chemicals [9]

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Yes. On the first one, as a kind of clarification on the previous question. When looking into sugar marketing year 2020/'21, are you -- or '19/'20, so which just started in October, is it fair to assume basically that the new contracts you've just signed are basically along the lines of the EU spot prices you're basically showing in your presentation. This would be my first question.

The second one is you mentioned earlier, basically, that last year's very low multiyear contracts you have signed still includes some price flexibility which provides upside. So can you give us an indication on kind of volume we talked about? Are you also kind of proportioned with this kind of price flexibility?

And last but not least, third question would be you stated earlier, basically, that the guidance you just reiterated does not take tailwinds from global sugar market -- from the current global sugar market developments into account. So I'm curious to know what would be the kind of upside you would expect if you would do a kind of mark-to-market right now?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [10]

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Yes. To your first question, looking forward to the sugar marketing in '19/'20 and indications about 10, 15 years with sugar '20/'21, clearly there are chances due to the phasing out of the contracts we locked in, in the years '18 and beginning of '19, and that will start from the end of calendar year-end 2019 and goes further in spring '20. And clearly, if -- when we look on fiscal '20/'21, we have then the full year effect 12 months of this development, but it's clearly, let me say, too early to give you implications for our fiscal year '20/'21. We will give the update then in spring 2020 when we have, let me say, a clear future. Clearly that we have also stated last year and also in this year, we have a portion in the multiyear contract as well as in the 1-year contract which are, let me say, variable price to market prices. And therefore, we have some price changes, as I flagged in the speech. But we haven't, let me say, converted that as we also rise with the third question in our current guidance. There, we have not, let me say, accounted for tailwinds which we would have from an improved global pricing. There is upside, clearly.

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Operator [11]

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The next question is from Roland French of Davy, Research.

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Roland French, Davy, Research Division - Food Analyst [12]

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Just a couple of questions on, really, the sugar segment from me. So just, firstly, I know you've talked to the beet landscape. You've talked in terms of, I guess, the difficulties for farmers and the requirement to pay incentive or bonus payments to secure volumes, and you've also talked about that the beet prices increasing in H2 as the prices recover. But my understanding is that there's a change to the actual beet pricing mechanism, and the shift is from the previous risk and profit share arrangements to one that's at a minimum price. I don't know whether that's regional specific or just a certain tranche of the farmers. Perhaps you could just kind of clarify that and expand on that? So that's the first question around that beet price mechanism.

And then maybe question 2. Historically, again, you've spoken to a breakeven price for the sugar segment, and I know that was in and around the mid EUR 300 per tonne level, I guess in context of, one, your upcoming restructuring and reduction of capacity; two, the requirement to pay beet bonuses and potentially the change to beet mechanism. There's many moving parts, but I'm just wondering, could you give us a sense as to what -- where that breakeven price might go to over the next 12, 18, 24 months.

And then I guess, thirdly, just on the guidance. I know you've held the range and you've reiterated that you're optimistic to beat the midpoint, but I'm just looking at the comparison from Q1. Fruit has been tempered a little bit. I'm just wondering is the pickup in CropEnergies? Or is there some pickup more in sugar?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [13]

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Let me say -- let's start with the third question with the guidance, 0 to EUR 100 million, and that we are optimistic to slightly outpass the midpoint. Let me say more the communication also after Q1. And in the meantime, we had 2, let me say, new developments. This was the reduction of the guidance in fruit as well as the increase of the guidance in CropEnergies, and both are, more or less, balanced. So for the other business sectors, special products, sugar, we are still on track on the original communication from May as well as from quarter 1. So these 2, 1 positive and 1 negative effect, are today with our knowledge, more or less, balanced so that we keep our message, our guidance from Q1 that we slightly outpass the midpoint of this guidance.

To your second question, what we every time stated is that our sugar production costs are significantly below EUR 400 a tonne. And second, let me say, point to you every time stated that we will really improve after, let me say, this restructuring plan, the closure of 5 factories. Starting from October 2020, we'll see a further, let me say, reduction of production costs up to EUR 20 a tonne. That is, let me say, that what we can say with the knowledge of today.

And then to your first question. Clearly, after, let me say, 2 difficult years for the farmers and as well for the industry, to get the beets, you have to run the factories with a higher, let me say, utilization. We have to change, let me say, our beet price sharing formula to give, let me say, the farmers more comfort that they are also in difficult times ready to keep or to increase acreage. And therefore, we adapted slightly our beet price formula and offer to farmers, let me say, premiums which were linked, let me say, to the -- to fulfillment of future campaign deliveries. And that is, let me say, makes for both parties, for the farmers as well as for the factories, more visible. And therefore, we changed slightly this formula.

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Operator [14]

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The next question is from the line of Anton Brink of Kepler Cheuvreux.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [15]

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Apologies if I raise a question that has been raised before because I have other results as well. So I have a question on the mismatch in the guidance of AGRANA and Südzucker. Because if I read the AGRANA statement, I read quite a constructive tone on H2 sugar. While if I read the Südzucker statement, one would get much more bearish. So maybe if you can elaborate a bit on that? And then you mentioned that you haven't accounted for the rising global sugar pricing in your guidance. Can you give us an indication of the extent to which you're exposed to in the global sugar price in a -- say, in a net debt situation of Europe?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [16]

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Your first question, like AGRANA, since it is also more optimistic for H2, as explained, the forecast for our sugar operations and significant improve in earnings for the half year 2019/'20. And the -- let me say, the -- what was the second part? Could you repeat this question for me?

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [17]

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Yes. So the -- let me see. Second question was about your dependence on movements in the global sugar price in terms of your current guidance.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [18]

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Yes. As explained in our current guidance for sugar, there is no upside in. For the current development we have seen in the last 3, 4 weeks, the global price has gone up. And so there is -- let me say there would be potential if the world market price would go further, clearly.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [19]

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And that will be related to your '19/'20? Or would that be an effect for next year?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [20]

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It would be -- let me say the main effect would be for next fiscal year.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [21]

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Okay. And then maybe coming back on your first question. I guess, my apologies, I do not fully understand it. You indicated that you expect a significant earnings improvement, yet...

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [22]

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We expect a significant earning improvement for our sugar operations in H2 fiscal 2019/'20 against fiscal '18/'19, as AGRANA is doing.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [23]

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And that's apart from the inventory write-down or that's including the inventory write-down?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [24]

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The inventory write-down that we profited in the first half year 2019/'20.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [25]

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Okay. So if we compare it to -- we should take the full figure, do not make an adjustment for the inventories.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [26]

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No. For the second half year, not.

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Operator [27]

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The next question is from Oliver Schwarz of Warburg Research.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [28]

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Again, sorry to labor this point, sugar segment. Contracted volumes, can you highlight how much of the volumes on annual and multiyear contracts are currently settled? And secondly, if you compare that to the situation last year, last year, most or almost all of your sugar volumes produced were contracted on annual and multi-annual contracts due to the fact that we had a significant decline in sugar production. For the current year, sugar production is estimated to increase but only, let's say, rather insignificantly, 1% to 2%. So if you compare the, let's say, absolute amount of contracted volumes in the current -- for the current year and for the next year, so '19/'20, and the first half of '20/'21, is the absolute amount higher or equal or even less than what we had in the season or, let's say, in the [fiscal] year that ended on 30 September of 2019. That would be my first question.

The second question is the -- how are the incentives for the sugar beet farmers developing from the current year, '19/'20, into the next year? Because obviously feeding is in spring 2020. So farmers need some information, whether they will get increased incentives or incentives are to decline. Can you elaborate a bit about the developments there? Is that a stable number? Or is this number to increase or even decline?

And a quick one on the one-off effects in fruits that you highlighted in your presentation, what are they? And how much was that?

And sorry, number four, I'd like to squeeze in here guidance. You said the effect of CropEnergy (sic) [CropEnergies] and fruit even -- were offset by each other, basically, but there's also bioethanol operations in the specialty segment, which is the bioethanol operations run by AGRANA. So why hasn't the guidance changed in regard to specialties and the absolute amount number here. Is something working against it within the segment specialties that results in the number for the group being stable?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [29]

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Let me start with the last question. After the first half year, we are 15% up in operating profit. So we see clearly the good, let me say, ethanol pricing in this number, but we keep so far our full year guidance with a moderate increase. So maybe there is some room also for that, let me say, segment to be better than originally expected, but we have also to see in that sector the raw material price developments, grains, also the ingredients for pizza, et cetera. So with the current knowledge we have, we stick to original, let me say, guidance with a moderate increase. But after the first half year, we are better than what we guided for the full year. But still, 6 months to go and raw material price are increasing.

Then to the -- to your sugar question, first of all, we don't disclose, let me say, if we have settlements in, let me say, in the 1-year or multiyear contracts. Then to your questions to volumes and split of contracts, first of all, to clarify, we expect a decrease in sugar production for campaign 2019 against 2018, not an increase. And the split of this reduced campaign volume is that 85%, so far, is contracted and 15% is reserved for spot volumes and as a buffer for the uncertainty for the running campaign 2019.

And then to -- let me say, to your questions with the incentives for the farmers, the incentive or, let me say, the -- that we pay is for the campaign 2020 higher than for the campaign 2019.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [30]

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Very clear. The one-offs in the fruit segment?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [31]

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The one-off in the fruit segment, let me say, when we look on the decrease in profitability, I would expect that with my knowledge I had is -- that we can say 1/3 are one-off linked to raw material sourcing as well as exceptional staff costs.

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Operator [32]

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The next question is from [Ella Anne Castro] of JPMorgan Securities.

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Unidentified Analyst, [33]

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I have one clarification and one question, please. You mentioned that regarding the sugar contracts, the 85% is contracted. And at the beginning of the call, you had said 65% is on 1-year contracts. So I was wondering whether it's 65% of the 85%. So is it roughly like 55% of your total volumes is under 1-year contracts. And the question is what's the average prices you locked in, in those 1-year contracts, please?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [34]

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Yes. You are right. The 65% is the number for the total volume. And we don't disclose, let me say, the pricing for the different sectors.

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Unidentified Analyst, [35]

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Okay. In that case, can I have a follow-up, please? Because earlier with respect to another question, you said you expect FY '20 prices to be about EUR 10 per tonne higher versus last year, right? So obviously, the first half of the year, let's assume you -- I mean, given that you -- the Slide 8, where you show the EU sugar prices. First off, probably something around EUR 350 from prior year's low-price contracts. And for you to -- on an average basis, 2H prices probably need to be maybe 5%, 6% higher year-on-year to actually get to a EUR 10 higher for the full year. Am I right? Because the prices on Page 8 show more like a 30% uplift with respect to spot prices. Whereas in order to get to an average EUR 10 increase for the full year, it should be -- the contract should be more like 5%, 6%, probably higher. Am I correct in my calculation?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [36]

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Let me answer in that way that we clearly in the half year, first half year '19/'20 against first half year '18/'19, we had significant lower sales prices. And in the second half year from October onwards, we calculate with significantly higher sales prices. And then, on average, we are slightly higher in pricing, the EUR 10 I mentioned before. And to the EUR 10, everybody has to be clear that we have several effects behind, yes. The lower pricing is going in our fiscal year with 7 to 8 months, and the higher price basis is going in with 4 to 5 months. Some contracts are running up to the end of the calendar year, so no effect or no major effect for fiscal 2019/'20. And so -- and we have also phasing out and screening of all contracts that we know that we get higher prices. So as said before, the price effect for fiscal '20/'21 is then higher than that what we calculated in for the last 4, 5 months for fiscal 2019/'20.

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Unidentified Analyst, [37]

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Got it. So -- but then if your first half prices are significantly lower than EUR 350 that I mentioned, then your price actually is more in tune with the -- just looking at Slide 8 again, with the reporting prices and not the spot prices. So that -- I'm just trying to get an understanding as to the absolute pricing that you have. So essentially, even if you have significantly higher pricing in the second half, you'll still be around EUR 350, 360 maybe in the second half of it. I know you don't want to comment on it, but...

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [38]

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No. We don't want to comment. But to give you some absolute numbers, the price increase for the open contracts is up to EUR 100.

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Unidentified Analyst, [39]

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Okay. The open contracts is the...

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [40]

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For the open contracts, we could negotiate.

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Unidentified Analyst, [41]

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Yes. And that's the 15% of the volumes that you mentioned, right? Because 85% is contracted and 15% is on the open contracts, I understand.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [42]

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No, no. When we talk about this 50% to the 85%, this is the only, let me say, split we give is for the forecasted volumes we produced out of campaign 2019, what is then the new split. But this has nothing to do with what we could negotiate, which was not fixed starting for October with the negotiations for October 2019 onwards.

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Operator [43]

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We have a follow-up question from the line of Chris Ryan at Bank of America.

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Christopher Anthony Ryan, BofA Merrill Lynch, Research Division - Analyst [44]

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I have 3 questions on the Mercosur. One, what is the time line for the decision-making here? Two, when would you expect volumes to be hitting Europe? And then, three, if you could maybe discuss, is there a political appetite right now for this agreement given that it could be deflationary pressure on sugar prices?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [45]

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Let me say, to Mercosur, our view is that it would take years until all participants will have ratified the equipment. And especially in the political framework we have today, there are a lot of strong, let me say, European stakeholders country which are clearly with the current framework against that Mercosur.

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Operator [46]

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The next question is from Marc Gabriel of Bankhaus Lampe.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [47]

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I have a question with regards to the increased beet price premiums. What additional cost must we expect for the current campaign and if you made any provisions for these higher beet price premiums already in H1 or because you know what you have to pay as additional cost here? So that would be the first question.

And the second question. In the view of the lower exports, you bought some vessels 2, 3 years ago with production on the vessels. What are the plans for those vessels in the future? And what are your export plans at all? Is that no longer a topic and concentration is more on Europe? Or what could we expect here?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [48]

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Yes. Okay. Let me start with the second part. Due to the adoption of our strategies after the closure of the factories after the campaign 2019, we will then, starting from October 2020 onwards, focus more on the European market. Only when we would have extraordinary high yields, good campaign, there will still be export volumes. But the clear focus is, going forward, the European market. And therefore, let me say, these export vessels volumes and numbers will reduce going forward. It's a leased vessel, and we will, let me say, adapt that.

For the beet pricing, the security premium we have so far, let me say, 2 paths. The first one is for -- linked to the beet deliveries 2019. So the P&L effect of this, first, let me say, premium will be affected with the selling of the first volumes out of campaign 2019, that means from October 2019 onwards. And for the premium we paid for 2020 will be affected then from October 2020 onwards with the selling of the sugar campaign 2020. And then let me say, to give you a number the -- for 2020, the absolute amount is EUR 50 million to EUR 60 million. So you can calculate them pro rata.

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Operator [49]

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We have a follow-up question from Roland French of Davy, Research.

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Roland French, Davy, Research Division - Food Analyst [50]

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Just a quick follow-up question. I know you mentioned the relief in the inventory write-down in the last fiscal year. I think you mentioned a figure, EUR 63 million. I just wanted to clarify whether that is a balance sheet number that's been written down or is that a P&L impact. Maybe just -- the absolute question is what's the benefit in H1 as an operating profit level from the write-down?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [51]

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Yes. Been made in the last fiscal year '18/'19 an inventory write-down in the volume of EUR 63 million to contracts which we saw at that time will not be profitable, and that means we sell them in the first half year 2019/'20, those contracts without loss. And in the first half year, let me say, roughly EUR 15 million was used from that number because we are still selling 1, 2 months all sugar in September and beginning of October.

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Operator [52]

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We have another follow-up question from the line of Anton Brink of Kepler Cheuvreux.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [53]

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Yes. My question relates to -- I think it's a phrase in the release today. You're saying that the sugar segment is still faced with a lot of uncertainty. Could you maybe give me an idea of the -- let's say, the factors in play here that could still have an impact on your current expectation?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [54]

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Yes. We can do. Let me say, the first point is, let me say, the final output of the running campaign 2019 over the last 3, 4 weeks, we have had heavy rains in Europe. So we have to look at what that would -- how that would influence the yields than...

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [55]

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It should be positive, right?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [56]

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Wait and see. And then we have also, let me say, due to the rain, this is a fact, higher sale -- soil content on the beets that will bring higher transport costs. Then still, let me say, we have, let me say, upsides and downsides in the variable price contracts. We have -- we don't know at that time, let me say, that the expect run rate of the customers. We seek prices but not volumes. So only to mention, let me say, some points. We have also the final beet pricing for the campaign 2019. So there also, let me say, depending on the world market price development, we have also the stock valuation in February 2020. So there are a lot of points which are, at that time, uncertain and that we wanted to flag.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [57]

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And if we speak about the renegotiable contracts, I think you've -- could you give us a hint what percentage of those contracts are still renegotiable because I remember something about the delaying contract signings due to lower global sugar prices. Is that a process still ongoing? How should I think of that?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [58]

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I didn't get the content fully. Could you more clarify your question?

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [59]

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Yes. So obviously, this is at least a set of periods. So August to October is normally the period where you renegotiate 1-year contracts. What number of -- or what percentage of those renegotiable contracts is still due to be renegotiated?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [60]

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I think with the current knowledge, let me say, knowledge, I've said before, we have finalized the negotiations for the contracts with 65% 1-year contracts and 20% multiyear contracts. And then we have 15% for spot volumes and the buffer for the -- at that time not known, a final output of campaign 2019. So overall, 85% of the volume is fixed.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [61]

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Okay. And 15% is just to renegotiate still? Or actually the remaining 15%...

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [62]

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It is a buffer, yes. When we talk about the numbers we shared with you, 4.4 million tonnes is the production volume, yes. And then 15% of that expected volume, nobody knows, is that will be 4.2 or 4.5, but we've calculated to be 4.4. And therefore, 15% is for spot as well as a reserve or a buffer.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [63]

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Okay. So there is the potential upside or downside.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [64]

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Yes.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [65]

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Okay. And you said...

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [66]

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With the current framework we have, it's a more upside, but nobody knows how will be the final output of the campaign 2019.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [67]

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Yes. And then when you refer to spot, should we think of that European spot? Or are you going to export that? How should I think?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [68]

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No. You can think about European spot.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [69]

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European spot, okay. And sorry, last question. Can you give me a hint of the latest report European spot prices?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [70]

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Yes. We have a slide in earlier about. It is the Slide #8. And currently, we are at EUR 450, maybe slightly above.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [71]

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Slightly above EUR 450, okay.

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Operator [72]

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(Operator Instructions) We have a follow-up question from the line of Oliver Schwarz of Warburg Research.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [73]

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Firstly, I was quite positively surprised by the performance, what seems to be ED&F Man, and you had equity result of the sugar segment. Because as the world market price for sugar is still in the doldrums, at least if you take a longer-term view, there seems to be some, let's say, significant turnaround from what we saw in the Q1 figures. Can you elaborate a bit on that? Is that sustainable? Or is that just a blip on the radar screen because of one-off lucky trades or whatever?

And second question is regarding your tax rate again. Q2 had a rather high tax rate of more than 60%. Obviously, that's due to loss-making entities where the result cannot be offset with the result of profit-making entities. I understand that. But I also understand that you haven't activated possible tax loss carryforwards yet as the view on the profitability level of those loss-making entity is not clear yet. If we take into account what you said about contractor pricing, likely spot pricing, the impact of the restructuring measures in 2020/'21 and so on, would you be willing to start using or activate those tax loss carryforwards that have been built up to lower your tax rate from fiscal year 2020/'21 onwards?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [74]

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Clearly, if -- when we talk about this taxation, we have at the end of fiscal 2021 a clear view about, let me say, world market, about European market and a robust future that we would be back in a sustainable -- in black territory. Clearly, we would use it. Clearly. But today, with the knowledge we have for fiscal 2020 ending, we don't foresee that. But '21, maybe that is, let me say, then a framework, we can do that.

And to your first question, like in our view, it is not a significant, let me say, change in ED&F Man equity results. But clearly, everybody has to be aware we have still very difficult times for ED&F Man in the sugar trading as well as in the development of their industrial assets.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [75]

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If you say it's not significant, I mean, in the first quarter, it seems to be, let's say, minus EUR 8 million, and then the second quarter seems to be plus EUR 3 million. If that's not significant, what would you deem as significant?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [76]

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This is still far away, let me say, from the historic levels, yes. And in the second -- in the quarter 2, as we mentioned, we had some one-off in positive.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [77]

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Okay. I understand. And just a quick one on the tax loss carryforwards, the absolute number of that would be around about in the ballpark of perhaps EUR 150 million to EUR 200 million?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [78]

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Let me say the P&L effect, I would say, is -- would be more than in the line to EUR 100 million. But that we -- there are a lot of, let me say, moves, et cetera. We have to clarify (inaudible). But it is -- if we would do that and if you would -- could use the full amount, then it would be a visible number, clearly.

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Operator [79]

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The last question is from the line of Michael Schäfer of Commerzbank.

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Michael Schäfer, Commerzbank AG, Research Division - Equity Analyst of Chemicals [80]

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Yes. I would like to come back to your updated breakeven number for the sugar segment you've provided. You said earlier, basically, that you see the number significantly below the EUR 400 per tonne production cost, lowering by another EUR 20 per tonne from the capacity reductions you are -- and the restructuring cost savings you're targeting, basically. So I would, first of all, clarify, is this based on operating profit level or EBITDA? This would be my first question.

And the second one is does this already take into account, let's say, your adopted strategy on your beet price formula or your beet price security premium you're paying? How should we think about this one?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [81]

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Yes. When we talk about the production costs, then depreciation is included when we talk about operating profit. And then the second part of the question, could you please say it again?

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Michael Schäfer, Commerzbank AG, Research Division - Equity Analyst of Chemicals [82]

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When it is EUR 400 -- below EUR 400 or below EUR 380, it's already based on, let's say, your adopted beet price formula.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [83]

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Yes.

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Operator [84]

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And there are no further questions at this time. I hand back to presenters for closing comments.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [85]

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Okay. Thank you, ladies and gentlemen, again for your interest in Südzucker Group. Goodbye.