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Edited Transcript of SZU.DE earnings conference call or presentation 14-Jan-20 10:59am GMT

Q3 2020 Suedzucker AG Earnings Call

Mannheim Jan 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Suedzucker AG earnings conference call or presentation Tuesday, January 14, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nikolai Baltruschat

Südzucker AG - Head of IR

* 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

* John Mark Ennis

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Marc Gabriel

Bankhaus Lampe KG, Research Division - Research Analyst

* Oliver Schwarz

Warburg Research GmbH - Chemical Analyst

* Roland French

Davy, Research Division - Food Analyst

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Presentation

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Nikolai Baltruschat, Südzucker AG - Head of IR [1]

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Thank you, and good morning, 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 statements for the first 9 months of financial year 2019/'20. We're 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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Ladies and gentlemen, also a warm welcome from my side and a happy new year to all of you. As mentioned, I would like to give you a brief overview about the business performance in the first 9 months of financial year 2019/'20 and details about the guidance for financial year 2019/'20 that has been updated 18th of December.

Let me start with the highlights of the first 9 months results on Page 4. The overall development in the first 9 months was more or less in line with our expectations. Group revenues came in below previous year's level.

In H1, group EBITDA was down by 17%. Now after 9 months, it is up 8% against previous year's level. In H1, group operating result was down by 47%. Now after 9 months, it's almost on previous year's level, with a minus of only 3%.

Nonsugar segments performed well. EBITDA and operating results were significantly up, and after 9 months already on the level of full year 2018/'19. Our free cash flow has made up most of the shortfall reported in H1. Due to one-off effects, EPS came in at minus EUR 0.42 against minus EUR 0.01 a year before. As expected, net financial debt end of November 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 detail segment by segment. Group revenues decreased by 3%, mainly driven by a significant decrease in segment sugar while segment fruit showed a stable development. Segment Special Products and CropEnergies increased revenues. Group operating result came in, as mentioned, almost on previous year's level, nonsugar segment's earnings improvement almost compensated for losses in segment sugar.

Let's continue with segment sugar on Page 7. Let me revisit our view on the global sugar market. Over the last month, there has been a continuous increase in deficit expectations for the running sugar market in year 2019/'20. The most recent report from F.O. Licht dated 6th of January shows a further very pronounced increase in deficit expectation. Now the deficit expectation is 10.9 million tonnes, which marks an increase of more than 4 million tonnes against the previous report. This leads to a stock-to-use ratio of only 36.3% as of September 2020. This is the lowest ratio since 2010/'11.

This confirms clearly a more encouraging market environment. 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 Page 8 we reiterate the continued positive new market environment. You see the sustained strong increase in new spot prices. This had been the basis for the contract prices increases for sugar market in year 2019/'20. EU has become a net importer since January '19, and as of today, is expected to stay most likely a net importer also beyond October 2020.

Today, about 95% of total volume has been signed. In regard to total volume, about 80% are 1-year contracts, 15% are multiyear contracts and 5% are open and spot volumes.

EU price reporting over the first 2 months of sugar marketing year 2019/'20 showed hardly any price increase. This underpins our view that the achieved price increases will gradually find their way in the industry's P&L. It is also worthwhile mentioning that quarter 3 numbers contained only 2 months of the new sugar marketing in 2019/'20.

Let me turn to the complete development in segment sugar in the first 9 months on Page 9. Revenues in segment sugar decreased by 16%, but the reduction has slowed down in quarter 3 with a decline of 8%. The development in the first 9 months was mainly driven by lower sales revenues and the drought-based significantly lower sales volume in light of low 2018 and 2019 harvest.

Operating result was, as expected, significantly down. The reported loss reflects the non-cost cover in new sugar price level. On the other hand, I mentioned drought-based below 2018 and 2019 harvests are the background for significantly lower sales volumes, especially in the export business. There was some relief in H1 due to an inventory write-down that was already booked in fiscal year 2018/'19, and therefore supported H1 performance.

In previous quarter 3, another price decrease had to be accepted. Since October 2019, a price recovery has been observed. The price increase had to face higher production costs, mainly due to higher beet prices.

Now let me address some points about the still running campaign. On reduced growing area, it was marked again by dry weather conditions leading to below-average beet yields throughout Südzucker Group.

In comparison to last year, they were yielding rainfall towards the end of the growing period, but it had very negative effect on the beet sugar content. In total this results in a slightly higher sugar beet yield against last year, but below the 5-year average. We expect a campaign length of 112 days against 115 days in 2018. Sugar production from beet should reach about 4.3 million tonnes.

We continue with segment Special Products on Page 10. 2019/'20 is going to be another successful year for segment Special Products. In the first 9 months, revenues grew by 5%, supported by higher sales volumes and especially by significantly higher ethanol sales revenues, which continue to stay strongly above previous year's level.

In this slide, operating result increased by 21%. Operating result grew even faster in quarter 3 with an increase of 32%. The sustained positive revenues development more than compensated the raw material and fixed cost increase.

Let me now turn to segment CropEnergies on Page 11. Revenues in segment CropEnergies were up by 14% in light of higher ethanol sales revenues. Operating result more than tripled against previous year's level. Higher ethanol sales revenues more than compensated the increase in net raw material costs.

The average ethanol price in the first 9 months was at EUR 605 per cubic meter against EUR 475 per cubic meter after 9 months last year. The average ethanol price in December was EUR 687 per cubic meter against EUR 582 million in December 2018. Also in January, we see so far a continued very sound price level.

Let's move on to segment fruit on Page 12. Revenues came in on previous year's level, and this is due to slightly higher revenues in fruit preparations in light of slightly higher sales volumes. In fruit juice concentrate, significantly higher sales volumes were not enough to completely compensate for lower sales revenues.

Operating result significantly decreased by 26%. Fruit preparations earning were down as slightly higher sales volumes could not offset higher costs. In fruit juice concentrates, lower sales revenues could not be completely offset by higher sales volumes and lower raw material costs.

Let me now turn to the main point in the P&L on Pages 14 and 15. The result from special items is almost entirely driven by segment sugar. This is mainly due to the offer to beet growers linked to factories of Warburg and Brottewitz to return their beet delivery rights. Both factories will be closed following the campaign 2019. An additional burden is expected in quarter 4 to the strike in the French with the factory Cagny which will be closed after this campaign.

As already communicated in our October outlook release, the equity result was burdened by ED&F Man. On the one hand, there was a positive contribution from the operating results. On the other hand, there was a significant noncash expense due to the new strategy of ED&F Man Group.

In the context of the new strategy, it is planned to sell several nonperforming noncore industrial participations outside of its core trading business. The measures should be executed throughout 2020.

The financial result came in at minus EUR 31 million. It contains the net interest expense of minus EUR 19 million and the other financial results of minus EUR 12 million.

Let's continue on Page 15. Tax payments decreased to EUR 47 million after EUR 81 million in the same period last year. It is again distorted by the development in segment sugar, for which there was no recognition of deferred taxes. Earnings per share came in at minus EUR 0.42 against minus EUR 0.01 in the prior year.

Let me now turn to the cash flow, working capital and investment development on Page 17. Cash flow reached EUR 283 million, representing 5.6% of revenue. Working capital increased mainly due to an increase of inventory book values in segment sugar, special product in fruit as well as higher trade receivables. The development was partially offset by an increase of liabilities to beet farmers at the same time. CapEx decreased by 16% in quarter 3, leading to a 13% decrease after 9 months.

Let me now illustrate the main movements in the balance sheet on Page 19. Noncurrent assets have been decreased by EUR 740 million, mainly due to the goodwill impairment in segment sugar in 2018/'19. Net financial debt end of November is up by EUR 578 million against last year and EUR 230 million against end of February 2019. Since the beginning of fiscal 2019/'20, IFRS 16 standards are applied, leading to a recognition of leasing liabilities in the amount of EUR 136 million. Gearing is at 36% against 16% 1 year before. Equity ratio at 45% 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 results. Group revenues should come in at EUR 6.7 to EUR 7 billion, and operating result should reach EUR 70 million to EUR 130 million.

With the knowledge of today, we see us in the middle of the operating profit range. Despite the mentioned relief from already written-down inventories, we realized in segment sugar further losses after 9 months in 2019/'20 based on execution of low-priced contracts from sugar marketing 2018/'19.

Since October '19, the beginning of sugar marketing at '19/'20, we increasingly operate on the basis of increased sugar prices. They will gradually arrive in our P&L. This development will be supported by the new inventory reduction out of campaign '18 and a stable production level in campaign 2019 in light of planning reductions across the new industry and the decreased yield expectation.

Let me remind you about 2 important points. Firstly, for financial year '19/'20, the earnings improvement potentially will not be fully exploited as the price increase will concern not all sugar contracts and for the unchartered contract that we are phasing out -- that we are phasing in over time. EU sugar market will remain a net importer beyond October 2020, which should provide tailwind for the phasing out multiyear contracts.

And secondly, significantly higher production costs are expected for campaign 2019, mainly influenced by higher beet prices in parallel to higher sugar selling prices and the raw material security premium for beet deliveries campaign 2019.

As you know, we announced substantial restructuring program will improve earnings from H2 of fiscal 2020/'21 onwards, but not in fiscal 2019/'20. So all in all, we expect for sugar and operating loss between EUR 200 million and EUR 250 million.

Segment Special Products is expected to show a moderate increase in revenues and a significant increase in earnings. The support from higher ethanol prices has increased since the beginning of the financial year. On the other hand, we have to cope with higher raw material costs in all divisions.

Segment CropEnergies. We see revenues at about EUR 810 million and an operating result at about EUR 100 million. The increased earnings forecast in light of the positive ethanol price development is in place since December 16.

Segment fruit will show stable revenues and a significant decrease in operating result. This is mainly due to much lower result from division fruit preparations with slightly higher sales volumes, stagnating revenues and higher costs.

For the division fruit juice concentrate, we foresee a significant earnings decrease due to a lower capacity utilization in light of a smaller apple harvest in the 2019 campaign, and therefore a lower raw material availability.

Let me now turn to Page 22. The EBITDA range of EUR 430 million to EUR 490 million mirrors the operating development and the further increase in depreciations also reflecting accounting changes according to IFRS 16. Investments in fixed assets are expected below previous year's level.

Let me now turn to pages -- to Page 24. Ladies and gentlemen, segment sugar showed first signs of a recovery in quarter 3 in light of a significantly improved European market environment and respective increase in sugar prices. Overall, despite the still 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 the factory closures and additional measures will mainly kick in from October 2020 onwards.

On top, we see from October 2020 onwards market opportunities. Sugar balances worldwide and in EU are getting more and more tight. And almost 100% of our contracts at that time, in October 2020, are free for negotiation. A burden from 2020 onwards will be the raw materials secure premium for the beet deliveries in 2020, but it helps clearly to gain volume in an improved sugar environment.

For our nonsugar activities, 2019/'20 is going to be another successful year with the revenues and earnings growth as well as another year of capacity expansion in our starch, functional food and pizza areas. Despite a rather difficult year in segment fruit, we are confident to be back on track over the course of next year.

Going forward, diversification [reflect a] sustainable strong cash flows contribution from those nonsugar activities, a recovery of our sugar business as well as a conservative financial policy and a strong balance sheet will be very supportive.

Ladies and gentlemen, now let me finish today's presentation with a look ahead on Page 25. As described already in our analyst conference in May '19, Südzucker has 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 reached last fiscal year an EBITDA level of about EUR 450 million and will jump in the current fiscal year clearly above EUR 500 million, representing a continued high cash quality.

Despite some temporary headwind in segment fruit, we keep our mid-term target for our nonsugar activities to reach about EUR 600 million. Together with the first step of recovery in segment sugar into positive earnings territory, increased group EBITDA will improve financial headroom for Südzucker Group going forward and further growth that are already financed via historic CapEx.

Ladies and gentlemen, thank you all for your attention.

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Nikolai Baltruschat, Südzucker AG - Head of IR [3]

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Thank you. 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) And 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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My first question is on the starch and sweeteners. Can you just give more detail on the increase in the starch and sweeteners revenue and what were the drivers for that?

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

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Yes. Please go alongside with all your questions.

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

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Sure. And then the second question, do you have any expectation for the December price that'll be published by the European Commission in the coming weeks? For EU sugar, that is.

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

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Yes. We foresee for, let me say, the December [right] reporting a level more or less what we have seen for October, November, maybe slightly up, and the visible increase we see from the beginning of calendar year 2020 onwards. And let me say, the drivers for the starch, there's -- have been sound volume development, but the main driver has been higher ethanol prices in that business field.

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Operator [6]

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The next question is from Anton Brink of Kepler Cheuvreux.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [7]

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I have quite a number of questions. Firstly, I think historically, you've always shown some willingness to speak about the next fiscal year. Would you be willing to go that route with me? And especially, I guess if you could give some context on the likely development of the sugar business, that would be very helpful.

Secondly, looking at the spot price development that you've given in today's presentation. I am not sure how to interpret it because I would basically assume that in the context of the recent rally in global sugar prices, white sugar now above EUR 340 per tonne, we should think of a European spot price very close to the EUR 500 mark. Is that correct? Then, I guess an important element in this year's sugar performance is the risk of a similar or maybe a smaller but an inventory write-down as we saw last year. Can you explain to us how big that risk is in the context of the recent sugar price [readout]?

And my last question would be related to the fruit business. It seems to be that the business underperforms quarter-over-quarter. How much of a concern are the current issues to you structurally?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [8]

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Okay. Maybe referring to that what I mentioned in my speech, we clearly see really a substantial improved overall sugar market environment, that means globally and EU-wide. And beet has also looking forward to the closing date of fiscal 2019/'20. That, let me say, what we can say today, that the risk of a substantial inventory write-down as we had in last fiscal year is limited. With the today knowledge, we can't, I like to say, clearly state that there is no inventory write-down. That is still, let me say, the potential that there is a limited number, but not to that extent as we had last year with a number of more than EUR 60 million. So this is not, let me say, the case for this closing in February -- February this year. And to the spot price development, you're right. Your second question is that we have in the period of the rallying campaign, is sugar available also in the market. And that limit in that tier clearly, and a further increase of spot prices in parallel to the development we have seen in the global market. So going forward, if we expect that the global environment [will stay as it] is, there is clearly potential for further increase of spot prices in the EU, which will help also then, let me say, in the upcoming negotiation round for price negotiations in October 2020.

Then to your question about our willingness to say something about 2021. I think I have mentioned a lot in my speech that we are really more optimistic than we were the quarters before about 2021 with the now improved environment. And clearly, it is much too early to talk about a complete guidance for 2021. And what I will talk about later on but this is not an official guidance, but we are ready to share with you our thoughts, let me say, in the most important drivers. We see that the current knowledge for 2020/'21 and beginning with sugar, clearly, we didn't expected a deficit for the, let me say, running global sugar marketing in '19/'20 of close to 11 million tonnes. This is a substantial number. The number is 5 million tonnes higher than the latest reports that will bring the absolute stock level down, that will bring down the [stock juice] ratio substantially.

And then we are looking, let me say, for the next sugar market at 2021. There are a lot of, let me say, analysts out with opinion that we will see another, let me say, balanced or a deficit market. So a supportive world market environment and prices have started to increase from a very low level.

EU, as mentioned also in my speech with the knowledge of today, we see -- we expect also further reduction of growing areas for 2020. So also with normalized deals, the market balance in the EU should be more or less the same. We expect for the running new market 2019/'20 and that will be clearly a very supportive [factor] for EU price negotiations from October 2020 onwards. And for Südzucker, a very important point when we are looking for the economics is the debt negotiation rounds almost then 100% of the contracts are open for negotiations.

Then clearly, cost reduction programs will kick in from October 2020 onwards. On the other hand, we have cost inflations in our cost structure, which we have [sought to] balance. But clearly the cost reduction program is a very substantial one. Then we have clearly some concerns also about our volume. That means that we have maybe some limitation from the volume side on -- in the P&L.

And then we have, let me say clearly what I mentioned also in the speech, the second raw material [set] Europe brand premium for beet delivery in the campaign in 2020. But clearly this is a burden on earnings, but it clearly helps us to keep volumes high in a better pricing environment we have today. And then clearly higher prices means also in general higher beet prices.

But all in all, adding all together, clearly it could be possible that our sugar business returns back to black figures in fiscal 2020/'21.

Nonsugar. When we are looking on the nonsugar businesses special products. The knowledge of today, we should see a continued positive volume development. We foresee no signs that we have major deviations in ethanol prices, burdens risk clearly are higher raw material costs in some of the business field.

CropEnergies, clearly we'll do everything to repeat the forecasted outstanding 2019/'20 results. And here we have also no major negative signs that within the current knowledge it is not possible to do so.

And to fruit, we will try everything to get back, let me say, on track after a really disappointing performance 2019/'20.

So all in all, for nonsugar activities, it could also be possible in total that we confirm that we see the highest level -- the high level for 2019/'20. And that means on group level, that the possible return of our sugar business into black figures would be enough to strongly increase improved operating result going forward.

And clearly, let me remind you, these are thoughts, the first thoughts and what I shared with you now, this is absolutely no official guidance. We will share our guidance, which we do every year in spring, in our analyst conference.

And to fruit, clearly, the last question you raised, we have different, let me say, developments in the markets globally. Some are burdened by economic developments negatively. Some are burdened by consumer habits changing, then we have some one-offs in our cost structure and raw material sourcing, also in personnel costs, which hurt it especially in quarter 1 and also quarter 2. But let me say, the underlying that was -- the core of your question is the underlying structure of the business impact that you can observe that also in a very difficult year, we have increase in volumes, not at what we originally forecast in plans, but there's a slight increase in volumes. And our tasks are now to adapt the cost structure, maybe midterm on the lower volumes increase, and to do everything to gain volume to diversify our product portfolio to come back to, let me say, to growth rates we had in the past.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [9]

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This has all been very clear. Could I ask a couple of short follow-up questions?

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

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Anton, we have lot of guys in the queue, so maybe you can let them through.

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Operator [11]

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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 [12]

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Well, actually all my questions have been already answered.

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

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We ran out of time because the stock exchange will start in several minutes. So okay. One question or -- Marc?

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [14]

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Actually, that was the question I had was -- regarding the provisions you are expecting for the final quarter. I mean, it didn't change your forecast for the sugar division, and that implies that you do some provisions in Q4 to get to breakeven or positive by next year in the sugar division. But I'm not quite sure whether you really go for the upper end of that range. The implementation is more like if we see EUR 40 million, EUR 45 million, so a similar loss in Q4 on operating base with lower provisions, as you mentioned, the EUR 60 million last year, probably this year, EUR 30 million, I don't know. Then we are really at the EUR 200 million losses in the sugar division and not EUR 260 million. Why you kept that EUR 260 million loss forecast? That will be the question.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [15]

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Yes. Clearly, we have still 2 months to go. The campaign is still running, and further the phasing in of the new contract is also not 100% sure and also the production cost and then also, let me say, the possible inventory write-down at the closing date. So there is still an uncertainty, and therefore we kept the range of EUR 200 million to EUR 260 million. There is an uncertainty, but [that was] the main points, the write-down in inventories will be substantially below that what we saw in last fiscal and other provisions or one-off, let me say, if there are any, maybe one I mentioned in the speech is the slide in Cagny, that we have extraordinary costs and that will be booked in the exceptional result.

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Operator [16]

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The next question comes from the line of John Ennis of Goldman Sachs.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [17]

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Just a few follow-ups from me. The first is on the beet price development. You highlighted it as a bit of a headwind in the third quarter, and I assume this will remain the case over the course of the marketing year. I just wondered if there are any sort of onetime payments that we should be aware of? I know you've taken those in the past, either this quarter or over the course of the marketing year that you've locked into. And then my second question is on the European spot prices. There still remains quite a sizable premium between European and global prices. So I just wondered how you view that EU premium developing over the course of this year and what your view is from more sort of sustainable EU premium relative to global prices.

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

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To your first question, no, no one-offs in the beet price development. These are all regulary (sic) [regulatory] points. Also the beet security premium for '19 and '20, it is included in the number. And for the EU premium, we foresee, let me say, an stable development. EU will be -- will stay a net importer also beyond October 2020. So the EU premium will stay, and that means higher worldwide prices will directly convert in higher EU prices.

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Operator [19]

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The next question comes from the line of Oliver Schwarz of Warburg Research.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [20]

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Yes. I've managed to come up with some additional ones. Basically, chiming in on what Marc already asked on the sugar guidance implicitly for Q4, which requires you at least to generate a loss of EUR 54 million up to EUR 114 million. Looking at that -- at those numbers, comparing this with the numbers of last year Q4 and taking into account the numbers last year of 117 -- EUR 107 million contained a provision of around about EUR 60 million. It seems like in those numbers, even at the lower end of the guidance, the EUR 200 million, some -- at least some provision is baked into that. Is that -- that's at least my impression. Can you confirm that? That will be my first question.

Secondly, fruit. Obviously, 2019/'20 was not an excellent year for fruit. But looking at past numbers I would say fruit might never had a really excellent year up to now. Looking at EBITDA margin numbers hovering somewhere between 7.1% to 9.8% for the last 10 years. And now basically, we are at a level perhaps by year end, 8.5%, 8.7%-or-something EBITDA margin. So if you say returning to normal, do you imply that basically an EBITDA margin somewhere 9.5%, 9.8% is at -- is as good as it gets? Or is -- in your expectation for the nonsugar segment, is there something baked in of -- for the fruit segment of in excess of, let's say 10%? And how could -- how is that achievable? So basically, fruit as good as it gets when returning to '17/'18 numbers perhaps or is more to come here?

And another question regarding the nonsugar activities. In your midterm guidance of EUR 6.5 million EBITDA. Is -- when we're looking to CropEnergies and the bioethanol activities of AGRANA. How much of the current bioethanol price environment is baked into that number? Is your number basically requiring CropEnergies to repeat the excellent 2019/'20 result in the years to come again? Or is there something of a more like, safety margin baked into that assumption? Then turning to the sugar segment. The -- those, let's say retention benefits for the farmer or whatever you call them, basically for the farmers to retain planting sugar beets and not turning to other crops to allow for a steady volume of sugar beets going to your remaining sugar factories. Those payments, are they, let's say, now regarded by the farmers as a given and are expected every year from now on? Or are those numbers basically variable depending on the price of sugar beets? So if sugar beet prices go up following the increase in the sugar price and using the beet price formula, will those payments -- those additional payments come down once sugar beet prices go up following the increase in the sugar price? That was -- that would be my question on sugar.

And last but not least, EDF (sic) [ED&F] Man, huge write-down. What's expected from EDF Man in the years to come? And in regard to the change of your strategy focusing on the European sugar market, not being highly active in the international sugar market, is there still a place for ED&F Man in the Südzucker Group for those 35% participation?

And lastly, could you quickly peek into the tax assets that have accumulated yet from the loss-making sugar activities and how much of that might be used in the future once the operations come back into the black figures, which might already be as you assumed already in the financial year 2021?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [21]

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A lot of questions. Normally, we have -- we should do that in a one-on-one. Quarter 4, as explained this week, as explained in the session and question before, we haven't -- we have still an uncertainty in the last, let me say quarter due to several points. And clearly if we have included a portion for inventory write-downs, then that is this big spread.

Fruit, I answered also to Anton the main points, and clearly is not to answer the question, not to avoid it. But as you are aware about, we are in market culture commodities acting with a high volatility in prices, and that influence also year-by-year our margin. So we are talking about absolute numbers. And our key steering criteria is the ROCE. And what we are saying is that the goal for every business unit, and all that means also for fruit, is a 10% growth on capital employed. And there, we have been on good track over the last years to be there. And if you would convert them, let me say, this 10% ROCE goal, in normal raw material prices in peers that would then convert clearly in a double-digit EBITDA margin also for fruit.

Then let me say the beet security premium you raised, we have so far paid 2x, and indeed, it was in periods where we had the lowest pricing globally and in the EU market ever, to keep our, let me say factory utilization on high levels that we have also volumes then onboard when prices -- when markets return as of today. And that is, let me say the history of the beet security premium, and we will do it also if it is necessary, and that would be to bring -- to be in the best interest of future [there].

ED&F Man. Clearly this is [an restructuring] plan and a new setup for the company. And it's clearly now we are in the middle of the restructuring process, yes, a lot of work to do. To give here a clear advice what could be, let me say, the future profitability of ED&F Man, the only point I would like to mention is, that what I said also in the speech, the underlying core business has been positive and will be positive also in the current fiscal of ED&F Man.

And the strategy of Südzucker clearly is the -- things have changed over the last years, we have adapted slightly our sugar strategy, and we reassess steadily, let me say the participation of ED&F Man going forward.

And the tax assets, it is clearly too early to advise here what we will do. When we have, let me say finalized our midterm planning in sugar, when we have closed, let me say the 50 years of running 2019/'20, then we have a more robust framework and then we can decide what to do with these valuable tax assets going forward.

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Operator [22]

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The next question comes from the line of Roland French of Davy, Research.

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Roland French, Davy, Research Division - Food Analyst [23]

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Three questions from me, all sugar-related. So firstly, if I look at Slide 25, you clearly -- you haven't disclosed the medium targets for the sugar EBITDA. Just wondering what are the key factors that's prohibiting you from calibrating that target? I guess stated alternatively, you've done the work on the upcoming cost restructuring, you've recalibrated some of the big price mechanisms and agreements. And you can kind of see the trajectory of where the EU price is. So is there a way even for you to kind of give us a little bit of a clue if you were to mark-to-market all of those factors where 2 or 3 years out you might want -- or you might target that segment from a profit perspective? So that's the first question.

Second question relates to the restructuring again. And initially, you set a target for EUR 100 million of cost savings. But if I recall correctly, there was a caveat to those cost savings related to the then level of sugar prices. So I'm just saying if you might update us as to that estimate and given the current rally in sugar prices.

And then I guess maybe you could put in a third question against kind of what is a favorable backdrop, increased global prices, increasing deficits. Does the upcoming restructuring still makes sense in its current form? And I guess post that restructuring, how do you position yourself? Or how are you positioned against your competitors to capitalize on any kind of sustained price rally?

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

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Yes. First question, midterm guidance. The sugar, we don't give midterm guidance. We clearly shared with you also in this call the 2019/'20 forecast, and we've clearly given really deep analysis of what's happened in 2021. And the only thing what I can say today is if these thoughts, and I've repeated these thoughts for 2021, will apply, then it's clearly due to the effect that this higher pricing environment will then [collide] for 12 months for '21, '22, that will be, per definition, bring higher earnings for '21, '22, but no more details about that. Second point, cost program. The EUR 100 million is the number. Clearly we are looking also for additional measurements, et cetera. So EUR 100 million is still a good number. And the third question, I didn't get.

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Roland French, Davy, Research Division - Food Analyst [25]

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Sure. It's just in context of the restructuring and capacity rationalization, how you are positioned against your competitor set.

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

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Yes. (technical difficulty) but clearly the aim is to improve our competitiveness in the European sugar market, yes, to bring the biggest producer in EU back in the position that we are also going forward [cross] leading in that area.

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Operator [27]

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(Operator Instructions) And we have a follow-up question from the line of Chris Ryan of Bank of America.

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Christopher Anthony Ryan, BofA Merrill Lynch, Research Division - Analyst [28]

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I have 3 quick ones. The first one, do you expect the working capital build that was in Q3 -- it was higher seasonally. Is Q4 expected to be a significant working capital outflow as well? Secondly, can you give how much the IFRS change has added to EBITDA year-to-date? And then the last one is, are there any plans to take any actions in regards to the perpetual hybrids as of right now?

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

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The hybrid, no action. To working capital, no further increase with the current framework of today. And the IFRS, full year number is EUR 30 million, full year number. And the quarter 3 number, do we have the quarter 3 number? I'm asking the team. Maybe you phone Investor Relations after the call. They can share with you the 9 months quarter -- 9 months number for IFRS.

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Christopher Anthony Ryan, BofA Merrill Lynch, Research Division - Analyst [30]

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Can I just get a clarity on the working capital. Are you saying in Q4, there will be no working capital outflow? In cash flow?

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

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More or less the same like in quarter 4 last year.

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Operator [32]

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And we have another follow-up question from Anton Brink of Kepler Cheuvreux.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [33]

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Yes, this time last and 3 very quick follow-ups. You mentioned 11 million tonne deficit. Can you remind me of the source for that number? Is that their figures recently though?

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

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Yes, just as of the 6th of January.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [35]

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Okay. Secondly, you mentioned all of the contracts are due for renegotiation. Does that also apply to the contract signed for October '19?

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

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Yes, almost 100% I said.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [37]

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Okay. Okay, very interesting. And in, I guess relating that to your comments that sugar should see -- or could see black numbers again. Isn't that very cautious wording in the context of a very significant sugar price improvement? The cost savings that we are to see as of H2, the renegotiation of all those contracts. Isn't that quite -- or isn't that still very cautious?

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

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No, it's a realistic number. The cost savings are kicking on from October onwards. Also the new pricings we kick on in from October onward also with some phasing. We have to be very clear. And clearly if you are looking on the run rate for H2 2019, '20, it has to be clear that also for the first half year, we expect with the thought of today that we are loss-making in sugar.

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Operator [39]

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And there are no more questions at this time. I hand back to Nikolai Baltruschat for closing comments.

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Nikolai Baltruschat, Südzucker AG - Head of IR [40]

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Okay. Ladies and gentlemen, thank you again for your interest in Südzucker Group, and please do not hesitate to contact us in case of additional questions. And again, a good year for all of you 2020. Bye.