KWS SAAT SE & Co KgaA
XETRA:KWS
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KWS SAAT SE & Co KgaA
Earnings Call Analysis
Q3-2024 Analysis
KWS SAAT SE & Co KgaA
KWS has demonstrated remarkable resilience and performance during the first nine months of the 2023-2024 fiscal year, reporting a sales increase of approximately 18%, adjusted for currency effects, and an impressive 48% rise in EBIT. Despite facing some headwinds in the agricultural market, KWS attributed this success primarily to strong innovations that add economic value for farmers, particularly within its Sugarbeet and Cereals segments. The company's strategy emphasizes innovation over fluctuations in commodity prices, highlighting a core strength of its business model.
A significant factor in KWS's financial results was the completed sale of its Chinese Corn business, which provided a one-time EBIT boost of around EUR 30 million. Additionally, the divestiture of the South American Corn business is regarded as a strategic move aimed at enhancing the company’s financial independence and profitability. This transition also allows the company to focus more on developing its core competencies and markets, particularly in Europe.
However, the Vegetable segment did face challenges, reflecting lower sales and significant ongoing investment in breeding programs, maintaining a loss of EUR 22 million in EBIT.
Looking ahead, KWS has raised its guidance for the fiscal year, now expecting a sales growth of between 11% and 13%. The company anticipates a significant increase in its EBIT margin, projecting it to rise to between 15% and 17%, factoring in the impact of the sale of its China business. KWS is also increasing its Research & Development ratio to around 20% to support its innovation strategy, which remains central to its growth plans.
KWS's strategic realignment away from certain international markets like China and South America allows the company to hone in on its European markets, where it holds a dominant position. This approach is designed to drive profitability and efficiency, particularly in segments where KWS has established strong market shares, such as Sugarbeet and Cereals. The company remains optimistic about growth opportunities in hybrid crops and the burgeoning plant-based protein market.
While KWS's long-term prospects appear strong, the Vegetable segment is not expected to break even until the late 2030s due to high initial R&D investments. The company believes in the potential of this sector but recognizes the time needed for these investments to yield positive financial results. KWS is committed to executing its plans effectively while navigating various challenges in different market segments.
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Good morning, ladies and gentlemen, from Einbeck. Welcome to KWS's conference call on the occasion of the publication of our financial results for the first 9 months of the current fiscal year 2023-2024. I am very pleased to report to you today on a very successful business performance in the first 9 months of the 2023-'24 financial year.
As you probably have noticed, we had already published preliminary key figures for sales and EBIT on April 30 as part of an ad hoc publication. We now confirm these preliminary figures today with the publication of our final figures. KWS is once again showing a strong operating performance this fiscal year, despite some headwinds from the agricultural market.
A significant increase in revenue and EBIT despite those headwinds, once again demonstrate the strength of our business model. It is not so much commodity prices that move our business but innovations with clear economic benefits for the farmer. Here, we have very compelling, sustainable solutions in our portfolio that drive and continue to drive our growth.
Our sales grew by around 18% after adjusting for currency effects and EBIT by 48%. This strong development is once again driven by our Sugarbeet business, but we also grew very well in Cereals with 11% adjusted sales growth. In addition to this overall very pleasing operating performance, we completed the sale of our Chinese Corn activities as announced combined with an one-off EBIT income of around EUR 30 million. Taking these developments into account, we have significantly raised our annual forecast, and I will go into the details again later.
We reported on another strategic development, the sale of our South American Corn business at the end of March. For some of you, this move may have come as a bit of a surprise. But from our strategic perspective of a long-term company whose DNA is shaped by independent and financial strength, this development is conclusive. At the end of my presentation, I will take out the topic again and give you an update on the transaction.
After these introductory words, let's look at the most important key figures in the first 9 months. It is important to emphasize here that we are classifying the South American Corn business from now on as discontinued operations. As a result, we are reporting the resulting earnings contribution from discontinued operations in a single line in the P&L and report for the continuing operations as usual. Previous year's figures have been adjusted accordingly.
Sales in euro increased significantly by around 10%, with currency effects having a negative impact. Eastern European currencies, the Turkish lira and the U.S. dollar are particularly noteworthy here. Without these effects, growth would have been around 18%. Key earnings figures, EBITDA and EBIT rose over proportionally by 37% and 48%, respectively. Below EBIT, we see a decline in the financial results to EUR 24.7 million negative. This was due to both higher interest expenses and a decline in earnings contributions from our joint venture with AgReliant in the U.S., which is accounted for at equity. For the remainder of the year, we expect these effects to continue.
Bottom line, there is a significant increase in net income or earnings per share of around 37% in relation to continuing operations. Earnings from the divesture -- sorry, earnings from the divested South American Corn business, on the other hand, declined significantly. In particularly, the currently challenging cultivation conditions for corn in Brazil, key with commodity prices and [indiscernible] as well as the significant depreciation of the Argentinian peso, which we had already reported on in the first half of the year had a negative impact on the results.
Now let's move on to the individual product segments. Sales in the Corn segment, excluding South America, helped significantly by 9% or 4% after adjusting for currency effects. In Europe, business was largely stable operationally, but in view of the lower commodity prices, we are seeing a certain shift in acreage to other crops this year.
Our North American joint venture, AgReliant, on the other hand, once again posted a disappointing sales development with declining volumes and negative earnings contribution. As we announced at the end of March, we are examining possible strategic options for our participation in this joint venture. The process here is still ongoing. The segment result rose significantly from EUR 61 million to EUR 83 million, with a one-off effect from the sale of the China business having a positive effect in particular. On the Corn segment, we expect significantly lower sales for the year as a whole and taking into account the China effect and EBIT margin slightly above previous year levels.
Now looking into the Sugarbeet segment, which is writing another successful chapter in its success story with a significant increase in sales and earnings. With a 25% increase in sales, overall stable acreage for Sugarbeet, we are once again underpinning our world's leading position in this area. This development is closely linked to the success of our innovations such as CONVISO SMART and CR+, which now accounts for 56% of our total sales.
The third quarter also benefited slightly from seasonal shifts but we still expect relevant sales for the segment in the fourth quarter. So nothing should stand in the way of another record year for Sugarbeet.
Positive business development is also noticeable at EBIT where earnings rose by around 50% from EUR 195 million to EUR 291 million. In the light of the strong business performance, we continue to expect significant revenue growth for the year as a whole and now even expect a slight improvement in margins compared to the already strong previous year.
Now let's move on to the Cereal segment, which generates the majority of our business -- of the business in the first half of the fiscal year and has mostly been recorded. Here, we see a strong increase of 9% compared to the previous year in sales. The main driver of growth this year was once again our rye business, followed closely by rapeseed and wheat. The segment's very positive business performance is also reflected in our earnings figures.
With a segment result of EUR 79 million, we achieved significant growth compared to the previous year, driven by price effects and product mix. The South America transaction also had an impact on the Cereal segment, although small, where the sorghum business was also reclassified to discontinued operations.
Let's now look at the Vegetable segment, where our sales declined as expected, especially due to lower sales to China. At minus EUR 22 million, EBIT was significantly lower than in the previous year. This is due to lower earnings contributions from the business and the planned higher expenses for the expansion of our breeding and business activities. We have now established breeding teams in Italy, in Spain, Turkey, Mexico and Brazil to drive our breeding programs. So we are fully on schedule here, and this will then also be reflected in growing business in the medium term.
Finally, let's take a look at our expectations for the current fiscal year, all related to continuing operations. In terms of sales development, we expect comparable growth of 11% to 13%. Regarding EBIT margin, we forecast a significant increase to 15% to 17%, including the roughly EUR 30 million from the China transaction.
For the R&D ratio, we see this at around 20%, but this change is more mathematical in nature as discontinued operations has a lower R&D ratio than the group average. All in all, KWS is off to another successful financial year with strong growth in sales and earnings.
As mentioned in the beginning, a few words on the divestiture of our South American Corn business. The buyer is the family-owned Grupo Don Mario or GDM, one of the world's leading breeding companies for soybean seeds based in Argentina. The decision to sell the business was the result of a comprehensive evaluation process of the future opportunities and risks for KWS is a South American corn market.
In Brazil, we have written a great success story in terms of breeding new varieties and their market acceptance. However, the economic environment has also always been challenging, see it in terms of the strong capital requirements, the high local financing costs and also the significant currency fluctuations.
Even though the share of our own genetics and our variety portfolio has recently increased significantly, we would continue to be dependent on third parties in the long term. However, these 2 aspects, independence and profitability are very important elements of our entrepreneurial DNA at KWS, which is why we ultimately decided to divest this business.
We are convinced that this step is also in the interest of our shareholders. The transaction will have a significant positive impact on key financial indicators of the KWS Group. Since the majority of the proceeds will be used to repay loans, we expect a significant improvement in financial leverage and equity ratio as well as a significant reduction in interest expenses in the future.
As far as the closing of the transaction is concerned, we currently expect it to take place either in the current fiscal year or at the very beginning of the new fiscal year. The decisive trigger for this is the approval of the Brazilian antitrust authority CADE, which is currently examining the corresponding application.
The transaction includes all breeding and sales activities in Brazil, Argentina, Paraguay and Uruguay as well as the corresponding production site in Argentina and Brazil. In addition, the Brazilian sorghum business, which we previously reported in the Cereal segment will also be transferred.
GDM itself does not yet have an own footprint in the Brazilian corn market, but is the leading provider for soybean seeds. With corn and soybean, GDM will become a provider of the 2 most important crops in the Brazilian seed market in the future. Let me stress that our South American footprint has no -- not disappeared with the sale. We will continue to be active locally in the field of both Vegetables and Sugarbeet. Also, our counter-seasonal breeding activities for the European corn market in Peru and Chile will remain with KWS. Our European Corn business remains core for us with its attractive profitability and relevant market shares, especially in silage [ court ].
With this, I would like to close my presentation. Thank you for your attention and now look forward to your questions.
The first question comes from Oliver Schwarz from Warburg Research.
Congratulations for the very favorable results after 9 months. So well done, ladies and gentlemen. I've got a few questions here. First of all, could you spell out the earnings contribution of AgReliant after 9 months of 2023-2024, please? And secondly, Sugarbeet, I appreciate that the high-margin products contained in CONVISO SMART and CR+ made further inroads into the market. Nevertheless, in EBIT margin after 9 months to more than 40% seems pretty steep. Is that something that is, from your point of view, is sustainable? Or is that driven by whatever special development in this fiscal year that might not reoccur in the years to come?
And perhaps lastly, in regard to Vegetable. I mean it's been a while since the acquisition. The business seems to drag along. You are heavily investing in breeding teams. You are heavily investing in portfolio. But on the sales and earnings level, not so much good news has come out of the business so far. When do you expect -- as you said mid-to -- when do you expect that business basically to turn around and the cost of capital. That would be my 3 questions.
Okay. Let's start with the first one. And not into detail about the earnings contribution of AgReliant after 9 months. It is still positive, but at a disappointing level. So that's the only detail I can reveal here, but not a specific number. Regarding the Sugarbeet EBIT, and I did not properly understand that you judge the margin to be pretty -- I think I hope I understood it whether it's sustainable at that high level. And yes, it is because in Sugarbeet, the margin improvement is mainly as a result of the shift in the product portfolio to more innovative products like CONVISO and CR+. And those are higher-yielding products than a let's sort of say, classical Sugarbeet would be. So that is, yes, sustainable and we do not expect a significant increase in the production cost here.
So if we have not an extreme adverse weather pattern here that would -- that will heavily influence our seed production, et cetera, these margins can be sustainable also not only in short term but also for a longer perspective.
And then a question regarding Vegetables business and the breeding costs and the question when is sort of the business returning here positively. We have elaborated several times on the long-term strategic perspective of vegetable here. And in the peak years, let's say, the R&D costs that will largely still outgrow the sales perspective. So a positive profit contribution for the entire segment here is not to be expected before the mid or end of the '30s so beyond '35 and later.
As we have basically right now the spinach business with the sales of -- you see here now [ EUR 40 million ] for the first 9 months. So this is not going to double or triple in the next years with regards to spinach. But of course, all the other crops will have to take off depending on the breeding outcome. We have minor sales in tomato already, but clearly, the expectation here is the segment profitability not to become positive before the second half of the '30s.
Not sure what you mentioned with cost of capital here. We are not allocating sort of calculating cost of capital per segment of a business unit. So maybe you can elaborate a little bit more here. The cost -- the pure cost of financing for the acquisition will be unfair from our perspective to just allocate it to an operating business model. So I hope I am sort of getting the question in the right direction. If not, please come back and report exactly what you meant with the cost of capital. I'm Sorry.
[Operator Instructions]. The next question comes from Oliver Schwarz, Warburg Research again.
Sorry about that. It seems to be a very one-sided call. No offense. I'd like to ask you in regards to your growth perspectives. With your withdrawal from China and from South America and perhaps also from North America in the future, those are Corn and part -- at least part of the Cereal business. You seem to focus more on your core European markets. That's understandable given your high market share there. And unit cost, obviously, being lower due to a positive leverage effect. And the same applies for my point of view, also for your Sugarbeet business. Given that your market share in Sugarbeet in North America is already very high. And in Europe, it seems to be expanding. But there seems to be limits to your growth due to the overall market size in the respective regions that you are focusing on.
So is your, let's say, when it comes to growth of the business, is your view to, let's say, generate cash and grow in those respective markets until the Vegetable business really takes off? Or am I missing something?
Okay. We still do see growth. Basically, you have pointed out the relevant topics, but let's go one by one. On Sugarbeet, we do not see a limit to the growth. As you have seen, again, the Sugarbeet discussion, I am leading since I'm with KWS when I joined, we had already high market shares in the U.S. We have still increased the market shares. We have significantly increased the top line. The acreage has not been increasing. Acreage has been constantly reducing in Sugarbeet. It is now at a stable level. We expect it to remain there, and we are still growing the business, especially through innovation and new product introductions, which will continue. So we have a super strong motor, of course, innovation, given this is our home turf.
So clearly, globally and also in the U.S., you can expect top line growth, maybe not in volume, but definitely by price and by innovative new products and add-ons, like we have proven in the last 5 years with the introduction of CONVISO and CR+. So there is nothing that would limit the growth in Sugarbeet.
We do have still opportunities ahead in Cereals and a lot to come. We have just embarked into Canada. You might have gotten into that with the right business here. The rye has also increased a lot in the last years and is still to come. We are, as you know, is working on introducing hybrid wheat as well as hybrid barley sooner or later. So if those crops move to the hybrid state, we will start shaping an entire new market with growth potential for hybrid crops in that segment. We have a very strong performance and portfolio with rapeseed, who has positively recovered from the dip right after the neonic's ban.
And again, we have a lot more crops, not talk about the protein crops that sit in the Cereal segment where we are strategically moving the plant-based protein business forward. So also here is enough room for growth within the portfolio irrespective of only looking from a market perspective here.
Vegetables, as I mentioned, is clearly to come, and this is globally. So this goes into South America. As I mentioned, we're still in Mexico. We are growing products there. We are in the U.S. We are also looking into Asia sooner or later. We have not yet embarked on the European perspective broadly in Vegetables.
So there's a lot here you will see. So definitely, there is growth, and it's not only about generating cash, but it has always been a profitable growth and growth for the sake of increasing top line with 0 effect on the bottom line, as I mentioned, is something, we are ready to invest for a certain perspective at a certain point of time. But if it comes to too many factors, that do not translate the top line possibilities into bottom line upside, we're taking strategic decisions. So basically, we do not see a sort of flattening out of our growth perspective here.
Perhaps I can sneak in an additional question. So in regard to the Vegetables business, obviously, that is, as you stated, a business that is to become profitable, perhaps past 2035. Judging from your, let's say, from what you did with your Chinese breeding business and your South America breeding business, if that Vegetable business, for whatever reasons, shouldn't take off by 2035 because there will be costs involved with the distribution of those seeds as well, similar perhaps or closely similar to what we saw in Brazil. How much longer would you be prepared to wait until you decide whether that was a favorable decision or whether it's more prudent to walk away from the Vegetable business?
That would take quite a longer period than 10 years because, again, in Brazil, we started off completely different with full-fledged existing businesses for commercial corn and for breeding and developing corn. So this is a different state. So we had a jump start in Brazil. We converted the product portfolio. We managed, as I mentioned, excellently to gain market shares and to convert to our own product portfolio.
But seeing the bottom line, as I said, just given the margin circumstances also in Argentina, with hyperinflation, et cetera, this is something that just eats up your whole efforts and profit just by pure financing and cash needs. And this is something you would not see in Vegetables businesses in other countries and in -- especially not in Europe where we are going.
Vegetables, we have started from the scratch. So other than the spinach business with EUR 60 million, EUR 70 million turnover and a very good profitability. If you look at the [indiscernible] operations on its own, they have a 25% profitability. We're just embarking on -- and this is what we do a lot on a seed breeding greenfield way forward in 9 crops. We're just cost a lot of R&D money before something comes back, and this is more than a 10-year period, you need to evaluate.
So clearly, it takes quite a longer time, and we would not just close things away. And by the way, we have met all milestones so far, as I mentioned. So right now, this is definitely not our concern, and we are successful in all the milestones we have set ourselves so far measured both, and we are very positive. And if we are lucky enough, there is another interesting acquisition on the way down the next 10 years. So this will even speed up the development of the segment.
The next question comes from Christian Faitz from Kepler Cheuvreux.
Just one question, please. Have you seen any weather-related issues in your Q3 quarter? Because, I mean, Europe was very wet. Was there any delays in seeding? Or was that even a chance for you as farmers needed to reseed after they faced waterlogged fields in large parts of Western Europe.
No, not for this season, nothing extraordinary here. We have had extremely good harvest also in Brazil corn last year. So also from a production perspective, there is definitely enough seed on the inventory shelves for this season and even beyond. So the harvest has been extremely good in some countries in the last year. And right now, there is nothing which relates to, as you mentioned, that [ patents ] are reseeding or sort of even late sowing.
So there are no further questions at this time. So I would hand over back to you.
Thank you very much for your interest in joining the call today. I'm happy that I could report some nice numbers. There was some critical voices after the first half year. And I think the more we grow, the more variance throughout the year and the quarters will continue to remain. So I hope I could gain an understanding today on that is about first quarter and the remainder under strategic outlook. Thank you very much for your interest, and have a great day.