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Edited Transcript of SZU.DE earnings conference call or presentation 11-Jul-19 10:59am GMT

Q1 2020 Suedzucker AG Earnings Call

Mannheim Jul 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Suedzucker AG earnings conference call or presentation Thursday, July 11, 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

* Jack Pobjoy

Barclays Bank PLC, Research Division - Research Analyst

* John Mark Ennis

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Unidentified Company Representative, [1]

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Thank you, and good morning, ladies and gentlemen. We welcome all of you to the conference call this morning. The underlying presentation for the call has been published this morning at 7:30 a.m. CET on our homepage. Today, we released the Q1 statement for 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 homepage shortly following 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 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 quarter financial year 2019-'20 and details about the full year guidance.

Let me start with the highlights of the first 3 months results on Page 4. Group revenues came in below previous year's level. As expected, group EBITDA and group operating result were significantly down. Nonsugar segment's revenue, EBITDA and operating results increased. Cash flow decreased significantly in parallel to the EBITDA development. EPS came in at minus EUR 0.04 against plus EUR 0.10 the year before. Net financial debt end of May 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 4%, mainly driven by a significant decrease in segment sugar. Whilst segment fruit showed stable development, segments special products and CropEnergies increased their revenues level. Operating result decreased by 40%, also mainly driven by the earnings drop in segment sugar.

Segment fruit was also significantly below previous year's level. Segments special products and CropEnergies came in significantly above last year's quarter 1 results.

Let's continue with segment sugar on Page 7. Let me start off with a quick look at the global sugar market. As there are no major changes in our assessment, let me repeat our main statements made back in May alongside the analyst conference.

According to the latest change in estimates about global sugar marketing year 2018-'19, starting in October 2018, the so far expected deficit of 0.2 million tonnes is now expected to turn into a higher deficit of 1.1 million tonnes.

For sugar marketing year 2019-'20, the so far expected deficit of 3.1 million tonnes is now expected to turn into a higher deficit of 4.2 million tonnes. Stock-to-use ratio would go down to 38.8%. This confirms a more encouraging market environment for the next 12 to 18 months. So our full year guidance is still not taking into account any tailwind from this global development.

On Page 8. We will reiterate our continued positive EU market environment. You see the strong increase in EU spot prices, which is going to build the basis for the upcoming new contract negotiations for sugar marketing year 2019-'20. EU has become a net importer since January 2019. We are optimistic to convert this positive momentum into favorable contracts to improve our profitability step-by-step into the next year.

Let me now turn into the concrete development in segment sugar in quarter 1 2019-'20 on Page 9. Revenues in segment sugar decreased by 16%. This was mainly driven by significantly lower sales revenues and moderately lower sales volumes in light of the drought-based lower harvest in 2018. Operating result was, as expected, significantly down. The reported loss reflects the challenging pricing environment and significantly lower export volumes. As shown in the annual report, some relief occurred as there was an inventory write-down in fiscal year 2018-'19 in the amount of about EUR 63 million. This helps quarter 1 but also will help quarter 2 performance in fiscal 2019-'20.

Let me continue with segment special products on Page 10. Revenues grew by 8% supported by higher sales volumes and significantly higher ethanol sales revenues. In this slide, operating result increased by 20%. The 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 5%. Lower sales volumes were more than compensated by significantly higher ethanol sales revenues. Operating result tripled against quarter 1 2018-'19, helped by a significantly higher ethanol sales revenues against the low price year base. They were enough to more than compensate for lower production and sales volumes and higher raw material costs. Also in June and so far in July, we have seen further strong support from higher ethanol prices. Average ethanol price in June was EUR 624 per cubic meter.

Let's move on to segment fruit on Page 12. Revenues came in on previous year's level. This is due to slightly higher sales volumes in fruit preparations against lower sales revenues in fruit juice concentrates. Operating result decreased by 15% in light of higher costs in fruit preparations, whilst fruit juice concentrates contributed in its higher earnings.

Let me now turn to the main points in the P&L on Pages 14 and 15. The result from special items contained a negative EUR 6 million effect in segment sugar. This is mainly due to the offer to German beet growers linked to factories Warburg and Brottewitz to return their beet delivery rights. Both factories will be closed following the campaign 2019. The net equity result was burdened by losses of ED&F Man's participation in sugar factories, reflecting the difficult sugar world market environment. The main profit contributor in segment special products of EUR 4 million were the earnings from Hungrana Group's starch ethanol businesses. Net financial result came in at minus EUR 9 million. It contains the unchanged net interest expense of minus EUR 6 million and the other financial result of minus EUR 3 million.

Let's continue on Page 15. Tax rate came in at 62% against 48% 1 year ago. Tax rate is again distorted by the development in segment sugar. The earnings per share decreased from plus EUR 0.10 to minus EUR 0.04.

Let me now turn to the cash flow, working capital and investment development on Page 17. CapEx increased by EUR 6 million to EUR 72 million. Investments into future growth and efficiency have been successfully completed or continued. There were only minor investments in financial assets.

Let me now illustrate the main movements in the balance sheet on Page 19. Noncurrent assets have been decreased by EUR 592 million, mainly due to the goodwill impairment in segment sugar. Net financial debt end of May is up by EUR 441 million against last year and EUR 111 million against end of February 2019. Since 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 31% against 16%, 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 now summarize our projection for fiscal 2019-'20 for revenues and operating result. Group revenues should come in at EUR 6.7 billion to EUR 7 billion, and operating results should reach EUR 0 to EUR 100 million. Including all uncertainties, especially in segment sugar and taking into account that there are still 9 months to go, we are slightly optimistic to outpass the midpoint of the expected operating result range.

Despite the mentioned relief from already written down inventories, we expect in segment sugar further losses in H1 2019-'20 based on execution of low-price contract from sugar marketing in 2018-'19. From October 2019, the beginning of sugar marketing year 2019-'20, we expect the price-based significant earnings improvement against H2 of fiscal '18-'19. This development will be supported by the EU inventory reduction out of campaign 2018 and an expected stable production level in campaign 2019 in light of planting restriction across the EU industry.

For financial year 2019-'20, presumably the earnings improvement potential will not be fully exploited as the price increase will concern less than 70% of sugar contracts. Furthermore, 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 cultivation.

As you know, we announced restructuring program with cost savings of up to EUR 100 million 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 820 million and an operating result in the range of EUR 30 million to EUR 70 million. The increased forecast is in place since CropEnergies' quarter 1 press release dated 14th of June.

Segment fruit will show a moderate increase in revenues and a significant increase in operating result. So it is clearly more challenging following the shortfall in quarter 1. We'll stick to the forecast for the time being.

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 depreciations also reflecting accounting changes according to IFRS 16. Investment in fixed assets are expected below previous year's level.

Let me now turn to Page 24. Ladies and gentlemen, '19-'20 is going to be another year of revenue from earnings growth of our nonsugar activities. Segment sugar should show first signs of a recovery from October 2019 onwards in light of a significant improved European market environment. Overall, despite the depressed full year earnings level in segment sugar, we are confident to cope with the challenges which remains in the market, especially as we have set many measures to get our sugar business back on track. Diversification and expected strong cash flow contribution from the 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 May presentation, 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 have reached an EBITDA level of about EUR 450 million in '18-'19, representing already a high cash quality. They are expected to reach about EUR 600 million midterm.

Together with the first step of recovery in segment sugar into positive earnings territory, increased group EBITDA level will improve financial headroom for Südzucker Group 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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Thank you, Mr. Kölbl. 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 is from the line of Anton Brink with Kepler Cheuvreux.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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Two questions from my side. Firstly, can you give us some background on the exact driver of the stronger-than -- well, I guess, at least stronger-than-consensus expected performance in sugar? You were highlighting that people were likely a bit too pessimistic because of the write-down of inventories in H2 last year. It also seems that a significant decline in exports volumes -- loss-making export volumes is helping you there. Second question would be, when would you expect the global sugar price to start profiting from the expected decline in global inventories that you are highlighting?

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

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Yes. To the development of the sugar profit in quarter 1, you flagged the main important point for this development is the write-down in inventories we had to make in the fiscal '18-'19 in the second half with an amount of EUR 63 million. And from this write-down, clearly, we will profit and we had profit in the quarter 1 development, and we will further profit in the quarter 2 development. And this is the main driver together with slightly higher spot price developments we have seen especially in the east and southeast area.

To the global development, to be here very clear, we have still a difficult framework on the global -- in the global balance and balanced market expected for '18-'19, and the first -- or slightly deficit now and higher deficit forecasted for '19-'20 and stock-to-use ratio will go down to 39%, 38.8%. This has gone forward. But so far, there has been no reaction from the global prices. But going forward there is room for higher prices more at the end of the calendar year 2019 when the market has also a clear picture about the running -- about the campaign in Brazil. And about the further oil and ethanol price development, when it's more clear of how the split of the use of the sugar to produce sugar as end product or ethanol. So still some uncertainties about the development price-wise for the next month, but better framework than 1 year ago, half year ago, 3 months ago.

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Operator [4]

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The next question is from the line of Jack Pobjoy with Barclays.

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Jack Pobjoy, Barclays Bank PLC, Research Division - Research Analyst [5]

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I just wanted to ask a quick question on fruit. You said there is an increased cost base and that impacted earnings in the quarter. Is that expected to persist for the remainder of the year? Or is this supposed to reverse? Yes, it's probably my first question. And second question, if you could just give some more color on ethanol and where you see it evolving in the next few quarters, given that it's such a boost to the special products and CropEnergies segments? I just wanted to get your thoughts on that as well.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [6]

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To the first question, the increase in raw material cost is a one-off effect that we saw in quarter 1. Quarter 1, we have also in the bigger part of the business in fruit preparations and solid volume development, but which was not enough to offset this one-off burden. For the upcoming months, we see further growth, and so there is still confidence that we will beat last year's profit level on a full year basis. And to the ethanol business, we can say so far, as explained in my speech, so far up to yesterday, we really have seen a favorable ethanol price development. The market is now, over the last 4 or 5 months, balanced in some areas higher blending rates accrued.

We are now in the middle of the driving season. So overall, we have no signs that there will be short-term price decrease. Lot of I have said before is from a global perspective. We have to look on Brazil what they are going around. We have to look on the corn harvest in the U.S. how there the pricing will be going forward. But over the next month, we have no signs that we will -- that we see strong price decreases in the ethanol sector. And we will use our capacities as in the first quarter on AGRANA side as well as on CropEnergies side. So this should bring support for special products as well as for CropEnergies, which underpin that it is realistic from today's perspective to beat the midpoint of our guidance for 2019-'20.

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Operator [7]

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

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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I had a question really around the premiums you're paying to farmers going into the second half of this year. I wonder if you could talk about how we should think about the cost impact in 2H '20 from those higher payments to farmers and whether you could sort of quantify the P&L impact we should expect for 2H '20 or if it's easier for the marketing year next year.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [9]

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This is premium offered to farmer for first time to fulfill long-term contracts and especially focused for beet delivery in the campaign 2019, more or less, a difficult year in this sugar cycle in the EU. And this premium will occur and influence the cost basis from the production of campaign 2019, that means from September, October this year onwards, and we'll burden the sugar we sell in the sugar marketing year 2019-'20. And this is a premium in an amount of mid-double-digit million euro number.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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That's very helpful. So effectively, there will be an additional cost of, let's say, EUR 50 million coming through each...

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [11]

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Yes. Additional cost of about slightly higher than this EUR 50 million you mentioned, which then is additional cost for the sugar we produce in the campaign '19 and which we are selling from October '19 onwards up to September '20.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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That's very helpful.

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

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The point is the cash is paid.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [14]

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Yes.

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

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This is only P&L-wise.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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Exactly. But then there is, I suppose, an expectation that there will also be the same thing repeated effectively in a year's time. Would you agree with that logic?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [17]

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Yes.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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Okay. And the full EUR 50 million, sorry, just to follow up on that, would come into your P&L in the second half of 2020? You don’t smooth over the course of full 12 months. You would just put into the first 6 months of the marketing year.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [19]

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No. We will book that pro rata.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

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Pro rata every 12 months.

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

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Yes, yes.

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Operator [22]

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(Operator Instructions)

The next question is from the line of Anton Brink with Kepler Cheuvreux, as a follow-up question.

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

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Apologies in advance. My question related to the full year guidance on the sugar segment is, if I look at the Q1 performance, I think you've -- in the past, you've said, well, H1 this year should be quite comparable to H2 last year. I guess it will be a fair assumption to expect that Q2 should largely be similar to Q1. Then you are implicitly guiding for an operating loss or a significant operating loss in the sugar segment in H2, which on the back of strengthening prices -- I guess there is an element of rising production cost, I'd buy that, but I do not fully understand why we should be so negative on H2?

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

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Yes. Fair point. Let me widen that a little bit. We have a situation that we have in H1 strong burden of this low price contracts out of campaign '18. H1 is helped by this inventory write-down of EUR 52,000 in '18-'19. And when we are looking now in H2, having in mind our full year guidance, it is clear that H2 will see an earnings swing from October 2019 onwards, leading to significant improvement of profitability compared to H2 2018-'19. But clearly, it's only 70% of the quantity fall from sugar marketing year 2019-'20 onwards will benefit from this price increase because we have multiyear contracts, which have fixed prices or variably priced. So looking forward to fiscal 2020-'21, we will see then a stronger impact from price increases. Coming back to H2 2019-'20, as explained in the question before, production cost will increase, yes, first due to higher beet cost based on the higher sugar revenue and the phasing in of this raw material secure premium.

And so these are the main factors why we still expect a loss in the range of EUR 200 million to EUR 300 million. But clearly after this development we have seen in quarter 1, there might be room for an upside, but there, as I said, is still 9 months to go, and we are in a really volatile environment, and there is a high degree of uncertainty regarding the final pricing for the contracts 2000 -- from October '19 onwards, yes? Regarding the vegetation period, that means volume, we can at the end of the day produce and also regarding the final campaign costs how also the conditions of the campaign will be.

And so there is still a high degree of uncertainty. So at that point of the year, we still speak to this range of sugar losses of EUR 200 million up to EUR 300 million and see clear improvement for 2021.

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

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That's very helpful. And maybe a follow-up question on the multiyear contracts because I would assume that the average price level in the multiyear contracts is higher than your price levels in the 1-year contract? Is that a fair assumption?

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

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No. On the fixed price contracts, no.

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Anton Brink, Kepler Cheuvreux, Research Division - Equity Research Analyst [27]

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And so what would have been the rationale for you to sign longer-term contracts that are loss making?

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [28]

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Yes. It was -- you have to look back on the period when we made those contracts on the background of extreme good campaign. At that time, we had the first goal was to secure sales volumes on customer side.

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Operator [29]

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Ladies and gentlemen, there are no further questions at this time. I hand back to Thomas Kölbl for closing comments.

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Thomas Kölbl, Südzucker AG - Finance Director & Member of Executive Board [30]

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Yes. Thank you, again, for your interest in Südzucker Group. And please do not hesitate to contact us in case of additional questions. So goodbye, good summer to all of you. See us in the H1 call. Thank you.