INTERIM REPORT 1st Half Financial Year 2005/06, 1st March to 31st August 2005

Mannheim, 13.10.2005

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Dear Shareholders,
This interim report informs you about the development of business in the first six months of the current 2005/06 financial year (March to August 2005).

Reform of the European Sugar Market Regulation

The proposal on the reform of the Common Sugar Market Regulation presented by the European Commission on 22 June 2005 is currently being debated in the Council of Ministers and in the European Parliament. The European Commission's intention is to have the new Sugar Market Regulation passed before the WTO summit in Hong Kong in December 2005. Whether this will happen is still open.

The aim of the reform proposal is to contribute towards improving the competitiveness of the European sugar industry and at the same time to provide a long-term perspective for efficient producers through to the year 2015. The core points are a phased reduction of the sugar reference price by 39 % and of the sugar beet price by 43 % from the sugar industry year 2006/07, the creation of a Restructuring Fund for purchasing quota surpluses and the partial conversion of C sugar into quota sugar.

Südzucker supports the basic tenor of the reform proposal because, firstly, it provides a reliable long-term framework to the year 2015 for efficient producers and, secondly, the inevitable consequences have been drawn from the WTO panel lost in May 2005. However, beyond that Südzucker believes it is necessary for all imports to be systematically integrated into the Sugar Market Regulation quota system, sufficient external protection to be provided and agreement to be reached with the World Trade Organisation on a redefinition of the permitted export volumes. We consider the price reductions proposed in the reform draft to be exaggerated. A smaller price reduction and participation by the beet growers in the Restructuring Fund would also accommodate the demands of the European Parliament and the third-world countries concerned.

Südzucker will defend the profitability of the Sugar segment, despite the price reductions, by focusing on the most efficient regions in Europe in terms of sugar yields.

In September 2005 the European Commission undertook a declassification, which had long been urged, of 1.9 million tonnes for the sugar industry year 2005/06. Equivalent to 10.4 % of the total EU quota this is the biggest reduction in quota sugar production to date. This decision makes up for the fact that there had been no declassification the year before and will lead to a relaxation on the domestic markets. We assume that, as a result, the price situation on the internal market will recover significantly.

Capital-raising measures

A number of successful capital-raising measures were conducted in the reporting period. With the rights issue and the issuance of a nominal EUR 700 million of hybrid bonds we have considerably strengthened our capital base. The subordinated bond which has been issued for an indefinite term - Südzucker has a unilateral right to call them after 10 years - counts as equity. The tax-deductible coupon of 5.25% reflects the currently favourable interest rate level which we have been able to lock in long-term with this issue.

The Group's equity base was further strengthened by utilizing the authorized capital agreed so at the Annual General Meeting on 28 July 2005. At the beginning of September 2005 we issued 14.6 million new shares (subscription ratio of 1 new share for every 12 shares held). With the market price trading at just over EUR 17.00 per share, the subscription price was fixed at EUR 14.00 per share. The new shares were fully subscribed and provided the Group with approximately EUR 200 million of fresh capital. After the rights issue the market price rose further to over EUR 19.00 per share on 6 October 2005. The successful placing of the new shares and the hybrid capital is evidence of the confidence which the capital markets place in the strategy and long-term outlook of the Südzucker Group.

With these capital-raising measures Südzucker has laid the foundations for a continuation of the company's dynamic, value-oriented growth. This long-range growth strategy builds on the one hand on the selective expansion of the Special Products segment with the focus on investment in the bioethanol, fruit and functional food businesses. On the other hand, with this growth, the Group aims to create the necessary basis to strengthen its competitive position in the Sugar segment within the reorganised EU sugar market and also through advantageous investment opportunities outside the European Union.

Capital expanditure

The investment drive launched in the 2003/04 financial year was continued according to plan in the reporting period. The focus was on the Special Products segment. In June 2005 the ownership interest in the Atys Group, the central pillar of our strategy in the fruit business, was increased by 6.5 % to 62.5 %. We have agreed to take over all the remaining shares by the end of the year. In addition, new fruit preparation plants were set up in Serpuchov near Moscow (Russia) and Tennessee (USA) to create capacities to keep pace with the dynamic market growth in the dairy industry (yoghurt) in Russia and the USA.

Our functional food-business was significantly strengthened with the expansion of the Palatinit plant in Offstein. Construction of the new ORAFTI plant in Chile is progressing on target. The first sowing of chicory in Chile began this summer and the new plant will come on stream in spring 2006. This additional production location will almost double ORAFTI capacities.

The bioethanol facility in Zeitz was brought on stream in May 2005. However, owing to technical start-up difficulties, production is still below the target capacity of 260,000 m³ of bioethanol per year. We are working hard to eliminate the bottlenecks. The Europe-wide expansion of the bioethanol business is being taken forward as planned. AGRANA has begun work on the construction of a new bioethanol plant at the Pischelsdorf/Donau location. This facility is designed for an annual capacity of 200,000 m³ and is due to come on stream in mid-2007. We continue to see good market potential. Direct blending with ethanol is under growing consideration. The German Automotive Industry Association (VDA) for instance has come out in favour of a 10 % admixture of bioethanol to mineral oil.


In the first six months of the 2005/06 financial year Group revenues rose by EUR 388 million, or 17.1%, to EUR 2,661 (2,273)* million, to which growth in both Sugar and Special Products contributed.

Revenues in the Sugar segment were up by 13.7 %, or EUR 223 million, to EUR 1,847 (1,624) million. Owing to the good sugar harvest the year before and the lack of declassification in 2004/05 exports of quota and C sugar were significantly higher than in the year-earlier period.

Revenues in the Special Products segment were up by 25.5 %, or EUR 166 million, to EUR 815 (649) million, which is attributable mainly to the expansion of the fruit business as planned. For the first time this included revenues from the Atys and Wink group of companies; furthermore, revenues of the Steirerobst Group had only been included for three months in the year-earlier period.

Income from operations

In the first six months of the 2005/06 financial year the Group achieved an income from operations of EUR 237 million and a sales margin from operations of 8.9 %. Given difficult conditions, the very good result of EUR 262 million posted in the year-earlier period was not matched.

The income from operations in the Sugar segment was more or less level with a year earlier at EUR 183 (185) million. While high exports thanks to the bumper harvest in 2004 continued to have a positive effect, the burdens from the lack of declassification by the European Commission in 2004 outweighed in the second quarter.

The income from operations in the Special Products segment declined to EUR 54 (77) million, with the poorer performance being attributable in the main to the start-up losses at the bioethanol plant in Zeitz. Firstly, unforeseen expenditures were incurred as a result of technical problems during the plant's commissioning. Secondly, the facility has not been operating at the targeted capacity so far but regular depreciation had still to be charged. The functional food business failed to match its year-earlier performance, which had received an exceptional boost from the "low carb" wave in the USA which has since subsided. The growth of the fruit business and a gratifying development of earnings from the starch activities in the reporting period were not able to compensate fully for these two factors.


For the full year 2005/06 we forecast growth of almost 9 % in revenues to EUR 5.2 billion.

We expect revenues in the Sugar segment to decline as the result of significantly reduced quota sugar exports in the second half of the financial year. This decline will be due to the declassification which had been urged by the sugar industry and has now finally been undertaken by the European Commission. This will be set against strong double-digit growth in revenues from the Special Products segment as the positive effects of the enlargement of the fruit group and the contribution to revenues from the start-up of the bioethanol business feed through in the second half of the financial year.

We do not expect to match the Group's pre-year income from operations in 2005/06. Profits in the Sugar segment will continue to suffer from the negative effects of the European Commission's lack of declassification in 2004 before relief is felt from the substantial declassification now undertaken in September 2005. In addition, the massive rise in energy costs of late will burden production in the upcoming campaign. All in all, earnings performance in the Sugar segment will be below previous year. In the Special Products segment we are working hard to contain the start-up losses at the bioethanol plant and to bring the functional food business back into line with its growth in the preceding years so that - in contrast to the first half - the earnings growth from the expansion of the fruit business will materialize in the second half of 2005/06.

Yours faithfully,
The Executive Board

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