Growing with Europe. 2006/07 annual report

Transcription

1 Growing with Europe 2006/07 annual report

2 Group figures Nordzucker at a glance Consolidated net income in EUR m Revenues in EUR m HGB IFRS HGB IFRS ,023 1,007 1,073 1,184 1,146 1,254 1,234 1,296 1,235 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 Return on revenues in per cent Return on equity in per cent HGB IFRS HGB IFRS Target 5 % Target 10 % /98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07

3 Growing is in our nature Growing is in our nature. Ten years after Nordzucker was founded, we can be proud of what we have achieved: key financial and industry indicators are testament to the success of our steady growth strategy. As a major European sugar producer, we will continue in the same vein in the future, exercising prudence whilst remaining determined. Focusing on producing sugar from beet gives us the strength to continue playing a leading role in the European sugar market of the future.

4 Group figures and ratios HGB IFRS Structure figures 2002/ / / / /07 Number of plants (total) Number of plants abroad Number of employees average for the year 3,475 3,758 3,458 2,820 3,616 Number of employees average for the year (abroad) 1,706 1,864 1,540 1,023 1,959 HGB IFRS Operating business 2002/ / / / /07 Beet farmers 16,466 17,028 16,417 15,917 14,239 Beet cultivation area ha 201, , , , ,862 Beet processing t/day 120, , , , ,000 Sugar production millions of tonnes Sugar revenues millions of tonnes Revenues EUR m 1,146 1,254 1,234 1,296 1,235 of which abroad % Total revenues EUR m 1,075 1,211 1,211 1,178 1,271 Gross income EUR m EBITDA EUR m EBIT EUR m Net income EUR m Cash flow from operating activities EUR m Investments in property, plant and equipment EUR m Investments in financial assets Nordzucker AG EUR m

5 Group figures HGB IFRS Yield ratios 2002/ / / / /07 Gross margin 1 % Total operating profitability 2 % Return on revenues 3 % Return on equity 4 % Interest coverage ratio Redemption period 6 years Cash flow from operating activities per share EUR Earnings (Group) per share 7 EUR Dividend per share 8 EUR Total dividend EUR m HGB IFRS Balance sheet ratios as of 28/ Balance sheet total EUR m 1,023 1,125 1,383 1,343 1,651 Equity EUR m Equity ratio % Debt capital EUR m Financial liabilities EUR m Cash and cash equivalents EUR m Net debt 9 EUR m Gross income/revenues EBITDA/total revenues Net income/revenues Net income/equity EBITDA/net interest Net debt/ebitda Net income/number of shares Total dividend/number of shares Cash and cash equivalents financial liabilities

6 Nordzucker markets and trends Highlights of 2006/07 Politics Market Company New sugar regime applicable until 2015 The new EU sugar market regime comes into effect on July 1, 2006, remaining valid for nine years. Radically different market regulations apply for beet and sugar from the 2006 campaign along with stage one of the price reduction, which will be implemented in four phases up to Restructuring scheme fails to achieve interim goal So far restructuring scheme payouts are not encouraging enough EU sugar manufacturers to reduce or stop production. Half way through the scheme, the interim results at the end of January 2007 reveal that manufacturers have surrendered 2.1 million tonnes of production quota. However, European Commissioner Fischer Boel states that a reduction of six million tonnes is necessary to balance out the market. If this quantity cannot be achieved on a voluntary basis, appropriate quota cuts for everyone may become necessary in 2009/10. In order to avoid such measures, the regulations governing the restructuring scheme are currently being revised. 2 Global market experiencing a bioenergy boom As a raw material, sugar is profiting from the global bioenergy boom and the growing demand for agricultural raw materials. After a three-year deficit in the world sugar balance, surpluses are expected for 2006/07 (Oct/Sept). Growth in new sectors New markets are opening up in the shape of industry sugar contracts and our entry into the bioethanol business, which was confirmed in Losses from the cessation of exports will therefore be compensated for. Growth in Northern Germany Acquiring an additional sugar quota of 72,000 tonnes from the EU s purchasing scheme has boosted our production opportunities in this key area. Growth in Serbia In June 2006, Nordzucker acquires a 51 per cent stake in Sunoko d.o.o., Novi Sad, and the production and marketing of 180,000 tonnes of sugar at four Serbian sugar factories. The EU import quota of 180,000 tonnes of sugar gives the country duty-free access to the EU. Concentrating on core business In these turbulent times, Nordzucker is sharpening its focus on its strengths, consistently aligning its business towards the core business of sugar and bioethanol made from beet. Management Board reshuffle A difference in opinions concerning strategy prompts changes in the make-up of the Management Board. Hans-Gerd Birlenberg takes over from Jens Fokuhl as CFO from October 1, Following Dr Ulrich Nöhle s resignation on February 1, 2007, Birlenberg also becomes Chairman of the Management Board. The field of raw material procurement will be overseen on the Nordzucker Board by Dr Henrik Einfeld. Adapting to new challenges In the first year of the sugar reform, a cost-cutting programme worth 46 million Euro is supporting the transition to the new market regulations. The focus is on measures to increase efficiency, adjust capacity and make targeted disinvestments. Beet prices will also be adjusted.

7 Contents Campaign Less beet in transitional year Rigorous WTO export limits, EU production cutbacks and a dry summer all lead to considerably less beet and lower sugar production in the first marketing year governed by new EU regulations. Campaign begins in 16 plants Between September 4 and 28, 2006, the campaign begins in a total of 16 Nordzucker plants, including four plants in Serbia for the first time. The Nordzucker campaign in the transitional year 2006 lasts an average of 80 days. Plant closure in Groß Munzel After 122 campaigns, the Groß Munzel plant shuts down on December 13, All 69 employees are offered generous packages: 47 of them transfer to other Nordzucker plants. With this move, Nordzucker implements the plant structure and capacity objectives for Northern Germany which it set itself in Bioethanol Green light for fuel 21 In May 2006, Nordzucker establishes fuel21 GmbH & Co. KG. This wholly owned subsidiary is responsible for funding, constructing and operating the planned plant, which is set to produce 130,000 cubic metres of bioethanol based on beet per annum. Ethanol beet In June 2006, 3,600 beet farmers sign four-year contracts to supply beet for the production of ethanol, which all Nordzucker plants in Germany will accept from It is processed into storable thick juice for year-round ethanol production in Klein Wanzleben. Berlin ruling on additives The Biofuels Quota Act comes into force in Germany in January This forces the mineral oil industry to mix bioethanol with petrol and biodiesel with diesel fuel. The additive quotient for ethanol is set to increase gradually from an initial 1.2 per cent of the share of energy to 10 per cent in Letter from the Management Board 5 Growing with Europe 10 Generations dedicated to sugar 10 fuel 21 The fuel with a climate bonus 20 Corporate Governance Report 24 Group Management Report 28 Political environment 28 Market 29 Products 31 Beet cultivation and campaign 33 Environment 36 Employees 36 Financial and earnings situation 39 Risk report 45 Positioning of the Nordzucker Group 51 Supplementary report 54 Forecast report 55 Consolidated financial statements 58 Consolidated income statement 58 Consolidated cash flow statement 59 Consolidated balance sheet 60 Table of changes in consolidated equity 62 Notes to the consolidated financial statements 64 Auditor s report 98 Report of the Supervisory Board 99 Glossary 102 Financial calendar Cover Nordzucker 2006/07 3

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9 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Dear Shareholders, In the financial year 2006/07 Nordzucker reported the best results in its ten-year history. At the same time, last year was a year of realignment for us and our beet farmers. Both the WTO panel ruling on export restrictions for EU sugar and the reform of the sugar market regime came into effect, creating a new framework for the production and marketing of our products. Nordzucker has reported the best results in its ten-year history. These profound changes to the regulatory environment had many and varied consequences for the sugar market, in addition to the price reductions for quota beet and levies to be paid to the restructuring scheme. For example the very restrictive practices for issuing export licenses for quota sugar or the creation of an import contingent for industrial sugar. However, the most important challenge at the moment for the entire sugar industry in the European Union is the return of sugar quotas to the restructuring scheme, which is quite inadequate for the purposes of the reform. Currently, high annual market withdrawals followed by an imminent linear reduction in quota in March 2010 are looking less and less unlikely. At the same time, surplus volumes will continue to put the sugar market under pressure. The result is that the market environment for sugar production is much more volatile than ever before. The aim of the reform is a fundamental reorganisation of the European sugar market, and this remains unavoidable. As a major European sugar producer we were able to provide clear evidence of our strengths last year. Our annual earnings were particularly impressive and show how effective our activities have been. We have positioned ourselves in good time as a European company with an international revenues structure. We began the restructuring process as soon as the WTO export ban was announced and closed two factories in Northern Germany. We have made considerable cost savings on all levels and reviewed and improved the efficiency and effectiveness of our work. Under these new conditions, only those who proactively and consistently exploit the opportunities available to them will be amongst the major sugar producers in Europe still standing at the end of the process. Under these new conditions, only those who consistently exploit the opportunities available to them will be amongst the major sugar producers in Europe still standing at the end of the process. Nordzucker 2006/07 5

10 Hans-Gerd Birlenberg (born in 1954) Chairman of the Management Board of Nordzucker AG since 2007 and Member of the Management Board since 2006 Responsible for: controlling, finances and taxes, IT, communication, corporate development, sales Dr. Hendrik Einfeld (born in 1945) Member of the Management Board of Nordzucker AG since 2007 Responsible for: agriculture, risk management, raw material procurement, growth in Europe Faced with this evolving environment, a company like ours, which is particularly committed to its beet farmers and shareholders, must take every decision in resolute calm and full awareness of our strengths. This will ensure that we remain a strong player on the European sugar market. We are fully aware of our capabilities and will continue to pursue our path consistently. Last year we demonstrated this consistency very clearly. We have disposed of most of our investments which did not match our core competence sugar from sugar beet. Also, we have expanded our core business with the acquisition of shares in four Serbian sugar factories and purchased additional sugar quotas. Sugar from sugar beet and Europe are the rallying cries for mobilising and uniting our forces. The reform of the sugar market regime not only had an enormous impact on our sales markets, however, but also affects the supply of sugar beet, our raw material. As shareholders you will certainly have noticed that the markets for agricultural commodities are viewed in a very different light today, given the boom in renewable resources, compared to just a year or two ago. Whilst prices for other agricultural products have risen steadily over the past year, the prices for sugar beet had to be lowered as part of the new sugar market regime. Nevertheless, cultivation of quota beet still remains superior to other arable crops. To ensure that this continues to be the case, we are working intently, and in collaboration with our beet farmers, on exploiting opportunities for raising yields and saving costs in the cultivation of sugar beet. Together we are developing organisational structures which enable cost savings in the purchase of supplies for beet production, rent management, loading and cleaning as well as in the transport and delivery of sugar beet. This new focus of our business has become ever more important and is reflected in the new division of responsibilities within the Management Board from mid February 2007, which now contains a new department for Raw Materials Procurement. Günter Jakobiak (born in 1951) Member of the Management Board of Nordzucker AG since 1998 Responsible for: human resources, supply chain (buying, production, logistics) Of course, the boom in renewable resources also affects us as an agribusiness. With the construction of the bioethanol plant in Klein Wanzleben, which is due to start production in autumn 2007, we are creating an additional sales channel for our beet farmers. The development of the market for bioethanol and the level of additives recommended by the EU provide us with a great opportunity of taking an early stake in a rapidly growing market. In addition to our core competence in sugar from sugar beet in the EU and neighbouring states we intend to make the production of bioethanol and the field of renewable resources our second core competence. 6

11 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Increased market complexity and the higher demands made of Nordzucker are currently more than evident. However, in difficult times it is particularly important to rise to the challenges of the market in a focused and unified manner. At our international management conference in January 2007 all Nordzucker managers began a period of intense reflection on the content and consequences of the new corporate strategy for company planning and positioning. In the course of the financial year 2007/08 this will lead to the adoption of concrete steps for the future development of the company. This provides a broad foundation for the company s progress, made up of the creativity, knowledge and responsibility of our highly motivated managerial staff. Nordzucker will only emerge robust and successful from the transformation phase in the European sugar market with the support of all our staff and you, our shareholders. Nordzucker can draw on a broad foundation made up of the creativity, knowledge and responsibility of our managerial staff. We thank all our employees for their commitment to serving, supporting and developing Nordzucker in these difficult times. We thank our customers, suppliers and partners for their constructive and productive collaboration. And we thank you, our shareholders, for the trust that you continue to place in Nordzucker. Nordzucker AG Management Board Hans-Gerd Birlenberg Dr. Hendrik Einfeld Günter Jakobiak Nordzucker 2006/07 7

12 8 Core competence sugar from sugar beet Generations dedicated to sugar

13 Nordzucker 2006/07 9

14 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Generations dedicated to sugar Generations dedicated to sugar By 1860 the Duchy of Braunschweig had become Germany s largest sugar producer. Strong roots structural change goes with the territory Nordzucker s roots go back to a wave of new sugar factories founded in the 1830s. This means that Nordzucker has been producing sugar from sugar beet in Northern Germany for more than a century and a half. By 1860 the Duchy of Braunschweig had become Germany s largest sugar producer outside Prussia. In 1891 there were 406 sugar factories in the region. From this point on a process of concentration began, barely noticeable at first, but becoming ever stronger. Improvements in logistics and increases in the factories processing capacity due to technical advances were the reason for this. In the 20th century the sugar industry has experienced a steady stream of restructuring measures, with mergers on the one side and factory closures on the other. The birth of Nordzucker Following a large number of mergers between smaller North German companies, the final step in uniting nearly all sugar producers in Northern Germany was taken on March 1, 1997 with the establishment of Nordzucker AG. The company was well equipped to begin a new phase in its corporate development with eleven factories, about 13,000 beet farmers, 1,956 employees and sugar production of 1.2 million tonnes. In 2003 after lengthy endeavours the merger with Union-Zucker Südhannover GmbH was finally realised. Since then Nordzucker has represented all beet farmers in Northern Germany. Nordzucker s particular expertise lies in the continual analysis and improvement of the whole process from beet farmer to sugar customer. The key to Nordzucker s success is close cooperation with the industrial and retail customers, with universities, research institutes, seed growers, farmers, the equipment and technology suppliers, and with public authorities and politicians. This innovative European network, to which Nordzucker contributes a knowledge of sugar and sugar beet built up over generations, is the foundation for the company s development into a strong European Group. The EU is expanding and so is Nordzucker The merger in Northern Germany enabled forces to be joined. This was a necessity for the forward-looking development of the company, which brought the Central and Eastern European states into Nordzucker s strategic focus. At that time these states were considered as candidates for accession to the EU. The aim was to participate in the distribution of quotas after EU accession in One of the forerunners of Nordzucker took an equity stake in the Czech sugar company TTD as early as This was followed in 1998 by an investment in the Slovakian sugar company Word A.S. and in 1999 shares were bought in six sugar factories in Poland. 10

15 The purchase of three sugar factories in Hungary in 2003 completed the successful round of acquisitions in the future EU states. When the Central and Eastern European states joined the EU in 2004 Nordzucker was able to take stock of its hard work in expanding the company for the first time. Consolidated net income in line with IFRS of 82 million Euro on revenues of billion Euro, and a return on revenues of 6.6 per cent showed how successful the policy of expansion had been. Compared to the year it was established, Nordzucker s revenues had increased by some 25 per cent. The development of the return on revenues was particularly impressive, exceeding the internal target of five per cent since The early entry into Central and Eastern European markets meant that the restructuring programmes in these countries were nearly completed by the time they joined the EU. Strong in Europe In 2006 Nordzucker acquired a stake in four profitable sugar factories in Serbia and was able to increase the sugar quotas for Germany and Poland via the EU programme of additional purchases. Production in 2006 took place in 16 sugar factories in four main growing areas in the EU and Serbia. Group sugar revenues in 2006 were well above the mean for the last five years despite the cuts due to export restrictions. Today, Nordzucker is a heavyweight European player with a market share of 33.5 per cent in Germany, 8.6 per cent in Poland, 38.9 per cent in Slovakia, 36.5 per cent in Poland and around 50 per cent in Serbia. Nordzucker 2006/07 11

16 12 Proven in Northern Germany, success in the EU 150 successful campaigns

17 Nordzucker 2006/07 13

18 150 successful campaigns European knowledge transfer Nordzucker s partners in the sugar business benefit from Nordzucker s experience and expertise in sugar production, beet cultivation, logistics and European distribution. Nordzucker is particularly proud of the rapid and efficient integration of its investments in three Central and Eastern European countries. By working hard with the subsidiaries in Poland, Slovakia and Hungary Nordzucker has realised complete solutions to the major structural challenges in a very short period of time. Nordzucker has made profound modifications to the factory structures and invested in the necessary expansion and modernisation work at selected economically viable locations, and all without delays. Of the 13 sites which Nordzucker originally acquired in these three countries, five are now cost efficient and customer oriented sugar producers. The extremely complex legal structures of the Nordzucker subsidiaries are also no longer a problem. They have been cleaned up, simplified and adapted to the new structures. Behind this impressive performance of integration and adaptation are the employees from five countries. Their experience and skill form the solid foundation on which Nordzucker has been building its successful development for ten years now. Effective cultivation advice for sugar beet farmers is an important tool in ensuring a sustainable supply of the raw material sugar beet for the factories. From the outset Nordzucker also applies its knowledge on the supply side to improve operating efficiency, and not only in Northern Germany but also in the new Average number of employees in the Nordzucker Group for the year 2,000 1,600 1,657 Germany Poland Slovakia Hungary Serbia 1, / / / /07 1,

19 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes 150 successful campaigns states. With Nordzucker s expertise and support the farmers in Poland, Slovakia, Hungary and Serbia are continuing to catch up in terms of sugar yield. They have significantly improved the efficiency of their beet cultivation in a short period of time and are now near the top of the European league tables. International knowledge transfer is a boon both for Nordzucker and for its partners. Knowledge transfer is not a one-way street, but also works in the opposite direction. Nordzucker is growing with its international subsidiaries. Further growth with sugar In 2007 Nordzucker is a strong partner for regional and international customers. Nordzucker is continuing to expand its core business in Europe in line with strategic marketing perspectives and to increase value. Consistent customer focus, improved product quality thanks to process optimisation, integration of staff and suppliers, sustainable, targeted investments and a financing structure in line with the strategy form the framework for the continued development of the company. In so doing Nordzucker relies on their employees and their willingness to embrace change and development as well as on their capacity for high level innovation. This is also apparent in the standards for staff and management. In addition to professional knowledge Nordzucker primarily demands and facilitates readiness for change. Nordzucker delights in flexibility, mobility, good communication skills and sensitivity towards national and personal characteristics. Nordzucker encourages multilingualism and international exchange within the Group and provide access to a wide range of professional qualifications. Nordzucker encourages international exchange within the Group and provide access to a wide range of professional qualifications. Sugar yield per hectare by country in tonnes Germany Poland Slovakia Hungary Serbia Nordzucker 2006/07 15

20 Quality without compromise Responsibility for human food means that Nordzucker has an obligation to deliver the highest performance in many areas. Dealing with natural products and foodstuffs, but also the specificities of the campaign and the dependence on weather and vegetation make high demands of a flexible working and process organisation. Process quality is continuously monitored and improved by means of a dependable quality management which applies the demanding quality, environmental and social standards applicable in Germany throughout Europe. Nordzucker will accept no compromises in quality management at any of its national and international sites. Nordzucker employees have an obligation to process and product quality, no matter what their area of responsibility within the company. The sugar factories in Opalenica, Chelmza, Trenscianska Tepla, Szerencs and Szolnok have been integrated into the sophisticated programme of certification from the beginning. All 16 sites fulfil the highest quality Certifications awarded to Nordzucker Uncompromising product quality and safety Quality management Q+S Quality management QM-Milch International Food Standard IFS-4 Good Manufacturing Practice GMP 13/B2 Biosugar VO-EWG-2092/91 Environmental management DIN EN ISO EU Eco-Management and Audit Scheme Quality management EMAS-ÖKO-Audit DIN EN ISO 9001 year Plants accredited in stages 16

21 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes 150 successful campaigns and certification standards, which opens many doors for Nordzucker throughout the EU. This means that both customers and beet farmers value Nordzucker as a capable, reliable and dependable partner whom they can trust. A reliable partner Changes in the political framework, uncertainties concerning the restructuring of the EU sugar industry and the difficulty of forecasting future volumes of imported sugar pose a number of new questions for European sugar customers in industry and retail. Solid growth has strengthened Nordzucker s market position in Germany and the European Union. Nordzucker is continuing to build on the position it has achieved. Security of supply even when markets and harvests vary, flexibility and high product quality and service levels all define Nordzucker as a strong European and regional partner. New revenues targets New partnerships with Cristal Union, France s third largest sugar producer, and ED&F Man, London, the leading global sugar trader are aimed at developing forward-looking revenues structures. The joint goal is the establishment of EuroSugar in order to bundle sales activities, which is awaiting the approval of the monopolies and mergers authorities. Foreign share of Group revenues in per cent Foreign countries 42 % Germany 58 % Nordzucker 2006/07 17

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23 Renewable resources/bioethanol fuel 21 The fuel with a climate bonus Nordzucker 2006/07 19

24 fuel 21 The fuel with a climate bonus Following Brazil and the USA the Europeans are now also placing great emphasis on energy from renewable resources. Bioethanol energy of the future The need for us to use energy which does not provoke climate change is becoming more and more urgent. In the EU and in Germany politicians are now sending clear signals for a rapid transition to an era of climate friendly energy. This presents farming and the agricultural industry with new challenges and opens up new prospects beyond food production. Following Brazil and the USA the Europeans are now also placing great emphasis on energy from renewable resources. Since 2003 the EU has taken a number of key steps towards the sustainable supply of energy. Ambitious targets on climate protection, as well as the cost and uncertain availability of fossil fuels provide reasons to act now. Biomass as an energy source creates new opportunities in cultivation and production, presents new challenges in terms of quality, productivity and efficiency and opens up new markets. Advantages compared with petrol Bioethanol made from sugar beet has an important role to play in this context because it has many advantages over conventional fuel for petrol engines. Used as a replacement for petrol, bioethanol does not emit greenhouse gases. Net CO 2 emissions are 30 to 60 per cent better than for petrol. Adding just five per cent bioethanol to fuel reduces CO 2 emissions by around 4.5 per cent. Bioethanol is free of sulphur and aromatic compounds and also considerably reduces the emission of fine particles. A further advantage lies in the mature technology available for both the production and sale of bioethanol. Transportation is one of the causes of global warming. It is responsible for some 21 per cent of all greenhouse gases in the EU, and its share is rising. Bioethanol can help reduce CO 2 emissions significantly and prevent further global warming. 20

25 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes fuel 21 The fuel with a climate bonus EU subsidies for biofuels In 2003 the EU passed two directives on subsidising the use of biofuels in order to achieve the reduction in greenhouse gases agreed in the Kyoto protocol: The Biofuels directive (2003/30/EC), which defines non-binding volume targets for the use of biofuels. The market share of renewable fuels should reach at least 5.75 per cent by 2010, increasing to 10 per cent by The Energy taxation directive (2003/96/EC) provides additional flexibility in energy policies by allowing EU states to exempt biofuels from taxes on mineral oils by up to 100 per cent. Binding framework In recent months binding targets have been set for the first time in Brussels and Berlin on the use of renewable energies. Throughout the EU fuels must contain at least 10 per cent biofuel by This was agreed on March 9, 2007 by the EU heads of state and government under the German presidency. The share of renewable energies in total consumption is to rise to 20 per cent by This includes wind, water and solar energy as well as biomass. A 20 per cent increase in energy efficiency and the reduction of greenhouse gas emissions to at least 20 per cent below 1990 levels were also made binding. Germany commits to quotas for biofuels and tax exemption for E85 The Biofuels Quota Act dating from December 18, 2006 came into effect in Germany in January 2007, and requires the petroleum industry to add bioethanol to petrol. The favourable tax treatment previously available for biofuels additives no longer applies in Germany. As a pure fuel (E85), bioethanol remains exempt from the petroleum tax until the end of 2015 and therefore enjoys a price advantage over normal and super unleaded petrol. Flex-fuel vehicles which are currently available in Germany from Ford, Volvo and Saab, can now be filled cheaply at an increasing number of petrol stations. The additive quotient for bioethanol in Germany (Ottokraftstoff) in per cent/year 1.2 % % % % from 2010 Source: The additive quotient for bioethanol is to increase in stages from an initial energy share of 1.2 per cent, rising by 0.8 per cent annually up to 3.6 per cent in January From 2009 an overall quota is to be introduced for the biofuel content of fuels, which will start at 6.25 per cent in 2009 and go up to 8 per cent in Nordzucker 2006/07 21

26 Bioethanol from Nordzucker will be launched in late 2007 under the name fuel 21. New markets for sugar and sugar beet The demand for bioethanol opens up new revenues markets for sugar and sugar beet. As a leading European sugar producer Nordzucker is investing in the development of bioethanol as a new business area. In 2006 fuel 21 GmbH & Co. KG was established in Klein Wanzleben. fuel 21 fuel for the 21st century Bioethanol from Nordzucker will be launched in late 2007 under the name fuel 21. The wholly owned Nordzucker subsidiary, fuel 21 GmbH & Co. KG, is responsible for production and distribution. The company is currently overseeing construction of the bioethanol plant in Klein Wanzleben which will commence operations at the end of fuel 21 benefits from synergies thanks to its connection to the sugar factory. These start with crop planning for the sugar beet, purchasing raw materials and beet logistics and include beet processing, energy supply, waste water treatment, repairs, maintenance and administration. The infrastructure and key process steps for all these are already in place in Klein Wanzleben. During the autumn campaign raw juice a by-product of sugar production forms the basis for the production of ethanol. Thick juice another, storable by-product of sugar production will ensure that the plant can operate all year round and will also be supplied by other Nordzucker factories. After the start-up phase fuel 21 will supply 130,000 cubic metres of bioethanol annually from Klein-Wanzleben. Its customers are petrol Main revenues channels for bioethanol Bioethanol can replace normal and super unleaded petrol. The German fuel norm DIN EN 228 allows petrol companies to include up to 5 per cent bioethanol in petrol. In ethyl tertiary butyl ether (ETBE), a compound of bioethanol and isobutene made from crude oil, it is already used to increase resistance to engine knocking. ETBE replaces the fossil anti-knocking agent methyl tertiary butyl ether (MTBE). Petrol fuels may contain up to 15 per cent ETBE. Flexible-fuel vehicles (FFV) are still rare in Germany, in contrast to Brazil, the USA and Sweden. FFV can be powered by fuels containing up to 85 per cent ethanol (E85). Demand for bioethanol E85 is due to increase considerably, as it enjoys tax benefits as a socalled pure fuel. 22

27 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes fuel 21 The fuel with a climate bonus companies and petrol trading companies. Vinasse is a by-product used as a fertiliser and as fodder. Bioethanol production has increased continuously over recent years. In 2006 some 750,000 tonnes (945,000 cubic metres) were produced in the EU. According to conservative estimates demand in the EU will rise to between six and seven million tonnes ( million cubic metres) by produced worldwide. The main producers are Brazil, where sugar cane is used as a raw material, and the USA, which primarily uses maize. Both countries consume the majority of their ethanol production domestically. Experts anticipate that global consumption will double to some 80 million tonnes (100 million cubic metres) by Global consumption set to double Today only small quantities of bioethanol are traded internationally. The largest exporter is Brazil, but global trade is barely existent at a mere three million tonnes. In 2005 some 36.3 million tonnes (45.7 million cubic metres) of bioethanol were Key figures for bioethanol Common raw materials Yield Fuel equivalent Market price CO 2 reduction sugar beet, cereals 5.22 tonnes bioethanol/hectare sugar beet 2.18 tonnes bioethanol/hectare cereals 1 litre of ethanol replaces approx litres of petrol EUR per litre Approx per cent compared to petrol Sources: WVZ, Biokraftstoffe aus Zuckerrüben und Getreide, p. 7, Bonn 2003 Nordzucker 2006/07 23

28 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Corporate Governance Report Corporate Governance Report for the financial year 2006/07 Corporate governance covers the system of managing and monitoring a company, including its organisational structure, its corporate policies and guidelines as well as the internal and external mechanisms of control and monitoring. Nordzucker AG attaches great importance to clear, wellstructured and honest corporate governance, which ensures that the management of the company is carried out responsibly and in line with long-term value creation. It fosters the confidence of shareholders, financial markets, business partners, employees and the general public in the management and oversight of the Nordzucker Group. Corporate governance is the foundation for the decision-making and control procedures at Nordzucker AG. Our activities are based on clearly defined guidelines. These guidelines postulate the systematic alignment of our actions with the interests and expectations of our shareholders, customers, business partners and employees. Our actions are based on the criteria of reliability, speed and cost and promoting creativity and flexibility at the same time. Integrated processes and systems provide support for operating routines on the basis of our guidelines. The Management Board is responsible for determining company policy. It sets corporate strategy, plans and approves company budgets, decides on the allocation of resources and monitors company development. The Management Board is responsible for preparing the quarterly financial reports of the company, the annual financial statements for Nordzucker AG and the consolidated financial statements. Earning a reasonable and sustainable income, continuing to generate organic growth and increasing our market share are the defining criteria for the work of all our members of staff. Continuous improvement of all business processes by competent, well-managed employees earning performance-related pay secures the existence and the systematic longterm development of the company in an everchanging competitive environment. Guaranteeing high-quality, safe food and fodder, conserving our resources, permanently minimising and preventing environmental pollution, and ensuring health and safety in the workplace are vital aspects of all our corporate activities. Avoiding mistakes and taking preventative measures are particularly important. The Supervisory Board of Nordzucker AG is composed of twenty members, half appointed by the shareholders and half by the employees. The Supervisory Board monitors and advises the Management Board on the management of the company. The Supervisory Board regularly discusses the course of business and company planning as well as corporate strategy and its implementation. It examines and approves the annual financial statements of Nordzucker AG and the consolidated financial statements for the Group, giving due regard to the auditors reports and the results of the examination by the Audit Committee. Major decisions of the Management Board are dependent on its approval. The remuneration of the Supervisory Board and company shares held by members of the Management Board and the Supervisory Board above one per cent of issued shares of Nordzucker AG are dealt with in the Notes to the consolidated financial statements (44.2 and 44.3). Neither members of the Management Board nor of the Supervisory Board have bought or sold company shares for more than 5,000 Euro in the calendar year. 24

29 Declaration of Nordzucker AG on the German Corporate Governance Code, in compliance with 161 Companies Act (AktG) The Management Board and Supervisory Board of Nordzucker AG, Braunschweig, have examined in detail the recommendations of the German Corporate Governance Code of June 12, 2006 and are in agreement with the regulations contained therein. Although the German Corporate Governance Code is not binding for Nordzucker AG, as the company is not listed on the stock market, its recommendations and suggestions are to be implemented by Nordzucker AG with the following exceptions: 1. Paragraph of the German Corporate Governance Code stipulates an age limit for members of the Supervisory Board. The rules of procedure of the Supervisory Board of Nordzucker AG stipulate an age limit of 65 for membership of the Supervisory Board. This rule was relaxed by the shareholders general meeting on September 5, 2003 to allow the appointment to the Supervisory Board of two members whose particular abilities and experience from their lengthy involvement with Nordzucker AG and Union- Zucker Südhannover GmbH would be of particular benefit to the work of the Supervisory Board. 2. Paragraph of the German Corporate Governance Code includes the recommendation that nominees for membership of Supervisory Boards should take into account the company s international profile. As the shareholders of Nordzucker AG are exclusively from northern Germany, the Group s international profile is not currently reflected in the membership of the Supervisory Board. Braunschweig, March 2007 H.-G. Birlenberg Chairman of the Management Board Dr. H. Isermeyer Chairman of the Supervisory Board Nordzucker 2006/07 25

30 26 Group management report Nordzucker in detail

31 Nordzucker 2006/07 27

32 Group Management Report The graphics and diagrams on the following pages are not part of the Group management report. They serve solely to provide additional information. Political environment New era for the sugar market The financial year 2006/07 at Nordzucker was significantly marked by two changes to the political and legal environment. One was the WTO panel ruling on new regulations for sugar exports from the EU, which came into effect on May 22, The other was the reform of the EU sugar market regime governing the production and marketing of sugar dating from July 1, Export restrictions The decision of the WTO arbitration panel dating from April 28, 2005 to limit the export of sugar from the EU to million tonnes of white sugar annually had a considerable impact for sugar production and sugar revenues last year. The EU reacted to the WTO s demands with a revised policy for granting export licences. It had already become apparent in 2005 that no more C sugar would be able to be exported from the EU from May 2006 onwards. Nordzucker reacted rapidly and prudently to the WTO ruling and closed in Germany the Wierthe plant after the 2005 campaign and the Gross Munzel plant after the 2006 campaign in consequence. This reduced production capacity by a total of around 200,000 tonnes. The WTO arbitration panel s ruling also affected the export of quota sugar. Although the EU allowed the export of million tonnes of subsidised quota sugar, here too the restrictive export licence policy led to a considerable and painful decline in exports. Reform of sugar market regime takes effect On July 1, 2006 the new EU sugar market regime, valid until September 2015, came into effect. The conditions applying from the 2006 campaign onwards are considerably less favourable for beet farmers and sugar producers. With the new regulations the European Commission reacted to the potential effects of the trade agreement with the least developed countries (LDC/EBA treaty). From 2009 these countries are allowed to export sugar to the EU in unlimited quantities. The aim of the reform is to achieve market equilibrium under conditions of rising imports. Three regulations form the core of the new sugar market regime: Nordzucker reacted rapidly and prudently to the WTO ruling. The gradual reduction of beet prices by 39.7 per cent and of sugar prices by 36 per cent over a period of four years. For 2006 beet prices were lowered by 24.6 per cent. Partial compensation for lost income for beet farmers and no compensation for sugar producers. 28

33 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Political environment Market Voluntary withdrawal of around six million tonnes of EU production quotas via a restructuring scheme with limited life of four years. This Scheme is to be financed by levies on the sugar industry and is intended to create greater incentives for market participants who are no longer competitive to abandon sugar production. The restructuring scheme is financed by the sugar producers via levies on their production quotas. The restructuring levy is limited to three years and is due for the first time for the sugar marketing year 2006/07. For the year under review Euro was payable per tonne of sugar quota. For 2007/08 the levy has risen to Euro. Finally, Euro will be payable in 2008/09. New markets for surplus sugar The previous A and B quotas have now been combined in one uniform sugar quota. Sugar produced in addition to the quota is surplus sugar. This can either be set off against the production of the following marketing year ( carry-forward ), or marketed as industrial sugar in the nonfood industry of the EU for the production of bioethanol, alcohol, yeasts and syrup, or in the chemical or pharmaceutical industries. Surplus sugar may also be sold for human consumption in the most outlying areas of the EU, for example the Canary Islands or Madeira. Reform begins with a temporary reduction in quotas To ensure market equilibrium the European Commission has temporarily reduced production quotas for the marketing year 2006/07 by 2.5 million tonnes across the entire EU. For the Nordzucker Group this corresponds to a reduction of quota sugar production by 14.9 per cent. The early announcement of the reduction in sugar production before beet sowing in 2006 enabled beet farmers and sugar producers to react in time and adjust the quantity sown. Market Strong growth in global sugar production Market observers estimate global sugar production for 2006/07 (October 1 to September 30) at around 162 million tonnes (152) at raw sugar values, which is equivalent to a white sugar values of some 149 million tonnes (140). In contrast to the forecasts made in early 2006, consumption of 150 million tonnes at raw sugar values will lead to a considerable sugar surplus. Observers assume that global stocks will increase to 50 per cent of consumption. Until the WTO resolution for 2005/06 took effect the EU exported five to six million tonnes of sugar annually. Current EU exports are estimated at around one million tonnes. The increase in sugar production in the marketing year 2006/07 is clear evidence that lower production in the EU was more than compensated for by other producing countries. The rise in production is largely due to the expansion of sugar cane cultivation and the creation of additional production capacities in South America and Asia as well as in Eastern Europe and the USA, where sugar beet cultivation intensified considerably. The Russian government in particular is targeting a high level of selfsufficiency in sugar. In Brazil, after poor harvests in 2005 due to unfavourable weather conditions, this marketing year As the announcement of the quota reduction was made before beet sowing in 2006 beet farmers and sugar producers were able to react in time and adjust the quantity sown. Before implementation of the WTO ruling the EU exported five to six million tonnes of sugar annually. Lower production in the EU was more than compensated for in 2006/07 by other producing countries. Nordzucker 2006/07 29

34 Driven by the sharp rise in the oil price and increased demand for bioethanol the world market price for white sugar reached a peak of 380 Euro per tonne in is expected to see sugar production increase by four million tonnes to 31.3 million. High growth is also anticipated in India and Thailand. On the demand side, orders from major buyer countries such as China are declining, as their booming processing industry is increasingly converting to fructose-based or starch-based sweeteners. The world market price for sugar reached a peak in May Driven by the sharp rise in the oil price and the related higher demand for bioethanol, the world market price for white sugar climbed to 380 Euro per tonne. Declining oil prices and the simultaneous rise in global sugar production caused the sugar price to restabilise around its long-term mean of around 245 Euro per tonne in early The sudden leap in the first half of 2006 showed that the world market for sugar has become much more volatile, and that new interdependencies exist between sugar and energy markets. EU sugar production drops Sugar production for the EU 25 sank by 3.5 million tonnes to 15.9 million in the sugar marketing year 2006/07. This was the reaction of beet farmers and sugar producers in the EU to drastic export reductions and the withdrawal of 13.6 per cent from the market. The long summer drought throughout the EU also contributed to lower quantities. Export and intervention Before the WTO export restriction came into effect Nordzucker as a Group still exported 252,000 tonnes of C sugar to non- EU countries (previous year: 365,000). High world market prices meant that this generated acceptable earnings. The export of quota sugar, which was also limited by the WTO ruling, was well below the level for the previous year (182,000) at 81,000 tonnes for the whole Group, due to the continued restrictive authorisation practices of the European Commission. World market prices for sugar, Source: LIFFE white sugar trading, London No. 5, as of April White sugar $/t FOB White sugar EUR/t FOB Jan 07 Feb 07 Mar 07 Apr 07 30

35 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Market Products Since March 2005 and especially in view of significantly poorer opportunities for exporting quota sugar Nordzucker again took advantage of the option available to EU producers of offering sugar stocks for sale to an intervention agency. Sugar for customers in the food industry Challenges of the sugar market regime The reform of the sugar market regime and the fact that some European regions are partially or wholly abandoning sugar production led to an accelerated Europeanisation of the sugar industry in 2006/07. At the same time an ongoing market imbalance and the restrictive export licence policy caused competition to intensify further. Whilst the previous year was characterised by considerable price differences and price pressure, in the reporting year sugar prices for the food industry stabilised throughout Europe at a lower level. Sugar revenues within the Group (excluding Serbia) sank by eleven per cent compared to the previous year to 1,655 million tonnes (1,867). Revenues at Nordzucker AG dropped in particular to 1,199 million tonnes from 1,431 million tonnes in the previous year. This sharp decline in revenues of around 16 per cent is due to lower exports. In the reporting period a total of 117,000 tonnes of intervention stock were accepted from the Nordzucker Group in Hungary, Poland and Slovakia (147,000). Since March 2005 a total of 1,878 million tonnes of sugar have been offered for sale to intervention agencies across the whole EU. Intervention stocks dropped to 855,000 tonnes at year-end 2006 following successful tenders. Since early 2007 the European Commission has again been allowing exports of intervention sugar as part of the WTO-compatible export volumes. Products Gratifying developments in the international division The markets in Poland, Hungary and Slovakia developed well overall. In these countries large quantities of sugar were offered for sale to the intervention agencies in spring This step, which was also taken by competitors, caused the markets to stabilise significantly. From the middle of 2006 supply bottlenecks became apparent which resulted in higher market prices. In all three countries, and taking account of the intervention volumes, revenues volumes were stable or increased. Sugar revenues in Poland at 171,000 tonnes remained roughly at the level of the previous year (172,000), revenues in Slovakia went up from 90,000 tonnes to 100,000 tonnes and in Hungary revenues increased from 178,000 in the previous year to 186,000 tonnes in the reporting year. The acquisition in July 2006 of shares in the Serbian Sunoko d.o.o., based in Novi Sad, enabled Nordzucker to gain significant influence over sugar exports from the Balkans into the EU. In ,000 tonnes of sugar were sold in Serbia, of which 93,000 went as exports to the EU. As domestic prices in Serbia also remained gratifyingly stable, the company was able to achieve good results. In the consolidated financial statements the results of the Serbian subsidiary are only included for July to December 2006 as the acquisition took place in June Sugar markets in Poland, Hungary and Slovakia developed well overall. The Europeanisation of the sugar industry continued to accelerate in 2006/07. The acquisition in 2006 of 51 per cent of the Serbian Sunoko d.o.o., based in Novi Sad, enabled Nordzucker to gain significant influence over sugar exports from the Balkans into the EU. Nordzucker 2006/07 31

36 Nordzucker increased its market share for household sugar in the EU. This makes Nordzucker a flexible partner for major European customers as well as for small and medium sized sugar processors. New Website: Since December 2006 Nordzucker has been presenting even more exciting new information on the Nordzucker brand range at the new website This new internet presence provides inspiration for end consumers with appetising pictures and up-to-date recipes, and tips and tricks for baking and preserving. European distribution As one of the major European sugar producers Nordzucker systematically adapted to evolving market conditions in the reporting year. A strong focus was placed on the requirements of the distribution network, which acts on a European level. Nordzucker s European distribution network is supported by an integrated international communications network using uniform, standardised information and was further extended and given a firmer base within the organisation in the reporting period. This makes Nordzucker a flexible partner for major European customers as well as for small and medium sized sugar processors active on a regional level. Maintaining a regional distribution structure guarantees this flexibility and a prompt reaction to specific customer requests. Investments in building strategic alliances are particularly important for gaining access to more European revenues markets. Nordzucker is especially focusing on markets which have already returned quotas to the restructuring scheme. These include Ireland, Scandinavia and Italy, but also the new EU members in 2007, Bulgaria and Rumania. Household sugar Consolidation and competitive pressure in retailing In the retail food sector private labels were subject to intense, increasingly international competition. The market was also affected by the continuing dynamism of the discounters, who are setting new focal points, especially via product offensives in the wellness and organic sectors, in order to continue their pursuit of other retailers. On the other hand the consolidation of food retailing continued in Edeka Group acquired Spar Handelsgesellschaft and Metro Group announced the takeover of Wal-Mart s German operations. Growth primarily in Slovakia and Hungary In the reporting year Nordzucker was able to increase slightly its market share for household sugar in the EU. Whilst revenues in Germany remained at the same level as the previous year, business in Eastern Europe progressed particularly well. Significant growth was recorded in Hungary and Slovakia. Thanks to intervention and revenues by local providers to Western Europe these countries even experienced temporary supply shortages, which led to increased demand in Nordzucker subsidiaries markets. Market growth for preserving sugar Nordzucker showed above-average performance in a generally successful 2006 season for preserving sugar. Thanks to its 1:1 and 2:1 preserving sugar products Nordzucker was able to grow much faster than the market as a whole. SweetFamily gains market share Further gains in market share compared to the previous year were achieved for the branded products. A comprehensive package of communication and revenues promotion activities increased both brand awareness of SweetFamily with end consumers and unit revenues. Involvement with the charity Aktion Mensch and the prize draw with attractive travel vouchers played a major part in this success. The 32

37 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Products Beet cultivation and campaign package was rounded off by additional activities with individual retail partners and new listings, which resulted in further growth. Nordzucker is well placed in the European market with its international umbrella brand SweetFamily, launched in Increasing consumer acceptance in all countries led to higher revenues for the brand range. SweetFamily is currently sold in seven countries. New at SweetFamily: Quick&Easy and ZuckerSticks The Nordzucker SweetFamily range saw further customer and market-oriented developments in the reporting year and two new products. SweetFamily-Gelier Quick&Easy, for fresh fruit spreads in seconds without boiling, had a successful launch. New on the German market from September 1, 2006 are also SweetFamily- ZuckerSticks in 250g or 500g packets. These have done very well in Slovakia, where they have long been a successful part of the SweetFamily range. Industrial sugar The reform of the sugar market regime has created a new market for surplus sugar in the EU. Nordzucker estimates the market for sugar processed into non-food products by the chemical and pharmaceutical industries at some 600,000 tonnes. During the last campaign Nordzucker supplied around 15,000 tonnes of surplus sugar from Slovakia, Hungary and Poland to the chemical industry. Molasses Imports of competing cane molasses into Europe nearly dried up altogether in the reporting year, as the product was increasingly used for ethanol production in its countries of origin. Shortages of cane molasses were replaced by beet molasses, for which scarce supplies also led to price increases of nine per cent on average. The highest price rises were recorded in Poland and Slovakia. Revenues at Nordzucker were maintained at the level of the previous year despite lower volumes. Pellets Summer drought and increasing demand from the energy sector led to a sharp increase in cereal prices of 30 per cent in This also benefited the markets for animal fodder. Prices for pellets rose by some nine per cent in the 2006 campaign. The overall drop in beet processing meant that Nordzucker also sold lower volumes of pellets. Altogether revenues were around nine per cent below the previous year s level, as improved prices could not fully compensate for lower quantities. Beet cultivation and campaign A year of extremes Conditions for sowing and growing sugar beet were generally less favourable in Nordzucker s farming regions in In Northern Germany late sowing through to May and a severe lack of rain in the summer led to below-average beet yields in many areas. Although beet farmers in Schleswig-Holstein were able to achieve high beet yields with relatively low sugar contents due to sufficient rain, the beet production in the south of Lower Saxony was particularly affected by the arid summer with regionally limited rainfall. In the international growing regions the ye- Nordzucker is well placed in the European market with SweetFamily. Currently this own-label brand is sold in seven countries. Nordzucker 2006/07 33

38 Sixteen Nordzucker plants processed sugar beet in the 2006 campaign. For the first time this included four plants in the Serbian Vojvodina, one of the most fertile arable regions in Europe. Beet farmers in Poland achieved their highest ever beet yield, whilst the other countries of Central and Eastern Europe registered an extraordinarily high sugar content. ar was also characterised by extremes. Here sowing was delayed by persistent showers and widespread flooding of the Danube, Theiss and other rivers. Despite unfavourable weather conditions for sugar beet throughout Europe the Polish beet farmers achieved a record beet yield whilst extraordinarily high sugar contents were registered in the other countries of Central and Eastern Europe. Sugar content above expectations The campaign began between September 5 and October 5, 2006 in a total of 16 (previous year: 13) Nordzucker plants of which seven were in Northern Germany, two in Poland, two in Hungary, one in Slovakia and for the first time four in Serbia. The delivery of beet was completed on schedule and before Christmas in all Nordzucker plants. Group campaign results Poland Cultivation area (ha) 18,900 22,600 Beet yield (t/ha) Sugar content (%) Sugar yield (t/ha) Campaign length (d) Braunschweig Berlin Poznan Warsaw Slovakia Germany Cultivation area (ha) 117, ,900 Beet yield (t/ha) Sugar content (%) Sugar yield (t/ha) Campaign length (d) Cultivation area (ha) 10,400 11,500 Beet yield (t/ha) Sugar content (%) Sugar yield (t/ha) Campaign length (d) Bratislava Budapest Hungary Cultivation area (ha) 16,100 19,800 Beet yield (t/ha) Sugar content (%) Sugar yield (t/ha) 8.6 9,4 Campaign length (d) Belgrade Serbia Cultivation area (ha) 34,500 27,500 Beet yield (t/ha) Sugar content (%) Sugar yield (t/ha) Campaign length (d)

39 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Beet cultivation and campaign Sugar production Nordzucker Group in millions tonnes white sugar values * 1997/ / / / / / / / / /07 * Sugar production incl. Serbia Campaign ran smoothly The 2006 campaign was short at 80 days on average (94) and ran without any major disruptions at all of the Nordzucker sites. The average length of the campaign was 79 days in Northern Germany (93), 75 days in Poland (90), 68 days in Hungary (103), 95 in Slovakia (144) and 89 in Serbia (82). The beet yield in Northern Germany was well below the record yields of the prior two years at 54.0 tonnes per hectare (58.1). However, the sugar content of 17.9 per cent marginally surpassed the previous year s level of 17.8 per cent. The sugar yield per hectare of 9.6 tonnes did not reach the level of the previous year (10.3). Poland achieved good results with the beet yield of 51.4 tonnes per hectare (46.3), although the sugar content was much lower at 16.4 per cent compared to The sugar yield of 8.4 tonnes remained below the previous year s figure of 8.6. In Slovakia the beet yield of 49.3 tonnes per hectare was below that of the previous year (56.3). The sugar content of 17.7 per cent was higher than the previous year (17.0), but the sugar yield of 8.7 tonnes per hectare fell short of the previous year s (9.6). Hungary produced a beet yield of 50.5 tonnes per hectare (58.2). Together with a sugar content of 17.1 per cent (16.1) this resulted in a sugar yield of 8.6 tonnes per hectare (9.4). Nordzucker grows in Serbia The beet cultivation land in Serbia, which is included in the Group reporting for the first time, covers an area of 35,000 hectares and produced an average beet yield of 48.4 tonnes per hectare (50.4). In combination with a sugar content of 15.2 per cent (13.7), this generated a sugar yield of 7.3 tonnes per hectare (6.9), which requires further improvement. In the reporting year the number of beet delivery sites on land cultivated by Sunoko d.o.o. was reduced from 78 to 20. Preliminary cleaning of the beet on the field, which was previously unknown in Serbia, was introduced almost everywhere. In the four plants of Nordzucker s Serbian subsidiary beet classification was also standardised. Production quota met almost exactly The reduction of production quotas for 2006/07 throughout the EU by 13.6 per cent represented a temporary quota cut for Nordzucker of some 14.9 per cent. Nordzucker 2006/07 35

40 In Northern Germany the land available for beet cultivation in 2006/07 was reduced by some 28,000 hectares compared to the previous year. For the Nordzucker Group as a whole 18 per cent (approximately 37,000 hectares) of available land was withdrawn. The considerably lower quota was met almost exactly. The Group quota of 1,604 million tonnes was thereby reduced to 1,378 million tonnes in total. In Northern Germany the land available for beet cultivation was cut back by around 19 per cent (approximately 28,000 hectares) compared to the previous year. Over the whole EU the Nordzucker Group withdrew 18 per cent of its land (approximately 37,000 hectares). The production volume of only 1,380 million tonnes of sugar, including a carry-forward of 31,000 tonnes from the previous year, meant that the reduced quota was met almost exactly. Nordzucker builds a bioethanol plant In July 2006 Nordzucker signed additional agreements with its beet farmers for delivery of 736,000 tonnes of bioethanol beet. At the same time construction work began on the bioethanol plant at the sugar factory site in Klein Wanzleben. From the 2007 campaign onwards Nordzucker will produce bioethanol from raw juice and thick juice made from sugar beet here. After a warm-up phase the plant will generate 130,000 cubic metres of bioethanol annually from Environment Our goal of total quality is reflected in our corporate policy and our environmental guidelines, which provide a binding code of conduct for all our staff. Emissions Even within the German sugar industry Nordzucker is a leader in implementing the Kyoto Protocol, having voluntarily reduced its CO 2 emissions by more than 45 per cent of total emissions since Environmental certification Continual improvement of environmental performance has long been an important topic for Nordzucker. Since 1995 all German sites have taken part in the European eco audit (EMAS II). They are also certified under DIN ISO 9001:2000 (quality management) and 14001:2004 (environmental management). The annual review of the factories took place during the 2006 campaign. All sites examined passed the Delta Audit on conversion to the new DIN EN ISO without discrepancies. The validation of the environmental statements under EMAS with the current values from the 2006 campaign followed in March Employees The yearly average number of employees in the Nordzucker Group rose to 3,616 (2,820). This increase was due to the initial recognition of 1,042 employees in the Serbian factories. Adjusted for this one-off effect staff numbers went down to 2,574, largely due to early retirement and other restructuring programmes. Internal recruitment will continue to be used wherever possible to fill vacant positions. Closure of the Gross Munzel plant In Germany the plant in Gross Munzel completed its final campaign, which with a processing performance of 8,000 tonnes per day was very successful. The factory was closed at the end of December after 122 years of operations. Nordzucker thanks all the staff for their excellent work. 36

41 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Environment Employees The Management Board and the Works Council have agreed on a redundancy and redeployment programme for staff members affected by the closure of the Gross Munzel plant in December Twelve employees took early retirement or left the company and Nordzucker was able to offer a total of 47 employees a new position at other Nordzucker sites. Ten staff members will remain in Gross Munzel for the time being to wind up operations. Vocational training Proper vocational training for young staff is very important at Nordzucker. On average the company employed 146 trainees (113) in 2006/07. The number of available trainee positions means that Nordzucker deliberately provides more vocational training that is necessary for its own recruitment, in order to offer as many young people as possible a solid foundation for their subsequent careers. The new subsidiary fuel 21 GmbH & Co. KG in Klein Wanzleben has recently taken on 15 young skilled workers on a temporary basis. Staff development Nordzucker needs employees with ever higher qualifications in order to sustain the company s performance in times of increasingly rapid change in the content and form of work. Nordzucker provides the opportunity to acquire these specific qualifications in line with company requirements. The successful Manager Development Programme (MEP) introduced in Nordzucker has more vocational trainees than it can later take on itself in order to offer as many young people as possible a solid foundation for their subsequent careers. Nordzucker needs employees with ever higher qualifications in order to sustain the company s performance. Average number of employees in the Nordzucker Group for the year (in Germany/Foreign countries) 2006/07 1,657 1,959 3, /06 1,797 1,023 2, /05 1,918 1,540 3, /04 1,894 1,864 3, /03 1,769 1,706 3, /02 2,087 1,965 4, /01 1,470 2,469 3, /00 1,994 1, /99 1,908 1,908 Germany Foreign countries 1997/98 1,956 1,956 Nordzucker 2006/07 37

42 2004 was continued in the reporting year in order to coach junior managers. The programme is limited to a small number of participants and includes a mixture of theory, intensive coaching and specific practical projects in the company. This offer is supplemented by the Competence Development Programme (KEP) for senior and junior managers and the Foreman Development Programme (MeistEP) saw the launch of the first international Nordzucker KEP with participants from Poland, Hungary, Serbia and Slovakia. The latest focus of the Nordzucker Quality Standards, which are renewed annually, was on training for new qualifications, new technologies and social skills. Flexible working hours Since the year 2000 the permanent staff at Nordzucker AG who work under collective wage settlements have increasingly been making up for overtime by taking time off in lieu. This means that working hours can be adapted with greater flexibility to commercial requirements. Over recent years Nordzucker has drastically reduced the amount of paid overtime from some 288,000 hours in the year 2000 to about 17,000 hours in From 2007 paid overtime for permanent Nordzucker employees is a thing of the past. In addition the regular working hours have also been adapted to commercial requirements by the introduction of flexitime. Nordzucker is currently in negotiations with the Works Council on introducing a system of annual working hours which would then combine all the flexible working arrangements. The goal is for all company employees to have an account for annual working hours. New shift working system in the factories A new shift working system was successfully tested and introduced in the Nordzucker factories in Germany during the 2006 campaign. As well as further improvements in working times the use of reserve pool employees provides flexibility for planning days off. By applying the new shift system, which is based on sound research into labour and health protection, Nordzucker reduces specific pressures on shift workers. New company settlement on voluntary social benefits Nordzucker AG has concluded a new agreement with the Works Council on voluntary social benefits for permanent employees working under collective wage settlements. This meant that for the financial year 2006/07 the profit share was based on the dividend per share and no longer on consolidated net income. This figure is then docked for individual absences. For the financial year 2006/07 employees of Nordzucker AG will receive a total profit share of around three million Euro. Brain Pool The Nordzucker Brain Pool is the modern equivalent of a suggestion box and reflects the performance, creativity and commitment of the workforce. It is the pool for suggestions for improvements developed by staff directly at their workplace. Over time the quality of suggestions has improved considerably. This creativity and commitment brings benefits to both staff and company. In 2006 suggestions were mainly made for further improvements in production processes as well as for improvements in health and safety at work, efficiency and employee 38

43 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Employees Financial and earnings situation satisfaction. In ideas out of a total of 246 were approved by management. Total bonuses of 58,000 Euro were paid to staff. Implementing the ideas enabled Nordzucker to make cost savings of about 850,000 Euro in Financial and earnings situation Earnings situation In the financial year 2006/07 the Nordzucker Group earned consolidated net income after minority interests of million Euro, compared with 68.8 million Euro in the previous year, which was very satisfactory. The financial year 2006/07 was characterised above all by widespread adjustments necessary to adapt to the fundamentally different political framework of the EU sugar market. At the same time Nordzucker consistently took advantage of growth opportunities whilst discontinuing projects and disposing of investments outside its core business. The decline in revenues which had been anticipated as a result of export restrictions and temporary quota cuts was substantially compensated by the purchase of production quotas and the investment in Serbia. Moreover, the cost reductions and restructuring measures taken the previous year began to bear fruit. A comparison with previous year s earnings is only partially possible, as negative non-recurring items (primarily restructuring costs) weighed on the previous year and there were a number of positive non-recurring items in the reporting year. Revenues and earnings Group revenues declined slightly compared to the previous year from 1,296.3 million Euro to 1,234.9 million Euro. The development in revenues was characterised by opposing trends. High prices for C sugar exports and good price conditions for by-products had a positive effect on revenues, as did the initial recognition of the investment in Serbia Sunoko d.o.o. based in Novi Sad, with revenues of 71.2 A comparison with previous year s earnings is only partially possible due to negative non-recurring items in the previous year and positive non-recurring items in the reporting year. Nordzucker was able partially to compensate for the anticipated decline in revenues for 2006/07. Consolidated EBIT in EUR m HGB IFRS / / / / / / / / / /07 Nordzucker 2006/07 39

44 Consolidated revenues 2006/07 by country in per cent Rest of the EU 17 % Others 2 % Serbia 4 % Germany 58 % Poland 8 % Hungary 9 % Slovakia 2 % Price reductions for sugar beet, adjustments to beet bonus payments and lower beet quantities were not able to compensate for the rise in the cost of materials and services. Other operating income of 60.8 million Euro was 29.2 million Euro above the previous year s figure (31.6). This increase is mainly the result of income from the reversal of provisions for production levies on A and B sugar, which turned out to be much lower than planned. Group personnel expenses declined from million Euro in the previous year to million Euro, a reduction of 13.3 per cent. It should be noted that personnel expenses in the previous year were considerably higher due to one-off effects of provisions for redundancy payments and early retirement programmes of some 23.5 million Euro. Not including personnel expenses of 4.4 million Euro from the initial consolidation of the Serbian subsidiary and this year s addition to the provision of severance payments and early retirement in the amount of 4.9 million Euro, adjusted personnel expenses were below the level of the previous year. Extraordinary depreciation of around 28.0 million Euro from factory closures depressed the previous year s earnings. Depreciation, amortisation and impairment losses in the reporting year include amortisation of the additional quotas purchased in Germany and Poland of some 6.5 million Euro, further depreciation resulting from the consolidation of the Serbian subsidiary of around three million Euro and an impairment loss of some four million Euro recognised on the promillion Euro. The negative effect came mainly from revenues at Nordzucker AG, which dropped in comparison with the previous year from million Euro to million Euro. The reasons for this decline of about 13.2 per cent were above all lower exports of quota sugar at 66,000 tonnes (151,000), not making use of intervention revenues, lower revenues of retail products, persistent price pressure in the quota sugar business and lower quantities of by-products due to reduced beet volumes. The revenues of the international subsidiaries remained roughly at the level of the previous year, however. The increase in stock by 36.3 million Euro is primarily due to the initial consolidation of the Serbian subsidiary, given that production levels declined in Germany and the Eastern European states. Including the increase in stocks total revenues amounted to 1,271 million Euro (1,178). The restructuring levy of Euro per tonne of quota which came into effect for the first time for quota sugar in the 2006 campaign increased the cost of materials and services by million Euro. This increase could not be compensated by reductions in the cost of materials and services due to price reductions for sugar beet of some 23 per cent laid down in the first year of reforms, equivalent adjustments to beet bonus payments or lower quantities of beet. This meant that the cost of materials and services rose to million Euro (802.3). 40

45 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Financial and earnings situation perty, plant and equipment assets of the Hübner-Medopharm Group following an impairment test. Other operating expenses amounted to million Euro and were slightly above the level of the previous year. Other operating expenses at Nordzucker went down considerably as a result of lower storage removal costs for surplus sugar, lower insurance premiums and reduced administrative expenses. This decline was cancelled out by the initial consolidation of the Serbian subsidiary. Operating result (EBIT) for the Nordzucker Group in line with IFRS was million Euro compared to million Euro in the previous year. Operating costs were reduced in the reporting period at slightly lower revenue levels. The one-off expenses from factory closures which weighed considerably on the cost structure in the previous year, no longer apply in the reporting year. Non-recurring items such as the reversal of provisions of 25.8 million Euro through the income statement also had a significant effect. The international investments in the sugar business also delivered excellent earnings contributions. Net interest income improved slightly in comparison to the previous year to three million Euro. Net income from investments stabilised at a low level of four million Euro compared with the previous year, which was impacted by non-recurring items in connection with the investment in the Amino Group. It includes the dividend from Cukrovary TTD a.s., Dobrovice, and an accounting profit from the successful disposal of the stake in Syral S.A.S., Marckolsheim. These improvements in the financial result totalling 8.1 million Euro led to pre-tax earnings from ordinary activities (EBT) of million Euro (107.9). At an income tax rate of around 30 per cent (36) this results in consolidated net income of million Euro, a considerable improvement over the previous year (69.0). The decline in the tax rate is due to higher foreign earnings as a proportion of total earnings and the lower income tax rates payable abroad. After allowing for earnings attributable to minority interests of 9.5 million Euro resulting from the consolidation of the Serbian subsidiary, net profit after minority interests is million Euro (68.8). Balance sheet and cash flow The combination of high net income and relatively low additions to stock meant that an operating cash flow in accordance with DVFA of million Euro (112.8) was achieved for 2006/07. If short-term provisions and receivables and liabilities not attributable to financing and investing activities are included, the cash flow Nordzucker 2006/07 41

46 As in the previous years the cash flow used for investing activities was clearly exceeded. from operating activities amounted to million Euro (90.4). As in previous years this is well above cash flow used for investing activities of 44.4 million Euro (46.3). After repayment of bank debt of 52.3 million Euro (34.1) and a dividend payment of 12.6 million Euro (22.5), the Group has cash and cash equivalents totalling 86.9 million Euro (46.4) at the end of the financial year on February 28, The consolidated balance sheet total of the Nordzucker Group was 1,651.0 million Euro (1,342.8), well above the figure for the previous year. Important changes relate to the growth in intangible assets from nine million Euro in the previous year to million Euro. The increase is due to the purchase of additional sugar quotas of 72,000 tonnes for Germany and some 8,700 tonnes for Poland, as well as to the recognition of goodwill from the acquisition of the Serbian subsidiary. Property, plant and equipment went up by around million Euro to million Euro. This substantial increase is also the result of the initial consolidation of the Serbian subsidiary. Financial assets declined by the amount of the stake in Syral S.A.S., Marckolsheim. Stocks of finished goods rose from million Euro to million Euro. This increase in inventory derives essentially from the initial consolidation of the Serbian subsidiary. Consolidated net debt in EUR m HGB IFRS / / / / / / / / / /07 42

47 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Financial and earnings situation A significant rise in receivables to million Euro (88.7) and in financial assets to 22.9 million Euro (8.3) also contributed to the higher balance sheet total. Cash and cash equivalents also went up by 40.5 million Euro to 86.9 million Euro. The equity ratio for the Group increased to 41.4 per cent compared with 38.6 per cent in the previous year. The increase was mainly due to higher shareholders equity of 683 million Euro (517.7). This increase in shareholders equity is in turn the result of substantially higher retained earnings and the greater amount of minority interests stemming from the Serbian subsidiary. Other liabilities include the outstanding payment on the restructuring levy and the payment for the purchase of additional quotas. Although the long-term financial liabilities remained similar to last year s at million Euro, the short-term financial liabilities were reduced from million Euro to 90.5 million Euro. Attention should be paid to the initial consolidation of the Serbian subsidiary, which had the effect of slightly increasing the financial liabilities. Taking account of long-term and shortterm liabilities as well as cash and cash equivalents of 86.9 million Euro, net debt is below last year s level at million Euro (194.2). Capital expenditure In the reporting year the Nordzucker Group invested million Euro (54.4) in property, plant and equipment and intangible assets. This level of investment was higher than in the previous year and included 61.3 million Euro for intangible assets. The capitalised assets are the additional sugar quotas which will be amortised over the period up to the end of the current sugar market regime. Capital expenditure on property, plant and equipment amounted to 52.3 million Euro (52.1) in the financial year. This includes 5.5 million Euro for the bioethanol plant under construction in Klein Wanzleben as well as 8.8 million Euro for investment in the factories in Serbia. The investment in Serbia meant that property, plant and equipment assets went up by 90.3 million Euro. Goodwill of 46.7 million Euro was also recognised. Capital expenditure in the reporting period mainly related to energy saving investments and market-driven steps to improve product quality. The transfer of redundant machinery from the factory in Wierthe, particularly the new pulp presses, to Clauen, Nordstemmen, Uelzen and Klein Wanzleben reduced the energy consumption in the factories there. Breakdown of the assets and liabilities making up the 2006/07 balance sheet total consolidated figures as per IFRS in EUR m 1,651 1,651 50% 33% 17% Assets Long-term assets Inventories Other short-term assets 41% 22% 37% Equity & Liabilities Equity Long-term liabilities Short-term liabilities Nordzucker 2006/07 43

48 Investments by the Nordzucker Group in EUR m HGB IFRS / / / / / / / / / /07 Alterations made in response to more demanding environmental specifications concerning emissions and waste water, the continual optimisation of standards on the beet yard and market-driven adjustments to the Nordzucker Service Centre serve to improve product and service quality still further. At the same time improvements to the heating system were made in order to generate higher energy efficiency in the factories in Güstrow, Nordstemmen, Opalenica (Poland), Szerencs (Hungary) and Uelzen. The modernisation programme for the process control systems at the plants in Clauen and Uelzen was continued. Other investments related to efficiency gains from the installation of new pulp presses, and new processes for drying pulp, which primarily served to reduce energy consumption. At the same time alterations were made in response to more demanding environmental specifications concerning emissions and waste water. Continual optimisation of standards on the beet yard and market-driven adjustments to the Nordzucker Service Centre serve to improve product and service quality still further. In the mid-term Nordzucker will be able to maintain capital expenditure at the level of the reporting period as the factories throughout Europe are technically very well equipped and represent beet processing at its worldwide best. Research and development In 2006/07 Nordzucker continued to invest in the development of products and technologies, in quality assurance and customer service. Following the winding up of InnoSweet GmbH, Braunschweig, which had also carried out research and development work for Nordzucker in addition to trading in sweeteners, these responsibilities were integrated into Nordzucker AG at the end of The Product development and technical service department works on the development of new products and formulas as well as on sensor and process engineering issues. Other focal points are advising Nordzucker customers on application technology and using research networks effectively. In the reporting period re- 44

49 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Financial and earnings situation Risk report Total dividends, Nordzucker AG in EUR m / / / / / / / / / /07 search and development expense at Nordzucker amounted to 2.8 million Euro (3.9). Dividend proposal A proposal will be tabled at the Annual General Meeting to distribute a dividend of 0.48 Euro (0.26) per share of share capital. In addition 11.1 million Euro of the balance sheet profit is to be transferred to retained earnings. Risk report Nordzucker has a comprehensive system in place throughout the company for the early identification and permanent monitoring of risk as well as for risk measurement and avoidance. Risks are monitored in close cooperation with the line managers responsible. Opportunity and risk assessments are carried out using predetermined thresholds and alternatives developed. The Group-wide reporting and controlling system ensures that all decision makers are continually informed, if necessary at short notice. Regular market and competitor analyses enable Nordzucker to identify significant changes in advance and take appropriate action. Adjustments are made on the basis of risk inventories and the working results of the Internal Audit department. As part of the conversion of the consolidated financial statements to IFRS Nordzucker is increasingly moving the system of company management towards financial indicators. Management by objectives is used in risk management and controlling and also in setting variable remuneration components for managers and the Management Board. Political and legal risks The success of restructuring is uncertain The market for sugar beet cultivation and sugar production in the EU and particularly in Germany has been stabilised by the new sugar market regime, which provides a reliable framework for the pe- Nordzucker 2006/07 45

50 The sugar industry in EU countries with competitive sugar production are demanding improvements to the restructuring scheme in order still to achieve the objectives of the sugar market reform. The final tally for the restructuring has been announced for 2009/10. riod up to The restructuring phase untill 2009 nevertheless remains subject to uncertainties. Take up of the EU restructuring scheme, which uses compensation payments to facilitate the return of sugar quotas by producers which are no longer competitive, has so far remained sluggish. Half way through its term (as at January 2007) the restructuring scheme for sugar had received binding notification on the return of 2.1 million tonnes of quotas. Of these, around 1.8 million tonnes apply to sugar quotas and some 300,000 tonnes to isoglucose and inulin quotas. To date Ireland, Latvia and Slovenia have returned their entire quota. Portugal returned about 70 per cent of its sugar quota to the restructuring scheme and Italy and Greece each transferred around half of their quotas. Lesser quotas were returned by Hungary, Slovakia, Czech Republic, Sweden, Finland and Spain. The declared goal of the EU is the voluntary withdrawal of six million tonnes of production quotas. So far, sugar producers on the margins of the EU have not withdrawn from production altogether, as expected, but mostly only returned half of their quota or even less. Payments from the restructuring scheme, which are intended to provide an incentive to relinquish quotas, will be reduced from February 2008 from 730 Euro per tonne of quota for 2006/07 and 2007/08 to 625 Euro per tonne for 2008/09 and to 520 Euro per tonne for 2009/10. A final tally for the restructuring has been announced for 2009/10. If the targeted production changes and concentration of production in competitive cultivation areas have not been achieved by then, the Commission is threatening all EU sugar producers with a permanent linear reduction of production quotas from March 1, 2010 of up to 25 per cent without compensation from the restructuring scheme. Since January 2007 the sugar industry, especially in those EU countries with competitive sugar production, has been demanding changes to the restructuring scheme in order to make it still possible to achieve the reform s objectives. Nordzucker is assuming that the European Commission will take the necessary steps in good time to ensure that the restructuring scheme for sugar achieves the desired effect over the next two marketing years and that a new market equilibrium will be reached. In late January 2007 the European Commissioner Mariann Fischer Boel ordered a situation analysis with the goal of making the fund more efficient. The impending and definitive linear reduction of production capacity without compensation for all EU sugar beet farmers and EU sugar producers must be avoided at all cost if competitive market participants are to be provided with sustainable development prospects. If this is not the case the EU development initiative Everything but arms (EBA treaty), which allows the 50 poorest countries worldwide to export their sugar to the EU duty-free and in unlimited quantities from July 2009, and the economic partnership agreement (EPA), which is intended to give partner countries in Africa, the Caribbean and the Pacific (ACP states) better market access, will become a serious threat to the entire European sugar industry. 46

51 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Risk report 3 2 Production quota returned to the restructuring scheme in per cent /07 07/08 Finland (3) 38 Greece (9) Ireland (1) 100 Italy (10) 50 2 Latvia (4) Portugal (12) Sweden (2) 12 Slovakia (6) Slovenia (8) 100 Spain (11) 9 2 Czech Republic (5) 22 Hungary (7) 27 Market withdrawal 2007/08 In order to limit the risk of market turbulence due to high surpluses of quota sugar the European Commission has already set a preventive market withdrawal of two million tonnes of sugar at the end of February This is equivalent to a cut in the quota production volumes for the current financial year of 13.5 per cent. The reduction only fully affects those states which have not previously surrendered any of their quotas. Countries which have returned high levels of quotas (over 50 per cent) such as Italy, Portugal and Greece are completely exempted from the cut. Nordzucker welcomes the early announcement of the required reduction. It enables beet farmers and sugar producers to react accordingly and alter their sowing plans as necessary. However, the Commission has reserved the right to start another withdrawal procedure in autumn 2007 if further surpluses arise. This sugar can then only be carried forward to the next year or sold in the EU as surplus sugar. Additional import volumes The European Commission is now sending clear signals, intended to put pressure on the sugar market. Another duty-free import contingent of 200,000 tonnes of white sugar has been created for example, in order to supply European industry with cheap sugar for the marketing year 2006/07. The import sugar is only available to producers of chemicals, pharmaceuticals, industrial alcohol and bioethanol. EU sugar market Who makes use of the restructuring scheme? The marked countries have withdrawn in part or fully from sugar production. Source: European Commission; Update of impact assessment SEC (2005)808, p. 14, Brussels, 22/6/2005 Nordzucker 2006/07 47

52 For sugar producers in the EU the risk of losing external safeguards as a result of an agreement in the WTO negotiations is compounded by uncertainties concerning new bilateral trade treaties. Germany and six other EU countries had pointed out that sufficient sugar is already available. The large surpluses and the intervention volumes of 840,000 tonnes speak against allowing imports for industrial sugar. In the coming financial year Nordzucker will expand revenues of chemical sugar substantially throughout the Group. New sugar market regime raises administration costs for sugar producers In addition to these external factors which the company can do little to influence, Nordzucker has registered a sharp increase in administration expenses. Since the new sugar market regime came into effect the administration expenses for financing the storage costs of surplus sugar have risen dramatically. There is now a new requirement to provide collateral for beet volumes produced as part of the cultivation of energy plants. The administrative expense is also considerable for beet volumes grown as energy plants or as renewable resources. Loss of external safeguards The Doha round of the WTO negotiations which began in the Gulf state Qatar in 2001 was suspended at the end of July 2006 without agreement on a new trade treaty. The 150 member states were not able to settle on the reduction of farming subsidies or the reduction of import duties on industrial and agricultural products. Whether the hiatus will lead the so-called development round to collapse altogether is currently unclear. The office of the WTO Director General based in Geneva is hoping for a successful conclusion to the Doha round after the American congressional elections in November Until then the external trade regulations applicable to EU sugar will remain unchanged. These include the EU basic duty of 419 Euro per tonne of white sugar, application of the protection clause which allows additional duties, as well as permitted sugar exports of 1,374 million tonnes of white sugar for the EU 25. Nordzucker is assuming that despite the temporary suspension of the Doha negotiations the WTO will continue to work towards its goal of liberalising the world market. For sugar producers in the EU this means that in addition to the risk of losing external safeguards as a result of an agreement in the WTO negotiations there are also uncertainties concerning new bilateral trade treaties. Economic partnership agreements (EPAs) are intended to be signed between the EU and all 77 ACP states by the end of These new trade treaties, which will take effect from January 1, 2008, will replace the previous ACP treaty with dutyfree import licenses for 1.3 million tonnes of sugar. New regulations in individual preferential treaties can mean in extremis that over three million tonnes of additional sugar can be imported into the EU annually from ACP countries. In its negotiations the European Commission is aiming for full duty and quota-free access for the ACP countries to the EU internal market, following the pattern created by the agreement with the least developed countries (LDC/EBA treaty). In exchange the ACP states are to open their markets to the EU. It is currently uncertain whether the negotiations will be completed in There is also the possibility that special arrangements will be made for sugar, as for a range of other products. Nordzucker is preparing itself over the longer term for higher sugar imports into the EU and an evolving market environment. 48

53 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Risk report Market risks Securing raw materials The new sugar market regime also alters conditions on the procurement markets for the raw material sugar beet. In the reporting year the first phase of drastic price reductions for sugar beet and sugar adopted as part of the sugar market reform came into effect. Despite compensation payments for sugar beet established by the EU, the relative attractiveness of sugar beet compared to competing arable crops will change. The increasing importance of renewable resources for EU agriculture will accelerate this change. Nordzucker is therefore confronted with new risks in securing the supply of raw materials. Nordzucker will seize all opportunities to increase yields and save costs at all levels of beet cultivation in order to ensure that the sugar factories are supplied over the long-term with sufficient beet volumes and to target cost leadership. Furthermore, Nordzucker will continue to develop organisational structures in collaboration with the beet farmers which enable cost reductions for purchasing supplies for beet production, rent management, loading and cleaning, beet transport and beet delivery. At present quota beet cultivation remains superior to competing arable crops. In the medium term yield differences will initially lead to a migration of beet cultivation within regions and also between growing areas. In future securing the supply of raw materials as a result of changes in the framework of the European sugar market and the subsequent weakening of sugar beet s position in crop rotation will play an increasingly important role. Supplying the factories with sufficient quantities of beet in high processing quality and at reasonable prices is becoming increasingly central to company management. The company has responded to these changes by reorganising responsibilities within the Management Board. A new department for Raw Material Procurement has therefore been established as of February 1, Sugar As the amount of production quota returned to the EU restructuring scheme is far too low and the volume of future imports of raw sugar is difficult to estimate, Nordzucker assumes that the sugar market will suffer from sugar surpluses over the transformation phase in the years ahead. Nordzucker is confronting this growing competitive pressure and the increasing internationalisation of the EU sugar business with its ensuing market risks by improving its working practices in line with market and customer demand and bundling revenues activities at a European level. Bioethanol Via its wholly owned subsidiary fuel 21 GmbH & Co. KG, Klein Wanzleben, Nordzucker intends to develop actively the new business sector bioethanol. As well as creating new sales opportunities for sugar beet the Group is benefiting from cost advantages from linking bioethanol production to sugar production as well as from the expertise and dependable and trustworthy relationships going back over many years in raw material procurement. In view of the increasingly volatile markets for agricultural products the main risks of bioethanol production lie in the secure supply of raw materials. Risks exist in the development of the oil price and in maintaining a fundamental external safeguard, which must be taken into account when new bilateral trade agreements are signed. At present quota beet cultivation remains superior to competing arable crops. As well as creating new sales opportunities for sugar beet the Group is benefiting from cost advantages from linking bioethanol production to sugar production as well as from the expertise and dependable and trustworthy relationships going back over many years in raw material procurement. Nordzucker 2006/07 49

54 Operating risks All business processes at Nordzucker are integrated into the management system, as well as the focus areas quality assurance, health and safety at work and environmental management. In order to comply with the high internal standards and all statutory requirements regular examinations, audits and certifications are carried out in accordance with DIN EN ISO 9001/DIN EN ISO 14001, EC eco audit directive 761/2001 (EMAS II) and the IFS- 4 standard of the food retailing industry, and the GMP B2 standard and Q&S standard for the animal feed industry. Nordzucker also has attained certification according to the usual standards for quality assurance, safety at work and environmental management for its international sites. The international insurance concept for Nordzucker and all its affiliates includes uniform insurance standards and premiums and takes individual national requirements into account. It primarily includes insurance for property, machinery and third party liability in order to cover all potential risks. Risks at former sites are also included and covered by appropriate insurance. In the course of redeveloping former sites risks can arise which require recognition in the financial statements. These mostly relate to environmental or other restrictions on the use of land which depress the planned revenues price and previously unknown contamination for which provisions are required to cover the cost of disposal. Nordzucker reviews these risks on a regular basis. Financial risks Currency risk Nordzucker has pursued a natural hedge approach to reducing currency risk for many years, as even for Eastern European countries both sugar and beet prices are set in Euros since they joined the EU. The aim is to reduce the balance of income and expenditure in a given currency and thereby minimise the effects of changes in exchange rates against the Euro. Additional beet payments by the Eastern European companies are also hedged by derivative range hedges until these countries adopt the Euro. The Group also hedges any other exchange rate risks with appropriate financial instruments. Interest rate risk To the extent that financial liabilities have floating interest rates, the risk exists both that interest rates will rise and that they will fall. As part of interest rate management these risks are measured, assessed and managed with the use of classical, non-speculative interest rate derivatives. All interest rate hedges serve solely to minimise the interest rate risks identified and have a clear connection to the hedged transaction in order to qualify for hedge accounting under IAS 39. In order to secure the historically low rate of interest for future drawdowns of available funds Nordzucker has concluded a forward swap which comes into effect from December 1, Liquidity risk Nordzucker deploys various financial instruments to improve the availability and management of liquidity. These include a syndicated loan arranged in February 2006, 50

55 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Risk report Positioning of the Nordzucker Group for which the term of the main revolving credit tranche has been extended for one year by exercising an extension option in February 2007, as well as bilateral loans and drawdowns from overnight and deposit accounts for which lines of credit have been confirmed. The cash management department produces regular liquidity forecasts. In view of the default risk for receivables the Group has extended its current credit insurance to the affiliates. National and company specific factors were taken into account and appropriate excesses agreed. IT risks Nordzucker ensures the security of its IT systems and data according to the latest standards. Nordzucker systematically uses up-to-date versions of standard software and commonly available hardware in order to benefit from technological developments with as little disruption as possible and make sure that the complexity of the IT systems remains manageable. The great majority of affiliates in the sugar sector have already been included in this strategy. Nordzucker has continued to dismantle existing data centres in the affiliates and centralise the IT systems in a failsafe data centre at the Braunschweig location. Positioning of the Nordzucker Group Management Board reorganised The situation on the European sugar market is currently defined by increasing Europeanisation on the demand side and at the same time by additional challenges in terms of securing the supply of raw materials. The Supervisory Board has responded to these developments by reorganising responsibilities within the Management Board. Following the resignation of Dr Ulrich Nöhle as Chairman of the Management Board on February 1, 2007 due to differences of opinion regarding corporate strategy, the Supervisory Board appointed Hans-Gerd Birlenberg as the new CEO. As CFO he had been responsible for corporate development, finance and IT since October 1, In his role as Chairman of the Management Board Hans-Gerd Birlenberg is now also responsible for sales and the corporate council, a combination of head office departments including legal, communications and investor relations. Dr Henrik Einfeld was appointed as an additional member of the Management Board with responsibility for the newly created raw materials procurement department. Core competence Sugar beet in the EU As a major sugar supplier Nordzucker will concentrate in future on its core competence, sugar from sugar beet. This is closely linked to the goal of reinforcing the company s position within the EU and neighbouring states. This strategic realignment required a fundamental re-examination of the investment policy and lead to focused new investments and at the same time to a number of divestments during the reporting period. Before the 2006 campaign had started Nordzucker was able to purchase 72,000 tonnes of additional sugar quota from the EU s additional purchase programme. In Poland a further quota of around 8,700 tonnes had already been purchased in Additional purchases of 5,900 tonnes were applied for in Slovakia. This enabled Nordzucker to make up part of the decline in production resulting from the export ban and market withdrawals. In June 2006 the Serbian subsidiary Sunoko d.o.o. was established in Novi Sad. Nordzucker holds 51 per cent of the company. Sunoko is the majority holder of four Serbian sugar factories. This investment enables Nordzucker to continue its successful growth in its core business. Serbia exports 180,000 tonnes of sugar annually into the EU as part of the Balkan quota granted by the EU. The four sugar factories in Serbia have a market share of over 45 per cent. With effect from December 31, 2006 Nordzucker ceased operations at Inno- Sweet GmbH in Braunschweig, which was launched in The objective of the wholly owned subsidiary was to trade in sweeteners, which were partly produced in China, and to develop new formulas and products. All the responsibilities hitherto carried out by InnoSweet, such as advising customers on application technology and developing formulas, sweetening concepts and new products, will henceforth be integrated into Nordzucker and carried on in the Product development and technical service department. Thirtythree of the 42 employees at InnoSweet were offered a position at Nordzucker or one of its subsidiaries. Early retirement and/or partial retirement agreements were signed with three further employees. Nordzucker 2006/07 51

56 In December 2006 Nordzucker also disposed of its 50 per cent stake in Syral S.A.S., Marckolsheim, to a consortium composed of Tereos and French agricultural cooperatives. Syral manufactures glucose, starch hydrolysate and other starch products. In November 2006 Nordzucker and Handelsunion Dr Wolfgang Boettger GmbH & Co. KG, which each held 50 per cent of the shares, disposed of the amino acid business of Amino GmbH, Frellstedt in a management buy-out (MBO). The company produces raw sugar juice, betaine, amino acids, and other ingredients from sugar beet molasses using mass chromatography and transferred its amino acid business with effect from June 1, This division was moved into an autonomous company under the name Amino. Nordzucker supported the MBO, which secures jobs and the production site in Frellstedt. The remaining company has changed its name to MEF Melasse-Extraktion Frellstedt GmbH. The decisions taken in the reporting year on strategic investments and divestments show the extent to which Nordzucker s future path will be defined by a clear focus and consistency of decision-making. The investments strengthen the company s position as a major European sugar producer. The second core competence: bioethanol and renewable resources The prospects for sugar and sugar beet as raw materials for bioethanol developed very well in 2006, in line with profound political shifts on the EU sugar market. Global demand for agricultural commodities is driven by the boom in bioenergy and high prices for oil and petrol. In discussions on the right energy mix for the future, climate friendly energy use and security of supply have become much more important. Against this backdrop, Nordzucker has decided to take part in this rapidly growing market. By building up technological potential on the one Nordzucker AG Nordzucker GmbH & Co.KG Braunschweig/Germany, 100% Nordzucker Ireland Ltd. Dublin/Ireland, 100% SugarPartners Partnership Dublin/Ireland, 50% Nordzucker Polska S.A. Opalenica /Poland, 99,83 % Považský cukor a.s., Trenčianska Teplá/Slovakia, 97,50 % Mátra Cukor Rt. Hatvan/Hungary, 99,89 % Cukrovary TTD Dobrovice a.s. Dobrovice /Czech Republic, 35,38 % Sunoko d.o.o. Novi Sad/Serbia, 51 % fuel 21 GmbH & Co. KG Klein Wanzleben/Germany, 100 % Anton Hübner GmbH & Co. KG Ehrenkirchen/Germany, 100 % Medopharm Arzneimittel GmbH & Co. KG Freiburg i. Br./Germany, 100 % MEF Melasse-Extraktion Frellstedt GmbH Frellstedt/Germany, 50 % 52

57 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Positioning of the Nordzucker Group hand and expertise in bioethanol on the other, Nordzucker will add a second core competence in renewable resources to its core competence, sugar from sugar beet in the EU. Via the newly established fuel 21 GmbH & Co. KG, Wanzleben, Nordzucker is investing some 50 million Euro in the construction of a production plant for 130,000 cubic metres of bioethanol annually. The new facility is being built as an annexe to the sugar factory in Klein Wanzleben. It will operate for 330 days a year using raw and thick juice from a total of 1.3 million tonnes of sugar beet. Raw juice is used as a raw material during the campaign. The beet processing capacity in Klein Wanzleben is being increased by 3,000 tonnes per day for this purpose. Outside of the campaign thick juice will be used for ethanol production, which is also produced at other Nordzucker factories. This will require investments of 35 million Euro in alterations to other factory sites in Northern Germany. Ground-breaking took place in September 2006 and was followed by site preparation, earthworks and foundations. At the end of the reporting period construction work had begun for two thick juice tanks, fermentation, distillation and vinasse concentration. The launch of the first ethanol campaign is planned for October Managers rise to the challenge as one At the international management conference held in January 2007 all Nordzucker managers began a period of intense reflection on the content and consequences of the new corporate strategy for company planning. Since then 170 managers from five countries have been working in small groups from different management levels and professional areas on various aspects of corporate development. In the course of the financial year 2007/08 the teams will elaborate concrete steps for Nordzucker s future development and for implementing the strategy. A focus on objectives, the will to win and joint creativity as well as the employees involved in corporate development will all contribute to Nordzucker s continued success. Profitability targets reached The Management Board of Nordzucker AG manages the company for commercial success on the basis of financial targets as defined by the capital markets. This includes meeting certain targets for selected performance indicators for the Group. In the financial year 2006/07 the Group was well above these targets for all key indicators. The return on total revenues was 17.7 per cent (target: above 15 per cent), the return on revenues was 9.2 per cent (target: above 5 per cent), the equity ratio was 41.4 per cent (target: above 30 per cent) and return on equity was 16.8 per cent (target: above 10 per cent). Targets of performance indicators in per cent Return on revenues Return on total revenues Return on equity Equity ratio Figure actually achieved Target figure Nordzucker 2006/07 53

58 Supplementary report Changes to the restructuring scheme Since March 2007 the European Commission has been examining a draft for a new directive intended to create greater incentives for companies in the EU sugar industry to surrender quotas. The current legal position is that beet farmers are entitled to ten per cent of the restructuring subsidy, whereby every country is free to increase this percentage. Farmers are also to receive an additional subsidy of Euro per tonne for each tonne of quota returned. The Commission also wants to give farmers the right to renounce quotas themselves. In order to ensure the survival of the sugar company concerned this return is limited to ten per cent of the quota for the company. Applications for returning quotas are to be decided by the member states concerned on a first come, first served basis. The restructuring subsidy is intended to be paid to both farmers and sugar companies according to the usual conditions. The Commission wants to exempt sugar companies which forego at least 13.5 per cent of their quota from the 2008/09 campaign onwards from the restructuring levy for that portion of their sugar quota which it withdrew from the market at the beginning of March The Commission is hoping that this rectification in administering the restructuring scheme will facilitate the return of some four million tonnes of additional quotas. If this target is not met despite the extra incentives a decision will be taken in February 2010 at the latest on whether to cut the quotas on a linear basis as well. MEF Melasse-Extraktion Frellstedt GmbH The Boettger Group and Nordzucker each hold 50 per cent of the shares in MEF (MEF Melasse-Extraktion Frellstedt GmbH, Frellstedt). Last year the shareholders of MEF pointed out the difficult prospects for the company in the medium term. Following the disposal of the amino acids business in 2006, MEF s activities are based solely on producing raw sugar juice from molasses for subsequent refining into liquid sugar. The shareholders agreed to continue the joint production and marketing of liquid sugar in a contract dating from March 7, This contract stipulates that Nordzucker will purchase the Boettger Group s 50 per cent stake with effect from August 1, This will result in the transfer of 21,000 tonnes of sugar quota to Nordzucker AG. It was also agreed that a joint liquid sugar production company and a joint revenues company for liquid sugar products would be established with the Boettger Group. Nordzucker AG will hold 51 per cent of this joint venture. The contract has not yet come into effect, as it was signed subject to conditions precedent, in particular the approval of the monopolies and mergers authorities. 54

59 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Supplementary report Forecast report Forecast report So far the European Commission s objective of substantially reducing sugar production by voluntary return of quotas has not been adequately reached. Furthermore, the continued restricted issue of export licenses by the EU is likely to result in ongoing intense competitive pressure. The market is therefore not currently in equilibrium. This has considerable consequences for competition and the development potential of sugar companies in the core European regions. The market withdrawal, adopted on the basis of anticipated surpluses, for 2007/08 of 2.2 million tonnes particularly affects the sugar industry in those countries which have not surrendered any quotas to the restructuring scheme. For Nordzucker AG this will represent a quota cut of 13.5 per cent for the current financial year. Thanks to lower quota reductions in Hungary and Slovakia the figure for the Group as a whole is 10.9 per cent. It is unclear whether there will be a further withdrawal in October If this can be avoided, Nordzucker will be able to maintain revenues before the regime levy in the current financial year at the same level as in the previous year, thanks to the revenue contributions of the Group affiliates. per tonne of quota. The restructuring levy is also imposed on quota which is not produced. Positive non-recurring items like the ones that affected earnings in the financial year 2006/07 are not expected in 2007/08. Start-up costs for the bioethanol plant which is due to commence production in October 2007 will also weigh on earnings. The effective cost reductions from the restructuring measures already implemented will not be able to compensate for these additional expenses. The Management Board expects a positive result, but one well below that of the year 2006/07. Earnings for 2008/09 will depend to a great extent on the progress made towards restructuring the European sugar market. From today s perspective a result in line with that of 2007/08 can be expected. The transformation phase of the reformed sugar market regime constitutes a major test for the entire industry. Thanks to Nordzucker s European outlook and a restructuring process which was initiated in good time and will produce systematic cost savings in all areas, the company is well prepared for the difficult phase ahead. Braunschweig, April 20, 2007 Group earnings for the current financial year will suffer considerably from the declining gross margin, especially from the restructuring levy of Euro (126.40) Management Board Birlenberg Dr. Einfeld Jakobiak Nordzucker 2006/07 55

60 56

61 Consolidated financial statements All the figures at a glance Nordzucker 2006/07 57

62 Consolidated income statement Nordzucker AG, Braunschweig, for the period from 1 March 2006 to 28 February 2007 Ref. 1/3/ /2/2007 in TEUR 1/3/ /2/2006 in TEUR 1. Revenues 6 1,234,929 1,296,326 less sugar regime levies ,371 1,233,946 1,218, Increase (previous year, decrease) in finished goods and work in progress 36,305 42, Own work capitalised Other operating income 7 60,839 31,625 1,331,855 1,209, Cost of materials and services 8 872, , Personnel expenses 9 116, , Depreciation, amortisation of intangible assets, property, plant and equipment and impairment losses 10 54,806 63, Appreciation on intangible assets, property, plant and equipment and impairment losses 17 5,242 32, Other operating expenses , , Operating result (EBIT) 174, , Net interest 12 a) Interest income 7,689 3,230 b) Interest expenses 24,472 22,991-16,783-19, Net income/loss from investments 13 a) Net income/loss from associated companies at equity 966-3,943 b) Other net income/loss from investments 3,012 2,621 3,978-1, Other net financial income/expense 14 1,070 1, Net financial income/expense -11,735-19, Income tax expense 15 48,316 38, Consolidated net income 114,943 69, Minority interests 9, Net income after minority interests 105,465 68,787 58

63 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Consolidated income statement Consolidated cash flow statement Consolidated cash flow statement 1/3/ /2/2007 in EUR m 1/3/ /2/2006 in EUR m Consolidated net income Net depreciation, amortisation and impairment losses on long-term assets Net amortisation and impairment losses on financial assets Changes in long-term provisions Other non-cash income/expenses Changes in finished goods and work in progress Cash flow pursuant to DVFA Changes in short-term provisions Proceeds on dispoal of long-term assets Changes in inventories, trade receivables and other assets not attributable to investing or financing activities Changes in accounts payable and other liabilities not attributable to investing or financing activities Cash flow from operating activities Proceeds on disposal of long-term assets Payments for investments in long-term assets Proceeds on disposal of intangible assets Payments for investments in intangible assets Proceeds on disposal of financial assets Payments for investments in financial asserts Cash flow for investing activities Proceeds from changes in equity Dividend payments Proceeds/repayments of loans Cash flow for financing activities Changes in cash and cash equivalents Cash and cash equivalents at the beginning of the period Effect of foreign exchange rate changes Cash and cash equivalents at the end of the period See Sections in the Notes for additional details Nordzucker 2006/07 59

64 Consolidated balance sheet Assets Ref. 28/2/2007 in TEUR 28/2/2006 in TEUR Long-term assets Fixed assets Intangible assets ,929 9,005 Property, plant and equipment , ,792 Investment property 19 6,379 8,968 Financial assets 20 Shares in associated companies at equity ,305 Other financial assets ,369 28,126 Accounts receivable and other assets 21,140 68, , ,196 Financial assets Other assets ,102 1,617 Deferred taxes 15 38,059 25, , ,727 Short-term assets Inventories 21 Raw materials, consumables and supplies 26,141 20,005 Work in progress 848 1,165 Finished goods and merchandise 519, , , ,580 Accounts receivable and other assets Trade receivables from external companies ,629 88,711 Receivables from related parties and companies 23 5,054 4,219 Receivables from income tax 15 7,495 4,653 Financial assets 24 22,914 8,301 Other short-term assets 25 34,735 32, , ,555 Assets scheduled for sale Cash and cash equivalents 86,856 46, , ,068 1,651,010 1,342,795 60

65 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Consolidated balance sheet Shareholders equity and liabilities Ref. 28/2/2007 in TEUR 28/2/2006 in TEUR Shareholders' equity 27 Subscribed capital , ,651 Capital reserves , ,035 Retained earnings , ,040 Accumulated other equity ,042 14,508 Minority interests ,364 4, , ,719 Long-term provisions and liabilities Provisions for pensions and similar obligations 28 99,235 96,787 Other provisions 29 13,218 18,190 Financial liabilities , ,539 Other financial liabilities 33 7,429 0 Other liabilities 34 24,927 14,393 Deferred taxes 15 91,134 69, , ,601 Short-term provisions and liabilities Provisions for pensions and similar obligations 28 4,958 5,194 Other provisions 29 38,115 66,790 Financial liabilities 30 90, ,093 Income tax liabilities 15 15,138 32,331 Trade payables , ,807 Liabilities due to related parties and companies 32 3,064 2,817 Other financial liabilities ,955 6,194 Other liabilities 34 26,387 61, , ,475 1,651,010 1,342,795 Nordzucker 2006/07 61

66 Consolidated statement of changes in shareholders equity for the consolidated financial statements of Nordzucker AG, Braunschweig Subscribed Capital Retained Accumulated Minority capital reserves earnings other equity interests Total equity in TEUR in TEUR in TEUR in TEUR in TEUR in TEUR As of 28/02/ , , ,797 11,665 6, ,139 Net income , ,036 Dividend payment , ,496 Capital increase 6,120 14, ,322 Currency effects , ,679 Fair value adjustment Others 0 0-2, ,077-4,125 As of 28/02/ , , ,040 14,508 4, ,719 Net income , , ,943 Dividend payment , ,558 Currency effects , ,817 Fair value adjustment Others ,401 54,375 As of 28/02/ , , ,921 23,042 68, ,013 See Section 27 in the Notes for additional details 62

67 Financial year 2006/2007 Notes to the consolidated financial statements Nordzucker 2006/07 63

68 Notes to the consolidated financial statements for the financial year 2006/07 for Nordzucker AG, Braunschweig General remarks 1. Accounting principles The consolidated financial statements as of February 28, 2007 for Nordzucker AG have been prepared pursuant to Sec. 315a HGB (German Commercial Code) in accordance with the International Financial Reporting Standards (IFRS) adopted and published by the International Financial Standards Board (IASB) as applicable in the European Union and with supplementary provisions of German commercial law. The financial statements comply fully with IFRS and give a true and fair view of the financial and earnings situation of Nordzucker AG and its consolidated subsidiaries, associated companies and joint ventures (hereinafter known as Nordzucker Group or Group ). Individual line items of the income statement and the balance sheet have been aggregated to improve readability. These items are listed in the notes. The income statement has been classified according to the total cost method. The consolidated financial statements have been prepared in Euros. Unless otherwise stated all amounts are given in thousands of Euros (TEUR). The consolidated financial statements were prepared by the Management Board of Nordzucker AG on April 20, The consolidated financial statements and the Group management report have been filed with the Braunschweig District Court under the commercial register number HRB Consolidation 2.1. Principles of consolidation The consolidated financial statements of the Nordzucker Group include all significant domestic and foreign subsidiaries in which Nordzucker AG has direct or indirect control of financial and operating policy. In accordance with IFRS 1.15 all acquisitions made by the Group prior to March 1, 2004 have been presented using the methods applied in the HGB consolidated financial statements. There were therefore no differences to the derived goodwill offset against reserves in the HGB financial statements Business combinations and goodwill Business combinations are presented using the purchase method. This involves the recognition of the identifiable assets (included intangible assets not previously recognised) and liabilities (including contingent liabilities but not including future restructuring) of the business acquired at fair value. 64

69 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Goodwill arising from a business combination is initially recognised at cost, which is the excess of the cost of the business combination over the acquirer s interest in the net fair value of the identifiable assets acquired and the liabilities and contingent liabilities assumed. Following initial recognition goodwill is measured at cost less any accumulated impairment losses. For the purposes of the impairment test the goodwill acquired in a business combination is allocated to the cash-generating units or groups of cash-generating units which benefit from the synergies of the business combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. If goodwill has been allocated to a cashgenerating unit (group of cash-generating units) and the entity disposes of an operation within that unit, the goodwill associated with the operation disposed of shall be included in the carrying amount of the operation when determining the gain or loss on disposal. The value of the goodwill disposed of is measured on the basis of the relative values of the operation disposed of and the portion of the cashgenerating unit retained. If a subsidiary is disposed of, the difference between the sales price and the net assets plus accumulated foreign exchange differences and goodwill without impairment is recognised in profit and loss. Expenses and income and receivables and liabilities between consolidated companies are eliminated. Interim results are reversed if significant. Associated companies are accounted for in the consolidated financial statements under the equity method ( at equity ). Associated companies are defined as companies in which the Nordzucker Group can exercise a significant influence over financial and operating policy. In applying the equity method the IFRS financial statements of these companies are used. Losses from associated companies which exceed the carrying amount or other long-term receivables from financing these companies are not recognised unless there is an obligation to provide further capital. The elimination of interim results is not necessary as they are insignificant. Joint ventures are recognised proportionally where Nordzucker Group exercises joint management together with its partners. For the measurement of goodwill and the share of fair value of assets and liabilities the principles of full consolidation apply. The financial statements of Nordzucker AG and the consolidated subsidiaries, associated companies and joint ventures are prepared on the basis of uniform accounting policies Group of consolidated companies The consolidated companies in the Nordzucker Group are as follows: The list of investments is filed with the commercial register of Braunschweig District Court under HRB In the financial year 13 subsidiaries which taken together were of minor importance for the financial and earnings situation of the Group were not included in the consolidated financial statements. The non-consolidated subsidiaries are mostly not operational. Group of consolidated companies 28/2/ /2/2006 Fully consolidated companies Domestic 9 9 Foreign Proportionally consolidated companies Domestic 1 1 Companies accounted for at equity Domestic 2 2 Foreign 0 1 Nordzucker 2006/07 65

70 The reporting date December 31 was used for the consolidation of all relevant companies. The use of this reporting date does not have a significant effect on the financial and earnings situation of the Group as a result of seasonal conditions in the sugar industry. There were no significant transactions between the reporting date for the subsidiaries and the reporting date for the Group Conversion of financial statements in foreign currencies Assets and liabilities of subsidiaries whose functional currency is not the Euro are translated at the exchange rate applicable on the balance sheet date. Items in the income statement are translated at the weighted average rate for the relevant year. Equity components of subsidiaries are translated at the historical rate for the date first recognised. Exchange differences arising from the conversion are recognised as equalisation amounts within the accumulated other equity or in minority interests. The rates for the conversion of key financial statements in foreign currencies into Euro have developed as follows: Foreign currency Average rate Rate on reporting date one Euro equals /12/ /12/2005 Polish Zloty Slovakian Crown Hungarian Forint Serbian Dinar Explanation of accounting methods 3.1. Recognition of income and expense Revenues are recognised when the goods or services are delivered if the amount of revenue can be estimated reliably and the flow of economic benefit is probable. Revenues are reduced by sales deductions. Operating expenses are recognised when the service is used or at the date they arise. Interest is recognised as an expense or as income in the period in which it arises. The Group does not recognise interest expense arising in connection with the purchase and production of certain assets. 66

71 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Income and/or expenses from agreements on the transfer of profits and/or losses are recognised at the end of the financial year as the amount of net financial income/loss calculated according to German accounting principles under commercial law. Dividends are recognised when distributed. The period of distribution is generally equivalent to the period in which entitlement is legally vested Intangible assets Self-created intangible assets are recognised at the costs arising in the development phase after technical and economic feasibility has been determined and up to completion. Capitalised production costs include the costs directly and indirectly attributable to the development phase. Separately acquired intangible assets are recognised at cost. Self-created and separately acquired intangible assets which have a finite useful life are amortised from the time the asset is available for use on a straight-line basis over the expected useful life of the asset as follows: Intangible assets Useful life in years ERP licences 20 Process control systems and updateable Microsoft licence packages 15 Other software 3-15 In the reporting year Nordzucker AG purchased an additional quota of 72,000 tonnes. The additional quota was capitalised at cost and will be amortised on a straight-line basis over the remaining duration of the sugar market regime (nine years to 2015). Goodwill is not subject to scheduled amortisation (see 2.2 above) Property, plant and equipment Property, plant and equipment assets are recognised at cost and depreciated on a straight-line basis over their expected useful lives. The costs of self-created property, plant and equipment assets include all direct costs as well as all indirect costs incurred in connection with the production process. Financing costs are not capitalised. Gains or losses on the disposal of long-term assets are recognised in other operating income or expenses. Rented or leased assets which are economically owned by Group companies (finance leases) are capitalised at the lower of the present value of the rental or lease payments and fair value of the leased asset and depreciated on a straight-line basis. The present value of payment obligations for future rental and lease payments is recognised as a liability. Scheduled depreciation takes place on a uniform basis for the Group over the following useful lives: Property, plant and equipment Useful life in years Buildings Technical plant and machinery 4-60 Railway tracks 70 Vehicles 4-15 Trailers and rolling stock 25 Other operating and office equipment 3-25 Depreciation generally begins when the asset is made ready for operation. This does not apply to technical plant and machinery used in the campaign, for which depreciation commences at the beginning of the financial year. Applying this method does not have a significant effect on the financial and earnings position of the Group. For assets under finance leases where the transfer of title to Group companies at the end of the lease term is sufficiently certain, scheduled depreciation takes place over the useful life of the assets. As they are not significant, long-term assets of minor value are fully depreciated in the year of purchase. Investment subsidies and public grants for the purchase or production of items of property, plant and equipment are accounted for by recognising an item of deferred income under other liabilities. The deferred income item is then reversed through profit and loss over the useful life of the subsidised asset. Nordzucker 2006/07 67

72 3.4. Investment property Properties classified by Nordzucker Group as available for rental to third parties are carried at depreciated cost in accordance with the classification alternative defined in IAS 40. These properties are depreciated on a straight-line basis over a useful life of years. reporting units are discounted at a rate which reflects current market assessments of the interest rate effect and the specific risks of the asset. An impairment loss is recognised when the present value of the cash flows is less than the carrying amount of the non-current and net current assets of the reporting unit Unscheduled depreciation and amortisation of intangible assets and property, plant and equipment (impairment losses) The Group companies test long-term assets for unscheduled depreciation or amortisation if events or changes in circumstances indicate that the asset may be impaired (impairment test). An impairment loss is recognised if the present value of the expected future cash flows from the assets is lower than the carrying amount of the respective asset. An impairment loss is recognised for intangible assets and items of property, plant and equipment if due to particular events the carrying amount of the asset is no longer covered by the anticipated proceeds of disposal or the discounted net cash flows from its continued use. If the recoverable amount cannot be measured for individual assets because the cash flows depend on other assets, the cash flow is determined for the next highest group of assets (reporting unit, cash-generating unit) for which such a cash flow can be determined. The cash flows of the An assessment is made at each reporting date as to whether there is any indication that an impairment loss recognised in prior periods may no longer exist or may have decreased. Impairment losses are reversed if the value in use has increased in subsequent periods. The increased carrying amount of an asset attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years. The assessment on the reporting date did not identify a significant change of value in use Investment subsidies and grants Claims for investment subsidies and grants are recognised from the time the Nordzucker Group is sufficiently certain that they will be granted and that the conditions for receiving them will be met. Grants and subsidies for purchasing assets are carried as liabilities and reversed through profit and loss over the useful life of the subsidised assets. 68

73 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes 3.7. Emissions rights The Nordzucker Group does not recognise emissions rights received free of charge. Nordzucker Group recognises equivalent liabilities at cost if the emissions rights held by the Group are not sufficient Financial assets and securities As a rule Nordzucker Group recognises financial assets on acquisition, i.e. at the settlement date. Insignificant shares in subsidiaries, associated companies and joint ventures which are not consolidated or not accounted for in the consolidated financial statements using the equity method, are classified in line with IAS 39 in the category available-for-sale financial assets for measurement purposes. Other financial assets and securities are categorised in line with IAS 39 according to their type and purpose either as available-for-sale financial assets or held-to-maturity investments. Available-for-sale financial assets are carried at fair value at the reporting date, and if this cannot be determined at amortised cost. Measurement of the fair value of other financial instruments in this category is made using the discounted cash flow method (DCF method). The parameters on which this measurement is based are not deemed reliable if they are subject to high volatility, the marketability of the investment is severely restricted or the Nordzucker Group as a minority shareholder has no influence over the dividend policy of the investment. The procedural assumptions are set in coordination with the investee companies on the basis of annually updated budgets. Unrealised gains and losses resulting from changes in the fair value of available-for-sale financial assets are recognised in accumulated other equity. Recognition of changes in fair value through profit and loss only takes place on disposal or if the impairment is lasting. Assets held to maturity are carried at amortised cost using the effective interest method. Impairment losses are recognised for these assets if the recoverable amount using the effective interest originally determined is below the carrying amount Long-term assets held for sale Long-term assets are held for sale if the disposal of the asset within the next twelve months is highly probable. This classification is only made when the asset is available for sale in its present condition and the marketing of the asset has already begun. Long-term assets held for sale are carried at the lower of amortised cost and fair value less costs to sell. No further scheduled depreciation is made for assets from the time they are classified as held for sale Inventories Inventories are recognised at cost. Costs are determined using weighted averages. Costs include all direct costs attributable to producing the asset and indirect costs attributable to production. Measurement of inventories at the reporting date is made at the lower of cost and net realisable value. Net realisable value is the estimated selling price less the estimated costs prior to sale. The net realisable value of unfinished goods and services is inferred from the net realisable value of finished goods and services less the outstanding costs of completion. Work in progress from production processes are measured using their respective full cost approach. If the measurement for finished products and goods is higher than fair value at the reporting date, the inventories are recognised at net realisable value. Sugar inventories from internal production disclosed under finished products are recognised at cost, unless they are recognised at lower net realisable value in view of revenues opportunities. Costs include production costs, indirect costs attributable to the production department and straight-line depreciation for wear and tear. Cost for quota sugar also includes the restructuring levy charged for the first time in the reporting year as Nordzucker 2006/07 69

74 part of the changes to the sugar market regime of EUR per tonne of actual production volume. Borrowing costs are not included in the costs of production. An impairment loss in inventories is reversed if the reasons for recognising an impairment loss no longer exist Receivables and other assets Trade receivables and other assets are initially recognised at fair value plus transaction costs. Subsequent recognition is at amortised cost. Default risks are recognised by appropriate write-downs based on past experience and individual assessments of risk Cash and cash equivalents Cash and cash equivalents include bank balances and cash in hand Provisions for pensions Provisions for pension obligations are determined in line with IAS 19 using the projected unit credit method and taking future developments in salaries and pensions into account. The measurement of the pension obligations is made on the basis of actuarial opinions and includes the assets available to cover these obligations (plan assets). The present value of defined benefit obligations is determined by discounting the estimated future cash outflows. The discount rate is based on the rate paid by high-quality corporate bonds which match the underlying pension obligations in terms of currency and maturity. If the actuarial gains and losses resulting from changes in the actuarial parameters exceed 10 per cent of the greater of the pension obligations and plan assets at the beginning of the financial year, the amount exceeding the 10 per cent threshold is recognised through profit and loss for the remaining term of service of the entitled staff (corridor method). Service cost and realised actuarial gains and losses are recognised in personnel expenses. The interest component of pension expenses and the expected income from plan assets is disclosed as part of net financial income/loss Other provisions Other provisions include all identifiable legal and constructive obligations of the Group towards third parties if their settlement is probable and the amount can be reliably estimated. Provisions are recognised in line with IAS 37 as the best estimate of the amount required to settle the obligation. Long-term provisions are recognised as the present value of the amount required to settle the obligation, discounted using appropriate market interest rates. Provisions for restructuring are only recognised if the planned measures have been developed in sufficient detail at the reporting date and if the measures have been announced. 70

75 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Liabilities Liabilities are recognised initially at fair value including transaction costs and any premiums and discounts. Subsequent recognition is at amortised cost using the effective interest method Deferred taxes Deferred taxes are recognised for future tax assets and liabilities resulting from temporary differences between the value of assets and liabilities for tax purposes and their carrying amount in the IFRS financial statements, and for tax loss carry-forwards. Deferred taxes are measured on the basis of the fiscal legislation enacted at the end of each financial year for the financial years in which the differences are expected to reverse or in which it is likely that tax loss carry-forwards will be used. Deferred tax assets for temporary differences and tax loss carry-forwards are only recognised if it is sufficiently likely that they will be realised in the near future. Deferred tax assets and liabilities are only offset if they relate to income taxes levied by the same taxation authority and the current taxes can be offset against one other Derivative financial instruments The Group uses derivative financial instruments to hedge interest rate risks. As a rule derivative financial instruments are recognised at fair value. For derivative financial instruments which fulfil the criteria of IAS 39 for hedge accounting the changes in fair value of the derivatives are recognised depending on the type of hedging relationship. Changes in fair value of derivatives used to hedge future cash flows (cash flow hedges) are recognised directly in accumulated other equity after accounting for tax affects. The amounts recognised in accumulated other equity are derecognised when the hedged transaction is recognised in the balance sheet or in profit and loss. Changes in fair value for certain derivatives used by the Group, which despite their effect as economic hedges do not fulfil the criteria of IAS 39 for recognition as hedging instruments, are recognised in profit and loss as a result of their classification at fair value through profit and loss Foreign currency transactions Purchases and revenues in foreign currencies are translated at the exchange rate applicable at the time of the transaction. Assets and liabilities in foreign currencies are translated into the functional currency at the exchange rate on the reporting date. Foreign currency gains and losses resulting from the conversion are recognised in profit and loss Fair value of financial instruments The fair value of financial instruments is determined by relevant market values or valuation methods. For cash and other short-term non-derivative financial instruments fair value is equal to the carrying amounts on each reporting date. For long-term receivables and other assets and long-term provisions and liabilities fair value is determined on the basis of expected cash flows using the reference interest rates applicable at the reporting date. The fair value of derivative financial instruments has been determined on the basis of the reference interest rates in effect at the reporting date Use of estimates Preparing the financial statements in line with IFRS requires the use of estimates and assumptions which affect the carrying amounts of assets and liabilities, the disclosure of contingent liabilities at the reporting date and the recognition of income and expenses. Key estimates and assumptions have been made in defining uniform periods of depreciation and amortisation for the Group, the amount of write-downs on receivables, the actuarial parameters for measuring provisions for pensions and the probability that deferred tax assets will be used. Other significant estimates have been made in performing the impairment test in accordance with IAS 36 concerning cash flows in the forecast period in view of the reform of the sugar market and in choosing an adequate capitalisation rate. The actual amounts may vary from the amounts derived from the estimates and assumptions. Nordzucker 2006/07 71

76 4. Recently published IASB accounting regulations In August 2005 the IASB published amendments to IAS 32, IAS 39 and IFRS 4 which are to be applied for financial periods beginning on or after January 1, The amended standards include rules on the initial and subsequent recognition of financial guarantees given. These amendments do not affect the IFRS consolidated financial statements of Nordzucker Group. The Nordzucker Group has not applied the rules in IFRS 7 Financial Instruments: disclosures, which standardise the disclosure of financial instruments and was also published in August 2005, in advance. The company is currently in a process of determining the effects on its IFRS consolidated financial statements. This also applies to the amendment to IAS 1, according to which information is to be disclosed in the financial statements which enable the users of the financial statements to make an assessment of the goals, methods and processes employed in capital management. Amendments to three further standards and one new standard also came into effect in the financial year 2006/07. Due to the nature of its business Nordzucker Group does not generally expect their application to have any effect on its financial and earnings situation. Sunoko Group Fair value at the Carrying in TEUR acquisition date amount Intangible assets Property, plant and equipment 90,288 41,136 Financial assets Deferred tax assets 1,083 1,099 Inventories 21,229 20,521 Cash and cash equivalents 1,678 1,678 Trade receivables 15,936 15,936 Other assets 18,614 18, ,968 99,421 Deferred tax liabilities -6, Other provisions Bank debt -26,640-26,868 Finance leases -1,167 0 Trade liabilities -11,785-11,785 Other liabilities -8,597-9,775-54,481-48,541 Net assets 94,487 50,880 Group share of net assets 46,225 Goodwill from acquisition 46,730 Total acquisition costs 92, Acquisitions in the financial year 2006/07 Acquisition of Sunoko d.o.o., Novi Sad/ Serbia With effect from June 22, 2006 the Group acquired per cent of the voting shares of Sunoko d.o.o. (Sunoko) based in Novi Sad/Serbia via its per cent subsidiary NORDAGRI N.V., Amsterdam/Netherlands. The company holds majority stakes (84.85 per cent to per cent) in four sugar factories which produce sugar on commission for Sunoko and solely from its sugar beet. Sunoko sells this sugar in Serbia (market share of around 50 per cent) and in the EU under the preference rule of the EU sugar market regime. The fair value of the identifiable assets and liabilities of the Sunoko Group at the acquisition date and the equivalent carrying amounts immediately before the acquisition date are as shown aside: 72

77 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Initial accounting for the acquisition is provisional within the meaning of IFRS 3.62, as the fair values have not yet been finally determined. As of the reporting date goodwill had not yet been allocated to cash-generating units, as it had not been finally determined. The goodwill amounting provisionally to TEUR 46,730 is derived from Sunoko s market share on its local market and the company s access to the EU market based on the EU preference rule for Serbia. The cost of the business combination depends on Sunoko s EBITDA in the years and inventory changes in sugar produced by the company. The estimated purchase price is TEUR 92,955, of which TEUR 49,021 has been paid on the reporting date. This includes directly attributable ancillary acquisition costs of TEUR 2,408. Since the acquisition date Sunoko has contributed TEUR 9,707 to earnings after minority interests and TEUR 71,201 to Group revenues. Had the business combination taken place at the beginning of the year Group earnings after minority interests would have risen by TEUR 1,606 and Group revenues by TEUR 57,423. Notes to the consolidated income statement 6. Revenues Revenues are made up as follows: Revenues 1/3/2006 1/3/2005 in TEUR -28/2/ /2/2006 Sugar revenues from own production 950, ,026 Other 284, ,300 1,234,929 1,296,326 Regions Germany 720, ,214 CEE countries 231, ,539 Other EU 211, ,471 Other 72, ,102 Revenues 1,234,929 1,296, Other operating income Other operating income is made up as follows: The largest item in income from the reversal of provisions is income from the reversal of provisions for the production levy, which was set at a lower level than in prior years. Other operating income 1/3/2006 1/3/2005 in TEUR -28/2/ /2/2006 Income from disposal of equipment 2,817 1,877 Income from reversal of provisions 33,080 4,873 Income from disposal of short-term assets 288 3,224 Insurance payments and other compensation for damages 1,109 4,968 Income from services to third parties 3,663 2,693 Income from write-backs on receivables 1,189 2,244 Miscellanous operating income 18,693 11,746 Other operating income 60,839 31,625 Nordzucker 2006/07 73

78 Cost of materials and services 1/3/2006 1/3/2005 TEUR -28/2/ /2/2006 Cost of raw materials, consumables and supplies and of purchased merchandise 635, ,935 Cost of purchased services 237,024 21,403 Cost of materials and services 872, , Cost of materials and services The cost of materials and services is made up as shown aside: Cost of services purchased includes the restructuring levy set for the first time in the reporting year at TEUR 201,071. Personnel expenses 1/3/2006 1/3/2005 TEUR -28/2/ /2/2006 Wages and salaries 93, ,836 Social security contributions 10,251 10,387 Other social expenses 3,879 2,730 Expenses for defined benefit plans 2,867 2,423 Expenses for defined contribution plans 5,469 5,998 Personnel expenses 116, , Personnel expenses Personnel expenses are made up as shown aside: Expenses for defined benefit and defined contribution plans relate to Group expenses for defined benefit and defined contribution pension plans and similar obligations. The interest portion of defined benefits obligations included in the pension expenses is recognised in net financial income/loss. Average number of employees 1/3/2006 1/3/ /2/ /2/2006 In 2006/07 and 2005/06 the average number of Group employees was as shown aside: Manual workers 2,233 1,660 Salaried staff 1,237 1,047 Trainees Average number of employees 3,616 2,820 Depreciation, amortisation and impairment losses 1/3/2006 1/3/2005 TEUR -28/2/ /2/2006 Depreciation and amortisation of intangible assets and property, plant and equipment 49,503 35,737 Impairment losses 5,303 27,987 Depreciation, amortisation and impairment losses 54,806 63, Depreciation, amortisation and impairment losses Depreciation, amortisation and impairment losses are made up as shown aside: Impairment losses on property, plant and equipment and intangible assets with a finite useful life are recognised in line with IAS 36 if the recoverable amount for an asset is lower than the carrying amount, whereby the recoverable amount is defined as the higher of net realisable value and value in use. 74

79 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes In the financial year 2006/07 impairment losses of TEUR 4,388 were recognised in the course of an impairment test for the Anton Hübner GmbH & Co. KG. Impairment losses in the previous year were mainly the result of factory closures in Wierthe and Gross Munzel. Amortisation of financial assets is part of net financial income/loss. 11. Other operating expenses Other operating expenses are made up as follows: Other operating expenses 1/3/2006 1/3/2005 TEUR -28/2/ /2/2006 Cost of revenues 50,269 48,153 Research and development expenses Expenses for leasing, rent, land leases and other hire costs 5,416 3,983 Adminstrative expenses 35,264 35,749 Taxes 4,888 3,913 Miscellaneous expenses 21,623 21,133 Other operating expenses 118, , Net interest Net interest is made up as follows: Net interest 1/3/2006 1/3/2005 TEUR -28/2/ /2/2006 Interest income Interest income on bank balances 3,777 1,933 Income from securities and loans Other interest and similar income 3,539 1,066 7,689 3,230 Interest expense Interest expense on bank balances 8,577 12,051 Interest expense on pension provisions (net) 4,103 5,995 Other interest and similar expenses 11,792 4,945 24,472 22,991 Net interest -16,783-19, Net income/loss from investments Net income/loss from investments is made up as follows: Net income/loss from investments 1/3/2006 1/3/2005 TEUR -28/2/ /2/2006 Net income/loss from associates 966-3,942 Net income/loss from other investments 3,012 2,620 Net income/loss from investments 3,978-1,322 Nordzucker 2006/07 75

80 Income tax expense 14. Other financial net income/loss The other financial net income/loss amounts to TEUR 1,070 (previous year: TEUR 1,222). Other financial net income/loss includes in particular exchange rate gains and losses from non-derivative 1/3/2006 1/3/2005 TEUR -28/2/ /2/2006 Current taxes Current domestic taxes 35,150 23,284 Current foreign taxes 9,742 3,071 44,892 26,355 Deferred taxes Deferred domestic taxes 3,398 9,715 Deferred foreign taxes 26 2,825 3,424 12,540 Income taxes 48,316 38,895 financial instruments and income from the disposal of other financial assets, as well as long-term and short-term securities. 15. Income tax expense The income tax expense includes taxes on income paid or owed in the individual countries and deferred taxes. Income taxes consist of trade tax, corporation tax, solidarity surcharge and the equivalent foreign income taxes. The income tax expense is made up by origin as shown aside: Current domestic taxes include tax credits of TEUR 3,284 from other periods (previous year: TEUR 0). Income tax expense 1/3/2006 1/3/2005 TEUR -28/2/ /2/2006 IFRS net profit before income tax 163, ,931 Group tax rate in % Expected tax expense 61,924 40,938 Differences due to different foreign and domestic tax rates -14,799-5,839 Change in Group tax rate 0 73 Non-capitalised deferred tax assets on tax loss carry-forwards 0 3,205 Current taxes for prior years -1,839 0 Deferred taxes for prior years Tax loss carry-forwards used -1,172 0 Tax free income -1, Income from offsetting corporation tax credits -1,445 0 Non-deductible operating expenses for tax purposes including impairment losses on investments 6,711 1,982 Non-offsettable income tax Additions/deductions for trade tax 385-1,086 Other effects Tax expense 48,316 38,895 The income tax expense that would have been expected if the tax rate applicable to the Group parent Nordzucker AG of per cent (previous year: per cent) had been applied to the IFRS consolidated net income before tax and minority interests can be reconciled with the income taxes according to the income statement as shown aside: Companies with limited liability registered in Germany pay corporation tax at a rate of 25 per cent as well as a solidarity surcharge of 5.5 per cent of the corporation tax payable. These companies and their subsidiaries in the form of limited partnerships are also liable for trade tax 76

81 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes at a rate determined by multipliers set by the local council. For limited liability companies the trade tax reduces the amount liable for corporation tax. From the fiscal year 2004 onwards only limited use can be made of tax loss carry-forwards for corporation and trade tax. This means that a taxable profit of up to one million Euro can be reduced fully and higher amounts can only be reduced by up to 60 per cent of available tax loss carryforwards. The effects of different tax rates for limited partnerships and between foreign income tax rates and those of the Group parent Nordzucker AG are disclosed in the reconciliation statement under differences due to different foreign and domestic tax rates. The following deferred tax assets and liabilities result from the temporary differences and tax loss carry-forwards: The deferred tax liabilities included deferred taxes of TEUR 539 (previous year: TEUR 100) recognised for temporary differences on available-for-sale financial instruments and derivatives in cash flow hedges. As these items are not recognised in profit and loss the corresponding deferred taxes are also recognised directly in accumulated other equity. Deferred tax assets are recognised for temporary differences and tax loss carryforwards if it is sufficiently probable that they can be used in the near future. In the financial years 2006/07 and 2005/06 no deferred tax assets were recognised for temporary differences and tax loss carry-forwards for corporation taxes of TEUR 324 and TEUR 3,622 respectively and for trade taxes of TEUR 16,101 and TEUR 6,714 respectively, as it is not probable that sufficient taxable income will be generated in the near future. According to current legislation the tax losses for domestic trade tax of TEUR Deferred taxes 28/2/ /2/2006 Deferred Deferred Deferred Deferred TEUR tax tax tax tax assets liabilities assets liabilities Intangible assets 0 1, ,276 Investment property Other property, plant and equipment 9,607 82,381 5,021 65,084 Financial assets Inventories 4,039 2,574 4, Other assets 2, , Pension provisions 9, , Other provisions 1,102 2,315 1,320 2,100 Bank loans Trade payables Other liabilities 10, , Leasing Deferred taxes on temporary differences 37,481 91,134 25,377 69,692 Deferred tax assets on tax loss carry-forwards Carrying amount 38,059 91,134 25,914 69,692 5,116 (previous year: TEUR 6,810) can be carried forward indefinitely. No income taxes are payable as a result of the dividend proposed by the Manage- ment Board for the financial year 2006/07, which is based on the earnings of Nordzucker AG as determined under German commercial law. Nordzucker 2006/07 77

82 Notes to the consolidated balance sheet 16. Intangible assets Changes in individual intangible assets for the Group are shown in the fixed assets schedule beginning on page 80. There were no intangible assets with an infinite useful life in the reporting period. In the financial year 2006/07 intangible assets with costs of TEUR 4,991 (previous year: TEUR 3,024) were still in use, although they had already been fully amortised. 17. Property, plant and equipment For changes in property, plant and equipment please refer to the fixed assets schedule for Nordzucker Group beginning on page 80. Assets which fulfil the criteria for a finance lease are mainly a storage reservoir in Stöcken and various IT leasing contracts which fulfil the criteria of IAS 17 for a finance lease. Finance leases As of February 28, 2007 property, plant and equipment with costs of TEUR 254,082 (previous year: TEUR 222,687) is still in use although it has already been fully depreciated. In the reporting period expenses of TEUR 765 (previous year: TEUR 724) were capitalised for self-created property, plant and equipment. In the financial year 2006/07 Nordzucker Group received compensation of TEUR 1,584 (previous year: TEUR 2,551) for the destruction of or damage to property, plant and equipment from third parties, e.g. insurance companies. In the reporting period costs and residual carrying amounts of TEUR 2,863 and TEUR 190 respectively (previous year: TEUR 781 and TEUR 317), were shown as disposals in the table of fixed assets and reclassified as fixed assets held for sale. Fixed assets of minor value with a total cost of TEUR 219 were fully depreciated. The net carrying amounts of capitalised leasing items are made up as follows: TEUR 28/2/ /2/2006 Technical plant and machinery 1,593 1,689 Other plant, operating and office equipment Finance leases 1,820 1, Impairment test for intangible assets and property, plant and equipment Impairment tests for intangible assets and property, plant and equipment are mainly performed on the basis of the values in use for cash-generating units. The reporting units have been determined according to the business activities of the Nordzucker Group and taking regional aspects into account. A write-up of TEUR 30,752 was recognised for the reporting unit Sugar domestic, which consists of the Nordzucker Group s factories in Germany, on the basis of the value in use as of February 28, In measuring the value in use of the reporting unit Sugar domestic, account was taken of the factory closures in Wierthe and Gross Munzel announced by Nordzucker AG in September These factories were shut down as part of the concept for factory structures in view of the ban on EU sugar exports by the WTO arbitration panel. Measurement of the value in use as of February 28, 2007 resulted in neither an impairment loss nor a write-up. Budgets for the next 5 years are used in determining the cash flows of the reporting units. The interest rate used in the financial year 2006/07 for discounting the cash flows of the reporting units is 7.85 per cent, compared with 8.0 per cent for the financial year 2005/06. A growth rate of zero per cent was assumed for the long-term earnings component of the discounted cash flow calculation. 78

83 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes An impairment test was required for the Hübner Group, which includes the subsidiaries Anton Hübner GmbH & Co. KG and Medopharm Arzneimittel GmbH & Co. KG, due to difficult market conditions in the health food store sector, which led to severe revenue losses in the current year. An impairment loss of TEUR 4,338 was recognised on the basis of the value in use calculated as of December 31, Budgets for the next 5 years were used to determine the cash flows of the reporting units. The interest rate used to discount the cash flows of the reporting units was 8.5 per cent. A growth rate of zero per cent was assumed for the long-term earnings component of the discounted cash flow calculation. In addition to the impairment test at the reporting level, property, plant and equipment are also written down to their recoverable value, e.g. in the case of factory closures (see note 10) and written back if the reasons for the write-down cease to exist. TEUR 5,242 was written back in the financial year (previous year: TEUR 1,949). 19. Investment properties The investment properties in the Nordzucker Group relate particularly to flats and land not required for operating purposes. TEUR 196 (previous year: TEUR 9) for which there was no corresponding rental income. The fair value of properties held for rent was TEUR 15,065 as of February 28, 2007 (previous year: TEUR 16,647). Fair value was determined on the basis of internal estimates of market values using comparable properties. Subsequent acquisition costs of TEUR 186 (previous year: TEUR 65) were capitalised in the financial year 2006/ Financial assets For changes in financial assets please refer to the consolidated fixed assets schedule for Nordzucker Group beginning on page Companies accounted for under the equity method and by proportionate consolidation In the financial year associated companies accounted for under the equity method reported total net profit of TEUR -3,412 (previous year: TEUR -4,515), revenues of TEUR 35,559 (previous year: TEUR 211,709), assets of TEUR 21,302 (previous year: TEUR 169,241) and liabilities of TEUR 19,518 (previous year: TEUR 123,383) in their financial statements. In applying the equity method losses from an associated company are not recognised which exceed the carrying amount of the investment or other longterm receivables relating to the financing of the associated company, as there is no requirement to invest further equity. This amount was exceeded by TEUR 331. The company for which proportionate consolidation was used reported annual net profit of TEUR 818 (previous year: TEUR -7,052), revenues of TEUR 625 (previous year: TEUR 393), assets of TEUR 1,390 (previous year: TEUR 1,758) and liabilities of TEUR 295 (previous year: TEUR 1,203) Other financial assets Non-consolidated shares in subsidiaries and other available-for-sale financial instruments included in long-term financial assets are carried at fair value at the reporting date or at amortised cost, if fair value cannot be reliably determined by other valuation methods or because there is no active market. The shares in Cukrovary TTD a.s. are disclosed here, despite a stake of 35 per cent, because the Group does not exercise significant influence. In the financial year 2006/07 the Group reported rental income of TEUR 145 (previous year: TEUR 301) and corresponding expenses of TEUR 183 (previous year: TEUR 172). There were also expenses of Nordzucker Group s share of the profits/losses of associated companies in the reporting period was TEUR -1,706 (previous year: TEUR -2,258). Nordzucker 2006/07 79

84 Consolidated fixed assets schedule for the previous year (2005/06) Nordzucker AG, Braunschweig Cost or fair value in TEUR As of Curreny Changes in Additions Reclassifi- Disposals As of 1/3/2005 effects group of cations 28/2/2006 consolidated companies Intangible assets Purchased rights and licences 18, , ,332 Internally produced software 2, ,487 Advance payments made Property, plant and equipment 20, , ,155 Land and buildings 443,189 1, ,968-2,573 28, ,895 Technical plant and machinery 1,329,638 1, ,541 8,492 74,544 1,293,724 Other plant, operating and office equipment 65, , ,096 63,314 Advance payments made and plant under construction 6, ,871-8,738 4,394 2,494 1,845,418 3, ,122-2, ,482 1,784,427 Investment property 13, , ,294 Financial assets Shares in affiliated companies 1, , ,101 Loans to related parties 7, ,500 Other loans 1, ,634 Shares in associated companies at equity 51, ,303 49,077 Other investments 21, ,969 Long-term securities , , ,563 94,404 1,964,650 3,575 12,815 54, ,650 1,917,280 80

85 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Accumulated depreciation, amortisation and impairment losses Carrying amounts As of Currency Change in Depreciation, Impairment Reversals of Reclassifi- Disposals As of As of As of 1/3/2005 effects Group of amortisation losses impairment cations 28/2/ /2/ /2/2005 consolidated losses companies 11, , ,614 7,718 7,124 1, , , , ,150 9,005 8, , ,607 7,502 9,218-3,259 28, , , , , ,057 19,570 23,024 1,690 71, , , ,719 50, , ,594 50,972 12,342 15, ,494 6,659 1,309,552 1, ,078 27,309 32,293-1, ,866 1,233, , ,866 5, , ,326 8,968 8, , , ,500 7,500 1, , , , ,772 40,305 44,248 2, ,128 19,841 19, , , , ,973 68,431 72,595 1,340,091 1,460 12,815 35,737 29,013 32, ,331 1,280, , ,559 Nordzucker 2006/07 81

86 Consolidated fixed assets schedule 2006/07 Nordzucker AG, Braunschweig Cost or fair value in TEUR As of Curreny Changes in Additions Reclassifi- Disposals As of 1/3/2006 effects Group of cations 28/2/2007 consolidated companies Intangible assets Purchased rights and licences 19, , ,942 Internally produced software 2, ,554 Goodwill , ,730 Advance payments made Property, plant and equipment 22, ,833 61, , ,256 Land and buildings 424,895 5,312 32,438 6,753 1,038 10, ,327 Technical plant and machinery 1,293,724 7,517 48,272 25,658 2,025 39,804 1,337,392 Other plant, operating and office equipment 63, ,633 3,210-1,525 9,594 58,356 Advance payments made and plant under construction 2, ,944 16, ,196 20,988 1,784,427 13,769 90,287 52, ,703 1,877,063 Investment property 16, ,818 10,811 Financial assets Shares in affiliated companies 14, ,266 Loans to related parties 7, ,500 0 Other loans 1, ,533 Shares in associated companies at equity 49, ,159 10,918 Other investments 21, ,848 Long-term securities Other financial instruments , ,953 47,925 1,917,280 13, , , ,501 2,065,055 82

87 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Accumulated depreciation, amortisation and impairment losses Carrying amounts As of Currency Change in Depreciation, Impairment Reversals of Reclassifi- Disposals As of As of As of 1/3/2006 effects Group of amortisation losses impairment cations 28/2/ /2/ /2/2006 consolidated losses companies 11, , ,718 60,224 7,718 1, , , , , , ,929 9, , ,754 4, , , , , ,085 1, , ,996 1,342 36, , , ,639 50, , ,340 8,929 44,509 13,847 12, ,988 2,494 1,233,635 1, ,427 4,620 5, ,126 1,222, , ,792 7, ,007 4,432 6,379 8,968 13, , ,500 1, , , , , ,305 2, ,130 19,718 19, , , ,785 21,140 68,431 1,280,084 1, ,503 6,678 5, ,148 1,274, , ,196 Nordzucker 2006/07 83

88 Inventories 1/3/2006 1/3/2005 TEUR - 28/2/ /2/2006 Raw materials, consumables and supplies 26,141 20,005 Work in progress 848 1,165 Finished goods and merchandise 519, ,410 Inventories 546, , Inventories Inventories are made up as shown aside: Inventories of TEUR 92,622 (previous year: TEUR 60,413) are carried at net realisable value. Impairment losses on inventories amounted to TEUR 9,293 (previous year: TEUR 2,431). Trade receivables TEUR 28/2/ /2/2006 Trade receivables (gross) 121,001 90,444 Impairment allowances on trade receivables 3,372 1,733 Trade receivables (from external companies) 117,629 88, Trade receivables Trade receivables are made up as shown aside: Receivables from related parties and companies TEUR 28/2/ /2/2006 Receivables from affiliated companies 1,727 1,726 Receivables from other related parties 3,327 2,493 Receivables from related parties 5,054 4, Receivables from related parties and companies Receivables from related parties are made up as shown aside: There are no identifiable default risks as of February 28, Financial assets TEUR 28/2/ /2/2006 Claims for damages 3,574 4,800 Suppliers with debit balances Positive fair value of derivatives 1, Available-for-sale securities Other financial assets 17,568 3,240 Financial assets 23,711 9, Financial assets The financial assets are made up as shown aside: Securities held as current assets and classified as available-for-sale are all carried at fair value. The main individual item of other financial assets is receivables from the sale of sugar beet delivery rights of TEUR 12,

89 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes 25. Other assets Other assets consist of the following items: Other assets TEUR 28/2/ /2/2006 Receivables from other taxes 17,207 15,388 Miscellaneous other assets 17,833 18,121 Other assets 35,040 33, Long-term assets held for sale Long-term assets classified as held for sale according to IFRS 5 consist of land and buildings valued at TEUR 257 (previous year: TEUR 502). 27. Shareholders equity Changes in shareholders consolidated equity are shown in the table of changes in shareholders equity on page Subscribed capital Subscribed capital (ordinary share capital) amounts to 123,651,328 Euro as of February 28, 2007 and is divided into 48,301,300 registered common shares. With the approval of the Supervisory Board, the Management Board is authorised to increase the share capital by up to 32.0 million Euro (authorised share capital). The ordinary share capital is fully paid in and has a nominal share of subscribed capital of 2.56 Euro per share, as in the previous year. As of the reporting date Nordzucker Holding AG, Braunschweig, had provided evidence that it held more than 50 per cent of the shares with per cent Capital reserves The capital reserves have been formed from share premiums paid in the course of capital increases by Nordzucker AG Retained earnings Retained earnings are made up of the net income earned in prior financial years and the current period by the companies Accumulated other equity included in the consolidated financial statements. Goodwill arising on acquisitions made by the Group before March 1, 2004 has been set off against reserves. In the IFRS opening balance sheet the equalisation amount from conversion of financial statements prepared in foreign currencies was set off against retained earnings Accumulated other equity Accumulated other equity is made up as follows: TEUR 28/2/ /2/2006 Fair value adjustment to derivatives cash flow hedges Exchange rate differences from consolidation of foreign subsidiaries 22,161 14,344 Accumulated other equity 23,042 14, Minority interests Minority interests exist primarily in the following companies: Minority interests TEUR 28/2/ /2/2006 Sunoko d.o.o. 0 63,779 0 Cukrownia Chełmża S.A. 1,995 2,006 Považský cukor a.s. 1,208 1,062 Cukrownia Melno S.A Cukrownia Krasiniec S.A Other companies Minority interests 68,364 4,485 Nordzucker 2006/07 85

90 28. Pension obligations Provisions for pension obligations are made for accrued and current benefits of both current and former employees of the Nordzucker Group and of their surviving dependents. sion commitments are based on collective agreements and in a few cases on individual agreements with fixed benefit amounts. The defined benefit plans have commitments either covered by provisions or funded by plan assets. Benefit obligations are structured in line with the legal, fiscal and economic conditions in each country. The Group has both defined contribution plans and defined benefit plans. Pen- Provisions for pensions are determined in accordance with IAS 19 on the basis of actuarial assumptions. The following weighted variables have been used in the financial years 2006/07 and 2005/06. Variables for pension obligations 28/2/ /2/2006 Discount rate (%) Salary increase (%) Pension increase (%) For domestic companies in the Nordzucker Group the assumptions for life expectancy are taken from the actuarial tables 2005 G by Dr Klaus Heubeck. Expenses of TEUR 6,976 (previous year: TEUR 8,440) were incurred for defined benefit plans in 2006/07, which were made up as follows: Expenses for pensions 1/3/2006 1/3/2005 TEUR 28/2/ /2/2006 Service cost 2,867 2,423 Effects of curtailments and cancellations of pension plans Amortisation of unrealised actuarial gains (-) and losses (+) Personnel expenses 2,867 2,436 Interest expense for provisions for pension obligations in the financial year 6,849 7,128 Return on plan assets -2,746-1,133 Effects of changes in exchange rates 6 9 Interest expense 4,109 6,004 Expenses for pensions 6,976 8,440 86

91 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Changes in the net pension obligations disclosed in the balance sheet are as follows: The actual return on pension plan assets was TEUR 2,109 (previous year: TEUR 1,133), the variation due to experience was therefore TEUR -637 (previous year: TEUR 0). Net pension obligations 1/3/2006 1/3/2005 TEUR - 28/2/ /2/2006 Provision for pensions at the end of the previous financial year 101, ,645 Service cost in the financial year 2,867 2,423 Interest expense for pensions in the financial year 6,849 7,128 Expected return on plan assets -2,746-1,133 Contributions to pensions companies/plan assets ,388 Pension payments -8,810-8,708 Income received from plan assets 3,997 4,651 Amortisation of unrealised actuarial gains (-) and losses (+) Expense from amortisation of retroactive changes in benefit entitlements; reductions (-), increases (+) 0-19 Effects of curtailments and cancellations of pension plans Transfers of pension obligations from other companies, including intra-group transfers Transfers of pension obligations to other companies, including intra-group transfers Effects of changes in exchange rates 6 9 Provision as of February , ,981 The amount of the provision is made up as follows: As of February 28, 2005 the present value of pension obligations was TEUR 161,205, the present value of plan assets was TEUR 807, the unrealised actuarial losses were TEUR 13,753 and the provision for pension obligations was TEUR 146,645. TEUR 28/2/ /2/2006 Present value of pension obligations 159, ,364 Present value of plan assets for funded pension obligations -42,705-46,677 Unrealised actuarial gains (+)/ losses (-) -13,027-25,706 Provision for pension obligations 104, ,981 Nordzucker 2006/07 87

92 29. Other provisions Other provisions are made up as follows: Other provisions As of Exchange As of TEUR 1/3/2006 rate effects Transfer Utilisation Reversal 28/2/2007 Sugar regime levies 31, ,621 4,421 25,816 3,342 Recultivation obligations 1, , ,508 Expenses for anniversaries 2, ,885 Partial early retirement 3, ,747 Profit sharing, bonuses and other gratuities 5, ,963 5, ,963 Early retirement 23, ,866 7,265 1,919 19,619 Miscellanous other provisions 16, ,591 9,380 4,727 14,269 Other provisions 84, ,972 28,456 32,936 51,333 The provision for sugar regime levies includes the Group s own share of the production levy, which had not been definitively set at the balance sheet date. ment in connection with changes to the sugar market regime which will come into effect in subsequent years, as well as other individual agreements. The provision for early retirement covers the Group s forecast obligations under existing collective early retirement agreements as part of a redundancy settle- Miscellaneous other provisions were made for bonuses and commissions, imminent losses from pending transactions and other anticipated expenses. Financial liabilities TEUR 28/2/ /2/2006 Bank loans and overdrafts 214, ,116 Liabilities from finance leases 1, Financial liabilities 216, ,632 Liabilities to banks Remaining term Remaining term Remaining term Total TEUR of up to one year of 1-5 years above 5 years 28/2/ , , ,884 28/2/ , ,387 3, , Financial liabilities The financial liabilities are made up as shown aside: As of February 28, 2007 the bank loans and overdrafts have the following term structure: As of February 28, 2007 the average interest rate for financing is 4.4 per cent. Currently unused lines of credit totalling TEUR 528,478 (previous year: TEUR 356,500) have also been confirmed for Nordzucker AG in the financial year. 88

93 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes 31. Accounts payable Accounts payable are made up as follows: Accounts payable TEUR 28/2/ /2/2006 Liabilities towards sugar beet suppliers 175, ,480 Other accounts payable 47,134 51,327 Accounts payable 223, , Liabilities towards related parties and companies Liabilities towards related parties are made up as follows: Liabilities towards related parties and companies TEUR 28/2/ /2/2006 Liabilities towards affiliated companies Liabilities towards other related parties 2,952 2,626 Liabilities toward related parties 3,064 2, Other financial liabilities Other financial liabilities are made up as follows: Purchase price liabilities include the purchase of additional production quotas and subsequent purchase price payments in connection with the acquisition of the Serbian investment. Other financial liabilities TEUR 28/2/ /2/2006 Liabilities towards employees 6,089 5,406 Liability for the restructuring levy, less reimbursement of the production levy for ,202 0 Purchase price liabilities 102,836 0 Negative fair value of derivatives Customers with credit balances Other financial liabilities 4, Other financial liabilities 212,384 6, Other liabilities Liabilities from investment grants, subsidies and other support payments derive from public subsidies in connection with the purchase or production of subsidised property, plant and equipment. They are reversed through profit and loss over the useful life of the subsidised assets. Miscellaneous other liabilities mainly consist of liabilities towards staff for outstanding wages and salaries as well as unused holiday entitlement. Other liabilities TEUR 28/2/ /2/2006 Liabilities from other taxes 9,997 8,925 Outstanding social security contributions 1,756 2,425 Investment grants, subsidies and other support payments 15,508 15,047 Deferrals 13,808 1,691 Advance payments received for orders 3, Liabilities for sugar regime levies 0 40,972 Miscellanous other liabilities 7,002 6,116 Other liabilities 51,314 75,642 Liabilities from sugar regime levies include the outstanding share of the produc- tion levy withheld from beet farmers for remittance to the authorities. Nordzucker 2006/07 89

94 Notes to the consolidated cash flow statement 35. Components of cash and cash equivalents The components of cash and cash equivalents are the same as in the balance sheet. No cash or cash equivalents disclosed in the consolidated cash flow statement was used for bank guarantees or escrow payments for warranties. Non-cash transactions TEUR 28/2/ /2/2006 Finance lease agreements signed Other non-cash equity transactions 0 1, Non-cash transactions In 2006/07 and 2005/06 significant noncash transactions took place as shown aside: Other disclosures in the consolidated cash flow statement TEUR 28/2/ /2/2006 Interest paid in the financial year 17,440 9,806 Interest received in the financial year 6,705 1,653 Dividends received in cash in the financial year 10 0 Current taxes paid in the financial year 27,058 29,050 Reimbursed current taxes 2,257 9, Other disclosures in the consolidated cash flow statement Cash flow from operating activities includes the payments for income taxes, interest and net income/loss from investments as shown aside: Other disclosures 38. Financial instruments Non-derivative financial instruments The fair value of non-derivative financial instruments is equal to their carrying amounts Interest rate risks/derivative financial instruments The Nordzucker Group uses derivative financial instruments to hedge against interest rate fluctuations. The use of interest rate derivatives is governed by specific Group guidelines and limited to hedging existing underlying transactions and planned transactions which are sufficiently likely to take place. The guidelines define the individuals responsible, the limits and reporting and stipulate a strict separation of trading and clearing. Existing exposure to interest rate fluctuations from floating rate loans is reduced by the use of interest rate swaps and interest rate caps. 90

95 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes In the financial year 2005/06 Nordzucker AG entered into a syndicated loan agreement for 50 million Euro as part of the partial transfer of pension obligations to Allianz Lebensversicherungs-AG. The loan is repayable in ten equal semi-annual instalments by December 30, The interest rate is variable and depends on the equivalent interest rate for the period (EURIBOR). To hedge the interest rate risk two interest rate swaps were closed for the amount and the maturity of the loan. The exchange of interest (settlement) takes place semi-annually in arrears on June 30 and December 31. At the end of the reporting period the fair value of the interest rate swap was TEUR 528. The syndicated loan for 400 million Euro, which was refinanced in 2005/06, was also extended for one year by exercising an extension option for the floating rate portion of 350 million Euro for an amount of 336 million Euro. To hedge the interest rate risk for the fixed rate portion of 50 million Euro an interest rate swap was concluded. The exchange of interest takes place quarterly in arrears on May 31, August 31, November 30 and February 28. The fair value of the interest rate swap at the end of the financial year was TEUR 1,036. In addition the planned drawdown of using accepted mathematical models. 50 million Euro from the floating portion This involved ascertaining the relevant of currently 350 million Euro was hedged market data such as money market rates from December 1, 2007 to February 28, and swap rates at the balance sheet date, 2011 with a forward swap. Interest is exchanged then determining the forward rates and quarterly in arrears on May 31, present values of future cash flows using August 31, November 30 and February 28. these data and subsequently calculating The fair value of this interest rate swap the overall MTM. at the end of the financial year was TEUR From the financial year ending February 28, 2006 onwards, changes in fair value The interest rate caps mentioned in the are recognised directly in accumulated previous year s consolidated financial other equity. In prior years changes in statements and carried at TEUR 20 at the fair value were recognised through profit balance sheet date February 28, 2006, led and loss, as the criteria of IAS 39 for recognising to reimbursement of interest of TEUR 37 a hedging relationship as a in the financial year and are no longer in cash flow hedge were not met, despite the portfolio as of February 28, the fact that the transactions represented hedges in economic terms. The value of the interest rate hedges (market value, also known as mark to The nominal amounts and market values market = MTM) as of February 28, 2007 of derivatives are made up as follows: was determined by the contracting banks Derivative financial instruments 28/2/ /2/2006 TEUR Nominal amount Fair value Nominal amount Fair value Forward interest rate swaps 100, , Interest rate swaps 30, , Interest rate caps , Credit risk Nordzucker Group is exposed to the risk that business partners may not fulfil their obligations to the Group. The maximum default risk is equal to the nominal amounts disclosed for the individual categories of financial assets. Business partners are subject to credit scoring in order to reduce credit risk. Identifiable default risks are accounted for by write-downs. Nordzucker 2006/07 91

96 Significant subsidiaries Group stake Domestic subsidiaries NORDZUCKER GmbH & Co. KG, Braunschweig 100 % fuel21 GmbH & Co. KG, Klein Wanzleben 100 % Anton Hübner GmbH & Co. KG, Ehrenkirchen 100 % Medopharm Arzneimittel GmbH & Co. KG, Freiburg 100 % Foreign subsidiaries Považský cukor a.s., Trenčianska Teplá/Slovakia >97 % Nordzucker Polska S.A., Opalenica/Poland >99 % Mátra Cukor Rt., Hatvan/Hungary >99 % Sunoko d.o.o., Novi Sad/Serbia 51 % The table of investments for Nordzucker AG and the Group is lodged with the commercial registry of the Braunschweig District Court in accordance with Sec. 287 and Sec. 313 (4) German Commercial Code (HGB). 39. Significant subsidiaries The following trading companies structured as limited partnerships (GmbH & Co. KG) are exempt pursuant to Sec. 264b HGB from the obligation to prepare financial statements in accordance with the regulations applicable to companies with limited liability: NORDZUCKER GmbH & Co. KG, Braunschweig fuel21 GmbH & Co. KG, Klein Wanzleben Medopharm Arzneimittel GmbH &Co. KG, Ehrenkirchen Anton Hübner GmbH & Co. KG, Ehrenkirchen 40. Related party transactions For Nordzucker Group related parties within the meaning of IAS 24 are individuals and companies which control the Group or exercise significant influence over it or are controlled or significantly influenced by the Group. The first category includes the active members of the Management Board and Supervisory Board of Nordzucker AG and its majority shareholder Nordzucker Holding AG. The subsidiaries, associated companies and jointly controlled companies in the Nordzucker Group are also defined as related parties. Related party transactions TEUR 28/2/ /2/2006 Balance sheet Receivables from related parties 5,054 4,219 Liabilities towards related parties 3,064 2,817 Receivables from and liabilities towards related parties are based on arm s length transactions. Commercial relationships existed with related parties in addition to those existing with fully consolidated subsidiaries as shown aside: 1/3/2006 1/3/2005 TEUR - 28/2/ /2/2006 Income statement Services provided to related parties Net financial income/loss 3,

97 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Receivables from related parties result almost exclusively from trade in goods and services. Of these, TEUR 1,727 (previous year: TEUR 1,726) relate to nonconsolidated subsidiaries and TEUR 3,327 (previous year: TEUR 2,493) to joint ventures accounted for under the equity method. No write-downs were necessary for the receivables listed. The liabilities towards related parties also result primarily from trade in goods and services. Of these, TEUR 112 (previous year: TEUR 191) relate to non-consolidated subsidiaries and TEUR 2,952 (previous year: TEUR 2,626) to joint ventures accounted for under the equity method. 41. Contingent liabilities The Group has given the following contingent liabilities: As of February 28, 2007 non-current assets carried at TEUR 86,050 (previous year: TEUR 64,287) have been pledged as collateral for liabilities. Guarantees TEUR 28/2/ /2/2006 Payment guarantees Warranties 0 1, Other financial obligations Other financial obligations for the Group are made up as follows: As of February 28, 2007 total future payment obligations for rental and lease agreements are made up as follows: Other financial obligations TEUR 28/2/ /2/2006 Purchase commitments for property, plant and equipment 38,735 1,869 Finance leases 1, Operating leases/rent Other financial obligations 40,378 2,422 Rental and leasing agreements TEUR Remaining term Remaining term Remaining term Total of up to one year term of 1-5 years of more than 5 years Future payments for finance leases 380 1, ,501 Future payments for operating leases Future payments for finance leases are made up as follows on February 28, 2007: Finance lease TEUR Remaining term Remaining term Remaining term Total of up to one year term of 1-5 years of more than 5 years Principal 370 1, ,444 Interest Payment 380 1, ,501 Nordzucker 2006/07 93

98 43. Supervisory Board and Management Board In the financial year 2006/07 the members of the Supervisory Board were as follows: Representing the shareholders Dr. Harald Isermeyer Farmer, Vordorf Chairman since July 14, 2006 Jürgen Seidel Engineer, Gronau Deputy Chairman Gerhard Borchert Farmer, Brome since July 14, 2006 Goetz von Engelbrechten Farmer, Uelzen Henning Hansen-Hogrefe Farmer, Ingeleben Chairman up to July 14, 2006 Dietrich Hauschildt-Staff, Farmer, Steinbrück up to July 14, 2006 Albrecht Hertz-Eichenrode, Chairman of the Management Board of HANNOVER Finanz Gruppe, Hannover Rainer Knackstedt, Farmer, Dedeleben Hans-Christian Koehler, Farmer, Barum Claus Lütje, Farmer, Rade Hans-Heinrich Prüße, Farmer, Ahlten Representing the employees Gunold Fischer Deputy Chairman of the trade union NGG, Hamburg Deputy Chairman Eckhard Bosse EMSR master, Leiferde Klaus Fentzahn Measurement and control mechanic, Güstrow up to November 11, 2006 Rolf Huber-Frey Businessman, Freiburg Gunther Kenk Trade union secretary for the state of Mecklenburg-Vorpommern of the trade union NGG, Ihlenfeld Gudrun König, Technical clerk, Wolfenbüttel Dieter Paschwitz MSR master, Hohenhameln Jochen Steinhagen Manager Raw Materials Procurement, Wieren Marina Strootmann Head of the Works Council Braunschweig, Braunschweig, since March 9, 2007 Manfred Tessmann Trade union secretary for the South-East Lower Saxony region of the trade union NNG, Vienenburg Wolfgang Wiesener Metalworker, Uelzen The members of the Management Board in the financial year 2006/07 were as follows: Hans-Gerd Birlenberg, Braunschweig Management Board member responsible for Corporate Development, Corporate Council, Revenues (Europe), Controlling, Finance and Accounting, Information Technology and Staff Development, member of the Management Board since October 1, 2006, Chairman of the Management Board since February 2, 2007 Günter Jakobiak, Hornburg Management Board member responsible for Production (Europe), Logistics, Human Resources, Purchasing (Europe), Management Systems, Consumer Protection Dr. Henrik Einfeld, Braunschweig Management Board member responsible for Agriculture, Beet Procurement (Europe), M+A International, Risk Management, Internal Audit, since February 2, 2007 Dr. Ulrich Nöhle, Braunschweig, Management Board member responsible for Research and Development, Marketing and Revenues and Business Development, member of and Chairman of the Management Board up to February 1, 2007 Jens Fokuhl, Wolfenbüttel Management Board member responsible for Controlling, Finance and Accounting, Communications, Information Technology and Sugar International, up to March 7, Remuneration report In the following section the principles of remuneration for members of the Management Board and Supervisory Board of Nordzucker AG are described and the amount of their remuneration disclosed, together with disclosures on shares held by members of the Management Board and Supervisory Board. 94

99 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes 44.1 Remuneration of members of the Management Board The Human Resources Committee of the Supervisory Board is responsible for setting the remuneration of members of the Management Board. The remuneration of members of the Management Board of Nordzucker AG is based on the size and business of the company, its economic and financial position and the level and structure of Management Board remuneration in comparable companies. Management Board remuneration is performance related and made up of two components in the financial year 2006/07: a fixed salary and a variable bonus. There are no share-based remuneration components. The fixed remuneration is paid as a monthly salary. The variable component is set by the Human Resources Committee of the Supervisory Board based on the targets met by the Management Board and can be up to 40 per cent of total salary. At the meeting of the Human Resources Committee on March 15, 2007 the bonuses were set at 32 per cent, based on performance in relation to the targets laid down at the beginning of the financial year. Total remuneration amounted to TEUR 1,243 (previous year: TEUR 1,284). The following remuneration was set for individual members of the Management Board for the financial year 2006/07. Remuneration of members of the Management Board Cash payments Pensions Other 1) Total Variable in EUR Salary annual bonus Hans-Gerd Birlenberg 150,499 68, ,086 22, ,496 Günter Jakobiak 350, , ,927 22, ,518 Dr. Henrik Einfeld 25, , ,789 Dr. Ulrich Nöhle 409, , ,373 Jens Fokuhl 29, , ,230 Total 963, , ,066 46,047 1,763,406 1) Non-cash benefit for tax purposes, e.g. for company car etc. Severance payments of TEUR 3,310 were made to departing members of the Management Board in the financial year 2006/07, which also covered pension claims. Pension commitments are made, equivalent to between 19 per cent and 33 per cent of fixed salary, depending on length of service. Nordzucker AG has set up provisions of TEUR 1,563 (previous year: TEUR 2,263) for pension commitments to members of the Management Board. Former members of the Management Board received pension payments of TEUR 480. Nordzucker AG has recognised provisions of TEUR 6,605 (previous year: TEUR 6,345) for pension commitments to former members of the Management Board. Member of the Management Board do not receive loans from the company. Nordzucker 2006/07 95

100 44.2. Remuneration of the Supervisory Board The remuneration of the Supervisory Board was set at the Annual General Meeting following a proposal from the Management Board and Supervisory Board. It is governed by the Articles of Association. The remuneration of the Supervisory Board is based on the size of the company, the duties and responsibilities of the members of the Supervisory Board and the economic situation of the company. The remuneration includes a dividend-related component in addition to a fixed payment. The Chairman and Deputy Chairman receive additional remuneration. The current rules on remuneration for the Supervisory Board are laid down in Sec.14 of the Articles of Association. According to these rules members of the Supervisory Board receive a fixed remuneration of 13,000 Euro and a dividendrelated payment of 500 Euro for every per cent of dividend distributed above five per cent. Subject to the approval at the Annual General Meeting the dividend for the financial year 2006/07 will be 0.48 Euro (previous year: 0.26 Euro) per share or per cent (previous year: per cent). The Chairman of the Supervisory Board receives twice and both deputies one and a half times the fixed remuneration of a normal member. Members of the Supervisory Board are also reimbursed for all out of pocket expenses and value added taxes incurred in the course of their duties. Subject to the approval of the dividend proposal at the Annual General Meeting the following payments will be made for the financial year: Remuneration of the Supervisory Board Fixed Variable in EUR remuneration remuneration Total Dr. Harald Isermeyer 21, , , Henning Hansen-Hogrefe 21, , , Jürgen Seidel 19, , , Albrecht Hertz-Eichenrode 13, , , Goetz von Engelbrechten 13, , , Dietrich Hauschildt-Staff 7, , , Gerhard Borchert 8, , , Rainer Knackstedt 13, , , Hans-Christian Koehler 13, , , Claus Lütje 13, , , Hans-Heinrich Prüße 13, , , Gunold Fischer 19, , , Eckhard Bosse 13, , , Klaus Fentzahn 9, , , Gudrun König 13, , , Rolf Huber-Frey 13, , , Gunther Kenk 13, , , Dieter Paschwitz 13, , , Jochen Steinhagen 13, , , Manfred Tessmann 13, , , Wolfgang Wiesener 13, , , Total 289, , , Member of the Supervisory Board do not receive loans from the company. 96

101 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Shares held by members of the Management Board and Supervisory Board Members of the Management Board held no shares. As of February 28, 2007 members of the Supervisory Board and related parties held less than one per cent of the issued share capital of Nordzucker AG. The shares bear no relation to the remuneration of the Supervisory Board Miscellaneous Board members of Nordzucker AG are indemnified by Nordzucker AG against third party liability as allowed by law. For this purpose the company has taken out D&O insurance for members of the Boards of Nordzucker AG. It is renewed or extended annually. The insurance policy covers the personal liability of Board members for claims for damages arising in the course of their work. It includes an excess as recommended in 3.8 (2) of the German Corporate Governance Code. 45. Declaration on the German Corporate Governance Code In accordance with Sec. 161 German Stock Corporation Act (AktG), Nordzucker AG has made the declaration of compliance with the German Corporate Governance Code given by the Management Board and Supervisory Board in March 2007 permanently available to shareholders on the company s website at Investor Relations Corporate Governance Declaration of compliance. 46. Dividend proposal The dividends that can be distributed to shareholders are defined by the German Stock Corporation Act (AktG) as the net balance sheet profit as determined under German commercial law and disclosed in the financial statements of Nordzucker AG. The annual financial statements for the financial year 2006/07 show a net balance sheet profit of 34,383, Euro. The Management Board proposes appropriating 23,184, Euro of the net balance sheet profit to be distributed as a dividend of 0.48 Euro per share with dividend entitlement, appropriating 11,100, Euro to retained earnings and to carry forward the remaining sum of 98, Euro to the next financial year. Braunschweig, April 20, 2007 Nordzucker AG Management Board Birlenberg Dr. Einfeld Jakobiak Nordzucker 2006/07 97

102 Auditors' report We have audited the consolidated financial statements prepared by Nordzucker AG, Braunschweig, comprising the balance sheet, the income statement, the cash flow statement, the statement of changes in equity and the notes to the consolidated financial statements, together with the Group management report for the fiscal year from March 1, 2006 to February 28, The preparation of the consolidated financial statements and the Group management report in accordance with IFRS as adopted by the EU, and the additional requirements of German commercial law pursuant to Sec. 315a (1) HGB [ Handelsgesetzbuch : German Commercial Code] is the responsibility of the Company s management. Our responsibility is to express an opinion on the consolidated financial statements and on the Group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with Sec. 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the Group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the Group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and the Group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRS as adopted by the EU, the additional requirements of German commercial law pursuant to Sec. 315a (1) HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The Group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group s position and suitably presents the opportunities and risks of future development. Hanover, April 27, 2007 Ernst & Young AG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft Hentschel Wirtschaftsprüfer [German Public Auditor] Lüpkes Wirtschaftsprüfer [German Public Auditor] 98

103 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Report of the Supervisory Board of Nordzucker AG for the financial year 2006/07 The Supervisory Board held a total of eleven meetings to discuss the commercial and strategic development of Nordzucker AG and to receive information on current events from the Management Board. All the Supervisory Board s discussions and decisions were aimed at protecting and increasing the company s assets. The members of the Supervisory Board monitored company management and advised the Management Board of Nordzucker AG. The Management Board provided the Supervisory Board with regular, prompt and comprehensive information on corporate and commercial policy, company strategy and management, risk management, the financial development of the company and transactions of fundamental importance. Furthermore, all matters requiring the authorisation of the Supervisory Board were presented to us for approval. In the course of a closed meeting held in March 2006 the Supervisory Board dealt with the adoption of IFRS accounting principles for the Group and for Nordzucker AG. We also examined the market for biofuels and biogenic fuels and discussed the economic and legal framework for bioethanol production. The result of this detailed review of the subject was the resolution taken at the meeting held in May 2006 to build a plant for producing bioethanol from sugar beet at the Klein Wanzleben site. The members of the Supervisory Board kept the developments on the European sugar market and the effects of the reform of the sugar market regime dating from February 20, 2006 on Nordzucker AG s business under permanent review. Together with the Management Board they approved the purchase of an additional sugar quota of 72,000 tonnes in Germany and argued in favour of a consistent implementation of the reform in order to make the restructuring scheme more attractive and reduce the surplus on the European sugar market. As part of the Group s move into Europe the Supervisory Board supports the Management Board s plan to reinforce Nordzucker AG s competitiveness in a changing market environment by serving major European customers on a large scale and at lower logistics costs. The Supervisory Board therefore approved the memorandum of understanding on setting up the European distribution company Eurosugar with the French sugar producer Cristal Union and the UK trading company ED&F Man. Over the whole financial year the Supervisory Board discussed acquisition and investment opportunities and carried out a fundamental review of the company s strategic orientation. In conjunction with the Management Board the Supervisory Board has come to the conclusion that Nordzucker AG should concentrate on the core competencies Beet sugar in the European Union and neighbouring states and Renewable resources/bioethanol. This orientation resulted in the discontinuation of the InnoSweet subsidiary s Dr. Harald Isermeyer Chairman of the Supervisory Board Nordzucker 2006/07 99

104 business in the sale of alternative sweeteners and the disposal of shares in Syral S.A. Marckholsheim, which is primarily active in starch saccharification. The management buyout of Amino GmbH represented a further divestment of an investment outside Nordzucker AG s core competencies. The Supervisory Board agrees with the Management Board that the company must maintain a strict cost discipline. It dealt with the capital expenditure programme of Nordzucker AG on a regular basis and passed resolutions with regard to this. It also applauds the extraordinary successes achieved by the subsidiaries in Poland, Slovakia, Hungary and Serbia and by the minority holding in the Czech Republic. At the meeting held on March 7, 2006 the Supervisory Board accepted the resignation of the Management Board Member Jens Fokuhl, who was responsible for the Finance and International Sugar departments. We appointed Hans-Gerd Birlenberg to the position in October Following the resignation of Dr Ulrich Nöhle as Chairman of the Management Board on February 1, 2007, the Supervisory Board appointed Hans-Gerd Birlenberg as Chairman of the Management Board of Nordzucker AG. At the same time it appointed Dr Henrik Einfeld as the Director for Raw Material Procurement and Agriculture as well as for Mergers and Acquisitions. The Supervisory Board expresses its thanks to Jens Fokuhl and Dr Ulrich Nöhle for their great commitment in the past. Events after the balance sheet date The Boettger Group and Nordzucker each hold 50 per cent of the Melasse Extraktion Frellstedt GmbH, Frellstedt (MEF). Last year the MEF shareholders pointed out the difficult mid-term prospects for the company. Following the outsourcing of the amino acid business in 2006 MEF bases its business solely on the production of raw sugar juice from molasses for subsequent refining into liquid sugar. At a meeting held on March 13, 2007 the Supervisory Board decided to acquire the Boettger Group s 50 per cent stake and to transfer the sugar quota of 20,703.5 tonnes to Nordzucker AG. The Supervisory Board also approved the establishment of a joint liquid sugar production company and a joint distribution company for liquid sugar with the Boettger Group. Nordzucker AG will hold 51 per cent of both these joint ventures. Previously Nordzucker and the Boettger Group had produced and distributed liquid sugar independently. As from the financial year 2006/07 Nordzucker AG permanently employs fewer than 2,000 employees in Germany, the Management Board has announced that the Supervisory Board will no longer be composed in accordance with the Codetermination Act, i.e. with an equal number of representatives of the shareholders and the workforce (parity codetermination). From now on the Supervisory Board is to be made up according to the German act on one third employee representation (Drittelbeteiligungsgesetz), under which two thirds of the members of the Supervisory Board are elected by the shareholders and the remaining third from among company employees. The Management Board and Supervisory Board of Nordzucker AG will therefore table a motion at the annual general meeting proposing an amendment to the Articles of Association under which the Supervisory Board will consist of 21 members in future. 100

105 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Supervisory Board Committees The Supervisory Board Executive Committee met six times during the reporting period. The Executive Committee primarily prepared the agenda for the following ordinary and extraordinary meetings of the Supervisory Board. The Audit and Finance Committee met three times during the reporting period. Representatives of the auditors also took part in the meetings. Items on the agenda included the examination and approval of the annual financial statements and consolidated financial statements for the financial year 2005/06, the proposal for the election of the auditors for the financial year 2006/07, their remuneration, the scope of the audit, monitoring the auditors independence, various internal audits, the half-year financial statement for Nordzucker AG and the Nordzucker Group as of August 31, 2006, the earnings forecast for the financial year 2006/07 and issues of corporate governance. The examination and approval of the financial statements and the consolidated financial statements for the past financial year as well as the proposal for electing the auditors for the financial year 2007/08 were prepared in an additional meeting outside the period under review. The Human Resources Committee met three times during the reporting period, mainly to deal with matters involving the Management Board. Particular attention was given to the appointment of the CFO and the Director for Raw Material Procurement and Agriculture, as well as to the change of Chairman of the Management Board. The variable remuneration of the Management Board for the financial year 2006/07 was set at a meeting held outside the reporting period. Regular reports on the proceedings of committee meetings were made to the Supervisory Board. Annual financial statements The annual financial statements of Nordzucker AG for 2006/07 and the Management Report together with the company accounts have been audited by Ernst & Young AG, Wirtschaftsprüfungsgesellschaft, Hanover, who have given an unqualified certificate of confirmation. This also applies to the consolidated financial statements in accordance with IFRS and the Group Management Report. Under Sec. 292a HGB (German Commercial Code) these IFRS consolidated financial statements exempt the company from the obligation to prepare consolidated financial statements in line with German law. The Management Board s proposal for appropriation of net income and the auditors reports have been presented to the Supervisory Board. They have been examined by the Finance and Audit Committee and by the Supervisory Board and discussed in the presence of the auditors. The Supervisory Board concurs with the result of the audit and concluded from its own examination that it has no objections to make. Personnel matters Having completed their terms in office, Dietrich Hauschildt-Staff and Hans-Heinrich Prüße left the Supervisory Board of Nordzucker AG at the end of the company s annual general meeting on July 14, Dietrich Hauschildt-Staff did not stand for re-election. At the annual general meeting Hans-Heinrich Prüße was re-elected and Gerhard Borchert newly elected to the Supervisory Board until the end of the annual general meeting which passes a resolution on discharging the Management Board for the financial year 2010/11. The Supervisory Board membership of Klaus Fentzahn also came to an end with his early retirement on December 1, He was replaced by Marina Strootman, who was appointed by the court to the Supervisory Board as an employee representative on March 9, 2007 up to the end of the annual general meeting which passes a resolution on discharging management for the last financial year. Henning Hansen-Hogrefe did not stand again for the post of Chairman of the Supervisory Board. At its constitutive meeting on July 14, 2006 the Supervisory Board therefore elected Dr Harald Isermeyer as Chairman of the Supervisory Board of Nordzucker AG. He thanked his predecessor for his noteworthy commitment during his time as Chairman of the Supervisory Board. The Deputy Chairman Gunold Fischer was elected in 2002 for five years from amongst the employee representatives. The Supervisory Board elected Jürgen Seidel as a further Deputy Chairman. The Supervisory Board thanks the retiring members of the Supervisory Board, the Management Board and all the employees for their considerable personal commitment. Supervisory Board Braunschweig, May 21, 2007 Dr Harald Isermeyer Chairman of the Supervisory Board Nordzucker 2006/07 101

106 Glossary Finance Cash flow Net inflow of funds. Difference between receipts and spending expenses within one accounting period. For the sake of simplicity, the cash flow is determined on the basis of net income, plus non-spending expenses, in particular depreciation and changes in longterm provisions. The cash flow is available to the company for investment, repayment of liabilities and distribution of profits. Consolidation The Group accounts are drawn up as if all Group member companies formed one uniform company in law. All expenditure and earnings as well as all interim trade results and other transactions between the Group members are eliminated by way of set-off (expense and result as well as interim result consolidation). Stakes held in Group companies are set off against their equity capital (capital consolidation), and all intra-group receivables and liabilities are eliminated (debt consolidation), because such legal relationships do not exist within a legal entity. Summation and consolidation of the remaining items of the annual financial statements result in the consolidated balance sheet and the consolidated income statement. Declaration of compliance Annual declaration made and published by the Management and Supervisory Boards of listed companies in accordance with Sec. 161 German Stock Corporation Act (AktG), stating to which extent the company management complies with the recommendations of the Commission of the German Corporate Governance Code and which recommendations are not applied. Dividend The amount of a stock corporation s net income apportioned to each individual share. Dividends are either expressed as a percentage of the par value or as a currency amount per share. The annual general meeting votes on validation. Dividends are paid out on an annual basis in Germany. D&O insurance (directors and officers insurance) Third party insurance for managers, Management Boards and Supervisory Boards. Provides insurance cover for civil law and public law liability arising from activities within the executive boards. DVFA (German Association of Financial Analysts and Asset Management). Association of financial and banking experts which aims to develop standardised methods of analysing and valuing stock corporations. EBIT (earnings before interest and taxes) This figure supplies information on the results of current operations. Since differences in capitalisation are not accounted for, the general interest rate level or tax rates are not considered. It therefore provides a better basis for comparing the operating success of companies across national borders. EBT (earnings before taxes) The result before taxes, including stakes held by other shareholders. Forward swap An agreement between two parties e.g. to swap future interest rate payments at different fixed rates on a notional amount. German Corporate Governance Code Statutes formulated in 2002 on the management and supervision of German companies listed on the stock exchange. The German Corporate Governance Code outlines nationally and internationally accepted standards of responsible business management, which primarily aim at transparency and clarity. The Code defines the responsibility of Management and Supervisory Boards, it sets forth or makes recommendations on how to protect the rights of shareholders, how executive and supervisory bodies should be filled and how their members should be remunerated. Non-listed companies are also recommended to comply with the Corporate Governance Code. Hedge accounting under IAS 39 refers to the way in which two or more contracts (or financial instruments) between which hedging relationships exist are recognised in the balance sheet. This method differs from conventional accounting methods. IFRS (International Financial Reporting Standards) and IAS (International Accounting Standards) are accounting standards that render balance sheet and disclosure methods comparable on a global scale. These accounting standards have been compulsory for listed companies in Germany and throughout the EU since the beginning of Impairment test This test must be conducted regularly according to IFRS in order to verify the valuation of long-term assets. It may result in unscheduled depreciation. Interest rate cap Option contract in the form of contractually fixed individual agreements. Interest rate caps enable interest rate change risks to be restricted by setting a fixed maximum or minimum interest rate. Interest rate swap Contractual agreement on the swap of interest cash flows at specific points in time according to a basic notional principal. Interest rate swaps enable variable interest rate agreements to be converted to fixed interest rates. KonTraG (Law on Control and Transparency in Business) This law was passed on March 4, Its aims include improving the work done by Supervisory Boards, increasing transparency, giving the annual general meeting greater control, approving modern financing and remuneration instruments, and improving the quality of audits and the way in which the auditor and Supervisory Board work together. Management-buyout (MBO) The acquisition of a company by its existing management. Natural hedge approach Minimising currency risks by financing foreign currency investments in the same currency, for example. Net debt Financial liabilities minus cash and cash equivalents. Operating lease A lease is classed as an operating lease under IFRS if it does not transfer substantially all the risks and rewards incident to ownership. Revolving credit tranche A credit line with parameters such as amount, interest rate, use and other conditions which are guaranteed for a particular period. Registered share The subscribed share capital of Nordzucker AG is divided into registered shares with a nominal value of 2.56 Euro each. Syndicated loan Lending by several banks (syndicate) on the basis of standardised contract documents and identical terms and conditions. True and fair view principle This stipulates that the consolidated financial statements convey an accurate picture of a company s earnings, financial position and assets. Volatile ( unpredictable, liable to change ) A market is volatile if it is subject to major price fluctuations. Volatility is the statistical means of measuring market fluctuations. 102

107 Letter from the Management Board Growing with Europe Management Report Consolidated financial statements Notes Glossary Sugar and bioethanol Bioethanol (agricultural alcohol) Ethanol produced from biomass (renewable substances containing carbon). Starch (e.g. from wheat or maize) is broken down by enzymes into glucose. Yeast is then added and the glucose is fermented to create ethanol. When sugar beet is used to produce ethanol, the raw juice or thick juice created as a by-product of sugar extraction is fermented directly. Unlike fossil fuels, bioethanol is CO 2 -neutral and has long-term economic benefits. In Germany, the Biofuel Quota Act has been in force since 2007, which stipulates the amount of bioethanol to be blended with petrol. CO 2 (carbon dioxide, greenhouse gas ) Chemical compound consisting of carbon and oxygen which, like carbon monoxide, is a carbon oxide. This colourless and odourless gas is a natural component of air. It is created when substances containing carbon are burnt, and during cellular respiration. Plants and some bacteria convert CO 2 into biomass. CO 2 balance Means of continuously monitoring the amount of the greenhouse gas carbon dioxide for long-term ecological purposes. CO 2 balances are not easy to produce as various additional factors have to be considered. Distillation (Latin: destillare to drop away ) A thermal process used to separate a liquid mixture into various mutually soluble substances, e.g. by burning alcohol. Repeated distillation increases the purity of the resulting distillate. Discounters Retail companies which are hallmarked by a limited range of products, simple product presentation, small outlets and low prices. Unlike traditional stores, discounters restrict themselves to popular products. E85 Fuel consisting of 85 per cent water-free bioethanol and 15 per cent conventional petrol. As a pure fuel E85 is exempt from the petroleum tax in Germany, and is being offered by a growing number of petrol stations. As it has higher resistance to engine knocking than standard petrol, E85 can improve an engine s performance. Other fuel mixtures containing ethanol are E2, E5, E10, E15, E25, E50, E85 and E100. Each figure indicates what percentage of the fuel s volume is made up by ethanol. Apart from a few exceptions, petrol engines can run on E10 without the need for conversion. E85 is designed for flexible-fuel vehicles (FFV). ETBE (ethyl tertiary butyl ether) is added to petrol fuels to improve their octane number. It consists of 47 per cent bioethanol and can be blended with petrol to a maximum volume of 15 per cent. ETBE replaces the anti-knocking agent methyl tertiary butyl ether (MTBE) which is banned in the USA. Fine dust is the component of emissions which can be inhaled. Fermentation (lat. fermentum: yeast ) The conversion of biological materials with the aid of bacteria, fungal or cell cultures or, alternatively, via the addition of enzymes (ferments). Originally, the term stood for the biological reaction when air was excluded. FFV (flexible-fuel vehicles) Vehicles which can run on different fuels either bioethanol or petrol. FFVs have just one tank. A sensor recognises the bioethanol/petrol blend in use and automatically adjusts the ignition point. FFVs can use E85 fuel. Cars with FFV technology manufactured by Ford, Saab and Volvo are currently available in Germany. Greenhouse gas emissions (CO 2 emissions) The EU is aiming to reduce greenhouse gas emissions in a cost-effective and economically viable way. Greenhouse gas emissions trading was introduced as a means of achieving this aim. Molasses Syrupy by-product of sugar production. Used to manufacture yeasts and animal feed. Pellets By-product of sugar production. These extracted, dried sugar beet pellets are sold molassed or unmolassed as animal feed. Private labels Own brands used by retailers or discounters to market products. Private labels are therefore in competition with manufacturers brands. They are a means of boosting customer loyalty to retail chains and can primarily be found in the lower price segment. Raw juice Sugary juice extracted from sugar beet which can be processed to make sugar or bioethanol. Raw sugar values (RV) A general reference figure for international sugar statistics. According to the International Sugar Agreement, the raw sugar values (with a sucrose content of 96 Z, measured polarimetrically) is converted to white sugar values at a ratio of 100:92. Thick juice Concentrated, purified sugar juice containing some 70 to 75 per cent solid material. Thick juice is produced at the end of the steam dryer unit before the sugar undergoes the actual crystallisation process in the sugar factory s juice boilers. Vinasse (lat. vinacaeus: refuse from wine pressing ) is a by-product of alcohol production in sugar beet. The dark brown syrup is derived from the fermentation of sugar beet molasses. Vinasse is primarily used in animal feed for added protein or as a binding agent. It is particularly suitable for adding to feed for ruminants. As it contains organically bound minerals, sugar beet vinasse is also a valuable organic fertiliser. White sugar values (WV) As a statistical indicator, white sugar values represent the proportion of refined (WV) to unrefined (raw) sugar (RV). According to the International Sugar Agreement, white sugar values is converted to raw sugar values at a ratio of 92:100 with a sucrose content of 96 Z, measured polarimetrically. Sugar industry A/B quota Sugar production volume assigned by the EU until 2006 with limited price and full revenues guarantees. When the new EU market regulation period for sugar began on July 1, 2006, the A and B quotas were combined to create a single sugar production quota. ACP countries (Africa, Caribbean and Pacific) This encompasses 77 states, most of them former French or British colonies. The EU has granted these countries preferential access to the European market and duty-free imports of 1.3 million tonnes of raw sugar since 1975 by means of the Cotonou Agreement. As of 2008, the EU wants to replace this treaty with Economic Partnership Agreements (EPA) with the ACP countries. In terms of sugar, this should place the countries on an equal footing with the least developed countries (LDC). Beet bonus payments Nordzucker pays beet bonus payments to its beet farmers. These include a quality bonus, pre- and post-harvest delivery bonuses, payments for processing services, and fees for maintaining beet heaps, loading and cleaning. Beet bonus payments are renegotiated each year and paid in addition to the minimum sugar beet price laid down in the sugar market regime. C sugar Term used until 2006 to denote sugar produced in excess of the A/B quota. Until the WTO panel came into effect on May 22, 2006, C sugar was sold on the world market. Declassification Regulatory instrument used to annually adjust the EU sugar quotas in order to maintain market equilibrium in the EU. Nordzucker 2006/07 103

108 Doha round A set of resolutions drawn up by the trade and industry ministers of the WTO member states in 2001 at the fourth WTO Ministerial Conference in Doha (the capital of Qatar), which was to be passed by The negotiations centred on liberalising agricultural trade, improving market access for developing countries, and aspects of protecting intellectual property. After the 2003 WTO Ministerial Conference in Cancún failed to reach an agreement, the negotiations were broken off. They were resumed in July 2004 and once again called off at the end of July 2006 by WTO Director-General Pascal Lamy after no conclusion was reached. EU production quota The sugar market regime stipulates how much sugar, isoglucose and inulin syrup each EU member state can produce. The member states share this quantity among their sugar producers. Production quotas are designed to limit the quantity produced in the EU and prevent surpluses. Export licences The European Commission controls the export of EU quota sugar and compliance with the value and volume stipulated by WTO export restrictions by issuing export licences. Industry sugar According to the sugar market regime, all sugar which exceeds the production quota and is largely intended for the production of certain non-food products. These include, for example, bioethanol, alcohol, yeast, syrups for spreading and certain pharmaceutical and chemical products. Intervention In order to support the market equilibrium in the EU, certain agricultural products can be sold to state bodies at fixed prices. The Federal Agency for Agriculture and Food (BLE) acts as the intervention agency for Germany. Sugar is eligible for intervention up to and including 2009/10. Kyoto Protocol At the Third Conference of the Parties in the Japanese city of Kyoto in 1997, a protocol was adopted for a framework convention on climate change. This laid down legally binding limits for greenhouse gas emissions for industrial countries for the period 2008 to The Kyoto Protocol came into effect for 163 signatory countries on February 16, LDC/EBA (Least developed countries/everything but arms) Both terms relate to an EU resolution of 2001 according to which the 50 least developed countries in the world may import any goods except arms into the EU free of any duty. Sugar falls under a special transitional arrangement until As of July 1, 2009, sugar can also be imported into the EU free of duty and with no restriction of quantities. Market withdrawal An option which can be exercised by the EU. This involves temporarily withdrawing a quantity of sugar from the market in order to maintain a structural market equilibrium at a price which resembles the fixed reference price stipulated in the sugar market regime. Production levy Levy paid by beet farmers and sugar producers to finance the export of quota sugar which cannot be marketed in the EU. Reference price The reference price stipulated in the sugar market regime for EU quota sugar serves as a basis for minimum beet prices. In this way, the European Commission also provides orientation for pricing sugar of the standard Category II supplied loose ex works in the new market regulation period beginning July 1, Market prices for sugar which are significantly above or below the EU reference price may trigger market regulation measures. Restructuring levy Beginning in the 2006/07 marketing year, all sugar producers in the EU are obliged to pay a levy to the restructuring scheme for sugar based on their production quota. The levy is payable regardless of the amount of sugar actually produced Euro is payable per tonne of production quota for the 2006/07 sugar marketing year. In 2007/08, the restructuring levy increases to Euro Euro is payable to the scheme for the last time in 2008/09. Retructuring scheme for the sugar industry This is at the heart of the 2006 sugar market regime reform. All EU sugar producers pay into the scheme for three years. It is used to compensate those EU companies who voluntarily surrender some of their production quota. The aim of the restructuring scheme for the sugar industry is to maintain beet cultivation in the competitive regions of the EU. Until now, quota returns have remained below expectations. To ensure that the reform is a success, the EU has announced that prices will be corrected. Sugar market regime A common market organisation for sugar founded in 1968 (active in the EEC/EC/EU) which regulates prices for sugar and sugar beet, maximum production quantities for sugar, and import safeguards. The previous regulation (EC) No. 1260/2001 was replaced on July 1, 2006 by regulation (EC) No. 318/2006, which was passed by the ministers of agriculture of the EU member states on February 20, Sugar marketing year The reform also heralds a change in the marketing year used by the common market organisation for EU sugar. In the future, the year will begin on October 1 and end on September 30. This excludes the 2006/07 marketing year, which begins on July 1, 2006 and ends on September 30, Supplementary levy Regulatory levy that may be imposed in addition to the production levy, should it be insufficient to fund the export of quota sugar. Surplus sugar According to the EU sugar regulation, all sugar in the EU which exceeds the relevant production quotas for the EU sugar marketing year (October 1 to September 30) and cannot be sold as industry sugar for non-food use. SweetFamily SweetFamily is the Nordzucker Group s international umbrella brand. Beet sugar products for end consumers, bakers and the food industry have been marketed in Germany, Poland, Slovakia and Hungary under the SweetFamily brand since November WTO (World Trade Organisation) Multinational organisation located in Geneva, in which 150 member states negotiate world trade liberalisation. WTO panel Body set up by the WTO for the settlement of disputes. Member states may commission the panel under the dispute resolution mechanism to examine whether obligations under the WTO agreements have been violated. Certification, quality assurance and consumer protection EMAS II (Eco Management and Audit Scheme) Voluntary system used by the EU as an environmental management instrument and to promote environmental action. GMP B2 (Good Manufacturing Practice B2/13) Dutch standard of quality control for animal feed from non-resident suppliers. IFS 4 Standard (International Food Standard) Used for the assessment of suppliers of private brands as a means of safeguarding food safety and consumer protection. Q&S Standard German feed standard established by Q&S-GmbH, Bonn, Germany to guarantee feed quality. 104

109 Important dates Financial calendar Annual general meetings June 28, a.m. Union-Zucker Südhannover GmbH, Berghölzchen Hildesheim July 4, a.m. Nordharzer Zucker-AG, Stadthalle Braunschweig July 5, a.m. Nordzucker Holding AG, Stadthalle Braunschweig July 6, a.m. Nordzucker AG, Stadthalle Braunschweig Juli 27, 2007 Quarterly Report, 1. Quarter 2007/08 Online publications The following publications can be downloaded from Annual Report Declaration of compliance Sustainability report

110 Nordzucker AG Küchenstrasse 9 D Braunschweig Telephone: +49 (0) Fax: +49 (0) info@nordzucker.de Shares register Wilhelm Just Telephone: +49 (0) aktien@nordzucker.de Investor relations Bianca Deppe-Leickel Telephone: +49 (0) ir@nordzucker.de Public relations Tanja Schneider-Diehl Telephone: +49 (0) pr@nordzucker.de Printed copies of this Annual Report for the Nordzucker Group are also available in German. Alternatively, the report can be downloaded in German or English from as a PDF.