international strategic management – SUDZUCKER company Germany

-> Resource based view

-> Resources & capabilities of the company

-> porters five forces

-> PESTLE and critical success factors (CSF’s) of the industry (food processing)

-> porter’s generic strategy

– > competitive advantage

– > Internationalization and organization

-> CAGE framework

-> strategic change of the company

– > industry profitabilty

-> Cultural web of suitability

-> porter’s value chain

-> hofstede’s national culture and liability of foreignness

Include references of all

sharp deadline: 7AM GMT (17th January) i.e in 10 hours

CORP 5039
Lecture Week 3

External Environment – Micro Analysis

Lecture Focus
The objectives of industry analysis
From environmental analysis to industry analysis
Porter’s Five Forces Framework
Applying industry analysis

From Macro to Micro (Industry) Analysis

THE INDUSTRY
ENVIRONMENT
Suppliers
Competitors
Customers

Social structure
The national/ international economy
Technology
Government
& politics
The natural environment
Demographic structure
Social structure
The Industry Environment lies at the core of the Macro Environment.
The Macro Environment impacts the firm through its effect on the Industry
Environment.

Determinants of Industry Profitability
3 key influences:
The value of the product to customers
The intensity of competition
Relative bargaining power at different levels within the value chain.

Industry Analysis
Define your industry.
It’s not easy! Globalising forces, internet connectivity and technological developments blur traditional industry parameters, and enable entrance into hitherto unrelated industries.
Boundaries further change as customer needs evolve
Google returns about 490 million in October 2017 (up from 310m in 2016) ‘hits’ for “e-books”. Has eBooks.com & bookhub.com, for example, merely advanced traditional book distribution. Are e-books and e-readers rivals, substitutes, new entrants, or complementors to traditional print media?

Industry Analysis
Industry Definition: A group of companies offering products or services that are close substitutes for each other – that is, products or services that satisfy the same basic customer needs.
In identifying the industry, a good starting point is being clear on the basic customer needs being served. That is, adopted a customer-oriented view of the business.
Industry Sector: Group of closely related industries
E.g. Computer sector
Components industries: disk drive; semiconductor; modem
Hardware: Mainframe; PC; handheld
Software
Market Segment: Groups of customers within a market differentiated from one another based on distinct attributes and specific demands
E.g. PC industry: Desktop PC; Notebook PC; Servers (hosting centralised network of PCs)

Hill & Jones (2009) Theory of Strategic Management:43-44

Profitability of Selected US Industries:
Median return on equity (%), 1999-2007

HIGH PROFITABILITY LOW PROFITABILITY
Household & Personal Products 26.0 Motor Vehicles & Parts 9.3
Pharmaceuticals 21.0 Insurance Life & Health 9.1
Petroleum 20.1 Forest & Paper Products 7.3
Tobacco 21.6 Food Production 6.5
Food Consumer Products 19.5 Semiconductors & Electronic Components 6.2
Securities and Investment Banking 18.4 Network & Communications Equipment 5.9
Beverages 17.2 Telecommunications 5.8
Medical Products & Equipment 17.2 Entertainment 2.7
Scientific & Photographic Equip. 15.6 Airlines -12.6
Commercial Banks 14.8
Computer Software 14.0
Aerospace & Defense 13.9

Industry Structures as Indicator for Profitability

Concentration
Entry and Exit
Barriers
Product
Differentiation
Information
Perfect
Competition
Oligopoly
Duopoly
Monopoly
Many firms
A few firms
Two firms
One firm
No barriers
Significant barriers
High barriers
Homogeneous
Product
Potential for product differentiation
Perfect
Information flow
Imperfect availability of information

Introduction to Porter’s Five Forces (1979/80)
Most commonly used tool for analysing the competitive environment.
Describes the environment in terms of five basic competitive forces.
Collectively, the factors determine the profit potential of an industry and relationships with the forces tend to be seen as conflictual and ‘zero-sum’ in nature.
The industry competitive analysis should focus on the overall industry a firm competes in prior to accounting for market segments or sector issues.

Porter’s Five Forces

Bargaining Power of Suppliers.
Threat of New Entrants.
Threat of Substitutes.
Bargaining Power of Buyers.

Intensity of rivalry

Suppliers

Substitutes

Buyers

Potential
Entrants

Determinants of the Strength of the Forces

THREAT OF ENTRY
Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to distribution
channels
Legal/ regulatory barriers
Retaliation
SUBSTITUTE
COMPETITION
Buyers’ propensity
to substitute
Relative prices &
performance of
substitutes
SUPPLIER POWER
Suppliers’ price sensitivity
Relative bargaining
power
INDUSTRY RIVALRY
Concentration
Diversity of competitors
Product differentiation
Excess capacity &
exit barriers
Cost conditions
BUYER POWER
Buyers’ price sensitivity
Relative bargaining
power

Threat of New Entrants
Threat of new entrants to industry profitability depends upon the height of barriers to entry.
Higher barriers lead to lower risks of entry and greater profitability.
The principal sources of barriers to entry are:
Capital requirements (e.g. Airbus/Boeing)
Economies of scale
Absolute cost advantage
Product differentiation (brands)
Access to channels of distribution & supply (shelf spaces; vertical integration)
Legal and regulatory barriers
Retaliation (Price wars; marketing blitz)

Threat of Substitutes
Substitute products (services): Offerings of companies to customer needs in a similar fashion to the industry under analysis.
Extent of competitive pressure from producers of substitutes depends upon:
Buyers’ propensity to substitute
The closer the similarity, the greater the likelihood of price sensitivity and possible inclination for substitution.
The price-performance characteristics of substitutes. (e.g. Aluminum and Steel)

Bargaining Power of Buyers (Suppliers)

Buyer’s price sensitivity
Relative bargaining power
Cost of purchases as %
of buyer’s total costs.
How differentiated is the
purchased item?
How intense is
competition between
buyers?
How important is the
item to quality of the
buyers’ own output?
Size and concentration of
buyers relative to
sellers.
Buyer’s information .
Ability to backward
integrate.
Note: analysis of supplier
power is symmetric

Competitive Rivalry
The extent to which industry profitability is depressed by aggressive price competition depends upon:
Concentration (number and size distribution of firms)
Diversity of competitors (differences in goals, cost structure, etc.)
Product differentiation
Excess capacity and exit barriers
Cost conditions
Extent of scale economies
Ratio of fixed to variable costs

Five Forces: Implications
Firstly, the 5Fs analysis is a good indicator of the industry structure
Monopoly, oligopoly, hypercompetition, perfect competition
Importantly, the tool should be seen as a means to an end not the end in itself.
Findings should prompt further evaluation:
What industries to enter (or leave)
What influences can be exerted?
How are competitors variously affected by changes to structure and environment?

Five Forces: Implications

Most industries are somewhere between the extremes

17
If Threats are High

Expect Normal Profits

If Threats are Low

Expect Above Normal Profits (results from market imperfections)

CORP 5039
Lecture Week 2

External Environment – Macro Analysis
Dr Demola Obembe

Lecture Focus
Outline of the strategic management process
Relevance of external analysis to business organizations?
Understanding the layers of the business environment.
The PESTLE framework.
Critical Success Factors (CSFs or KSFs).

The Strategic Management Process

Purpose
(Mission,
Vision,
Objectives)
Internal
Analysis
External
Analysis
Strategy
Formulation
(Objectives setting)
Strategy
Implementation
Evaluation &
Control

Environmental
Scanning

Strategic Influences on Business
Analysis is the critical starting point of strategic thinking.
– Kenichi Ohmae
Before you can evaluate an organisation’s business prospects, you need to ask:
What is the nature of the environment, where the firm operates?
What resources and capabilities are at the organisation’s disposal?

The Organisation As a Transformation System

INPUTS
Land, premises
Materials
Labour
Technology
Finance
Managerial Skills
BUSINESS
ORGANISATION
OUTPUTS
Goods
Services
Ideas
Information
Consumption

The Environment
The environment will have an impact upon all stages of the transformation process.
Resource Acquisition.
Conversion / Transformation
Output
Consumption
Feedback

Layers of the Business Environment

Changing conditions in:
General economic conditions
Legislation and regulations
Population demographics
Societal values & lifestyles
Technology

7
The Firm
(S/W)

Industry (Micro Environment) (O/T)

PESTLE (Macro Environment)

Some Considerations in Undertaking PESTLE
Political:
Home country legislation (current & potential) e.g. taxation and employability, International legislation , Political parties and alignments, Regulatory bodies and processes, Trading policies & regulations, State ownership of businesses and attitudes towards competition
Economic:
Home economy situation and trends, Overseas economies and trends, Inflation, Interest rates, Currency fluctuations and exchange rates, Consumer purchasing power, Disposable income, Unemployment, Business set-up & running costs
Socio-cultural:
Lifestyle trends, Demographics , Consumer attitudes and opinions, Changes in socio-cultural values, Income distribution, Fashion and role models, Ethnic/religious factors, Education and health

Some Considerations in Undertaking PESTLE
Technological:
Competing technology development, Expenditure on R&D and innovation potential, Innovation diffusion and new technology adoption, Technology legislation and government investment policy, Intellectual property issues (patents, licensing etc.)
Environmental:
Green issues, Pollution, Sustainability, Waste disposal, Climate change and seasonal conditions, Natural disasters, Natural resources
Legal:
Competition law and government policies, Health and Safety law, Employment law, International agreements, Human rights issues, Environmental policy

PESTEL Analysis Exercise
Task
In groups of 3-4, write down key issues for each element of PESTLE that may affect Industry sectors generally.
Political
Economic
Socio-cultural
Technological
Legal
Environmental

Discussion Point
What problems did you encounter in identifying issues?
Relevance?
How many?
Importance?
Implications?
Inter-dependencies?
Finding data?
Others…?

PESTLE: Example for the Airline Industry
Political:
Government Support for national carriers
Security Controls
Restrictions on migration
Economic:
National growth rates
Fuel prices
Socio-cultural:
Rise in travel by elderly
Student international study exchanges
Source: Johnson et al (2011) Exploring Strategy (9th Ed): p51.

PESTLE: Example for the Airline Industry
Technological:
Fuel-efficient engines and airframes
Security Check technologies
Teleconferencing for business
Environmental:
Noise pollution controls
Energy consumption controls
Land for growing airports
Legal:
Restrictions on mergers
Preferential airport rights for some carriers
Source: Johnson et al (2011) Exploring Strategy (9th Ed): p51.

You’re Not Alone!

“The first thing about information…that strikes me is that one gets too much information…Much of this is only partly digested and much of it is irrelevant.”
“I think the problem with information systems…has been that they’re overwhelming as far as the executive is concerned.”
Quotes cited from Rockart, J. (1979) ‘Chief Executives define their own data needs’,
Harvard Business Review, Mar-April, pp.81-93.

Criticisms of PESTLE
Pigeon-holing Issues
Time and resource intensive
Information Access & Utilisation
Possibility for overload
Restrictions to key information
Oversimplification of information
Dependence on subjective views
Subjectivity due to underlying assumptions
Context/Setting

The Solution?:
Critical Success Factors
CSFs term coined by Sloan School of Management, MIT, in the 1970s (see also J.F. Rockart’s 1979 Harvard Business Review article: ‘Chief Executives Define Their Own Data Needs’ https://hbr.org/1979/03/chief-executives-define-their-own-data-needs).
CSFs should be common to all major organisations in an industry and relate to the pool of resources, skills & attributes within organisations that are essential to delivering success in the marketplace.
CSFs could take the form of (inter alia):
Branding, Advertising, Low wage costs, Technological process or product innovation, Distribution, After sales service, Product specification and performance attributes

Critical Success Factors
CSFs will vary from industry to industry
Think about the following analogy:
“Think of athletes preparing for different races. Clearly they must all train, but they do so differently, depending upon the race they are going to run. The muscular build of a 100m sprinter is completely different from that of a marathon runner. And so are the standard training methods used to develop their physical fitness. What is key to succeed in a 100m race is different from what it takes to succeed in a marathon.”
Speed/agility vs Stamina

Ketelhohn, K. (1998) What is a Key Success Factor, European Management Journal,
v16 (3), pp. 335-340.

Critical Success Factors
In identifying CSFs:
Consider the Demand structure:
Who are the customers?
What do the customers want?
Analysis of competition (how does the firm survive competition?)
What drives competition?
What are the main competitive dimensions?
What gives superior position to competitors?

CSFs in Different Industries
It is generally expected that typically you may have 3-4 CSFs in an industry.
Task
In small groups, identify 3-4 CSFs for each of the following:
Car manufacturing.
Airlines.
Supermarkets.

Recognising Personal Limitations
Do you have the capability to analyse the factors that underpin success?
Is your analysis valid? – Influence of personal bias & interpretation?
Effects of ‘bounded rationality’? We tend to generate simple schemas to address our limited capacity to deal with complexity.

CSFs & PESTLE
In summary:
Having identified your 3-4 CSFs, attention should be drawn to changes or trends in the environment (PESTLE). Which PESTLE issues may, individually or in conjunction with other issues, directly affect your CSFs & how?
By focusing upon the CSFs first, you start to exclude much, largely irrelevant, external data.

CORP 5039
LECTURE 4

Business Level Strategies & Sources of Competitive Advantage

Lecture Focus
Key subject areas /models covered
Porter’s ‘Generic Strategies’,
Bowman’s ‘Strategy Clock
Learning Outcomes
Understanding of the ‘Positioning’ view of strategy.
Understanding the popularity and applicability of ‘Generic Strategies’
Recognising and appreciating the limitations of the strategies.
Application of ‘Strategy Clock’ model.

Porter in Strategy Context

Mintzberg’s 5Ps for
Strategy
PLAN
PERSPECTIVE
POSITION
PATTERN
PLOY
Porter’s key to
Sustainable
Competitive advantage
is correct ‘positioning’
– Generic Strategies

Central Tenet of ‘Positioning’ View of Strategy & Generic Strategies
The resource base of the organisation follows the market position – that is, the organisation’s resource base is adapted to fit the market position selected.
Why ‘Generic’ strategies?
The strategies have the same currency irrespective of the Industry under investigation.

Attractiveness of Porter’s Generic Strategies
Porter argued that only a few key strategies are desirable in any given industry: ones that can be defended against existing and future competitors. Ease of defence means that firms that occupy these positions enjoy higher profits than other firms in the industry. This, in turn, provides a reservoir of resources with which to expand.

Generic Strategies at the Business Level

COST
LEADERSHIP
DIFFERENTIATION
COST
FOCUS
DIFFERENTIATION
FOCUS
COMPETITIVE SCOPE
BASIS OF COMPETITIVE ADVANTAGE
LOWER COST
DIFFERENTIATION
BROAD
SCOPE
NARROW
SCOPE
Porter, M (1985) Competitive Advantage

Dimensions of Cost Leadership
Lowest cost producer in the industry.
Broad scope operating in several industry segments.
Sources of reducing costs vary between industries but often include economies of scale.
Must achieve parity or proximity in the basis of differentiation relative to competitors.

Dimensions of Differentiation
Firm must be unique in its industry along dimensions widely valued by buyers.
Sources of differentiation may include; product, delivery system, marketing, after sales services etc.
Will achieve above average profits if price premium exceeds costs of differentiation.
Aims for cost parity or proximity by reducing costs in areas that do not affect differentiation.
Unlike cost leadership, there may be more than one differentiation strategy in an industry.

Dimensions of Focus Strategy
Concentrate upon a narrow competitive scope of an industry, and excludes other industry segments.
Strategy either that of cost leadership or differentiation

Features of Cost Leadership & Differentiation Strategies

Generic Strategy Key Strategy Elements Resource and Organisational Requirements
Cost Leadership Scale-efficient plants
Design for manufacture
Control of overheads and R&D
Process innovation
Outsourcing (especially overseas)
Avoidance of marginal customer accounts Access to capital
Process of engineering skills
Frequent reports
Tight cost control
Specialisation of jobs and functions
Incentives linked to quantitative targets
Differentiation Emphasis on branding advertising, design, service, quality, and new product development Marketing abilities
Product engineering skills
Cross-functional coordination
Research capability
Incentives linked to qualitative performance targets

Dangers of Being ‘Stuck in the Middle’
Possesses no competitive advantage.
Cost leaders, differentiators, and ‘focusers’ are better positioned to compete in any industry segment.
Will only earn attractive profits if the structure of the industry is highly favourable or if the firm is competing with other firms ‘stuck in the middle’.
‘Stuck in the middle’ often a manifestation of being unwilling to select a competitive strategy

Criticisms of Porter’s Generic Strategies
Model is static.
Cost Leadership.
It is confused with competing low price market segments.
Confusing inputs with outputs.
Confusing lowest costs with lowest price.
Problems with managing the strategy.
Internal orientation
Differentiation.
Premium prices or market share gains?
Premium pricing over who?
Bowman, C and Asch, D (1996) Managing Strategy

The Strategy Clock
“…a market-based model of generic strategy options rooted in the question: what is of value in the product or service to the customer, user or provider of funding? It does not deny that the cost base of an organisation is crucially important, but it sees this as a means of developing generic strategies, and not as a basis for competitive advantage in itself” (Johnson & Scholes, 2003: 331)
Johnson and Scholes (2003) Exploring Corporate Strategy

Strategy Clock – Competitive Strategy Options

Faulkner & Bowman (1995) The Essence of Competitive Strategy
Low value/
Standard price
Increased price/
Standard value
Increased price/
Low value

The Strategy Clock
No Frills Strategy
Combines a low price, low perceived added value and a focus on a price sensitive market segment
Low Price Strategy
A lower price than competitors whilst trying to maintain similar value of product or service to that offered by competitors.

The Strategy Clock
Hybrid Strategy
Seeks simultaneously to achieve differentiation and a price lower than that of competitors
Differentiation Strategy
Seeks to provide products or services unique or different from those of competitors in terms of dimensions widely valued by buyers

The Strategy Clock
Focused Differentiation Strategy
Seeks to provide high perceived value justifying a substantial price premium, usually to a selected market segment
Failed Strategies
We may associate with the activities of monopolies, which may have the support of legislation or high barriers to entry.
However, may this be a flawed assumption?

CORP 5039: International Strategic Management, Markets and Resources
Culture in an International Context

Outline
Definitions of culture
Edgar Schein’s view of organisational culture
Strategic drift, path dependency & cultural ‘lock-in’
Strategy-culture compatibility

What is Organisational Culture?
All organisations have their own unique cultures.
Successful strategies require congruence with culture at the implementation phase.
It is important to recognise culture’s influence on strategy development is bi-directional.
Strategic choices may also shape culture.

Definition of Culture
“…a pattern of basic assumptions invented, discovered, or developed by a given group as it learns to cope with its problems of external adaptation and internal integration – that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think and feel in relation to those problems.”
Schein, (1985:9)

Deconstructing Schein’s Definition
Six core components of organisational culture:
a pattern of basic assumptions
invented, discovered, or developed by a given group
as it learns to cope with its problems of external adaptation and internal integration –
that has worked well enough to be considered valid
and, therefore, to be taught to new members
as the correct way to perceive, think and feel in relation to those problems

Understanding Culture
“We observe two Japanese businessmen facing each other and leaning forward, one more so than the other. Curious, we go and ask the one who is leaning more what he is doing. He responds, ‘bowing’. Why is he doing that? He responds that the other person is his boss. ‘So what?’ we ask. ‘So I have to show my respect’, he answers, slightly puzzled. Again we ask ‘Why?’ Trying not to show his irritation, he responds that one should show respect to one’s seniors. And again when asked, ‘Why?’ he answers ‘because they have wisdom’. Now confused, we ask ‘Why?’ He looks at us, unsure if we are mad or just stupid, and responds, ‘Because that is just the way it is’.”

Schneider, S and Barsoux, J-L (2003:23)

Spatial Analysis of Organisational Culture

ARTEFACTS
ESPOUSED VALUES
ASSUMPTIONS
Visible Organisational
Structures.
Strategies, Goals,
Philosophies
Unconscious taken for
granted beliefs, perceptions,
thoughts and feelings.

Culture and Strategic Drift (Johnson et al, 2011)
Strategic drift is the tendency for strategies to develop incrementally on the basis of historical and cultural influences but fail to keep pace with a changing environment
The tendency towards strategic drift may be encouraged by:
Managers building on the familiar
Core rigidities
Relationship shackles
Lagged performance effects

Strategic Drift

Johnson et al. (2008)

Cultural Frames of Reference

Source: Johnson et al, Exploring Strategy 2011: 169

Cultural Frames of Reference
Organisational field: defined as a community of organisations that interact more frequently with one another than with those outside the field and that have developed a shared meaning system. (Johnson et al, 2011: 169)
Shared attributes may include; technology, regulations or education and training.
Hence coherence around specific assumptions, norms and routines
E.g. field of Justice: lawyers, police, courts, prisons and probation services.
Parties in an organisational field form a self-reinforcing network, which may lead to behavioural lock-in.

Cultural Frames of Reference
Organisational Subcultures
Although organisational culture is representative of the entire organisation, it is still possible to identify aspects of culture that are peculiar to different divisions or functions (subcultures)
Subcultures may relate directly to the structure e.g. differences in geographical divisions or functional groups
Divisional differences are often apparent where growth occurs through acquisition and such divisions pursue different strategies
Subcultures can also rise due to differences in business functions e.g. upstream/downstream activities of oil companies

National Culture
Key Theorists:
Fons Trompenaars
Geert Hofstede

Dimensions to National Culture:
Power distance
Individualism/collectivism
Masculinity vs femininity
Uncertainty avoidance
Long term vs Short term orientation
Indulgence vs restraint

Hofstede’s Cultural Dimensions
Initial findings gathered in from survey conducted between 1967-1973
116,000 questionnaires
Completed by IBM employees
Over 70 different countries
Largest organisationally based culture study ever conducted

Hofstede’s Cultural Dimensions

Extent to which the less powerful members of organizations and institutions expect and accept equal distribution of power

Extent to which individuals are integrated into groups

Assertiveness and
competitiveness versus modesty and caring.
Societal preference for competition as opposed to cooperation/consensus

Extent of tolerance for uncertainty and ambiguity (principles vs. practice)

Deals with value placed on persistence. Traditional or future orientation.
Modified as Pragmatic (truth subjective relating to situation, context & time; strong ability to adapt traditions) vs. Normative (desire for absolute truth; respect for tradition)

Extent to which gratification of wants and needs are permitted or suppressed (e.g. By strict social norms)

Power Distance

Individualism vs collectivism

Masculinity vs femininty

Uncertainty avoidance

Long term orientation (added 1991)

Indulgence vs Restraint (added 2010)

Critique of Hofstede’s National Cultures
(Sweeney, 2002)
Sweeney offers a critique of Hofstede’s work on national cultures :
Produced a 30 page article critiquing primarily from a methodological perspective
Small representative sample: only 6 countries had more than 1000 respondents over two surveys; 15 had less than 200
Assumption of homogeneity of national populations & cultures
Assumption of existence of singular organisational culture in IBM

Types of Corporate Cultures
Thompson et al (2010)
Strong versus Weak Cultures
Strong cultures are characterised by deeply rooted values and operational approaches which regulate organisational conduct
Factors contributing to strong culture include leadership, long-standing commitment to traditional values, and concern of key stakeholders – customers, employees and shareholders
Weak cultures on the other hand lack values and principles that are consistently preached or widely shared and therefore provide little assistance in strategy implementation

Types of Corporate Cultures
Thompson et al (2010)
Adaptive Cultures
Refers to corporate cultures characterised by willingness of members to accept change and act to ensure long-term organisational success
Two distinctive traits are important in adaptive cultures:
Changes in operating practice and behaviours must not compromise core values
Changes must satisfy legitimate stakeholder interests

Culture-Strategy Fit
Organisational cultures can act as allies or obstacles to strategy execution
Culture-Strategy fit exists where the work climate promotes attitudes and behaviours required for effective strategy execution
E.g. cultures characterized by frugality and thrift would be well-aligned with successfully executing a low-cost strategy
However, where a mismatch exists between the culture and actions/behaviours needed to successfully implement a new strategic course for the organisation, there may be need to change the culture

Culture’s Influence on Strategy Development

1. When faced with a stimulus for action e.g. Declining performance, managers initially attempt to respond with existing strategies (e.g. Lower cost; improve efficiency
2. Where ineffective, a change of strategy may occur but in line with existing culture e.g. New market development
3. However, strategic change can require change in culture’s emphasis (e.g. From bureaucracy to customer-orientation)
Source: Johnson et al (2011: 175)

Assessing Strategy-Culture Compatibility

Is the planned strategy compatible
with the current culture?
Tie changes into the culture.
Introduce minor
Culture-changing
activities.
Can the culture be easily modified to
make it more compatible with the new strategy?
Is management willing and able to make major
organisational changes and accept probable
delays and a likely increase in costs?
Manage around the culture by establishing
a new structural unit to implement
the new strategy.
Find a joint-venture partner or contract
With another company to carry out the strategy.
Is management still committed to
Implementing the strategy?
Formulate a different strategy

YES
YES
YES
YES
NO
NO
NO
NO
Wheelan and Hunger (2002) Concepts in Strategic Management and Business Policy, p.226

Changing a Problem Culture

Identify facets of present culture dysfunctional to new strategic initiatives

Step 1
Clearly define actions, behaviours and practices to be prominent in ‘new’ culture

Step 2
Talk openly about problems of present culture and how new behaviours will improve performance

Step 3
Follow-up with visible and focused actions to ingrain new set of behaviours, practices and cultural norms

Step 4
Adapted from: Thompson et al (2010: 399)

Strategy-Culture Fit in Multinational and Global Firms
According to Thompson et al (2010:407), establishing a workable fit would require multinational firms to build their corporate culture around values and practices that travel well across country borders
Management may minimize subcultures and promote cultural uniformity by:
Trainings to communicate common values and encourage common operational approaches
Encouraging climate of adopting best practices and pursuing operational excellence
Allowing for flexibility among local managers where adherence to company-wide traditions is difficult and also allowing for discretionary authority to motivate and incentivize

References
Johnson, G., Whittington, R. and Scholes, K. (2011) Exploring Strategy, 9th Ed. Harlow: Pearson.
Schein, E.H. (2010) Organizational Culture and Leadership 4th Ed. San Francisco, CA: Wiley.
Schneider, S. and Barsoux, J-L (2003) Managing Across Cultures. Harlow: Pearson.
Thompson, A.A., Strickland, A.J. and Gamble, J.E. (2010) Crafting and Executing Strategy 17th Ed. New York: McGraw-Hill.

CORP 5039: International Strategic Management, Markets and Resources
Industry Evolution and
Strategic Change

Outline
Evaluate the industry life cycle
Identify key success factors associated with industries at different stages of their development
Discuss main approaches and tools for strategic change management
Appreciate the challenges of managing organizational change

The Industry Life Cycle
The industry life cycle is described as the supply equivalent of the product life cycle
As the industry produces multiple generations of a product, the ILC is likely to be longer in duration than that of a single product
ILC comprises of four phases: introduction (emergence), growth, maturity and decline
Industry evolution is driven by two fundamental factors:
Demand Growth
creation and diffusion of knowledge

The Industry Life Cycle

Introduction
Industry Sales
Time

Growth
Decline
Maturity

Creation and Diffusion of Knowledge
New knowledge in the form of product innovation is responsible for an industry’s birth
However, it is the creation and diffusion of the knowledge that helps the industry evolve
Furthermore, the emergence of dominant designs mark critical junction in this evolution
They constitute shift from radical to incremental product innovation
Dominant designs described as product or architecture that define look, functionality and production method; generally accepted across industry
e.g. McDonald’s Hamburger restaurant (1955); QWERTY Keyboard

From Product to Process Innovation

Rate of innovation
Product Innovation
Process Innovation

How Typical is the Life Cycle Pattern?
Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries.
Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline.
Industries may experience life cycle regeneration, e.g. motorcycles, TVs:
Life cycle model can help us to anticipate
industry evolution – but dangerous to
assume any common, pre-determined
pattern of industry development

B&W
Color
Portable
Flat Screen
HDTV
Sales
1930 50 70 90 00 10
TV’s

Implications of Industry Life Cycle for Competition and Strategy
Product Differentiation
At introduction, lack of consensus exists over requirements
Convergence around dominant design is followed by commoditization
i.e. erstwhile differentiated products become undifferentiated
Organizational Demographics and Industry Structure
Early stages witness rapid increase in firm numbers
However, onset of maturity is marked by decline in entry and exit rates. Concentration leads to mass markets and may usher new phase of entry – possibility for new entrants to create niches

Implications of Industry Life Cycle for Competition and Strategy
Location and International Trade
New industries begin in advanced industrial countries due to presence of affluent customers, and availability of technical and scientific resources
Growth in foreign demand initially met by exports
With maturity, commoditization, and deskilling of production processes, production shifts to developing countries with lowest labour cost
Nature and Intensity of Competition:
Growth in intensity of competition leading to narrow margins
Shift from non-price competition to price competition

Evolution of Industry Structure over the Life Cycle

INTRODUCTION GROWTH MATURITY DECLINE
DEMAND Early adopters Rapidly increasing market penetration Replacement/ repeat buying; price sensitive customers Obsolescence
TECHNOLOGY Competing technologies; rapid product innovation Standardization; rapid process innovation Diffused know how; incremental innovation Little innovation
PRODUCTS Wide variety of features & designs Design & quality improve; dominant design emerges Commoditization; brand differentiation Differentiation difficult
MANUFACTURING Short-runs, skill intensive Capacity shortage, mass- production Over-capacity emerges; deskilling Overcapacity
TRADE ——Production shifts from advanced to developing countries——
COMPETITION Few companies Entry, mergers exit Shakeout & consolidation Price wars & exit
KSFs Product innovation Design for manufacture
Process innovation Cost efficiency (scale economies, low cost inputs) Low overheads; rationalization

Key Success Factors and Industry Evolution
Introduction Stage:
Product innovation as the initial basis for entrance
Investment requirements and financial resources become increasingly important with subsequent generations of offering
Growth Stage:
Key challenge is increasing production scale due to market expansion
Internal administrative and strategic skills are also important due to tensions of organisational growth

Key Success Factors and Industry Evolution
Maturity Stage:
Efficiency as means of achieving competitive advantage; especially where industry tends to commoditization
Cost efficiency through scale economies, low wages and low overheads become KSFs
Decline Stage:
Transition to decline intensifies pressures for cost cutting
Stability is maintained by orderly exit of industry capacity and capturing residual market demand

Strategy Implementation in Mature Industries
Primary basis for CA is operational efficiency
Deriving cost advantage through economies of scale, low cost inputs, low overheads
But there is still the need to reconcile (cost) efficiency with innovation and customer responsiveness
Customer responsiveness may, for instance, involve:
focusing on specific segments thereby discouraging new entrants
targeting more attractive customers and transforming less valuable customers into more valuable customers

Strategy Implementation in Mature Industries
Strategic Innovation can be accomplished by:
Embracing new customer groups e.g. Video game consoles
Augmenting products and services
Bundling of range of products to create greater value for customers
Management proactivity
Not conforming to industry norms and convention about strategy
Promoting entrepreneurial mindset

Declining Industries
Key features of declining industries include:
Excess capacity
Lack of technical change
Declining number of competitors (Consolidation)
Possibility for new entrants due to acquisition of exiting firms
High average age of both physical and human resources
Aggressive price competition

Declining Industries
Factors affecting organisations’ ability to realise benefits in declining industries include:
Predictability of decline: where possible, effective planning can be put in place for transitions
Barriers to exit: can impede exit of capacity (e.g. Durable and specialised assets; Costs incurred in plant closure – accounting, redundancy, compensation etc; Management commitment: reluctance to closure due to emotional and moral reasons)
Strategies of surviving firms: stronger firms may facilitate exit of weaker firms through acquisitions and takeover of after-sales commitments

Strategic Alternatives for Declining Industries
Four strategic options can be pursued individually or sequentially dependent on industry profit potential and firm competitive position:
Industry Leadership: Establish dominant market position
encourage exit of rivals; buy market share through acquisition; acquire capacity; demonstrate commitment; dispel optimism about the industry’s future; raise the stakes
Niche: Identify an attractive segment and dominate it.
Harvest: Maximize cash flow from existing sources
Divest: Get out while there is still a market for industry assets

Strategic Alternatives for Declining Industries

COMPANY’S COMPETITIVE POSITION
Strengths in remaining demand pockets
Lacks strength in remaining demand pockets
Favourable to decline
Unfavourable to decline
INDUSTRY STRUCTURE
LEADERSHIP
or
NICHE
NICHE
or
HARVEST
DIVEST QUICKLY
HARVEST
or
DIVEST
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com

The Driving Forces of Industry Evolution

Customers become more knowledgeable & experienced
Diffusion of technology
Demand growth slows as market saturation approaches
Customers become more price conscious
Products become more standardized
Production becomes less R&D and skill-intensive
Production shifts to low-wage countries
Excess capacity reached
Distribution channels consolidate
Quest for new sources of differentiation
Price competition intensifies
Bargaining power of distributors increases
BASIC CONDITIONS
INDUSTRY STRUCTURE
COMPETITION
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com

The Basic Concept of Strategic Change
The pace of organisational change is represented by two extremes:
Slow organisational change: less resistance, smooth progress, higher commitment.
Fast organisational change: usually as part of a major strategic initiative and may be associated with strategic change.
Strategic change is the pro-active management of change in organisations to achieve clearly identified strategic objectives. (Lynch, 2012:564)
Different strategic perspectives exist for understanding organisational change:
The prescriptive approach and the emergent approach

Distinction between Prescriptive
and Emergent Theories
Prescriptive Theories
Change is clearly manageable and largely predictable.
It refers to implementation actions that result from the decision to pursue a specific strategy.
In extreme cases, it may be imposed on those who have to implement it.
Emergent Theories
Change acquires a momentum of its own and is therefore less predictable.
It may refer to the whole process of strategy development in addition to the actions that result once the strategy has been developed.
Such change may involve experimentation, learning and consultation among participants in the change.

Importance of Managing Strategic Change
Strategic change is concerned with people and the tasks they perform, and occurs through the organisation’s formal and informal structures.
Understanding the pressure points (links between change process and people involved) for influencing change is therefore important if such change is to be effective.
It is important because it may involve major disruptions, which could generate significant resistance.
Even if readily accepted, it may still be time-consuming, require careful thought and often carries important hidden (implementation) costs.

Prescriptive Approaches to Managing Strategic Change
Three-Stage Prescriptive Approach (Kanter et al 1992): Change process can take three major forms that can be linked with three categories of individuals:
Three Forms:
Changing identity of the organisation
Organisations respond to environmental changes e.g. reaction to political shifts
Coordination and transition issues due to life cycle evolution
Life cycle differences lead to relationship changes e.g. with growth in size, organisational age and product life cycles
Controlling political aspects of the organisation
i.e. political power changes among individuals and groups

Prescriptive Approaches to Managing Strategic Change
Three categories of people:
Change strategists – responsible for leading change. May or may not be responsible for detailed implementation.
Change implementers – have direct responsibility change management
Change recipients – receive change programme with varying degrees of anxiety; often perceive themselves to be powerless

Lewin’s Three-Stage Model of Change (1951)

Mobilise
(Move to new level)

Refreeze
(attitudes at new level)
Identify & mobilise the resources required to effect the change
Examine alternatives
Make information continuously available
Embed new ways of working in the fabric of the organisation
Engage in positive reinforcement and support for decisions taken
Unfreeze
(current attitudes)
Create the case for change
Dissatisfaction with the status quo
Need for change must be felt by those involved

Critical Comments on Prescriptive Approaches
There is an implicit assumption of clear movement from one state to another which may not be possible in turbulent environments and with uncertain outcomes
Assumes the possibility of refreezing. May be unrealistic given where internal organisation politics exists in a flux.
It may be difficult to judge when ‘refreezing stage’ is reached (especially where change is long-term).

Emergent Approaches to Managing Strategic Change
As with prescriptive theories, no single emergent approach exists.
Some emphasise the need to be responsive in an increasingly turbulent environment while others focus on longer term need for change in organisation’s skills, style and operating culture.
For example the learning theory suggests that organisations do not suddenly adopt strategic change but are perpetually seeking it through for instance; team learning, sharing views and visions for the future, exploration of ingrained habits/assumptions, personal development of skills and systems thinking (cf. Senge, 1990)

Emergent Approaches to Managing Strategic Change
Pettigrew and Whipp (1991) also identified five interrelated factors for successful strategic change management:
Environmental assessment
Leadership in change
Linking strategic and operational change
Strategic human resource management
Coherence in the management of the process through consistency of goals, feasibility, consonance, and delivery of competitive advantage

Tools of Strategic Change Management
Create perception of crisis – A crisis facilitates organizational change. If there’s no crisis—create the perception of one
Establish Stretch Targets – Demanding performance targets can generate ambition and mobilize effort
Create Organizational Initiatives – Initiatives launched by the CEO can be useful vehicles for change e.g. Jack Welch at GE

Tools of Strategic Change Management
Reorganization and New Blood – Changing the the organizational structure breaks down existing power bases and creates openings for external hires
Develop Dynamic Capabilities – “ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (David Teece)
Undertake Multiple Scenario Analysis – This offers a structured approach for managers to address the forces that are changing their business environment and to prepare for the future
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com

CORP 5039
LECTURE 5

The Organisational Context: The Resource Based View

Shift in Strategy Analysis – From External to Internal Environments

Rationale for Resource-Based
Approach to Strategy

Provides a counter argument to the ‘outside in’ perspective
When the industry environment is volatile, internal resources and capabilities offer a more stable basis for strategy than an industry or market focus
Resources and capabilities are the primary sources of profitability

Contributions to Variance in Profitability across Business Units

Rumelt, R (1991) How much does industry matter?, Strategic Management Journal, Mar, in
Lynch (2003) Corporate Strategy, p. 227.

Source within Corporation

Corporate Ownership

Industry Effects

Contribution to the total profitability of the organisation

0.8%

Cyclical Effects

Business unit specific effects

Unexplained factors

Total Across Corporation

8.3%

7.8%

46.4%

36.7%

100%

Prescriptive Strategies – Profit Maximising & Competition Based Theories

Analysis
of the
Environment
Analysis
of Resources
Vision,
Mission &
Objectives
Options
Development
Rational
Selection
Implementation
COMPETITION

PROFIT-MAXIMISING CHOICE
Long term monitoring
Long term monitoring
Adapted from Lynch, R (2010)

Prescriptive Strategies – Profit Maximising & Competition Based Theories

Analysis
of the
Environment
Analysis
of Resources
Vision,
Mission &
Objectives
Options
Development
Rational
Selection
Implementation
RESOURCES DIRECT &
GUIDE KEY STRATEGY AREAS
Long term monitoring
Long term monitoring
Adapted from Lynch, R (2010)

Emergence of the Resource-Based View
No one author created the theory but rather the RBV reflects the development of an Incremental school of thought over the last 20 years.
Some key authors however include:
Wernerfelt (1984) A resource-based view of the firm, (SMJ)
Prahalad & Hamel (1990) The Core Competence of the Corporation (HBR)
Barney (1991) Firm resources and sustained competitive advantage (JoM)
Grant (1991) The resource-based theory of competitive advantage:
Implications for strategy formulation (CMR)
Kay (1994) Foundations of Corporate Success (Book)

Critical Assumptions of the Resource-Based View
Relies upon two key fundamentals assumptions about the resources and capabilities that a firm may control:
Resource heterogeneity
Resource immobility

Criteria for SCA & Strategic Implications

Dess, Lumpkin and Eisner (2008) Strategic Management , Adapted from: Barney , J. (1991) ‘Firm Resources and Sustained Competitive Advantage’, Journal of Management, 17(1):99-120
Valuable? Rare? Difficult to
Imitate? Without
Substitutes? Implications for Competitiveness
No No No No Competitive disadvantage
Yes No No No Competitive parity
Yes Yes No No (Temporary) Competitive Advantage
Yes Yes Yes Yes Sustainable Competitive Advantage

Links Between Resources, Capabilities & Competitive Advantage

Appraising Resources

© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Resource Characteristics Indicators
Tangible Resources Financial Borrowing capacity
Internal funds generation
Debt/Equity ratio
Credit rating
Net cash flow
Physical Plant and equipment:
Size, location, technology flexibility.
Land and buildings
Raw materials Market value of fixed assets.
Scale of plants
Alternative uses for fixed assets
Intangible Resources Technology Patent, copyrights, know how, R&D facilities
Technical and scientific employees No. of patents owned
Royalty income
R&D expenditure
R&D staff
Reputation Brands. Customer loyalty, company reputation (with suppliers, customers, government) Brand equity
Customer retention
Supplier loyalty
Human Resources Training, experience, adaptability, commitment and loyalty of employees Employee qualifications,
Pay rates, turnover

Identifying Organisational Capabilities

© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Functional Area Capability Exemplars
CORPORATE FUNCTIONS Financial control ExxonMobil, PepsiCo
Management development General Electric, Shell
Strategic innovation Google, Haier
Multidivisional coordination Unilever, Shell
Acquisition management Cisco Systems, Luxottica
International management Shell, Banco Santander
Corporate Social Responsibility Johnson & Johnson, Danone
INFORMATION MANAGEMENT Integration of IT with decision making Wal-Mart, Capital One, Cemex
RESEARCH & DEVELOPMENT Research capability IBM, Merck
New product development Apple, 3M
Fast-cycle new product development Canon, Inditex (Zara)
OPERATIONS Operational efficiency Briggs & Stratton, UPS
Continuous improvement Toyota, Wal-Mart
Flexibility and speed of response Four Seasons Hotels
DESIGN Product design capability Apple, Alessi
MARKETING Brand management Procter & Gamble, Altria
Building reputation for quality Johnson & Johnson
Responding to consumer requirements L’Oréal, Amazon
SALES AND DISTRIBUTION Effective sales promotion and execution PepsiCo, Pfizer
Efficient, fast order processing L. L. Bean, Dell Computer
Speed of distribution Amazon.com
SERVICE Customer service Singapore Airlines, Caterpillar

Canon: Products & Core Technical Capabilities

© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Fine
Optics
Micro-
Electronics
Precision
Mechanics
35mm SLR camera
Compact fashion camera
EOS autofocus camera
Digital camera
Video still camera
Video security systems
Camcorders
Plain-paper copier
Color copier
Color laser copier
Laser copier
Basic fax
Laser fax
Scanners
Mask aligners
Excimer laser aligners
Stepper aligners
Inkjet printer
Laser printer
Color video printer
Digital commercial
printer
Calculator
Notebook computer
Binoculars

RBV & SCA – An Amalgamation of Factors

Sustainable CA.

Innovative capability

Prior or acquired resources

Imitability

Durability

Appropriability

Substitutability

Truely Competitive

The Activity System
An activity system is an integrated set of value creation processes leading to the supply of product and/ or service offerings.
This activity system is frequently referred to as the value chain or Porter’s value chain
The value chain identifies the key generic functions of an organisation.
The purpose of an organisation is to create ‘value’
The chain is a way to disaggregate costs from value creation across primary activities.
This can then enable an understanding of which capabilities will contribute to which value creating activities.

Porter’s Value Chain

E.g.: Quality control; receiving raw materials; supply schedules
E.g.: Manufacturing; packaging; production control; maintenance
E.g.: Finished goods; order handling; dispatch; delivery; invoicing
E.g.: Order taking; market research; sales analysis; customer management
E.g.: Warranty; maintenance; education & training; upgrades
Legal, accounting, financial management
Personnel; resource planning, recruitment, training etc
R&D, Product/process design, production engineering
Supplier management, funding, subcontracting etc

Margin

Analyzing the Value Chain
Questions you need to ask yourself:
Where in the business system do we take profit?
What has determined the size of our margins?
What are the major cost and price drivers?

Approaches to Identifying an Organization’s Resources & Capabilities

© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Starting from the outside
1. Key Success factors
How do customers choose?
What do we need to survive competition?

2. What resources & capabilities do we need to deliver these KSFs?
Starting from the inside

Appraising the Strategic Importance of Resources & Capabilities

Appraising Resources & Capabilities
Identify the firm’s resources and capabilities
Explore the linkages between resources and capabilities
Appraise the firm’s resources and capabilities in terms of:
(a) strategic importance
(b) relative strength to competitors

Appraising Resources & Capabilities
Develop strategy implications:
In relation to strengths
How can these be exploited more effectively and fully?
In relation to weaknesses
Identify opportunities to outsource activities that can be better performed by other organisations.

How can weaknesses be corrected through acquiring and developing resources and capabilities?

Framework for Appraising Resources & Capabilities

The Resources & Capabilities of Ducati Motor Holding Pre-Audi Acquisition

Strategic Importance (1 to 10) Relative strength (1 to 10)
Resources
Proprietary technology Extensive industry diffusion (3) History of technical innovation/few patents (6)
Location Some advantages – market proximity, industry knowledge & low cost inputs (4) Italy-biggest European motorcycle market & centre for engineering & design know-how (10)
Distribution Critical – buyer access/service (9) Strong in Italy, weak in major markets (3)
Brand Important; difficult to replicate (8) Iconic, racing heritage (10)
Finance Important for R&C upgrades (7) Weak cash flow, limited fin resources (1)
Capabilities
Manufacturing Critical wrt efficiency/quality… (10) High cost due to low output/history of quality problems (2)
Design Essential but easily replicable (6) History of innovative designs (10)
Engineering Key input into NPD (8) Strong in ingenuity & innovation (8)
New Product Devpt Regular model launch critical (10) Strong success record (9)
Marketing Important but capability not rare (6) Effective brand promotion (8)
Customer service Essential for reputation (7) Weak outside Italy (2)

The Resources & Capabilities of
Ducati Motor

Comments on the RBV
It remains a list of factors to consider – there is no ‘rule to riches’, but then the RBV by definition is not about generic industry solutions.
There is no analysis about the development of resources above and beyond the concept of innovation.
There is no consideration of the human element in resource development.
May RBV be considered tautological?*
There is no emphasis upon the emergent approach to resource development. That each element needs mere definition and then it will happen automatically is a gross oversimplification.
* See Priem and Butler (2001) & Barney’s reply to this argument (2001)
Academy of Management Review

CORP 5039: International Strategic Management, Markets and Resources
Methods of Development, Diversification and Evaluation

Outline
Consider the notion of strategy as a quest for value creation
Discuss three applicable criteria for evaluating strategies
Suitability; Acceptability; Feasibility (SAFe)
Outline different techniques for measuring performance
Consider Diversification Decision
Motives; Shareholder value creation; Issues of Competitive Advantage

Strategy as a Quest for Value
Value: Monetary worth of a product or asset.
The purpose of businesses can be described as being about value creation for customers and for the firm
Value can be created through production, whereby physical transformation of a product takes place or by commerce, whereby products are repositioned in space and time via trade from positions of less value to those of more value.

Strategy as a Quest for Value
Where profit maximisation is seen as organisation’s realistic goal, then there is a need to specify what constitutes profit and how it is measured.
Accounting or Economic Profit?
AP combines normal return to capital that rewards investors (for use of capital) and EP (pure surplus available after all inputs are paid for)

Strategy as a Quest for Value
EP is considered to be more advantageous than AP as a performance measure for two reasons:
It is more precise as it accounts for the cost of capital, thus giving a truer picture of returns
By accounting for real costs of more capital intensive businesses, it can help improve allocation of capital

Evaluating Strategies
The value of strategies to firms can be determined through enterprise value analysis
This can be applied to business strategy appraisal through four steps:
Identify strategy alternatives (e.g. compare current strategy with preferred alternative)
Estimate cash flows associated with each strategy
Estimate implications of each strategy for cost of capital (factoring in risks and financial implications)
Select the strategy which generates the highest NPV

Evaluating Strategies
Three success criteria can be applied in evaluating strategic options:
Suitability: Concern with extent to which proposed strategies addresses key organisational opportunities and constraints
Acceptability: Evaluation of extent to which expected performance outcomes of a proposed strategy is able to meet stakeholders’ expectations
Feasibility: Concern with the likelihood of strategy working in practice

Suitability
Suitability assesses which proposed strategies address the key opportunities and constraints facing an organisation.
At the basic level, consider which strategy (or strategies)
leverages the firm strengths and strategic capabilities,
and avoids or mitigates perceived weaknesses
A number of strategic concepts/frameworks can provide indications of suitability e.g. PESTEL, Five Forces, Value chain Analysis, Cultural web

Suitability of Strategic Options

Johnson et al (2011) Exploring Strategy p364

Use of Culture Web for Suitability

Control
systems
Stories
Symbols
Rituals
and routines
Paradigm
Power
structures
Organisational
structures

Johnson et al (2011) Exploring Strategy p176

Acceptability
Acceptability is concerned with whether or not the expected performance outcomes of a proposed strategy meets stakeholder expectations
can be evaluated in terms of risks,
returns and
stakeholder reactions
Risk: to what extent can the strategic outcome be predicted?
Developing a good understanding of an organisation’s strategic position is at the core of good risk assessment.

Acceptability
Three tools useful in risk assessment include:
Sensitivity (what-if) analysis – questioning and challenging important underlying assumptions of proposed strategy
How might variation of assumptions affect predicted performance?
Financial ratios – projections as to possible changes arising from proposed strategy.
e.g. potential change in capital structure (implications of long term debt requirement)
Impact on liquidity
Break-even analysis – helps assess risk associated with different price and cost structures of strategies

Acceptability
Returns: refers to (financial) benefits stakeholders can expect to receive from proposed strategy. Returns may be assessed using:
Financial analyses (ROCE; Payback period; Discounted Cash Flow)
Shareholder value analysis (total shareholder return; economic profit or economic value added)
Cost-Benefit analysis
Real options
Reaction of stakeholders: Considers how stakeholders may likely react to the proposed strategy.
Stakeholder mapping can be useful in determining likely reactions of key stakeholders to proposed strategies
Why might this be considered important?

Feasibility
Feasibility considers whether or not organisations have the capabilities to deliver a strategy in practice
Assessment of feasibility will likely address two questions:
Do the resources and competences currently exist for effective implementation?
If not, can such resources and competences be obtained?
The questions may be applied to any resource area such as finance, people and operations

Feasibility
Financial feasibility: should be considered in relation to the life cycle phase, factoring in funding requirement, cash availability, likely sources of funds, and cost of capital.
People and skills: As success may depend on ability of the workforce to deliver the strategy, it is important to consider:
Do staff currently have the competences required?
Are support systems for staff fit for the strategy?
If not, can the competences be obtained or developed?
Integrating resources: to what extent can resources (internal and external) be obtained and integrated?

Increased Focus on Performance Measurement
Shift from treating financial performance as the basis for performance measurement to treating them as one among a broader set of measures
Importance of agreeing a set of measures – ‘what gets measured gets attention’
Issue for managers– what should you measure and what should you use for comparison?
Two techniques to consider:
Comparative analysis (benchmarking), balanced scorecard

Comparative Analysis
Usually involves comparing performance with industry norms and is based on the idea that performance is more meaningful when compared to competitors
Information for such analysis can be obtained from the public domain e.g. press releases, newspaper reports, annual reports, company websites, and league tables
An example of comparative analysis is benchmarking, which is a comparison of business processes and/or performance metrics to industry bests or best practices

Balanced Scorecard
Developed by Robert Kaplan and David Norton at Harvard Business School in 1992. It Provides an integrated framework for balancing financial and strategic goals in terms of four key perspectives:
Financial Perspective – How do we look to shareholders?
May include measures of profit margin and/or cash flow
Gives indication whether or not the firm’s strategy and implementation processes are contributing to improving the bottom-line.
Customer Perspective – How do customers see us?
For the scorecard to be effective, managers must address key areas important to customers: time, quality, performance & service, and cost

Balanced Scorecard
Internal Business Perspective – What must we excel at?
Emphasis is on need to translate customer-based measures into indicators for operational effectiveness
Firms should be able to measure key resources and capabilities needed for continued strategic success
Innovation and Learning Perspective – Can we continue to improve and create value?
Future-oriented and targets activities that will be important to firm’s long-run performance
May entail investments in training or research

Balanced Scorecard for a Regional Airline

Source: Grant, R. (2013) Contemporary Strategy Analysis p.47
Simplified Strategy Map Performance Measures Targets Initiatives
Financial
Market value
Seat revenue
Plane lease cost 25% per year
20% per year
5% per year Optimize routes
Standardize planes
Customer

FAA on-time arrival rating
Customer service ranking
No. customers First in industry
98% satisfaction
% change Quality management
Customer loyalty programme
Internal
On Ground Time
On-time departure < 25 minutes 93% Cycle time optimization programme Learning % Ground crew stockholders % Ground crew trained Year 1, 70% Year 4, 90% Year 6, 100% Stock ownership plan Ground crew training Increase profitability Lower cost Increase revenue On-time flights More customers Low prices Improve turnaround time Align ground crews 20 The Basic Issues in Diversification Decisions RETURN ON CAPITAL > COST OF CAPITAL
INDUSTRY
ATTRACTIVENESS
COMPETITIVE
ADVANTAGE

Superior profit derives from two sources:
Diversification decisions involve two issues:
How attractive is the sector to be entered?
Can the firm achieve a competitive advantage?
© 2010 Robert M. Grant
www.contemporarystrategyanalysis.com

Motives for Diversification
Growth: The desire to escape stagnant or declining industries is a powerful motive for diversification (e.g. of low growth industries; tobacco, oil).
But, growth satisfies managers not shareholders.
Diversification that seeks growth (esp. by acquisition) may destroy shareholder value (especially conglomerate)
Risk Reduction: Diversification reduces variance of profit flows
But, does not create value for shareholders – they can hold diversified portfolios of securities.
With regards to value Creation; for diversification to create shareholder value, then bringing different businesses under common ownership must somehow increase their profitability.

Diversification and Shareholder Value: Porter’s Three Essential Tests
Porter proposes three tests to determine the propensity for diversification to create shareholder value:
The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive).
The Cost of Entry Test : the cost of entry must not capitalize all future profits (and may counteract attractiveness).
The Better-Off Test: either the new unit must gain competitive advantage from its link with the corporation, or vice-versa. (i.e. some form of “synergy” must be present)

Competitive Advantage from Diversification
Economies of Scope:
Sharing tangible resources (research labs, distribution systems) across multiple businesses
Sharing intangible resources (brands, technology) across multiple businesses
Transferring functional capabilities (marketing, product development) across businesses
Parenting Advantage:
Value comes from the resources and general management skills of parent company, holding company of corporate HQ (Goold, Campbell and Alexander, 1994)

Competitive Advantage from Diversification
Economies from Internalizing Transactions:
Economies of scope not a sufficient basis for diversification-must be supported by transaction costs
Diversified firms can avoid external transactions by operating internal capital markets and labor markets
Diversified firms have better information on resource characteristics than external markets

When to Diversify?
When it makes sense to diversify depends on:
Growth potential in present business
Attractiveness of opportunities to transfer existing competencies to new businesses
Potential cost-saving opportunities to be realized by entering related businesses
Availability of adequate financial and organizational resources
Managerial expertise to cope with complexity of operating a multi-business

CORP5039

LECTURE 1

Introduction to the module & understanding competitive advantage.

Welcome

About the Team 1

Business School/ Department of Strategic

Management and Marketing

Dr Szymon Kaczmarek- module leader

Dr Demola Obembe

Dr Suman Saha

All team members are experienced scholars. They

have taught at a number of British universities.

Their pedagogical experience reaches from UG to

MBA/PhD students.

About the Team 2
Business School/ Department of Strategic
Management and Marketing
Dr Szymon Kaczmarek- module leader
Dr Demola Obembe
Dr Suman Saha
The team members are also accomplished researchers
with the number of publications in reputed academic
journals. They have also had substantial exposure to
business practice and consultancy work.

Lecture Focus

Key subject areas

The module guide book

Competitive Advantage

Learning Outcomes

To be aware of the module’s objectives, syllabus and methods of assessment.

To be aware of assessment deadlines.

To understand the nature and sources of competitive advantage.

Module Guide Overview
Module structure
Lectures and topics
Tutorials and topics
Module assessments
Assessment types
Deadlines
Weightings
Aids to Success
Finding literature materials
Time management
Referencing
Mandatory texts

We are at the very beginning of time for the
human race. It is not unreasonable that we
grapple with problems. But there are tens of
thousands of years in the future. Our
responsibility is to do what we can, learn
what we can, improve the solutions, and pass
them on.
Richard Feynman 1918-1988 Nobel Prize for Physics, 1965
Levitt, 1983
Fukuyama 1989/ 1992
Ohmae, 1990

Why do we need Strategies?
Strategy as Decision Support
Strategy as Target
Strategy as a Coordinating Device

Challenges for Modern Organisations.
Modern Organisations
Competition
Turbulence & the rise of ‘Black Swan’ Events.
Technology
Social Pressures and the Crisis of Capitalism

Jensen, 1993
Beck, 2008

Definition of Strategy
What business strategy is all about is, in a word [sic], competitive advantage …The sole purpose of strategic planning is to enable a company to gain, as efficiently as possible, a sustainable edge over its competitors. Corporate strategy thus implies an attempt to alter a company’s strength relative to that of its competitors in the most efficient way.
So what is this Competitive Advantage ?
Kenichi Ohmae (1983) The Mind of the Strategist.

Competitive Advantage Defined
A firm has a competitive advantage when it is able to create more economic value than rival firms. Economic value is simply the difference between the perceived benefits gained by a customer that purchases a firm’s products or services and the full economic cost of these products or services. Thus, the size of a firm’s competitive advantage is the difference between the economic value a firm is able to create and the economic value its rivals are able to create.

How does competitive
advantage emerge?
External sources of
change e.g.:
Changing customer demand
Changing prices
Technological change
Internal sources
of change
Resource heterogeneity
among firms means
differential impact
Some firms faster
and more effective
in exploiting change
Some firms
have greater creative
and innovative
capability
The Emergence of Competitive Advantage.

Competitive Advantage Analysis.
Our Company’s offerings.

Customers needs.
Competitors’ offerings.
A
B
C
Key.
A = our points of difference.
B = points of parity
C = Their points of difference
D
E
F
G
What are the strategic issues for:
A, B and C?
Do we ignore D, E, F & G?
Source: Adapted from Urbany and Davis (2007) Strategic Insight in Three Circles, Harvard Business Review, v85 (11), pp 28-30.

The Competitive Advantage Cycle.
Performance Rewards
– Satisfaction
– Loyalty
– Profits
– Share
Sources of Advantage
– Superior assets
– Superior capabilities
Investments in renewal
Competitive dynamics erode advantages
Positional Advantages realised
– Superior customer value

Key Success
factors
Barriers to imitation

Source: Day and Reibstein (1997) Dynamic Competitive Strategy, Wiley & Sons.

COST
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
COMPETITIVE
ADVANTAGE
Similar product
at lower cost
Price premium
from unique product
Sources of Competitive Advantage.

Generic strategy Key strategy elements Resource and organisational requirements
Cost Leadership Scale-efficient plants
Design for manufacture
Control of overheads and R&D
Process innovation
Outsourcing (especially overseas)
Avoidance of marginal customer accounts Access to capital
Process of engineering skills
Frequent reports
Tight cost control
Specialisation of jobs and functions
Incentives linked to quantitative targets
Differentiation Emphasis on branding advertising, design, service, quality, and new product development Marketing abilities
Product engineering skills
Cross-functional coordination
Research capability
Incentives linked to qualitative performance targets

Features of Cost Leadership & Differentiation Strategies.

CORP 5039: International Strategic Management, Markets and Resources

International strategy and new market entry

Outline
The phenomenon of globalisation, drivers/ patterns of internationalisation and international strategies
Implications of international competition for industry analysis and the analysis of competitive advantage in an international context (theory of comparative advantage, Porter’s national diamond framework)
Determining the international location of production
Foreign market entry methods

Globalisation
Globalisation: the increasing economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders (see Hitt et al, Strategic Management: Competitiveness and Globalization 2005: 10)
Global competition increases performance standards in many dimensions e.g. quality, cost, productivity and operational efficiency
However differences in institutional frameworks in countries means there is no one best globalisation strategy.
Rather, firms have to vary their strategies according to the institutional environments in those countries

Drivers of Internationalization

Market Drivers

Similar Customer needs

Cost Drivers

Scale Economies

Favourable logistics

Government Drivers

Trade policies

Global Customers

Transferable marketing

Country specific differences

Technical standards

Host government policies

Competitive Drivers

Competitors’ global strategies

Interdependence between countries

Patterns of Internationalization

Main trading blocks

High concentration trading blocks:
EU – 28 countries – population approximately 0.5bn. World’s single largest market, with approx 73% of total output by the EU traded within its borders.
Mercosur (1991) Currently 4 countries
NAFTA (1994) (3 countries)
ASEAN (1967) (10 countries)
WTO – formerly GATT (1995) (164 countries) accession of China (11 December 2001), India (1995).

International strategies 1

Johnson et al (2014), 10th ed.

International strategies 2

There are four basic strategies firms may employ to enter and compete in a foreign market include:

Export strategy: Advantageous when both forces for global integration and local responsiveness are low
Leverages home country capabilities, innovations and products in different foreign countries
Companies that have distinctive capabilities together with strong reputation and brand names often achieve success following this strategy
The limits of a home country centralised view of the business and risks of skilled local competitors getting ahead are the strategy’s downsides

International strategies 3

Multidomestic strategy: Where the focus is on maximising local responsiveness
Firms customise product and marketing strategies to suit local needs of the market
Encourages local product development and R&D centres, but may give rise to high cost base

International strategies 4

Global strategy: One in which firms exploit experience curve effects and economies of scale through standardisation of products across country markets
Production, marketing and product development activities are concentrated in small numbers of advantageous locations
It produces lower risk but may cause firms to forego growth opportunities in local markets
Requires resource sharing and coordination across borders, making it difficult to manage

International strategies 5

Transnational strategy: an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness
Difficult to achieve due to simultaneous requirement for strong centralised control for efficiency and high level of flexibility to achieve local market responsiveness
However, effective implementation can produce higher performance than either multi-domestic or global strategies

The Benefits/Costs of Global Strategy
(Forces for Globalization)
Cost Economies from Scale and Replication: Accessing global scale economies in purchasing, manufacturing, product development, marketing. Replicating knowledge assets.
Serving Global Customers
Exploiting National Resources
Learning Benefits: Accessing and integrating knowledge from multiple locations
Competing Strategically: Exploiting global strength to win local wars

The Benefits/Costs of Global Strategy
(Forces for National Differentiation)
Transportation and communication costs arising from geographical distance and remoteness
Differences in customer needs and behavioural norms arising from cultural factors (including institutional, governmental, regulatory and political differences
Market and infrastructure differences arising from differences in level of economic development
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com

The CAGE framework- snowballing exercise
Cultural
distance
Administrative and
political distance
Geographic
distance
Economic/wealth
distance
Johnson et al (2014), 10th ed.

Implications of Internationalization for Industry Analysis 1
Internationalization usually results in increased intensity of competition within national markets and tends to reduce an industry profitability
Between 1976-2009, US automobile market went from 3 major players (GM, Ford, & Chrysler having 84% market share) to 14 firms with auto plants (reducing share of the former big three to 43% of auto sales).
From an industry analysis viewpoint, internationalization has direct influence on three of Porter’s 5 Forces:
Competition from potential entrants
Rivalry among existing firms
Increasing bargaining power of buyers

Implications of Internationalization for Industry Analysis 2
Competition from potential entrants
Lowered entry barriers due to factors such as reductions in tariff, falling real costs of transportation and convergence of customer preferences
Competitive rivalry among existing firms
Increased internal rivalry resulting from increased number of firms competing in national market and hence lowering of seller concentration
Also, intensified rivalry may result from greater diversity of competitors
Increased buyer power: wider choice of suppliers for distributors and consumers

Competitive Advantage within an International Context

Theory of Absolute Advantage 1

UK
Mexico
Wheat
bushels/hr.
Bananas
lbs./hr.
6
4
1
5
Exchange
Rate:
1 bu. = 1 lb.
UK: 2 hrs. = 6 bu. Wheat and 4 lbs. Banana, or
2 hrs. = 12 bu. Wheat
By trading, UK can get:
6 bu. Wheat and 6 lbs. Bananas
Gains from Trade
A ½ hour gain
from trade!

Theory of Absolute Advantage 2

UK
Mexico
Wheat
bushels/hr.
Bananas
lbs./hr.
6
4
1
5
Exchange
Rate:
1 bu. = 1 lb.
Mexico: 2 hrs. = 1 bu. Wheat and 5 lbs. Bananas, or
2 hrs. = 10 lbs. Bananas
By trading, Mexico can get:
5 bu. Wheat and 5 lbs. Bananas
Gains from Trade
A 4 hour gain
from trade!

Theory of Comparative Advantage

Absolute advantage is fine when each country party to the trade has an absolute advantage.
What if (using our previous example) the UK also had an absolute advantage in producing bananas over Mexico?
Ricardo (1817) suggests specialise where you have a Comparative advantage – or where you may be relatively less inefficient.

National Influences on Competitiveness: Comparative Advantage
Comparative advantage refers to the relative efficiencies of producing different products
The theory states that a country has comparative advantage in those products that make intensive use of the resources that are abundant within that country. E.g.
Philippines relatively more efficient in the production of footwear, apparel, and assembled electronic products than in the production of chemicals and automobiles.
U.S. is relatively more efficient in the production of semiconductors and pharmaceuticals than shoes or shirts.
When exchange rates are well-behaved, comparative advantage translates into competitive advantage
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com

Porter’s Competitive Advantage
of Nations
Porter notes the following:
International competitive advantage is about companies not countries—the role of the national environment is providing a home base for the company.
Sustained competitive advantage depends upon dynamic factors– innovation and the upgrading of resources and capabilities
The critical role of the national environment is its impact upon the dynamics of innovation.

Porter’s National Diamond Framework

FACTOR CONDITIONS—“Home grown” resources/capabilities more important than natural endowments.
RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”
DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation
STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

Porter’s Determinants of National Advantage 1
Factor Conditions (Production)
Resources: skills, knowledge, capital, infrastructure
Demand Conditions (Home markets)
Clusters of excellence (Airbus in EU), buyer sophistication, position of product life cycle
Related and Support Industries
Innovation processes (EG Silicon Valley), competitive advantage in related industries (skills in leather make Italy a fashion centre for boots)

Porter’s Determinants of National Advantage 2
Firm Strategy, Structure and Rivalry
Domestic industry structures (e.g. corporate cultures of Kaizen and TQM in Japan), level of sustained commitment and level of risk taking in investment
Chance
Pure inventions, shifts in financial markets or exchange rates, discontinuities (eg: new medical alternatives)
Government
Influences the 4 determinants.

International Location of Production
3 considerations:
National resource conditions: What are the major resources which the product requires? Where are these available at low cost?
Firm-specific advantages: to what extent is the company’s competitive advantage based upon firm-specific resources and capabilities, and are these transferable?
Tradability issues: Can the product be transported at economic cost? If not, or if trade restrictions exist, then production must be close to the market.
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com

Determining the Optimal Location of Value Chain Activities

Globally-Dispersed Production: Boeing 787 Dreamliner

Production of the iPhone

© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Item Supplier Location
Design and operating system Apple USA
Flash memory Samsung Electronics S. Korea
DRAM memory Samsung Electronics;
Micron Technologies S. Korea
USA
Application processor Murata Japan/Taiwan
Baseband Infineon; Skyworks; Triquint Taiwan
USA
Power management Dialog Semiconductor Taiwan
Audio Texas Instruments USA
Touchscreen control Cirrus Logic USA
Accel. and gyroscope ST Microelectronics Italy
E-compass AKM Semiconductor Japan
Assembly Foxconn China

Alternative Modes of Overseas Market Entry

Choice of Market Entry Modes 1
Potential for establishing competitive advantage is crucial to the means by which firms enter foreign markets
Key considerations in choice of entry modes include:
Breadth of competitive advantage
Tradability of product and barriers to trade

Choice of Market Entry Modes 2

Johnson et al (2014), 10th ed.

Alliances and Joint Ventures:
Management Issues 1
Benefits:
Combining resources and capabilities of different companies
Learning from one another
Reducing time-to-market for innovations
Risk sharing
Problems:
Management differences between the two partners. Conflict most likely where the partners are also competitors.

Alliances and Joint Ventures:
Management Issues 2
Benefits are seldom shared equally. Distribution of benefits determined by:
Strategic intent of the partners- which partner has the clearer vision of the purpose of the alliance?
Appropriability of the contribution – which partner’s resources and capabilities can more easily be captured by the other?
Absorptive capacity of the company – which partner is the more receptive learner?

CORP 5039: International Strategic Management, Markets and Resources
Strategic Management of Innovation

Learning Objectives
Distinguish between Innovation and Invention
Outline different models of innovation
Identify factors that determine the returns to innovation and potential for innovation to yield competitive advantage
Outline strategies for exploiting innovation and managing technology

Distinction between Innovation and Invention
“Invention is the creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge.” (Grant, 2013: 247)
“Innovation is the initial commercialisation of invention by producing and marketing a new good or service or by using a new method of production.” (Grant, 2013: 247)
“Innovation is the process of creating value from ideas” (Tidd and Bessant, 2014:3)

Distinction between Innovation and Invention

Invention is “the conception of the idea, whereas innovation is the subsequent translation of the invention into the economy” (US Dept of Commerce,1967 in Trott, 2012:15)

Innovation = theoretical conception + technical invention + commercial exploitation

The Development of Technology: from Knowledge Creation to Diffusion

Basic Knowledge
Invention
Innovation
Diffusion
IMITATION
ADOPTION

Supply side
Demand side

Chronological Development of Models of Innovation

Date
Model
Characteristics
1950/60s
Technology-push
Simple linear sequential process; emphasis on R&D; the market is a recipient of the fruits of R&D
Simple linear sequential process; emphasis on marketing; the market is the source for directing R&D; R&D has a reactive role
Market-pull
1970s
Emphasis on integrating R&D and marketing
Coupling model
1980s
1980/90s
1990s
2000s
Interactive model
Network model
Open innovation
Combination of push and pull
Emphasis on knowledge accumulation and external linkages
Chesbrough’s (2003) emphasis on further externalisation of the innovation process in terms of linkages with knowledge inputs and collaboration to exploit knowledge outputs
Source: Trott, P. (2012) Innovation and New Product Development (5th Ed). Harlow: Pearson. p26

Closed Vs Open Innovation Models
Closed innovation is premised on a philosophy of self-reliance when it comes to R&D.
Organisations tend to generate, develop and commercialise their own ideas.
Open innovation as a model has however gained prominence due to complexity and dynamism of 21st century industry environments
Organisation boundaries are porous and as such allow innovative ideas to move between the organisation and its environment.

Closed Vs Open Innovation

Chesbrough’s (2003) Principles on Open Innovation
Not all the smart people in the field are working in the organisation.
Developing a winning strategy will entail making the best use of internal and external ideas.
External R&D can create significant value but internal R&D is required to appropriate a portion of the value.
To develop a better business model is more important than being the first to market.
Profit from others’ use of your intellectual property and be willing to buy others’ IP where it will support and advance your own business model.
Additionally, R&D role should go beyond knowledge generation to knowledge brokering.

Chesbrough, H. W. (2003) “The era of open innovation“, MIT Sloan Management Review 44 (3): 35–41

The Procter and Gamble Example
By the late 1990s innovation success rate was around 35%
In recognition that significant innovation was carried out by others; P&G launched ‘connect and develop’
Original goal was to get 50% of innovations from outside the organisation.
By 2006, 35% of new products had externally originating elements compared to 15% in 2000.
By 2008, 45% of innovations in new product pipeline had externally originating key elements.
Source: Tidd, J. & Bessant, J. (2014) Strategic Innovation Management. Chichester: Wiley

The Procter and Gamble Example
Innovation success rate estimated to have more than doubled and significant reductions in R&D spend
4.8% of turnover in 2000 to 3.4% in 2008
2.4% of sales in 2012!

Linked expertise in skincare with people in tissue & towel areas, and from fabric property enhancing skills developed in ‘Bounce’.
Linked oral care experts with researchers in film technology as well as bleach & household cleaning groups.

Innovation and the Knowledge Dimension
Arguably, the ability for organisations to innovate is predicated on the extent to which such organizations can generate new knowledge and utilise existing knowledge.
Knowledge is commonly categorised as:
Tacit – difficult to specify, fuzzy often complex and unrecorded, or
Explicit – easily/precisely defined, articulated
Both knowledge types contribute to organisations developing sustainable competitive advantage but tacit knowledge more so because of the difficulty in replication.

Four Modes of Organisational Knowledge Creation

Nonaka, I. and Takeuchi, J. (1995) The Knowledge-Creating Company. New York, NY: OUP.

Mechanisms for Knowledge Creation
Davenport & Prusak (1998) suggest six mechanisms for creating knowledge:
Acquisition: ideas obtained from other companies
Rental: where the organization sponsors knowledge development via external research
Dedicated resources: e.g. task forces, R&D units
Fusion: similar to the quality management concept (quality circle)
Adaptation: in response to external pressures
Networks: engaging in formal and informal communities for knowledge sharing

Davenport, T. H. and Prusak, L. (1998) Working knowledge: How organizations manage what they know. Boston: Harvard Business School Press.

Profiting from Innovation
Two key factors determine if organisations make profit from innovation:
The ability to create value through the innovation
The amount of value that can be appropriated from the innovation
e.g. The PC Industry:
Innovators: MITS, Tandy, Apple, Xerox ; initially earned modest profits
Imitators/Followers: e.g. IBM, Toshiba, Dell, Compaq etc made more profits but overshadowed by
Suppliers: e.g. Intel (microprocessors), Microsoft (operating systems)
Customers however are deemed to have appropriated the greatest value as prices paid were far below value derived

Factors Determining Appropriation of Value from Innovation
Property rights in innovation: ownership of intellectual property, which confers legal protection on intellectual assets
Tacitness and complexity of involved technology: protection afforded by the extent to which technical knowledge is difficult to comprehend and replicate. (New fashion designs Vs. Integrated circuits)
Lead time: Timing it takes followers/imitators to catch up with innovators
Relates to First Mover Advantage
Complementary resources: Availability of diverse resources and capabilities needed to finance, produce, and market the innovation
Trade secrets (could be formulae or industrial processes etc)

Types of Intellectual Property Protection
Patents – Exclusive rights to a new product process, substance or design; may grant 20 years of monopoly
Copyrights – Exclusive rights to artistic, dramatic and musical works; may be valid up to 70 years after the death of owner
Trademarks – Exclusive rights to words, symbols or other marks to distinguish goods and services; trademarks are registered with the Patent Office
Registered Design – Registration of the outward appearance of an article; provides exclusive rights for up to 25 years

Perceptions on Effectiveness of Different Mechanisms for Protecting Innovation

Choice of Alternative Strategies for Exploiting Innovation
Two main sets of factors influence choice:
Characteristics of the innovation
To what extent are property rights for innovation clearly defined/established
Resources and capabilities of the firm
Start-ups, with limited resources attracted to licensing, or in concert with larger firms, outsourcing, alliances or joint ventures
Larger established corporations with wealth of resources and capabilities are better place for internal commercialisation

Alternative Strategies for Exploiting Innovation

Strategic Innovation: To Lead or to Follow?
Both leadership (pioneer) and follower strategies can yield success and long-term competitive advantage.
Two considerations in the choice of innovation leadership or follower strategy in entering new markets are:
Sustainability of product market leadership position (To what extent can the firm’s innovation be easily imitated? Can the firm innovate at a faster pace than competitors? e.g. Gillette)
Ability to dictate rules of the game (and create specific competitive advantages, for instance, through reputation, skill and experience) – e.g. Coca-Cola, McDonald’s

Strategic Innovation: To Lead or to Follow?
Additional Questions:
Can the innovation be protected by intellectual property rights or lead-time advantages?
If so, advantages in leadership.
How important are complementary resources?
Followers may be able to avoid investing in complementary resources due to better established industry infrastructure
Firm possessing complementary resources has the luxury of waiting
Is there potential to establish an industry standard ?
if so, advantages in being a leader.

Blue Ocean Strategy as an Innovation Approach
Developed by Kim & Mauborgne (2005) and focuses on untapped market space, demand creation and the opportunity for highly profitable growth
It is underpinned by:
The importance of analyzing markets for new opportunities
The importance of value-adding prospects (enhanced by lowering cost/raising price)
The identification of new innovation by focusing on key elements leading to new ways of thinking and acting
Kim, W.C. and Mauborgne, R. (2005) Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston: Harvard Business School.

Blue Ocean Strategy as an Innovation Approach
Key questions in employing blue ocean strategy:
Which aspects of industry are important and which are peripheral (elimination)?
Which current features are over-designed and can be reduced without affecting product/service offering (reduction)?
Which product features can be improved upon without compromise (raising)?
Which aspects of products and services can be employed to generate value through demand creation or new pricing models?

1. What is the definition of innovation?
The conversion of new knowledge into a new product, process or service,
The conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual use,
The initial commercialisation of invention by producing a new good or service or by using a new method of production,
Answers A and B,
Answers B and C,
Answers A and C,
None of the above.

2. Samsung is typically fast second to the market.
True
False

3. Who said that in many markets it is lead users who are the principal source of innovation?
Michael Porter,
Henry Mintzberg,
Eric Von Hippel,
Paula Jarzabkowski,
None of the above.

4. What statement about open innovation is true?
Open innovation means that organisation boundaries are porous and there are leakages of knowledge to the environment,
Open innovation gained impetus through the shift from vertically integrated systems of innovation to more market-based systems,
Open innovation is a preferred choice when competitive rivalry is intense,
Open innovation is best for the complex and tight-linked innovation.

5. The choice of the mode of innovation depends on:
Characteristics of innovation and resources and capabilities of the firm,
The occurrence of the tipping and tripping points on the S-curve,
Ambidexterity and creativity of the organisation,
Market uncertainty.

6. Strategic alliances imply the highest degree of commitment of resources and capabilities out of all modes of innovation.
True
False

7. Ijiro Nonaka named the process of conversion of tacit into explicit knowledge as:
Internalisation,
Socialisation,
Combination,
Externalisation.

8. The knowledge diffusion process on the supply-side unfolds through:
Adoption,
Invention,
Imitation,
Innovation.

9. Which factor does not explain the optimal timing of entry into an emerging industry?
Property rights and lead-time advantages,
Complementary resources,
The potential for a standard,
Flexibility.

10. Strategic gaps in the marketplace are:
Strategy canvas,
Critical success factors,
Blue Oceans,
Red Oceans.

A.B.C.D.E.F.G.
14%
21%
36%
7%
0%
14%
7%
True
False
60%
40%
Michael Porter,
Henry Mintzberg,
Eric Von Hippel,
Paula Jarzabkowski,
None of the above.
7%
14%
36%
7%
36%
A.B.C.D.
33%
0%
27%
40%
A.B.C.D.
88%
0%
12%
0%
True
False
36%
64%
Internalisation,
Socialisation,
Combination,
Externalisation.
29%
36%
29%
7%
Adoption,Invention,
Imitation,
Innovation.
20%
7%
67%
7%
A.B.C.D.
38%
23%
31%
8%
Strategy canvas,
Critical success factors,
Blue Oceans,
Red Oceans.
8%
17%
50%
25%

MANAGEMENT REPORT AND

FINANCIAL STATEMENTS

SÜDZUCKER

DATED 28 FEBRUARY 2017 (GERMAN GAAP – HGB)

The annual report is also available in German. This translation is provided for convenience only and

should not be relied upon exclusively. The German version of the annual report is definitive and takes

precedence over this translation.

_____________________________

The numbers in parenthesis in the report represent the corresponding prior year´s figures or

item.

CONTENTS
………………………………………………… 1 REPORT OF THE SUPERVISORY BOARD

………………………………………………………………. 6 MANAGEMENT REPORT

ABOUT THE GROUP ……………………………………………………………………………………………………………… 6

Group structure ………………………………………………………………………………………………………….. 6

Group management …………………………………………………………………………………………………….. 7

Strategic Direction and Objectives ………………………………………………………………………………….. 8

RESEARCH AND DEVELOPMENT ……………………………………………………………………………………………….. 11

Agricultural raw materials ……………………………………………………………………………………………11

Sugar ……………………………………………………………………………………………………………………….12

Functional food ingredients …………………………………………………………………………………………13

Starch ………………………………………………………………………………………………………………………13

Bio-Ethanol ……………………………………………………………………………………………………………….14

Fruit …………………………………………………………………………………………………………………………15

New products and processes ……………………………………………………………………………………….15

EMPLOYEES …………………………………………………………………………………………………………………….. 17

CORPORATE GOVERNANCE …………………………………………………………………………………………………… 21

Supervisory board and executive board operating procedures ……………………………………………21

Corporate governance report ……………………………………………………………………………………….23

Compliance……………………………………………………………………………………………………………….26

Disclosures on takeovers …………………………………………………………………………………………….27

BUSINESS REPORT ……………………………………………………………………………………………………………… 30

General and industry-specific business conditions …………………………………………………………..30

Legal and political environment ……………………………………………………………………………………31

Beet harvest and campaign chronology ………………………………………………………………………….33

Business performance …………………………………………………………………………………………………34

RISKS AND OPPORTUNITIES REPORT …………………………………………………………………………………………… 38

Risk management system ……………………………………………………………………………………………38

Risks ………………………………………………………………………………………………………………………..39

Overall risk position ……………………………………………………………………………………………………47

Opportunities ……………………………………………………………………………………………………………48

Internal control and risk management system as it applies to accounting systems ………………..50

OUTLOOK ……………………………………………………………………………………………………………………… 52

RECOMMENDATION ON APPROPRIATION OF PROFITS ………………………………………………………………………… 53

CONCLUDING DECLARATION REGARDING THE DEPENDENT COMPANY REPORT PURSUANT TO SECION 312 (3)

OF THE STOCK CORPORATION ACT (AKTG) ………………………………………………………………………………….. 53

FINANCIAL …………………………………………………………………………… 54
BALANCE SHEET AS OF 28 FEBRUAR 2017 ………………………………………………………………………………….. 54

INCOME STATEMENT 1 MACH 2014 TO 28 FEBRUAR 2017 ……………………………………………………………… 55

NOTES TO THE FINANCIAL STATEMENTS ……………………………………………………………………………………… 56

Application of German GAAP (HGB) ……………………………………………………………………………….56

Accounting policies …………………………………………………………………………………………………….56

Notes to the balance sheet …………………………………………………………………………………………..62

Notes to the income statement …………………………………………………………………………………….69

Other disclosures ……………………………………………………………………………………………………….72

………………………………………………………… 89 RESPONSIBILITY STATEMENT

………………………………………………………………….. 90 AUDITORS REPORT

Report of the supervisory board 1

REPORT OF THE

SUPERVISORY BOARD

Dear shareholders,

Before providing a detailed report on the super-

visory board’s work in fiscal 2016/17 as usual in

this space, let us first briefly look at an im-

portant topic: the future direction of the compa-

ny.

Since the EU decision in June 2013 to let all of

the key European sugar market regulations

ex-

pire without substitute, Südzucker has intro-

duced and implemented countless measures to

improve the efficiency of the value chain from

the field to the

customer.

What the European sugar market will look like

after October 2017 without the regulating

mechanisms that have been in place to date

cannot be answered with certainty at this point.

It will frankly be a once-in-a-lifetime event. No

other important sugar production market in the

world has been deregulated to the extent that it

will be in Europe. What is certain however is that

this radical change in the European sugar mar-

ket will have a strong impact on our company.

Developments in the world sugar market will in

future much more directly impact the European

market. That is why our company’s ability to

respond flexibly to market fluctuations will be

pivotal to its success. We have initiated and exe-

cuted the change programs we consider appro-

priate to the situation. For example, it is worth

mentioning the new beet contracting system at

this juncture. The company and beet growers

reached agreement early on conditions that will

allow both flexible and market-based beet com-

pensation, as well as better and longer loading

of the sugar factori

es.

The supervisory and executive boards are also

keeping an eye on the future of the other seg-

ments. An example here is the construction and

startup of the wheat starch plant in Zeitz, which

not only expands the company’s product range,

but also makes it possible to optimize the use of

the material streams at the multipurpose Zeitz

site.

With these topics, among others, we were able

to work on the basis of mutual trust and in the

spirit of a goal-oriented team with the executive

board and examine in depth the general frame-

work, direction and strategic development of the

company in fiscal 2016/17. In doing so, we con-

centrated on the tasks for which we are respon-

sible by law, the company’s articles of associa-

tion and the rules of procedure: to monitor and

advise the executive board in the latter’s man-

agement of

the company.

The supervisory board was directly involved in

all decisions of material importance affecting

Südzucker Group and was continuously advised

in detail and in a timely manner on all issues

related to corporate planning and further strate-

gic development, business activities, the status

and development of Südzucker Group (including

risk situation), as well as risk management and

compliance.

The executive board updated the supervisory

board at all meetings on the course of

business

as well as the company’s situation, and in be-

tween meetings informed the supervisory board

about the current developments and important

business dealings. The executive board reports

were mainly updates about the company’s situa-

tion and development, corporate policy and

profitability as well as Südzucker AG’s and

Südzucker Group’s corporate, treasury, invest-

ment, research and personnel budgets. In addi-

tion, the supervisory board chairman took part

in executive board meetings and was informed

by the CEO in several working meetings about

all important business activities.

Report of the supervisory board 2

Supervisory board meetings and decisions

The supervisory board met with the executive

board at four ordinary meetings and one ex-

traordinary meeting in fiscal 2016/17. The su-

pervisory board approved all of the executive

board’s decisions after a thorough review and

discus

sions.

The meeting regarding the balance sheet on 18

May 2016 dealt with the audit and endorsement

of Südzucker AG’s financial statements and the

consolidated financial statements dated 29 Feb-

ruary 2016. The auditor reported on the material

findings and results of the audit, which included

the accounting-system-related internal control

systems. The board approved the recommenda-

tion for appropriation of retained earnings and

the supervisory board report. The board also

made preparations for the 2016 annual general

meeting: The supervisory board adopted the

agenda and proposed resolutions. The executive

board presented the current compliance organi-

zation. The supervisory board approved budget

amendments, as well as acquisition projects and

property purchases.

At its meeting on 13 July 2016 – the day prior to

the annual general meeting – the supervisory

board approved the investment plan for

2017/18, the long-term investment program

and investment amendments. The CFO present-

ed the mid-term plan. The supervisory board

also approved acquisition and financing pro-

jects.

The earnings projections for 2016/17 were pre-

sented at the board’s 17 November 2016 meet-

ing. As always during the November meeting,

the supervisory board focused on corporate

governance. The board also conducted its annu-

al test of effectiveness and completed the 2016

declaration of compliance. The supervisory

board also approved an editorial change to the

wording of the articles of incorporation. It fur-

ther approved acquisition and financing pro-

jects, a corporate action and investment

amendments. Dr. Kirchberg’s appointment to

the executive board was extended by a further

five

years.

At the meeting on 31 January 2017, a

share-

holders representative candidate running for

supervisory board membership at the 2017

elections introduced herself. The responsibility

of the company’s bodies in connection with the

2014 antitrust fine was also discussed. The CFO

presented the current earnings projection for

2016/17. The supervisory board approved ac-

quisition and investment projects, as well as

investment budget updates. The supervisory

board approved the regular adjustment of the

executive board’s

remuneration.

One member was excused at the meeting on 18

May 2016 and two supervisory board members

were excused at the 17 November 2016 meet-

ing. However, the absent members took part in

the decision-making via written notes. Other-

wise, all supervisory board members personally

attended the meetings. No member of the su-

pervisory board took part in only half or fewer

than half of the board’s meetings or of its com-

mittees.

Supervisory board committees

The supervisory board set up five committees to

enable its efficient fulfillment of duties (execu-

tive committee, mediation committee, audit

committee, agricultural committee and econom-

ic and social committee), each of which is made

up of an equal number of shareholders’ and

employees’ representatives. The current mem-

bers of the committees are presented in the

notes under item 37 “

Supervisory board and

executive board”.

Report of the supervisory board 3

In accordance with the recommendations of the

German Corporate Governance Code, the chair

of the audit committee is not the same person

as the chair of the supervisory board.

The supervisory board general committee con-

vened four times in fiscal 2016/17. Subject of

discussion has always been strategic

issues.

Succession planning for the executive board was

also discussed at the meeting on 18 May 2016

and on 13 July 2016. At the 17 November 2016

and 18 January 2017 meetings, the board dis-

cussed the status of the antitrust damage claims

and the responsibility of corporate bodies in

connection with the 2014 antitrust fine. At its

meeting on 31 January 2017, the supervisory

board had a preliminary discussion regarding

the regular adjustment of the executive board’s

remuneration.

The audit committee convened five times during

the year, in three meetings and two telephone

conferences. At its 4 May 2016 meeting and in

the presence of the external auditors it dis-

cussed matters relating to the annual financial

statements

of Südzucker AG

and the consolidat-

ed financial statements. It prepared the supervi-

sory board financial review meeting – at which

the chair of the audit committee reported – and

subsequently approved the recommendations of

the audit committee. In addition, it discussed

the recommendation regarding the appointment

of the auditors and checked their independence.

At the meeting on 14 July 2016 the audit com-

mittee discussed the auditor’s quotation for the

audit assignment and commissioned the audit

assignment. In the 11 October 2016 audit com-

mittee meeting, the auditors dealt with monitor-

ing the accounting process, the effectiveness of

the internal controlling system, the risk man-

agement system and the internal audit system,

as instructed by the supervisory board. Another

agenda item was the discussion of the half-year

financial

report.

In telephone conferences on 5 July 2016 and 10

January 2017, the audit committee discussed the

Q1 and Q3 2016/17 quarterly financial reports

with the executive board. On 10 January 2017, it

also dealt with the new statutory requirements

for non-audit services and approved the catalog

of non-audit services auditors are permitted to

deliver, together with application guidelines.

The agricultural committee convened on 17

November 2016. Reports on current agricultural

division issues, the acquisition of a farming op-

eration in Thuringia and agricultural activities in

Moldova were presented and discussed.

The chairs of the committees reported their

findings at each subsequent supervisory board

sitting.

The mediation committee had no reason to con-

vene last fiscal year. Neither did the social com-

mittee meet.

Supervisory board effectiveness test

In accordance with paragraph 5.6 of the German

Corporate Governance Code, the supervisory

board again conducted a test of its effective-

ness. This is done annually using a question-

naire, without external assistance. Each year, the

questionnaire is revised according to the latest

changes to the code. The questionnaires were

assessed in the meeting on 17 November 2016,

at which time the results were discussed and

improvement recommendations made. The aim

is to continuously improve the work of the su-

pervisory board and its committees.

Report of the supervisory board 4

Compliance

On 10 January 2017, the executive board, exter-

nal auditor, chairman of the supervisory board

and audit committee sat for the regular fraud

review meeting. The topics presented and dis-

cussed included the assessment of business

risks and measures to limit the risks arising

from fraud.

Corporate Governance

A detailed description of corporate governance

at Südzucker, including the wording of the su-

pervisory board’s diversity goals for its future

composition and the declaration of compliance

for 2016 issued by the executive and superviso-

ry boards, can be reviewed in the corporate gov-

ernance report. In addition, all relevant infor-

mation is available on the Internet at

http://www.suedzucker.de/en/Investor-

Relations/Corporate-Governance/.

The executive board fully complied with its du-

ties as prescribed by law and the standard rules

of procedure regarding reporting to the supervi-

sory board, and did so in a timely manner. The

supervisory board is confident that company

management is acting properly and that the

company’s organizational structure is effective.

It discussed these subjects in detail with the

auditors. The same applies to the effectiveness

of Südzucker Group’s risk management system.

Here too, the supervisory board was updated in

detail by the executive board.

The supervisory board was not advised of any

conflict of interest on the part of any of its

members, especially one that could arise as a

result of a consultation or supervisory board

duty related to customers, suppliers, creditors or

other business partners.

Financial statements

PricewaterhouseCoopers Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft (PwC), Frankfurt

am Main, was selected by the shareholders at

the annual general meeting at the recommenda-

tion of the supervisory board. The auditor has

reviewed the financial statements and manage-

ment report of Südzucker AG for fiscal 2016/17,

the recommendation of the executive board for

appropriation of retained earnings and the con-

solidated financial statements and management

report for 2016/17, and issued a qualified audit

opinion on each of them. The auditor also con-

firmed that the executive board suitably com-

plied with its duties as outlined in article 91,

paragraph 2 of the German Stock Corporation

Act (AktG). In particular, it established an appro-

priate information and monitoring system that

meets the needs of the company and that is

suitable for early detection of developments that

may threaten the company’s survival. PwC has

audited the group and individual financial

statements since the 2003/04 fiscal year. Mi-

chael Conrad has been the responsible auditor

at PwC since 2016/17.

In view of the declaration by Süddeutsche

Zuckerrübenverwertungs-Genossenschaft eG

(SZVG), Stuttgart, which states that SZVG holds

over 50 % of the voting rights of Südzucker AG,

the executive board has prepared a report on

related party transactions in accordance with

article 312 of the German Stock Corporation Act

(AktG). The auditor reviewed this report and

reported its findings in writing. It confirmed that

the facts set out in the report are true, that the

contractual transactions itemized in the report

are not unreasonably high and that there are no

grounds for a significantly different assessment

than that of the executive board.

The documents to be audited and the audit re-

ports were sent to each supervisory board

member in a timely manner. The auditor partici-

pated in the audit committee’s 9 May 2017

Report of the supervisory board 5

meeting and in the supervisory board’s financial

review meeting of 17 May 2016 and provided a

detailed report on the proceedings and result of

its audit. After carefully reviewing the auditor’s

reports, the supervisory board agreed with the

results of the audit. The results of the prelimi-

nary review by the audit committee and the re-

sults of its own review are in complete agree-

ment with the results of the external audit. The

supervisory board raised no objections to the

audit reports submitted. In its meeting of 17

May 2017, it endorsed the financial statements

for Südzucker AG and consolidated Südzucker

Group financial statements prepared by the ex-

ecutive board. The financial statements of

Südzucker AG are thus adopted. The supervisory

board concurs with the executive board’s rec-

ommendation made on 24 April 2017 regarding

the distribution of a dividend in the amount of €

0.45 per share.

Personnel

There were no personnel changes on the execu-

tive or supervisory board in fiscal 2016/17.

Together with the executive board, the members

of the supervisory board would like to pay their

respect to those active and former employees of

the Südzucker Group who passed away during

the year. The supervisory board thanks the ex-

ecutive board and all employees of Südzucker

AG and its affiliated companies for their perfor-

mance during the year.

Mannheim, 17 May 2017

On behalf of the supervisory board

Dr. Hans-Jörg Gebhard

Chairman

Management Report 6

Management Report

About the group

Group structure

Südzucker AG, a German stock corporation

based in Mannheim, is the parent company of

Südzucker Group and also its largest operating

entity. The consolidated financial statements

include the parent company – Südzucker AG –

and 152 (153) other entities, of which Südzucker

AG is directly or indirectly the majority share-

holder. A total of 16 (16) of those entities were

accounted for in the consolidated financial

statement using the equity method. For addi-

tional details about Südzucker’s share ownership

in other companies, please see the list of share-

holdings beginning page 80 (“List of sharehold-

ings in accordance with section 313 (2) HGB”) in

the notes to this annual report.

Südzucker Group comprises four segments:

sugar, special products, CropEnergies and fruit.

The sugar, special products and fruit segments

are further subdivided into 13 divisions that

manage the day-to-day operational businesses.

The CropEnergies segment is managed as an

independent corporate entity.

The group’s departments are as follows: busi-

ness administration/controlling, byproducts,

procurement of operating supplies, purchase of

capital goods, maintenance supplies and ser-

vices, finance and accounting, re-

search/development/services, engineering, in-

vestor relations, agricultural research, food

law/consumer policies/quality assurance, prop-

erties/insurance, public relations, organiza-

tion/IT, personnel, legal, audit, taxes, strategic

corporate planning/group develop-

ment/shareholdings, sugar sales/sugar trading,

sugar/production and sugar/beets. Administra-

tive tasks are handled at shared finance centers

and research activities at several research cen-

ters.

SUGAR SEGMENT

The sugar segment comprises

the sugar business unit with its four divisions

located in Belgium (Raffinerie Tirlemontoise S.A.,

Tienen), Germany (Südzucker AG, Mannheim),

France (Saint Louis Sucre S.A.S., Paris) and Po-

land (Südzucker Polska S.A., Wroclaw) as well as

distributors in Greece, the United Kingdom, Isra-

el, Italy and Spain. The AGRANA sugar division’s

production operations are located in Austria,

Romania, Slovakia, the Czech Republic and Hun-

gary. There is also a sugar production division in

Moldova (Südzucker Moldova S.A., Chisinau) and

an agricultural division (Südzucker AG, agricul-

tural division and Agrar und Umwelt AG

Loberaue, Rackwitz; Terra eG, Sömmerda). The

following entities have been accounted for in the

consolidated financial statements using the eq-

uity method: British trading company ED&F Man

Holdings Ltd., Agrana Studen Group (including

its sugar production operation in Bosnia) and

Maxi S.r.l., an Italian marketing joint venture.

SPECIAL PRODUCTS SEGMENT The special

products segment is comprised of four divisions:

BENEO, Freiberger, PortionPack Europe and

Starch. BENEO produces and sells functional

food ingredients for food and animal feed prod-

ucts and are made from various raw materials.

The products have dietary and technology bene-

fits. Freiberger Group produces chilled and fro-

zen pizzas as well as frozen pasta dishes and

snacks and focuses strongly on the private label

business. PortionPack Europe specializes in de-

veloping, packaging and marketing portion

Management Report 7

packs. The starch division comprises AGRANA’s

starch and bioethanol business, which includes

Austrian potato and corn starch producers, a

corn starch factory in Romania and bioethanol

producers in Austria. The starch division is also

responsible for the wheat starch plant at the

Zeitz location. The starch and bioethanol busi-

nesses of Hungrana group in Hungary are con-

solidated at equity.

CROPENERGIES SEGMENT Südzucker Group’s

bioethanol business, with its four production

sites in Germany, Belgium, France and the Unit-

ed Kingdom as well as trading activities in Brazil

and Chile, is managed under the CropEnergies

segment as a listed stock corporation. CropEn-

ergies is a leading manufacturer of sustainably

produced bioethanol for the fuel sector in Eu-

rope. The company also produces food and an-

imal feed. CropEnergies owns 50 % of CT Biocar-

bonic GmbH, which has been operating a food-

grade CO2 liquification plant in Zeitz. The com-

pany is included in the consolidated financial

statements as an equity-accounted invest

ment.

FRUIT SEGMENT The fruit segment is comprised

of the fruit preparations division (AGRANA Fruit)

and the fruit concentrates division (

Austria

Juice). The fruit segment’s companies conduct

business around the globe and supply interna-

tional food companies, especially in the dairy,

baked goods, ice cream and soft drinks indus-

tries.

Group management

Südzucker AG’s executive board independently

manages the businesses and is supervised and

guided by the supervisory board. The executive

board is bound to work in the corporation’s in-

terests and is responsible for increasing share-

holder value. The executive board members are

jointly responsible for managing the entire com-

pany. Notwithstanding the overall responsibility

of all executive board members, individual

board members bear sole responsibility for car-

rying out the decisions made by the executive

board that concern the portfolios they handle.

The executive board’s rules of procedure outline

the details of the board’s work. Südzucker AG’s

articles of association stipulate that important

business transactions are subject to the consent

of the supervisory board.

The executive board is responsible for appropri-

ate risk monitoring and management at the

company. It is also responsible for ensuring that

executive management positions are appropri-

ately filled. The executive board is also respon-

sible for ensuring that the company complies

with statutory requirements and in-house cor-

porate policies and that group companies ad-

here to these rules (compliance).

The segment and divisional management organ-

izations also manage the day-to-day operation-

al businesses in compliance with the aforemen-

tioned requirements. The company uses a ma-

trix organizational structure, whereby the line

functions are supported and advised by central

departments, which are authorized to issue di-

rectives.

VALUE BASED MANAGEMENT The corporation’s

policies focus on steadily improving share

holder

value. The objective of Südzucker’s value-based

management system is to generate a higher

return on capital employed than the cost of

capital in each segment and division and thus

Management Report 8

create added value for the company’s share-

holders.

Südzucker uses a consistent group-wide report-

ing and budgeting system together with central-

ly defined key indicators such as operating re-

sult and return on capital employed (ROCE) to

achieve this value-based corporate manage-

ment.

When calculating operating result, the result

from operations reported in the income state-

ment is adjusted to reflect the results of restruc-

turing and special items as well as companies

consolidated at equity. Capital employed com-

prises the invested items of property, plant and

equipment plus acquired goodwill and working

capital as of the reporting date. Return on capi-

tal employed is the ratio of operating result to

capital employed. Südzucker calculates the cost

of capital for the operating assets as the average

of weighted equity and debt capital. The costs of

capital are specified for the segments and divi-

sions by taking into account the respective

country and business risks. Currently Südzucker

Group’s primary indicators for management

purposes are the financial performance indica-

tors.

FINANCIAL MANAGEMENT Südzucker’s growth is

financed by a steady, strong cash flow, a stable

relationship with the company’s various share-

holder groups, access to international capital

markets and reliable bank relationships. The

foundation for the financing is the company’s

investment grade rating, which secures the

company’s access to equity and loan financing

instruments. Südzucker operates an optimal mix

of financial instruments, taking into considera-

tion terms to maturity and interest rates, includ-

ing hybrid equity capital, bonds, promissory

notes and bank credits. The unique financing

requirements during the fiscal year due to the

seasonality of the sugar sector (financing beet

purchases and inventories) means that securing

short-term cash is an important aspect of our

financing structure. These short-term financing

needs are primarily covered through a commer-

cial paper program in the amount of € 600 mil-

lion and syndicated and bilateral credit lines.

The capital structure is managed based on a

long-term outlook and focuses on the factors

associated with an investment grade rating. The

key indicators Südzucker uses to manage its

capital structure are the debt factor (ratio of net

financial debt to cash flow), debt to equity ratio

(net financial debt as a percentage of equity) and

the equity ratio (equity as a percentage of total

assets).

However, for Südzucker AG, pursuant to the

provisions of the Commercial Code (HGB), the

metrics sales revenues, operating result (HGB)

and net financial debt are the key figures for

corporate management.

Strategic Direction and

Objectives

Our aim is to grow profitably without compro-

mising our ecological and social respon

sibilities.

Our policies enable us to sustainably increase

shareholder value.

Sustainability is integral part of our corporate

strategy Responsible conduct is a prerequisite to

long-term business success. Corporate man-

agement is committed to conducting business

sustainably, whereby the key principle is to han-

dle all of our resources carefully. No business is

worth harming our partner – the nature.

Management Report 9

We focus on global megatrends Global mega-

trends, such as the expanding world population

and rising incomes, continuously increase de-

mand for food and animal feed, as well as re-

newable energy. We continue to align our busi-

ness segments with these trends.

Südzucker Group’s four segments conduct busi-

ness in sectors that will benefit from these meg-

atrends, both in the medium and long term.

These trends will continue to drive growth and

offer new opportunities. Demand for our prod-

ucts will continue to rise, especially in the

emerging nations. For example, global sugar

consumption is expected to continue to rise

about 2 % per annum on average – from cur-

rently 180 million tonnes to about 200

million

tonnes in 2025.

Our objective is to sustainably increase share-

holder value The key indicator we use to meas-

ure our success is return on capital employed

(ROCE).

We aim to grow market share in our business

sectors We want to grow our share and set

benchmarks in the domestic and export markets

we target. Our aim here is to be number one or

a strong number

two.

The lifting of export restrictions for European

beet sugar will increasingly bring back sales and

marketing opportunities on the world market. As

Europe’s largest supplier of beet sugar, with

high-performance factories in the most compet-

itive European beet growing areas, Südzucker

considers itself well positioned in this new mar-

ket environment. Because Südzucker produces

in its European core markets, close to industrial

customers and the key sugar consumption mar-

kets, it is able to supply sugar products to Euro-

pean buyers at the lowest possible cost. The

next step is to expand sugar production and

establish a global distribution infrastructure, so

that the company will be able to directly supply

customers around the world from a single

source. We take advantage of additional world

market sugar sales opportunities through our

alliance with British trading company ED&F Man,

London.

To further boost competitiveness, Südzucker

continually cuts its sugar segment’s costs and

improves the division’s logistics processes. This

will include the upcoming higher loading of our

beet sugar factories.

We focus on our core competencies We focus on

our core competencies: large-scale processing

of agricultural raw materials and the associated

logistics. Our aim is to continually advance our

expertise in the areas by engaging in intensive

research – especially in fields such as raw mate-

rial security, processing technology, product

innovation, as well as utilizing and refining of

byproducts (→ research and development).

Our portfolio is diversified and we take ad-

vantage of synergies We maintain a balanced

risk exposure by diversifying our portfolio of

products and services and spreading it out

across a wide range of geographic locations.

This will continue to be our approach.

We aim to align our growth targets with our core

competence so that we can tap synergies along

the entire value chain – from raw material culti-

vation through various refining stages to the end

customer.

Management Report 10

We especially benefit from synergies when we

improve our multipurpose sites, where we pro-

duce products for different segments. This con-

serves natural resources, cuts costs and contrib-

utes to business success.

Solid financing strategy We have a solid financ-

ing strategy. Our aim is to sustainably strength-

en our ability to generate cash flow, nurture a

strong relationship with the shareholder groups

that support the company and ensure that we

have access to global capital markets and banks.

Targeted value-oriented investments We will

strengthen all of our divisions in order to secure

future growth. In addition to investing in re-

placements and energy efficiency improvements

in all segments and divisions, we will continue to

focus on establishing and expanding multipur-

pose sites, where investments benefit all seg-

ments.

In addition, we will continue to go forward with

our internationalization strategy by continually

evaluating acquisition opportunities.

We support and foster our employees The suc-

cess of our company is supported by the spe-

cialist expertise, experience, social skills and

commitment of our employees throughout the

world. Our various human resources policy

measures aim to supporting the company’s

strategy and enable our employees to work suc-

cessfully amid ever-changing conditions.

Our strengths and values

– Our core competence is large-scale pro-

cessing of agricultural materials in various

business segments. Our expertise covers

the entire value added chain – from our

suppliers to our customers.

– Our business relies on our highly skilled,

motivated employees. They embody our

expertise, our experience and our innova-

tion capability in production, sales and

marketing and logistics.

– We stand for quality and reliability and

manufacture excellent, safe products.

– We always treat our stakeholders fairly.

– Our business segments’ growth is founded

on a strong market position.

– Our values are solidly based on our corpo-

rate traditions.

– We respect the needs and demands of fu-

ture generations.

Our guiding principles

– We adhere to statutory provisions and corpo-

rate guidelines.

– We work efficiently and have a long tradition

of sustainable conduct. Our business is

founded on long sighted, careful and re-

sponsible utilization of nature and all re-

sources.

– We are our suppliers’ and customers’ reliable

partner.

– We are a responsible employer that helps its

employees fulfill their potential and takes in-

to consideration and values their distinct

personalities.

– We openly and transparently communicate

with our shareholders and all other capital

market players.

– Our food products should be part of a bal-

anced diet.

Management Report 11

Research and development

Südzucker’s business model is primarily based

on large-scale conversion of agricultural materi-

als into high-quality products. One of the re-

search department’s key tasks is thus to contin-

uously optimize and enhance every step in the

value chain; from raw material cultivation

through the process technology, up to and in-

cluding production of the final product. The

department also focuses on evaluating innova-

tive raw materials and product concepts by us-

ing new technologies or based on new interest-

ing raw materials, in order to expand the prod-

uct portfolio and penetrate new markets.

R&D handles projects for the entire group

throughout the world; also in co-operation with

research institutes, other companies, govern-

ment institutions and/or universities, and par-

ticipates in publicly funded projects. Groupwide

communication, team-based project execution

and sharing of information with all Südzucker

Group stakeholders ensure that the results of all

research and development activities are ulti-

mately implemented in practice.

In fiscal 2016/17, the company filed new patent

applications to protect its expertise and

strengthen its market position, especially in the

field of functional food ingredients and starch

derivatives.

143 (142) employees are responsible for tasks in

the area of research, development and techno-

logical services at Südzucker AG; the total ex-

penditure in 2016/17 for research, development

and technological services was €’000 20,245

(20,345).

Agricultural raw materials

A key priority in the agricultural research area is

defining various approaches to securing the

yield and quality of the agricultural raw materials

processed by the group – especially the raw

materials sugar beets and chicory, which are

supplied under contract. Research institutes,

such as the Sugar Beet Research Institute or the

“Kuratorium für Versuchswesen und Beratung”

[board of experimentation and consultation],

which we support together with beet growers in

southern Germany, play a key role here. We

jointly conduct practical field experiments in

various countries, taking into consideration the

individual and national situations and require-

ments.

The aim of all of our activities is to be in a posi-

tion to provide comprehensive advice to all of

our raw material suppliers and provide them

with options for improving their efficiencies in a

sustainable and environmentally sound way, in

alignment with their regional requirements and

respective situations.

Plant protection In Germany for instance, ex-

periments are geared toward future challenges;

for example, the German federal government’s

national action plan for plant protection, which

among other things aims to minimize risk when

using plant protection agents.

In order to achieve a measured, integrated ap-

proach toward the use of plant protection agents

for the targeted control of disease and pests,

combatting resistant strains, sequelae, emerging

pathogens and pests, it is important to develop

alternative processes to supplement chemical

plant protection and optimize them using im-

proved forecasting models. A current innovative

Management Report 12

approach is to further optimize weed control

using sugar beet varieties that resist herbicides

from the sulphonylureas group.

Varietals A key focus of the experimentation is

examining the performance of different varieties

with respect to yield, quality and storability in

combination with resistance to important patho-

gens such as nematodes, leaf diseases and root

rot. A further objective is to improve resistance

toward abiotic factors such as heat and drought.

Varietals are subjected to experiments under

differing environmental conditions at a large

number of sites, both nationally and interna-

tionally.

Boosting sugar and inulin content The aim of the

“Betamorphosis” project is to boost the efficien-

cy of sugar flow within the plant itself. The next

project, “Betahiemis”, will seek to improve the

tolerance of sugar beets toward frost. For chico-

ry, attempts are being made to slow inulin quali-

ty deterioration over the course of a

campaign.

Among the techniques being used here are new

molecular biological genome editing methods

such as CRISPR/Cas9.

Smart farming The objective of our smart farm-

ing initiative is to improve our agricultural advi-

sory services and the quality of the information

we provide. Farmers will increasingly have at

their disposal large amounts of data that have

been captured, analyzed and linked to help

them make decisions. The goal is to optimize

the use of operating supplies, boost efficiency

and productivity, cut cultivation costs, and last

but not least, reduce environmental pollution.

Optimizing harvest quality and improving long-

term storage During lengthy campaigns, issues

such as efficient and gentle harvesting, as well

as low-loss raw materials storage, such as sugar

beets on the edges of fields, become increasing-

ly important. In this area we work on solutions

together with harvesting equipment manufac-

turers and take advantage of options for inte-

grating innovative sensor technologies and/or

the soil biome.

Sugar

Process technology The sugar technology focus

is on improving individual process stages and

optimizing product quality. Again in anticipation

of future longer campaigns, the department is

working with experts from the sugar production

business units to develop models that assess the

efficiency of specific process sections and then

modify the processes to reduce sugar losses,

reduce energy consumption and cut operating

supplies requirements. By harmonizing the beet

processing systems throughout the group, the

department is able evaluate the optimization

potential of individual factories, taking into con-

sideration local constraints and the available

technical equipment, and through targeted

measures, further improve efficiencies.

R&D also evaluates investment projects and

provides assistance with the processes. This

work ranges from conducting tests on pilot

plants right through to commissioning newly

installed factory

systems.

Product development In the sugar and specialty

sugar products area, the department works on

recipes that focus on market trends such as

clean label and the use of natural ingredients, on

new production concepts and technologies, as

well as retail products.

Management Report 13

Functional food ingredients

Process technology Palatinose™ production was

switched to a newly developed biocatalyzer in

order to utilize the raw material sucrose as op-

timally as possible. New variants of the Fructan

product range having specific properties –

among other things a biovariant based on agave

inulin – were successfully introduced to market.

A physical treatment method led to the devel-

opment of new varieties of functional rice

starches with improved properties. The ad-

vantage of the starches produced this way is

that they can be used to produce clean label

products. The findings from the pilot plant were

easily transferred to the production system.

Dietary and physiological aspects Claims re-

garding the physiological properties of Palati-

nose™, inulin and oligofructose were further

reinforced by nutritional scientific research and

experimental studies. The focus of the work was

on the beneficial effect of Palatinose™ on blood

glucose regulation and energy metabolism as

well as inulin and oligofructose on bowel health.

Product development The functional food ingre-

dients product development department works

mostly on preparing application concepts, as

well as numerous customer developments and

answers to a wide range of customer questions.

The focus for galenIQ is developing application

options for tablets, coated products and pow-

ders, as well as new variants with a special parti-

cle size range.

The technological advantages of isomalt are

especially apparent in various chewing gum and

hard caramel applications. A translucent coating

was developed for the chewing gum sector.

A finishing glaze with reduced stickiness con-

taining Palatinose™ was produced on a large

scale for the first time. Recipes with a high

Palatinose™ component for producing milky

beverages were also developed.

For inulin and oligofructose, the focus is on de-

veloping formulas to reduce sugar and fat in

baked goods and dairy products. The fat content

of cream cheese was successfully reduced on

one project.

Work on developing applications for the use of

rice starch and rice flour in baby food products

and baked goods is being accelerated.

Plant-based proteins, such as textured gluten

and rice flour, are sought after ingredients by

the fast growing vegetarian and vegan food

market. Here we are working very hard on de-

veloping new combinations of gluten and rice or

wheat flour with various characteristic profiles.

The purchase of an extruder for our own tech-

nical center has enabled us to develop products

faster and more flexibly.

Starch

Raw materials The ripeness of grain, and espe-

cially corn, has a major influence on the pro-

cessability of the raw material, as well as the

properties of the starch produced from them.

Raw materials of varying stages of ripeness were

processed on a pilot plant that has been modi-

fied to also process wheat. The purpose of the

tests was to define the processing properties

and analyze the starch produced. Application-

related experiments are also being conducted

on food and non-food applications to evaluate

quality.

Management Report 14

Food Catering to the “vegan” and “clean label”

market trends, research in this area focuses on

developing commensurate starches for the food

industry. For example, a new recipe that elimi-

nates the need for eggs in various baked goods

recipes was developed for the vegan market.

Non-food Sustainability factors are also becom-

ing increasingly important in the technical sec-

tors and determine the demands of the market.

R&D was able to develop innovative solutions for

the starch adhesive market. A special foam-

based application process led to the develop-

ment of new starch products that permit faster

adhesion in the field while at the same time

reducing the volume of adhesive used.

The trend toward highly specialized starch

products continues in the dry mortar market.

Improved handling characteristics for tile adhe-

sives and grouts look promising. Together with

reputable manufacturers, the department devel-

oped and introduced to market highly modified

starch ethers.

New starch ether based thickeners for drilling

fluids were developed for the geothermal and

crude oil drilling sectors. Highly derivatized

starches have been manufactured that offer the

market new products with interesting properties.

Research and development work in the area of

biodegradable plastics was further intensified,

with the result that a significant percentage of

thermoplastic starches can now be used to

manufacture biodegradable plastic film. Custom

solutions can be developed by optimizing vari-

ous products and processes. This not only im-

proves the sustainability of the biopolymer end

product, but also cuts the cost of bioplastics

production.

New starch products to be applied in dry sham-

poos were developed for the cosmetics industry

and brought to the stage of production readi-

ness. Oil-based components were replaced by

newly developed starch based thickeners in reci-

pes for liquid shampoos and conditioners. These

products are especially gentle on users’ hair and

scalp.

Bio-Ethanol

We aim to use as wide a range of raw materials

as possible for fermentation at our bioethanol

production plants, which is why we continue to

prioritize the evaluation of new digestion tech-

nologies as well as new enzymes and yeasts on

efficiency and profitability.

We also focus on identifying and acting on po-

tential energy savings options, in close align-

ment with using optimized process automation

technologies. Any enhancements are applied to

the various CropEnergies Group plants. Exam-

ples include increased drying capacities for bio-

ethanol and optimized gluten drying at the site

in Wanze, Belgium, improved product quality

and expanded capacity of the DDGS pelletizing

system in Zeitz, as well as the smooth restart of

the plant in Wilton, Great Britain, where process

and other technical upgrades have had a positive

impact on process stability.

R&D continues to respond to quality related

questions and support the ethanol and ethanol-

based fuels standardization processes in Ger-

many and Europe. Studies by European experts

continued to explore the technical feasibility of

using gasoline with ethanol blend percentages

of up to 25 % by volume. This preparatory work

is in anticipation of standards for future fuels

with higher ethanol content. The focus is on

additional scientific studies geared toward im-

proving the energy efficiency of such fuels in

comparison to conventional gasoline.

Management Report 15

Fruit

By using new technologies in the area of raw

material procurement, microorganism activity on

the surface of harvested fruits was greatly re-

duced, thereby improving their shelf life. An

innovative treatment of fruits prior to freezing

resulted in a significant improvement in texture

when they were thawed. In addition to sensory

improvement, the new process generated signif-

icant savings in downstream pro

cessing.

A cooperation with TU Wien (Vienna) produced

new research findings related to optimizing

coolers. When implemented on the production

system, it reduces damage to fruits during pro-

cessing.

Die sensorischen Eigenschaften von Fruchtzube-

reitungen konnten durch eine Optimierung der

Pasteurisationsparameter und der Prozessfüh-

rung signifikant verbessert werden. Gleichzeitig

bleibt der hohe mikrobielle Qualitätsstandard

erhalten.

After optimizing pasteurization parameters and

process flow, the sensory characteristics of fruit

preparations were significantly improved, with-

out compromising the high microbial quality

standard.

An innovative fruit preparation was developed

for use in ice cream, which due to its texture, is

not mixed with either the ice cream or the choc-

olate coating, neither during production nor in

the finished product.

Chia seeds are currently an interesting new raw

material with significant potential for food appli-

cations. Research activities are focused on iso-

lating the outer seed layer, which consists main-

ly of mucopolysaccharides and exhibits strong

thickening properties. This stabilizer is similar to

the hydrocolloid xanthan, but exhibits a signifi-

cantly higher thickening potential. The extracted

material was successfully used to stabilize a

variety of foods, such as mayonnaise, ketchup,

fruit preparations, baked goods and whipping

cream.

New products and processes

Proteins Südzucker’s aim is to operate its pro-

duction plants as integrated biorefineries (→

keyword biorefinery) and improve the efficiency

and sustainability of its factories by extracting

additional components that have value. Of inter-

est are concepts for coupled processing streams

related to byproduct process energy and materi-

al consumption. These concepts are being stud-

ied in-house, and especially in publicly funded

projects.

For example, the EU project “PROMINENT” is

examining the efficient use of bioethanol pro-

duction byproduct streams that contain protein,

such as gluten, distillers’ dried grains with so

lu-

bles (DDGS) and concentrated distillers’ solubles

(CDS). Südzucker is a member of the Joint Tech-

nology Initiative – JTI Bio-based Industries (BBI),

together with European industrial and scientific

community partners. The objective of the project

is to develop process concepts for generating

new protein products for food applications from

bioethanol production byproduct streams. Dur-

ing the first phase, the group was able to identi-

fy wheat-based byproduct process streams con-

taining proteins and isolate an initial set of

highly functional protein products. This very

promising alternative to animal-based proteins

can contribute significantly to sustainable,

Management Report 16

healthy nutrition and at the same time improve

the efficiency of existing plants.

Keyword: Biorefinery Biorefining refers to sus-

tainably converting biomass into usable high-

quality products, such as food and animal feed,

as well as chemicals and energy in the form of

fuels, power or heat.

Bioethanol as a chemical raw material Südzucker

continues to work on concepts to produce C4

building blocks as a raw material for the chemi-

cal industry in the downstream part of the bio-

ethanol production process. The focus is on

chemical–catalytic conversion of ethanol to butyl

alcohol. Suitable catalytic converters were iden-

tified during the first phase. At present, a con-

tinuous process pilot plant is being installed in

order to further optimize reaction control and

yield.

Biobased chemicals Carbohydrate-based prod-

ucts are especially interesting to the plastics

sector in regard to sustainability. This is why the

company is deeply involved in the subject of

biobased chemicals as it relates to raw materials

and processes. Expertise related to fermentative

and chemical–catalytic processes is being devel-

oped in various publicly funded projects. This

expertise is being applied in in-house research

with the aim of producing carbohydrate-based

products. Initial applications for biobased prod-

ucts have been submitted based on promising

results. The next step is to design a continuous

process pilot plant.

One example is the “ZeroCarb FP” project spon-

sored by the German Federal Ministry of Educa-

tion and Research. It was implemented as part of

the innovation alliance “industrielle Biotechnolo-

gie”. Studies are being conducted on the materi-

al use of highly purified carbon dioxide generat-

ed by the bioethanol fermentation process. The

focus is on developing a cultivation process for a

microorganism that blocks CO2 and delivers

intermediate chemical products. The bio-based

chemicals generated this way can be used as an

alternate to petrochemical products and con-

tribute positively to sustainability and the overall

economics of bioethanol plants. During the first

phase, a two-stage biotechnical process for

organic acid was developed, which has the po-

tential to replace a very wide range of petro-

chemicals. The results look promising and are

now to be reviewed on a large scale plant.

Management Report 17

Employees

Südzucker AG employed an average of 2,501

(2,446) persons during the financial year.

There were no material changes in the number

of employees by region. Almost one-quarter of

all employees continue to work in Germany;

slightly over half in other EU countries. Twenty-

five percent work in other countries around the

world.

Employees according to employment relation-

ship and gender More than 70 % of all employ-

ees work under a collective agreement.

Roughly 13 % of the workers have a temporary

employment relationship. This group of employ-

ees primarily represents seasonal workers who

typically help with the harvest or are active in the

processing campaigns.

Südzucker supports its employees with exten-

sive benefits; for example, options to improve

the compatibility of career and family. Among

other things, this includes very flexible working

conditions – especially agreements on flex time,

part time employment or working from a remote

location – as well as various employee holiday

childcare programs. The number of part-time

employees for the group as a whole was about 3

%, most of whom were

women.

Südzucker obviously complies with all legislative

requirements. This applies also to compliance

with the general law on equal treatment. Em-

ployees are strictly hired and promoted accord-

ing to their suitability, qualifications and per-

formance, and/or willingness to learn. Gender is

not a consideration. Men and women have the

same opportunities. Nevertheless, due to the

company’s strong orientation toward production

and technology, men outnumber women at all

levels, at times significantly. The recruiting pro-

grams have recently seen a higher share of

women.

Age structure and length of service The age

structure of our employees continues to be bal-

anced. However, the share of older employees

will increase in coming years due to the raising

of the statutory retirement age. Appropriate

measures must be prepared and introduced to

create the necessary general conditions.

An average length of service for the group as a

whole of about 13 years is proof that Südzucker

is an attractive employer. Fair remuneration,
modern benefits and good conditions for suc-

cessful work along with the corporate culture

make an important contribution to creating a

good working environment.

For Südzucker Group overall, the percentage of

women on the payroll at the end of 2016/17

was about thirty. Women represent about 19 %

at the management level.

EMPLOYEE DEVELOPMENT/TRAINING AND

CONTINUING EDUCATION

Development and continuing education are key

priorities throughout the entire Südzucker

group. In view of the extended early-retirement

program (partial retirement) and the challenges

due to changes in the market, we continue to

pay special attention to our recruiting programs.

These include various international trainee pro-

grams, junior executive programs, international

‘Onboarding’ programs, as well as countless

training seminars conducted directly by the vari-

ous operations. Other initiatives include so-

called behavioral training – from management

seminars to presentation training –, foreign lan-

guage seminars and IT security training ses-

sions. We not only focus on continuing technical

training, but also teamwork, getting to know

Management Report 18

and communicate with colleagues from other

parts of the company, personal development

and motivation.

Career training at Südzucker AG and Südzucker

Group Primary vocational training continues to

be a high priority. This is on the one hand a

testament to the company’s social responsibility,

and on the other a way to prepare for the pro-

jected skills shortage. Südzucker AG’s appren-

ticeship ratio is about 10 %, with 200 apprentic-

es enrolled in nine vocational courses. Last fiscal

year, the overall average number of apprentices

at the German and Austrian Südzucker Group

companies was 307 (309), enrolled in seventeen

different career programs.

In September 2016, twenty-two apprentices

enrolled in a dual electromechanical engineering

program that was launched as a pilot project at

the Tirlemontoise refinery in Tienen. This project

is to be further expanded after a very promising

start. The Wanze location is currently exploring

various possibilities.

WORK SAFETY AND HEALTH PROTECTION

Work safety Work safety is of key importance to

the entire Südzucker group. There are two as-

pects to safety, both of which must be equally

addressed: creating a safe work environment on

the one hand, and on the other, ensuring every

individual employee is aware of safe work prac-

tices.

We regularly assess and evaluate work and plant

safety risks. We systematically check continuous

improvement targets and the associated

measures, and regularly evaluate the effective-

ness of the established programs. An in-house

work safety management system defines proce-

dures for identifying hazards, investigating acci-

dents, as well as training and roles and respon-

sibilities.

A fatal work accident occurred in fiscal 2016/17.

Unfortunately there were also other serious

work-related accidents, which resulted in a

higher accident-related daily absence rate than

last year. The on-the-job accidents are being

examined in detail and analyzed, and suitable

countermeasures are being defined in order to

avoid similar incidents in future. These proce-

dures were also expanded to include factories

that were not involved.

The programs to reduce work-related accidents

vary in the different segments and are adapted

to meet their specific requirements. This in-

cludes assessing hazards, training employees

and managers, and staging work protection

action days during which employees are actively

trained and sensitized using appropriate

measures. Especially noteworthy here are em-

ployee suggestions to improve work safety, such

as a suggestion to use a portable device to im-

prove safety when entering ditches and canals.

As a member of the sugar industry association

“Verein der Zuckerindustrie”, Südzucker actively

supports the “VISION ZERO. Zero Accidents –

Healthy at Work!” cooperation agreement be-

tween this employers’ association and the pro-

fessional association “Rohstoffe und chemische

Industrie”. ” Our group-wide target is zero acci-

dents. This was done at the following sugar

segment locations in 2016: Buzău, Cagny, Cere-

kiew, Etrépagny, Kaposvár, Regensburg, Roman,

Strzelin, Strzyżów and Tandarei. In addition,

BENEO-Palatinit in Offstein, BENEO-Remy in

Wijgmaal, Biowanze in Wanze and Ensus in Wil-

ton as well as seven production sites in the fruit

Management Report 19

segment were all accident free. Compared to

other companies in the industry, our German

sugar factories have played a pioneering role in

the sector for over twenty-five years. CropEner-

gies sites are also exemplary.

Health protection Protecting the health of its

employees is a very a high priority for Südzuck-

er. Various programs at the company, such as

occupational health care by on site doctors and

vaccinations, are supplemented by initiatives

such as ongoing analysis of psychological stress

in the workplace. Launched two years ago, the

program aims to identify potential for improve-

ment and take appropriate steps to ameliorate

adverse conditions. The company established an

integration management program to help em-
ployees returning to work after a lengthy ab-

sence.

The fact that employees can be reached via the

Internet, intranet, e-mail and social media can

also trigger psychological stress. Südzucker has

established clear rules in its code of conduct

about contacting employees outside of working

hours and under which conditions they may be

asked to work during such times.

In its guidelines, Südzucker has firmly commit-

ted to making its products part of a healthy and

balanced nutritional regimen. A series of articles

entitled “health tips” was started in the employee

magazine to raise employee awareness in this

regard and to impart appropriate knowledge.

Workshops are also offered at some sites. There

are also countless fitness initiatives such as run-

ning events and soccer tournaments, as well as

cooperation with fitness clubs.

Last fiscal year, the sickness ratio remained un-

changed at about 4 (4) %.

SÜDZUCKER AWARE OF ITS RESPONSIBILITY

AS AN EMPLOYER

Südzucker deals with its employees according to

the Südzucker code of conduct which, among

other things, prohibits discrimination, harass-

ment, child and forced labor, and declares the

company’s commitment to freedom of assem-

bly, health and safety in the workplace. The code

of conduct is an integral part of purchasing

terms and conditions, also for our suppliers and

service providers.

Südzucker Group companies demonstrate their

commitment to their employees, over and above

legal requirements, by offering a broad range of

diverse activities at their sites. This includes

family days and various types of celebrations,

joint sporting occasions, as well as cultural and

social charity events in the regions where the

plants are located.

COMPANY SUGGESTION PROGRAM

Employee suggestion programs are in place in

almost all Südzucker Group departments and

divisions. Together with the quality of the sug-

gestions, this shows that employees are moti-

vated to successfully contribute their specialized

knowledge, make processes more efficient and

reduce costs.

DIALOGUE WITH EMPLOYEE REPRESENTA-

TIVES – EUROPEAN WORKS COUNCIL

The European Works Council met last year in

Berlin. Representatives from Germany, Austria,

Belgium, France, Poland and Hungary met with

the executive board to talk about cross-border

issues.

Management Report 20

THANK YOU FROM THE

EXECUTIVE BOARD

The executive board greatly appreciates the

commitment and reliability of the employees

throughout the group and thanks everyone most

sincerely. This vote of thanks extends also to the

employee representatives for their ongoing co-

operation and constructive teamwork.

Management Report 21

Corporate Governance

In the section described below, Südzucker re-

ports on corporate management in accordance

with article 289a, paragraph 1 of the German

Commercial Code (HGB) and corporate govern-

ance as per item 3.10 of the German Corporate

Governance Code. The corporate management

declaration and the corporate governance report

are published on Südzucker’s website at

www.suedzucker.de/en/Erklaerung_zur_Unterne

hmensfuehrung/.

Supervisory board and

executive board operating

procedures

The following summary outlines the operating

procedures of the executive and supervisory

boards in accordance with article 289a, para-

graph 2, item 3 of the German Commercial Code

(HGB).

GENERAL INFORMATION Südzucker AG is a Ger-

man stock corporation and as such has a dual

management structure consisting of an execu-

tive board and supervisory board, each having

members with independent expertise in differ-

ent areas. The executive and supervi

sory boards

work on the basis of mutual trust and closely

cooperate to manage and supervise the compa-

ny.

EXECUTIVE BOARD Südzucker AG’s executive

board currently consists of four members. The

management body independently manages the

company’s businesses in the interests of the

corporation with the aim of generating sustaina-

ble added value. The duties assigned to the ex-

ecutive board members are outlined in the rules

of procedure for the executive board in the ver-

sion dated 26 January 2016.

Some executive board members have dual re-

sponsibilities with respect to the subsidiary

AGRANA Beteiligungs-AG, Vienna, Austria. The

CEO of AGRANA Beteiligungs-AG, Johann Mari-

hart, Limberg, Austria, is also a member of

Südzucker AG’s executive board and the CFO of

Südzucker AG. Mr. Thomas Kolbl, Speyer, is also

a member of the executive board of AGRANA

Beteiligungs-AG.

Südzucker AG’s executive board members are

also either members or chairs of the supervisory

boards of Südzucker Group’s major subsidiaries.

SUPERVISORY BOARD The supervisory board

supervises and advises the executive board in its

management of the company. It is involved in

strategy and planning, as well as all issues of

material importance to the company. For im-

portant business processes, such as budgeting

and strategic planning, acquisitions and divest-

ments, the rules of procedure of both the ex-

ecutive board and the supervisory board stipu-

late that decisions are subject to approval by the

supervisory board. The chair of the supervisory

board coordinates the supervisory board’s work,

chairs the meetings and speaks on behalf of the

panel to the outside world.

The executive board submits comprehensive,

timely reports regarding planning, business

developments and the group’s positioning to the

supervisory board – in writing and at regular

meetings. Risk management and compliance are

additional key reporting topics. If necessary,

extraordinary meetings are held with the super-

visory board to discuss important issues. The

supervisory board has established rules of pro-

cedure for its work, which are in force as per the

version dated 26 November 2009. The share-

holder representatives and employee represent-

atives always meet separately to prepare the

supervisory board meetings.

Management Report 22

SUPERVISORY BOARD STRUCTURE Südzucker

AG’s supervisory board consists of twenty mem-

bers as per the articles of incorporation, of

which ten are elected by the shareholders and

ten by the employees. The terms of office are

identical. The term of office of all supervisory

board members runs until the adjournment of

the annual general meeting in 2017, at which

shareholders will vote on ratifying the board’s

actions for fiscal 2016/17. There are no former

Südzucker AG executive board members on the

supervisory board. All members of the supervi-

sory board are familiar with the company’s op-

erating sectors. A financial expert on the super-

visory board and on the audit committee – that

is a member who has expert knowledge of ac-

counting and auditing – is Mrs. Veronika Has-

linger from Vienna, Austria.

DIVERSITY GOALS As per a resolution passed

on 25 November 2010, which was confirmed by

the newly constituted supervisory board on 20

November 2012, the supervisory board is aiming

for the following diversity targets in its future

composition, in consideration of the sector, the

size of the company and the share of interna-

tional business activity:

– Maintain the number of independent mem-

bers at the appropriate level, considered to

be at least two.

– Maintain the number of persons that espe-

cially meet the internationality criterion at the

appropriate level, considered to be at least

two.

The target for an appropriate level of wo

men

representatives on the supervisory board was

updated following the enactment of the law on 1

May 2015 regarding equal participation by

women and men in leadership positions in the

private and public sectors (so-called Gender

Quota Law). These targets will be explained in

the following corporate governance report.

The supervisory board’s rules of procedure state

that supervisory board members must step

down from the board at the end of the financial

year in which they turn seventy.

The supervisory board will continue to recom-

mend candidates at the annual general meeting

who are most suited to sit on a supervisory

board, whereby the aforementioned diversity

goals will be duly considered.

The degree to which these goals have been

achieved as of the time of this report is as fol-

lows:

The regular elections of employees’ representa-

tives by the workforce and of shareholder repre-

sentatives by shareholders at the annual general

meeting were held in 2012. At the annual gen-

eral meetings in 2014 and 2015, special elec-

tions were held for shareholder representatives

who had resigned. The supervisory board since

then has at least two independent members,

which satisfies code requirements (“not inde-

pendent” as per item 5.4.2 of the German Cor-

porate Governance Code is anyone who has a

personal or business relationship with the com-

pany, its organs, a controlling shareholder or

company associated with these, which could

result in a material and not merely temporary

conflict of interest). At least two members in

particular meet the criterion of “internationality”.

The supervisory board has four women mem-

bers – two representing the employees and two

representing shareholders.

SUPERVISORY BOARD COMMITTEES The supervi-

sory board has formed an executive committee,

audit committee, agricultural committee, social

committee and mediation committee from

among its members. These committees prepare

and supplement its work. The executive and

mediation committees each consist of four

members. The other committees have six mem-

bers each, with an equal number of shareholder

and employee representatives. The duties of the

executive board and the other committees are

Management Report 23

outlined in the supervisory board rules of proce-

dure version dated 26 November 2009. In addi-

tion, the audit committee’s rules of procedure

version dated 21 July 2009 apply to the audit

committee. The current members of the com-

mittees are presented in the notes of the con-

solidated statements under item 37 “Supervisory

board and executive board”.

The chairman of the supervisory board is not

simultaneously the chairman of the audit com-

mittee.

SHAREHOLDERS AND ANNUAL GENERAL MEET-

ING Südzucker AG’s shareholders exercise their

voting and control rights at general meetings

held at least once a year. On an annual general

meeting, shareholders vote on all issues as per

the statutory requirements. The decisions are

binding for all shareholders and the company.

Shareholders are entitled to one vote for each

share held.

Every shareholder meeting the general require-

ments for participating and exercising voting

rights and who registered by the due date is

entitled to participate in the annual general

meeting. Shareholders who are unable to attend

personally have the option of exercising their

voting rights by proxy through a financial insti-

tution, a shareholder association,

Südzuck

er AG

appointees who are bound by the directives of

the shareholders or by some other authorized

representative of their choice. Shareholders also

have the option of submitting their vote in ad-

vance of the general meeting via Südzucker AG’s

website

(www.suedzucker.de/en/Investor-

Relations/Hauptversammlung/) or by assigning

power of attorney to Südzucker AG’s proxies or

to a third party.

2017 ANNUAL GENERAL MEETING The invita-

tion to the annual general meeting scheduled for

20 July 2017, as well as the reports and infor-

mation required for the resolutions will be pub-

lished in accordance with the rules of the Ger-

man Stock Corporation Act and made available

on Südzucker AG’s website

(www.suedzucker.de/en/Investor-

Relations/Hauptversammlun

g/).

RISK MANAGEMENT Responsible management

of business risks is fundamental to good corpo-

rate governance. Südzucker AG’s executive

board and Südzucker Group’s managers make

use of group-wide, company-specific reporting

and control systems to detect, evaluate and

manage these risks. The executive board regu-

larly keeps the supervisory board abreast of

existing risks and how they evolve. The audit

committee deals mainly with monitoring the

counting process and the annual audit of the

financial statements. It also reviews and verifies

the effectiveness of the internal control systems,

the risk management process and the internal

auditing process. Details regarding risk man-

agement are outlined in the risk report.

Corporate governance report

Corporate governance aims to ensure that com-

panies are managed and controlled responsibly

and that they provide lasting shareholder value.

The following corporate governance report is

prepared in accordance with article 289a, para-

graph 2, item 1 of the German Commercial Code

(HGB). Effective and efficient cooperation be-

tween the executive and supervisory boards

ensures transparency and the claim to keep

shareholders and the public fully informed in a

timely manner. The corporate governance report

published here by Südzucker AG complies with

legal requirements and the German Corporate

Governance Code rules.

Management Report 24

Good corporate governance is a given at

Südzucker and has been practiced since many

years. The company’s policies are consistent

with the recommendations of the Code and

compliance is a key executive board and super-

visory board responsibility.

Südzucker regards the current version of the

Code dated 7 February 2017 as largely bal-

anced, practical and of high standard when

compared internationally. As in previous years,

we have thus not found it necessary to prepare

individual, company-specific corporate govern-

ance principles. We comply with the recommen-

dations of the code with the exception of the

items outlined in the declaration of compliance.

2016 DECLARATION OF COMPLIANCE

In the mutual declaration of compliance by the

executive board and supervisory board for 2016,

the following exceptions to recommendations

declared last year were deleted, since Südzucker

now complies with these recommendations:

Item 4.3.3 Paragraph 4 (executive

board/conflicts of interest) Südzucker AG ad-

justed its standard rules of procedure for the

executive board on 26 January 2016 to comply

with the new recommendation brought out in

the 2015 version of the code, which states that

business transactions by a person or company

related to an executive board member may only

be conducted with the approval of the supervi-

sory board. There is thus no further requirement

to declare an exception to the recommendation.

Item 5.4.1 (Diversity goals for composition of

the supervisory board) The code was amended

to comply with legislation regarding member-

ship on supervisory boards, Germany’s so-called

Gender Quota Law dated 1 May 2015. The cur-

rent version of the code contains only the same

wording as contained in the legislation and no

longer includes any recommendations that

would require taking exception to article 161 of

the German Stock Corporation Act (AktG). The

declaration of an exception (previously only

precautionary) was therefore deleted.

Item 5.4.6 (Remuneration of the supervisory

board) In last year’s annual report, supervisory

board members’ remuneration was not present-

ed for each individual. However, the fixed and

performance related components were dis-

closed. Südzucker has and will continue to com-

ply with this code recommendation in future, to

the extent that the wording of the declaration

regarding item 5.4.6 could be amended.

The complete version of the mutual 2016 decla-

ration of compliance by the executive board and

supervisory board – as well as the declaration of

compliance for prior years – is posted on

Südzucker’s website

(www.suedzucker.de/en/Entsprechenserklaerun

g/).

GENDER QUOTA

The so-called Gender Quota Law that came into

force on 1 May 2015 stipulates that listed and

co-determined companies have a fixed gender

quota of 30 % on the supervisory board and that

listed companies set targets for the number of

women on the supervisory board, executive

board and the two management levels below the

executive board.

In its meeting of 15 July 2015, the supervisory

board resolved that the percentage of women on

the executive board remain at 0 % until 30 June

2017.

In its meeting of 21 September 2015, the ex-

ecutive board resolved to raise the percentage of

women at Südzucker AG at the first and second

management levels below the executive board

level to 10 and 15 %, respectively, from the cur-

rent 8 % and 12 %, respectively, by 30 June

2017.

Management Report 25

EDUCATION AND TRAINING

Members of the supervisory board are solely

responsible for any education and training

measures they may require to fulfill their duties.

They received appropriate support from

Südzucker. Again in fiscal 2016/17, an infor-

mation seminar regarding corporate governance

topics was presented by an external legal ex-

pert. Almost all supervisory board members

attended.

REMUNERATION

Executive board Südzucker AG’s executive board

compensation consists of a fixed annual base

salary, a variable incentive component based on

the average dividends of the previous three

years, a company pension plan, which is mainly

based on a fixed percentage of the annual base

salary, plus payments in kind. The remuneration

does not include any share-based compensation

or comparable long-term remuneration compo-

nents. Since the Act on the Appropriateness of

Management Board Compensation (VorstAG)

came into force, the executive committee has

prepared the executive board’s compensation,

which is defined by the full supervisory board

and reviewed at regular intervals. Article 87,

paragraph 1 of the German Stock Corporation

Act, revised by VorstAG, states that the remu-

neration system for listed companies must be

based on sustainable corporate growth and that

variable compensation components must there-

fore be based on terms longer than one year.

The statutory requirement regarding a term

longer than one year is met by basing the varia-

ble component on the average dividend of the

three previous fiscal years.

SUPERVISORY BOARD The supervisory board is

compensated in accordance with article 12 of

Südzucker AG’s articles of incorporation.

Each member of the supervisory board receives

a basic remuneration in addition to the reim-

bursement of his or her cash outlays and the

value-added tax incurred arising from supervi-

sory board activities. This base amount consists

of a fixed sum of € 60,000 payable at the end of

the fiscal year plus a variable remuneration of €

500 for each € 0.01 of distributed dividends on

ordinary shares exceeding € 0.50. Tax-related

special dividends are not considered in the re-

muneration calculation. The chair receives triple

this amount and the deputy and other members

of the executive committee receive one- and-a-

half times this remuneration. Committee mem-

bers’ remuneration increases by 25 % for each

committee of which they are a member and

committee chairs’ by 50 %, assuming the com-

mittee actually met during the fiscal year. The

latter does not apply to members of the execu-

tive and mediation committees. As discussed in

detail in the declaration of compliance,

Südzucker AG does not disclose the level of

compensation of individual executive and su-

pervisory board members because the benefits

of such information bear no reasonable relation

to the associated invasion into their privacy.

The total remuneration of executive and super-

visory board members is presented under item

36 “Related parties” of the notes to the annual

report.

ASSET LOSS LIABILITY INSURANCE

The company has taken out an asset loss liability

insurance with a deductible, which covers the

activities of members of the executive and su-

pervisory boards (D & O insurance). Article 93,

paragraph 2 of the German Stock Corporation

Act (AktG) states the deductible for supervisory

board members shall be at least 10 % of the

damage up to at least 1.5 times their fixed an-

nual remuneration. The German Corporate Gov-

ernance Code endorses this recommendation

with respect to supervisory board members. The

D & O insurance deductibles for the executive

and supervisory board members have been ad-

justed accordingly.

Management Report 26

SHARES HELD BY MEMBERS OF THE

EXECUTIVE AND SUPERVISORY

BOARDS/SECURITY TRANSACTIONS SUBJECT

TO DISCLOSURE

No member of the executive or supervisory

board owns shares or related financial instru-

ments that either directly or indirectly represent

more than 1 % of Südzucker AG’s total share

capital. Furthermore, the total shareholdings of

all executive and supervisory board members

are less than 1 % of the total shares issued by

the company.

In fiscal 2016/17, the members of the executive

and supervisory boards have not informed

Südzucker AG about any notifiable dealings in

securities.

Compliance

The following summary relates to disclosures

about corporate policy regarding compliance in

accordance with article 289a, paragraph 2,

clause 2 of the German Commercial Code (HGB).

COMPLIANCE MANAGEMENT SYSTEM

For Südzucker, compliance; that is, operation in

accordance with laws and company policies, is a

standard part of good corporate management.

At Südzucker, practicing compliance is not

merely the responsibility of the executive board,

but also the managers of all of the group de-

partments, divisions and subsidiaries or compa-

nies in which Südzucker Group holds an interest.

The purpose of the compliance management

program is to ensure that the company, its man-

agement bodies and employees conduct them-

selves in accordance with applicable laws. The

goal is to prevent employees from breaking any

laws and to help them apply laws and corporate

guidelines properly and professionally. Accord-

ingly, the program is continuously enhanced and

regularly checked against current requirements.

Existing Südzucker Group corporate rules were

incorporated into the compliance management

system policies and various compliance-critical

company departments and activities were inte-

grated into the program. The compliance man-

agement system is based on the principles of

“knowledge” (informing and training), “compli-

ance” (verifying and documenting) and “im-

provement” (reporting and acting). Violations of

external and internal rules are not tolerated. Any

indication of wrongdoing is investigated.

Compliance activities and the compliance organ-

ization were again enhanced last fiscal year. The

management culture focus on transparency and

corporate principles was continuously enhanced

in 2016/17 to further strengthen the compliance

culture.

Südzucker’s group-wide compliance principles

are adapted as required to various national and

company-specific peculiarities and focus on

compliance with antitrust laws and prevention of

corruption. These principles are reinforced by

guidelines. Examples include the guideline on

compliance with antitrust laws at Südzucker

Group and the guideline for handling gifts and

invitations as it applies to Südzucker Group

business partners. The objective of these guide-

lines is to prevent employees from violating

antitrust laws and to provide practical support in

the application of relevant company rules and

statutory regulations.

Again in fiscal 2016/17, Südzucker continued to

strengthen its compliance measures – among

other things in consideration of the lessons

learned from the antitrust proceedings. Apart

from recommended conduct illustrated with

practical examples, employees of all major

group companies who could potentially be in-

volved in the key issues were further trained. For

example, last fiscal year twenty-three seminars

were held to inform about corruption preven-

tion. The executive board stipulated that all con-

tacts with competitors be approved in advance

Management Report 27

by the responsible supervisor and that such

contact always be documented.

The executive board regularly reports to

Südzucker AG’s supervisory board and the su-

pervisory board’s audit committee regarding

compliance issues.

COMPLIANCE – CORPORATE PRINCIPLES

Südzucker aims to compete successfully through

innovation, quality, reliability and fairness. This

entails complying with internal rules, as well as

statutory regulations. The corporate compliance

principles serve as a guideline. They highlight

key issues that are very important in day-to-day

practice. The corporate compliance principles

are published at Südzucker’s website at

www.suedzucker.de/en/Unternehmensgrundsae

tze/.

Südzucker applies the laws currently in force

and expects no less from its employees and

business partners.

Südzucker provides its employees with the nec-

essary information sources and advice to enable

them to avoid contravening any rules or laws. All

supervisors must organize their area of respon-

sibility to ensure that the corporate compliance

principles, the company’s internal rules and

statutory requirements are adhered to. After all,

only risk-aware employees can recognize risks

and successfully avoid or at least mitigate them.

The compliance officer and compliance repre-

sentatives ensure that information flow is timely.

They are charged with tasks such as training and

investigating alleged compliance issues. Group

wide training courses were held in fiscal

2016/17. All employees are obliged to report

any violation of corporate compliance principles

to the compliance officer, the compliance repre-

sentatives or the executive board immediately.

Disclosures on takeovers

The following disclosures provide further details

in accordance with articles 289, paragraph 4,

315, paragraph 4 of the German Commercial

Code (HGB) and an explanatory report as per

article 176, paragraph 1, clause 1 of the German

Stock Corporation Act (AktG); they form part of

the audited group

management report.

COMPOSITION OF SUBSCRIBED CAPITAL AND

VOTING RIGHTS As of 28 February 2017,

Südzucker’s subscribed capital amounts to €

204,183,292 million and consists of

204,183,292 ordinary bearer shares, each of

which represents a notional holding of € 1 per

share. The company held no treasury shares as

of the balance sheet

date.

VOTING RIGHTS, SHARE TRANSFERS All shares

entitle holders to the same rights and each share

is worth one vote at the annual general meeting.

Voting rights for the shares may be restricted as

per German Stock Corporation Act regulations.

Under certain conditions, shareholders may not

be entitled to vote (article 136 of the German

Stock Corporation Act [AktG]).

A voting agreement exists between Süddeutsche

Zuckerrübenverwertungs-Genossenschaft eG

(SZVG), Stuttgart, and Zucker Invest GmbH (Zuc-

ker Invest), Vienna /Austria, one of the compa-

nies of the registered Raiffeisen Holding Niede-

rösterreich-Wien cooperative with limited liabili-

ty (Raiffeisen-Holding), Vienna/Austria. Addi-

tional voting agreements exist between compa-

Management Report 28

nies of the Raiffeisen group. Furthermore, SZVG

has a preemptive right to buy 18,797,796 of

Zucker Invest’s Südzucker shares and Zucker

Invest has a preemptive right to buy 246,368 of

the Südzucker shares held by SZVG.

SÜDZUCKER AG SHAREHOLDINGS EXCEEDING

10 % Südzucker AG knows of two direct equity

investments in the company that exceed 10 %:

SZVG owns about 56 % of total share capital and

Zucker Invest about 10 %. Raiffeisen-Holding

and its associated companies hold a direct inter-

est via Zucker Invest. The shareholdings are

reciprocally attributed to the companies, so that

each holds a share of about 66 % of total share

capital, according to the German Securities

Trading Act.

SHARES WITH SPECIAL RIGHTS, VOTING RIGHTS

CONTROL FOR SHARES HELD BY EMPLOYEES

Shares with special rights that would impart

controlling authority do not exist at Südzucker.

No employees who hold shares of

Südzucker AG

are subject to voting rights control.

APPOINTMENT AND DISMISSAL OF EXECUTIVE

BOARD MEMBERS Executive board members are

appointed and dismissed by the supervisory

board in accordance with articles 84 and 85 of

the German Stock Corporation Act (AktG) and

article 31 of the German Codetermination Act

(MitbestG). In accordance with article 5, item 2

of Südzucker AG’s articles of incorporation in the

current version dated 23 December 2016, the

supervisory board determines the number of

executive board members and the supervisory

board has the authority to appoint deputy mem-

bers.

AMENDMENTS TO THE ARTICLES OF ASSOCIA-

TION Amendments to the articles of association

are governed by articles 179 and following of

the German Stock Corporation Act (AktG). Article

22 of the articles of incorporation authorizes the

supervisory board to make amendments to the

company’s articles of association that only affect

the wording.

AUTHORITY OF THE EXECUTIVE BOARD, ESPE-

CIALLY AS RELATES TO ISSUING AND SHARE

BUYBACK Subject to approval by the superviso-

ry board, the executive board is authorized to

increase the company’s share capital once or

several times up until 15 July 2020 by up to €

20,000,000 by issuing new no-par value bearer

shares in exchange for cash contributions and /

or contributions in kind, for the entire amount or

in tranches (Authorized Capital 2015). Subject to

approval by the supervisory board and according

to article 4, paragraph 4 of the articles of incor-

poration, the executive board may exclude sub-

scription rights of shareholders in certain cases,

provided the shares issued under exclusion of

the subscription rights do not exceed 10 % of

total share capital, neither at the time of the

coming into force of this authorization, nor at

the time of exercising same. Details are outlined

in article 4, paragraph 4 of the articles of associ-

ation. Authorized Capital 2015 has not been

utilized to date.

Shareholders at the 16 July 2015 annual general

meeting authorized the executive board to buy

back up to 10 % of the company’s total share

capital existing at that time until 15 July 2020 in

accordance with article 71, paragraph 1, item 8

of the German Stock Corporation Act (AktG). The

shares may be acquired on the open stock mar-

ket or via a public offer to purchase to all share-

holders. The costs of buying back own shares

may be charged against net retained earnings or

other revenue reserves. The executive board was

also authorized, subject to approval by the su-

pervisory board, to sell the shares bought back

to third parties and to exclude shareholder sub-

scription rights in the case of corporate mergers

or when purchasing companies or parts of com-

panies or shares of companies. Details are pro-

vided in the authorization approved at the annu-

al general meeting on 16 July 2015. To date, the

board has not exercised the right granted in

2015 to purchase own shares.

Management Report 29

CHANGE OF CONTROL AND COMPENSATION

AGREEMENTS Südzucker AG has signed an

agreement with a banking consortium providing

access to a line of credit in the amount of €

600,000,000. In the event of a change of con-

trol, each member of the bank consortium

would under certain conditions have the right to

terminate the line of credit and its share of the

outstanding loans, and demand immediate re-

payment of same, including interest. Other than

that, there are no material agreements pursuant

to article 315, paragraph 4, clause 1, item 8 of

the German Commercial Code (HGB) that would

be affected by a change of control resulting

from a takeover offer. Compensation agree-

ments with members of the executive board or

in favor of employees that would come into ef-

fect in the event of a change of control do not

exist either

Details regarding the executive and supervisory

boards’ compensation are outlined in the section

“compensation report” section of the corporate

governance report, which forms part of this

management report.

Management Report 30

Business report

General and industry-specific business conditions

WORLD SUGAR MARKET In its third estimate of

the world sugar balance for the 2016/17 mar-

keting year (1 October to 30 September) re-

leased in February 2017, German market analyst

F. O. Licht expects another sugar production

deficit. The previous marketing year 2015/16

saw the first production deficit in six years. De-

spite production recovering to 178.0 (174.7)

million tonnes, inventories are expected to de-

cline again, to 65.4 (70.9) million tonnes, about

36 (39) % of one year’s consumption and the

lowest level since 2010/11. The drop is driven

by continuously expanding consumption, which

grew to 181.0 (180.0) million tonnes. Weather

conditions, especially in India and Thailand,

together with cultivation cutbacks in Europe, had

resulted in lower production than in previous

years during the 2015/16 marketing year. Ex-

panded cultivation and higher yields in Europe

during the 2016/17 marketing year drove sugar

production slightly higher, but still not as high

as in prior years. The expansion of global sugar

consumption continued during 2016/17, driven

by population growth, especially in Africa and

Asia.

Global sugar balance

Million of tonnes 2016/17e 2015/16 2014/15 2013/14 2012/13

Opening balance 70.9 79.9 79.0 74.1 64.0

Production 178.0 174.7 180.7 181.5 184.2

Consumption -181.0 -180.0 -178.7 -175.8 -171.6

Volume adjustements -2.5 -3.7 -1.1 -0.8 -2.5

Closing Balance 65.4 70.9 79,9 102,079.0 74.1

In % of consumoption 36.1 39.4 46,744.7 61,144.9 45,543.2

Source: F.O. Licht, 3rd world sugar balance estimate 2016/17 as of

February 2017.

The steady climb that began in fall 2015 contin-

ued amid unchanged high volatility over the

course of the 2016/17 fiscal year. Driven by the

continuing deficits on the world market that

have been experienced for over two years and

reinforced by high positions taken by financial

investors, the world market price for white sugar

rose from 375 €/t to over 550 €/t as of October

2016, the highest level since 2012. Thereafter

the price initially corrected, falling to close to

450 €/t by mid-December. Prices subsequently

recovered and rose to over 500 €/t, helped by

the rising value of the US dollar versus the euro.

At the end of the reporting period, the world

market price for white sugar was 503 €/t.

EU sugar market The last sugar marketing year

(1 October – 30 September) governed by current

market regulations regarding quotas and mini-

mum beet prices began on 1 October 2016. Due

to expanded cultivation and better yields, the EU

Commission expects sugar production in the EU

(including isoglucose) to rise to about 17.4

(15.7) million tonnes. During the 2015/16 sugar

marketing year, production declined due to cul-

tivation cutbacks and a record harvest the previ-

ous year.

Management Report 31

As in preceding years, the European Commis-

sion expects a further reduction of quota sugar

inventories for the 2016/17 sugar marketing

year. The EU is a net importer of quota sugar. A

price level in the EU that at least covers market-

ing of the imports would be necessary for an

increase in preferential imports. The actual price

level in the EU has been below the world market

price since June 2016.

Export licenses for 1.35 million tonnes of non-

quota sugar were granted for the 2016/17 sugar

marketing year, the same as last year.

According to EU price reporting, the average

price for quota sugar rose from about 430 €/t at

the beginning of the fiscal year to 450 €/t for

bulk sugar (ex factory) in September 2016. At

the beginning of the new sugar marketing year,

the EU price level initially rose to 470 €/t in Oc-

tober 2016 and at the end of the fiscal year was

quoted at 495 €/t.

Legal and political environment

WTO-II negotiations WTO-II negotiations during

the Doha round, primarily aiming to improve the

trade perspective of developing countries, have

been ongoing since 2001 and have still not been

con

cluded.

On 19 December 2015, the WTO ministers’ con-

ference adopted a resolution to eliminate export

subsidies for agricultural goods earlier than

originally planned. The decision will have no

immediate negative impact on EU sugar exports

due to the expiry of the quota and minimum

price regulations in October 2017. After October

2017, EU sugar producers will be permitted to

export sugar to the world market without vol-

ume restrictions.

Free trade agreements In parallel with the ongo-

ing WTO discussions, negotiations regarding

potential free trade agreements are underway

with various nations and communities, such as

MERCOSUR and Australia. In the event sugar and

sugary products are not defined as sensitive

products – contrary to current trade practice –

substantial additional sugar volumes could in

future be imported into the European Union at

preferential tariff rates. In November 2016, the

EU released the procedures and specifications

for granting and administering quotas for EU

sugar imports from South Africa. A duty-free

import quota of 25,000 tonnes of raw and white

sugar was granted for the year 2016. Starting in

2017, the annual quota of imports from South

Africa to the EU is set at 150,000 tonnes of raw

and white sugar. In addition, at the end of De-

cember 2016, the EU and Ecuador concluded

negotiations concerning the procedures required

for preliminary application of the free trade

agreement. The trading part of the agreement

thus came into force on 1 January 2017. The EU

has committed to allowing two duty-free import

quotas: 15,000 tonnes for raw sugar and 10,000

tonnes for white sugar, isoglucose, glucose and

sugary products. These quotas are slated to rise

slightly every year going forward.

EU initiative to reduce sugar in food Spurred by

recommendations from the World Health Organ-

ization (WHO) concerning the amount of sugar in

people’s daily diet, the pressure on the EU com-

mission and EU member states to take action on

legislating changes to product recipes is steadily

rising. The EU member states have agreed that

by 2020, the volume of so-called added sugar in

the overall marketed volume of food be 10 %

Management Report 32

less than in 2015. This includes all types of sug-

ar, not only the household variety, but also fruit

preparations added to food for the purpose of

sweetening.

Management Report 33

Beet harvest and campaign chronology

In 2016, planting began for the most part as

early as in previous years, amidst average to

excellent planting conditions. By mid-April,

beets had been sown in all Südzucker AG re-

gions. After seeding, beet development was

restrained by successive periods of cool weather

and frost at night. By mid-May, most fields were

benefiting from plentiful rain and the beets

flourished as temperatures rose. August and

September brought high temperatures in excess

of 30°C. Parched soil at the start of the campaign

hampered beet harvesting in some regions.

Humid weather in early summer triggered severe

Cercospora attacks and beet root rot in some

regions. High temperatures at the start of the

campaign also had a negative impact on beet

quality, which caused temporary beet processing

problems at the Ochsenfurt, Plattling and

Brottewitz factories.

The campaign began between 10 and 21 Sep-

tember with beet receiving. Wabern was the first

factory to finish, completing its processing after

79 days, on 9 December 2016. The campaign

lasted until 4 January 2017 at the Plattling facto-

ry in Bavaria. The average campaign duration at

Südzucker AG was 100 days, 25 days longer

than last year. The yield was 78.6 t/ha, higher

than the five-year average. The average sugar

content of 17.8 % was slightly below average.

Management Report 34

Business performance

Like the prior year, the first half of the 2016/17

financial year was characterized by low sugar

prices. The rising sugar revenues in the course

of the financial year were able to offset the lower

volumes of both quota and non-quota sugar in

the second half of the year as a result of lower

harvest yields in 2015.

REVENUE AND OPERATING PROFIT

(in € millions) 2 0 16 /17 2 0 15 /16

Revenues 1,278.6 1,170.8

Change in work

in progress

and finished goods and

internal costs capitalized 54.7 -100.1

Other operating income 28.2 87.3

Cost of materials -988.1 -804.3

Personnel expenses -218.1 -196.1

Depreciation of in-

tangible assets and

fixed assets -54.7 -51.5

Other operating expenses -196.0 -216.

Operating prof it (HGB) -95.4 -109.9

Investment income/expense 210.0 214.7

Depreciation of f inancial assets 0.0 0.0

Interest income/expense -31.1 -36.0

Income f rom ordinary activities
83.5 68.8

Revenues rose in fiscal 2016/17 by €

107.8 million or 9.2% from € 1,170.8 million to

€ 1,278.6 million. The revenue growth is at-

tributable to the commissioning of the wheat

starch plant in Zeitz and the acquisition of sugar

trading and export activities from our subsidiary

Raffinerie Tirlemontoise S.A., Brussels, in the

current financial year. In addition, due to

amendments to the German Commercial Code

(HGB), income in the amount of € 37.1 million

was allocated to revenues in the current financial

year after previously being recognized under

other operating income. Sales revenues from

own sugar declined.

Other operating income in the amount of € 28.2

(87.3) million includes € 4.3 (20.1) million in

income from prior periods, which largely result-

ed from accounting profits and the reversal of

provisions. The decline is a result of the reclas-

sification stipulated by the Accounting Directive

Implementation Act (BilRUG) of cost allocations

in the group that were still included in the previ-

ous year.

In addition, income from the reversal of special

items with an equity portion of € 1.3 (1.4) mil-

lion is included as well as income last year from

the reversal of deferred items from EU restruc-

turing assistance totaling € 0.0 (11.9) million

deferred until 2015/16.

The increase in material expenditures by €

183.8 million to € 988.1 (804.3) million resulted

from the higher beet costs due to higher pro-

duction in the 2016/17 campaign and the raw

material requirements of the new wheat starch

factory in Zeitz.

Personnel expenses increased by € 22.0 million

to € 218.1 (196.1) million. Alongside the rise in

the average number of employees by 55 to a

total of 2,501 (2,446), with 30 of these attribut-

able to the wheat starch plant in Zeitz, this was

also due to a higher allocation to pension provi-

sions.

Depreciation was higher than last year, posting

at € 54.7 (51.5) million.

Other operating expenses fell by € 20.0 million

to € 196.0 (216.0) million. Other taxes shown

under a separate item in the previous year are

recognized under other operating expenses.

Management Report 35

Operating result (HGB) improved by € 14.5 mil-

lion compared to the previous year, but at € –

95.4 (-109.9) million it is still well below our

long-term expectations.

Income from investments posted at € 210.0

(214.7) million, which was well above the previ-

ous year.

The net interest result improved by € 4.9 million

to € -31.1 (-36.0) million. Included in the net

interest result are expenses from the unwinding

of the discount for pensions and long-term lia-

bilities totaling € 20.6 (21.1) million.

The income from ordinary activities increased by

€ 14.7 million to € 83.5 (68.8) million.

(in € millions) 2 0 16 /17 2 0 15 /16
Income f rom ordinary activities
83.5 68.8

Taxes on income
11.9 -1.3

P rof it af ter taxes/Net earnings for

the year 95.4 67.5

Profit brought forward from the previous

year 0.0 0.1

Allocations to revenue

reserves -3.5 -6.3

Net earnings available for

d istribution 91.9 61.3

Taxes on income in the current financial year

total € +11.9 (-1.3) million, resulting from the

reversal of a provision for prior years.

Net earnings were thus € 95.4 (67.5) million.

The allocation to revenue reserves in the fiscal

year was 3.5 (€ 6.3 million last year). With the

profit carried forward last year of € 0.0

(0.1) million, the net earnings available for dis-

tribution € 91.9 (61.3) million.

INVESTMENTS AND FINANCING

Investments in property, plant and equipment

and intangible assets totalled €

97.0 (129.5) million in the financial year. The

investments focused on the completion of the

wheat starch plant in Zeitz, environmental, re-

placement and optimization measures in the

sugar factories and the acquisition of sugar

trading and export activities in Antwerp from

our subsidiary Raffinerie Tirlemontoise S.A.,

Brussels/Belgium.

Net f inancial debt

(in € millions) 2 8 Fe b. 17 2 9 Fe b. 16

Securities -171.2 -209.2

Cash and cash equivalents -5.0 -2.5

Receivables as part of group

financing -689.7 -496.6

Bonds 0.0 125.0

Financial liabilities to

banks 208.6 188.8

Liabilities as part of group

financing 1,265.7 953.9

Net f inancial debt 608.4 559.4

Net financial debt increased from € 559.4 mil-

lion in the prior year to € 608.4 million as at 28

February 2017. This includes financing of the

acquisition of Terra e.G., Sömmerda, as well as

the increase in the shares in ED&F MAN Holdings

Limited, London, to 35%. Operating cash flow

posted at € 119.6 (273.9) million. Investments in

financial assets totaled € 10.3 million (€ 0.0

million last year) and were attributable to a capi-

tal increase at Südzucker Verwaltungs GmbH,

Mannheim, to purchase Terra e.G., Sömmerda.

Distributions for the previous year amounted to

€ 61.3 million.

Management Report 36

Südzucker has the following outstanding bonds

as at 28 February 2017:

Coupon

Volu-

lu-
men

(€)

ISIN

Stock

ex-

change

listing

Hybrid bond

2015 Percep-

tual NC 10

3–Month-

EURIBOR +310

= 2,968 %

700

million
XS0222524372

Luxem-

burg

(official

Market)

Bond

2011/2018
4,125 %

400

million
XS0606202454

Luxem-

burg

(official
Market)
Bond

2016/2023
1,25 %

300

million
XS1524573752

Luxem-
burg
(official
Market)

The financial instruments are generally issued

via the group financing company Südzucker

International Finance B.V., Oud-Beijerland,

Netherlands, and used throughout

the group.

A commercial paper (CP) program with a volume

of € 600 million is also available for seasonal

campaign financing. This program was utilized

in the amount of € 125 (200) million as at 28

February 2017.

The seasonal liquidity requirements are also

secured by the € 600 million syndicated credit

line concluded through 2020.

See the section on “Corporate management” in

the group management report for fiscal year

2016/17 for information on corporate manage-

ment at Südzucker AG.

BALANCE-SHEET

AS S E T S

(in € millions) 2 8 Fe b. 17 2 9 Fe b. 16

Intangible assets 13.7 7.7

Property, plant and equipment 513.4 478.8

Financial assets 2,791.9 2,782.0

Fixed assets 3,319.0 3,268.5

Inventories 455.3 389.1

Receivables and other

assets 965.2 694.5

Securities 171.2 209.2

Cash and cash equivalents 5.0 2.5

Current assets 1,596.7 1,295.3

Accrued and deferred items 1.3 1.3

4,917.0 4,565.1

Südzucker AG’s total assets reduced as at 28

February 2017 to € 4,917.0 (4,565.1) million.

Fixed assets totalled € 3,319.0 (3,268.5) million,

€ 50.5 million higher than last year.

The addition of inventories to € 455.3

(389.1) million resulted from the higher sugar

production volume of the 2016/17 campaign.

Receivables and other assets increased by €

270.7 million to € 965.2 (694.5) million. This

results due to higher allocations of intragroup

loans to affiliated companies for acquisition of

shares and higher trade receivables.

The decline in securities to € 171.2 (209.2) mil-

lion is attributable to the placement of 500

thousand shares of AGRANA Beteiligungs-AG,

Vienna, from Südzucker direct holdings as part

of the capital increase. As a result, the direct

stake in AGRANA Beteiligungs-AG was reduced

to 2.7 (6.5) %. Südzucker also has an indirect

stake of 39.2 (43.1) % via Z&S Zucker und Stärke

Holding AG, Vienna.

Management Report 37

LIABILIT IES AND SHAREHOLDERS’ EQUIT Y

(in € millions) 28 Feb. 17 29 Feb. 16

Shareholders’ equity 2,179.5 2,145.4

Special items with an equity portion 32.7 34.0

Provisions for pensions and similar

obligations 505.2 478.1

Other provisions 342.6 323.3

Liabilities 1,857.0 1,584.3

4,917.0 4,565.1

Equity increased to € 2,179.5 (2,145.4) million

due to the higher dividend from net earnings

compared to last year. The equity ratio improved

to 44.3 % (47.0 %) as a result of lower total as-

sets. As in the prior year, Südzucker AG’s fixed

assets at the balance sheet date were financed

entirely through medium and long-term capital;

the equity to fixed assets ratio was 121.5 %

(111.1 %).

Pension provisions rose by € 27.1 million to €

505.2 (478.1) million, largely due to the adjust-

ment of the discount rate to 3.97 (4.27) % and

the consideration of salary and pension adjust-

ments.

The other provisions item consists of taxes,

personnel expenses, litigation risks and reculti-

vation obligations.

Financial liabilities increased by € 272.7 million

from € 1,584.3 million to € 1,857.0 million. This

corresponds with allocations of intragroup loans

to affiliated companies on the one hand and

higher payables from deliveries during the 2016

campaign.

CURRENT AND PROJECTED BUSINESS

PERFORMANCE

Contrary to the stable expectation in last year’s

outlook, revenues increased due to the centrali-

zation of sugar export and trading activities.

The operating result is better than the year prior,

but still negative at € -95.4 million. There are

numerous reasons for this, but one main factor

is the unsatisfactory price level. This also in-

cludes a burden resulting from the reduction of

the discount rate for pension provisions and the

conclusion of a new agreement on part-time

early retirement.

Contrary to the forecast, the expected income

from investments is roughly comparable to last

year’s level. The expectation of an improved net

interest result due to the decline in interest rates

has been confirmed.

Overall, because of these effects, the company

was unable to achieve the net earnings forecast

for the 2016/17 financial of at least that of the

previous year.

Management Report 38

Risks and opportunities report

Risk management system

Südzucker Group’s business policies aim to

safeguard the company’s continued life, to earn

sustainable, reasonable returns and systemati-

cally and steadily improve shareholder value.

Risk management systems are installed

throughout the group to detect and actively

manage risks.

RISKS AND OPPORTUNITIES POLICY believes a

responsible attitude toward business risks and

opportunities is an important element of a sus-

tainable, value-oriented management system.

Südzucker views risks and opportunities as fu-

ture developments and events that can nega-

tively and/or positively influence implementation

of strategic goals and operational plans.

Südzucker uses an integrated system for the

early identification and monitoring of group-

specific risks. The guiding principle for success-

fully managing risk is to balance opportunities

and risks. The company’s risk culture is charac-

terized by risk-aware conduct, clear responsi-

bilities, independent risk controlling and internal

audits. Insofar as it is possible and economically

practical, insurable risks are covered by a

group-wide insurance policy

RISK MANAGEMENT The risk management sys-

tem is embedded in Südzucker Group’s value-

oriented management and planning system. The

purpose of the risk management system is to

detect existing risks early and systematically, to

evaluate them and to provide the relevant deci-

sion makers with properly organized risk infor-

mation. This is accompanied by improving the

internal transparency of all processes that have

an element of risk and creating a culture of risk

awareness among all employees. One of the key

risk management tasks is to limit strategic, op-

erative, legal and financial risks

Südzucker Group’s risk management system

includes a monitoring system that ensures com-

pliance with all actionable items.

RISK MANAGEMENT SYSTEM The executive

board is responsible for the group-wide risk

management system, as well as for the early

detection and mitigation of existential and stra-

tegic risks. The risk management committee

supports the board in this task. It regularly eval-

uates the suitability of the installed risk man-

agement rules and improves them if necessary.

In addition, it continuously monitors material

risks, including cross-business risks, and alerts

those responsible if action is necessary. The

auditor assesses the reliability and performance

capability of the risk early warning system as

part of the risk management system.

The risk management system of the business

segments, divisions and the corporate depart-

ments is the responsibility of their respective

managers, who take steps to reduce and defuse

operational risks, as well as financial and legal

risks. Changes in market prices can exert con-

siderable positive or negative pressure on the

operating result. The company has therefore

installed risk committees that evaluate how to

handle such risks in those divisions and busi-

ness units in which operating results are materi-

ally affected by market price volatility. Market

price risks resulting from commodity and selling

prices, as well as currency exchange and inter-

est-rate risks are also countered by selectively

using derivatives. The executive board has de-

fined the acceptable instruments in a risk man-

agement directive, which also governs hedging

strategies, responsibilities, processes and con-

trol mechanisms. The hedging instruments are

Management Report 39

exclusively used to protect the underlying trans-

actions; never for trading or speculation purpos-

es. Financial derivative instruments are only

entered into with banks that have a high credit

rating or on futures exchanges.

Operative, financial and strategic risks are re-

ported and documented regularly as part of the

overall planning, management and reporting

process. The executive board and the business

units and/or divisions responsible also receive

monthly risk reports that outline risks and sen-

sitive issues at both the divisional, business unit

and group level and that focus on the current

and subsequent fiscal year. The development of

the risk parameters, in line with the current

market situation and business performance, is

compared with the budget and/or the current

forecast, while the risk score is determined by

evaluating its impact on

operating result.

RISK COMMUNICATION Openly communicating

with the employees within the company who are

responsible for the businesses and processes is

essential to a properly functioning risk man-

agement system. As such, the executive board,

division and business managers as well as group

executives communicate risks quickly and

transparently. Employees are required to be

aware of and deal with risks proactively. Regular

meetings between the executive board and divi-

sion and business units heads to discuss earn-

ings developments and budgets is one tool

Südzucker uses to ensure that information flows

directly between the parties. Mitigating

measures are defined and initiated for any stra-

tegic or operational risks identified during the

sessions. Not only the heads of divisions and

business areas, but also the group departments

regularly report to their respective department

heads concerning current developments in their

areas of responsibility.

INTERNAL AUDIT The group’s internal audit

department monitors both the parent company

and group companies. The department, which

reports directly to the chairman of the executive

board, systematically and rigorously assesses

the effectiveness of the risk management sys-

tem, the controls, management and monitoring

processes on the basis of independent, objective

auditing and advisory methods. In doing so, it

focuses on improving them and the underlying

business processes.

Risks

SUMMARY OF CORPORATE RISK EXPOSURE

Südzucker’s exposure to material risks is out-

lined in the following section and classified ac-

cording to the parameters “probability of occur-

rence” and “financial impact” based on the me-

dium-term result forecast. The effect of already

implemented countervailing measures is in-

cluded.

The relative and absolute values “low”, “medium”

and “high” used for the corresponding catego-

ries are shown in the following table. The signif-

icance of the identified risks is determined by

weighing the combined probability of occur-

rence and potential financial impact.

Management Report 40

Occurance probability Financial impact

low < 10 % < € 5 Million

medium 10-50 % € 5–50 Million

high > 50 % € >50 Million

The price volatility of raw materials, risks associ-

ated with fluctuating product prices and changes

to the legal and political framework are currently

the most significant risks. The potential financial

impact of the other risks outlined in this report

is comparably minor.

Ove rvie w of c orpora te risks
Oc c urre nc e

proba bility

Fina nc ia l

impa c t

Re gula tory risks

Risks of changes in legal and polical

environment medium high

Macroeconomic risks medium medium

Risks of strucural changes of product

markets medium high

Ope ra tiona l Risks

Risks of availability of raw materials medium medium

Risks of price volatility of raw materials
high high

Risks of price volatility of products high high

Exchange rate fluctuation risks medium medium

Product quality risks low medium

IT risks low medium

Personnel risks low medium

Creditworthiness and default risks low medium

Other operating risks low low

Complia nc e risks

Legal risks medium medium

Antitrust risks low high

Corruption risks low medium

Fina nc ia l risks

Interest rate fluctuation risks medium medium

Exchange rate fluctuation risks medium medium

Liquidity risks low high

Creditworthiness and default risks low high

Risk of rating downgrade medium medium

STRATEGIC RISKS

As outlined in the respective sections of the

segments’ management reports, Südzucker’s

business is subject to a variety of legal and po-

litical stipulations, both at the national and Eu-

ropean level. The expiry of minimum beet price

and quota regulations on 30 September 2017

will cause beet sugar and isoglucose production

in the EU to expand. The EU will thus once ag

ain

be a net sugar exporter.The highly volatile world

market price for sugar increasingly drives EU

sugar market prices. This will lead to increased

competition in the markets. Sugar prices will

influence the availability of sugar beets as raw

material in the future, whose cultivation is in

competition with alternative crops. At the same

time, the competitive situation will be distorted

by the fact that several EU member states pay

incentives tied to beet cultivation

On 30 November 2016, the EU Commission

presented recommendations for implementing

the EU’s climate and energy policies to 2030,

which relate especially to renewable energies

and energy efficiency. At the current stage of the

legislative process, it is next to impossible to

predict how the future legal framework will im-

pact the bioethanol business. A reduction of

mandatory blend ratios can lead to reduced

demand, which could weigh on CropEnergies’

business

Additional risks could also arise if additional

duty-free import quotas for sugar are granted

under the terms of new bilateral free trade

agreements or if the level of EU tariff protection

is lowered. For bioethanol too, restriction or

promotion of the use of various materials to

produce bioethanol, boosting or cutting national

mandatory blend ratios after 2020, and regulat-

ing the use of cultivation areas can bring addi-

tional opportunities and risks. Changes to ex-

ternal trade relations with non-EU countries,

legislative compensation policies for generating

renewable energies as they exist in some EU

Management Report 41

countries as well as tariff rates can also lead to

new opportunities or risks. Any potential chang-

es to international and national trade agree-

ments or agricultural market regulations are

proactively analyzed without delay and evaluated

within the risk management framework regard-

ing their potential impact on Südzucker Group’s

earnings, financial and asset situation.

The vote by the majority of Great Britain’s citi-

zens to exit the European Union (Brexit) could

pose new risks for Südzucker’s business activi-

ties due to the changed legal and political

framework; however, these risks can presently

not yet be assessed. Great Britain submitted its

application to exit the EU on 29 March 2017

Südzucker Group’s products are also subject to

the risk of demand fluctuations due to overall

economic developments or changes in consumer

behavior.

OPERATIONAL RISKS

RISKS ARISING FROM THE AVAILABILITY OF RAW

MATERIALS Every year, Südzucker Group pro-

cesses roughly 30 to 35 million tonnes of agri-

cultural raw materials grown on more than

800,000 hectares of land. In addition to sugar

beets, the crops comprise corn, wheat, barley,

rice, triticale, chicory and potatoes, as well as

the raw materials processed in the fruit seg-

ment.

As a processor of these raw materials, Südzuck-

er is exposed – in spite of regional diversifica-

tion – to procurement risks. These relate mainly

to above-normal fluctuations of harvest yields,

due primarily to extreme weather conditions

(climate change), as well as pests and diseases

that attack the company’s crops. The associated

risks result from greater evaporation and even

more frequent and intense extreme weather

events, such as sustained drought, flooding,

storms and hail.

In addition, geographically shifting climatic

zones or rainfall can negatively impact regional

production of agricultural raw materials. This

risk is addressed to the greatest extent possible

by appropriate cultivation planning and targeted

cultivation consultation and research.

However, in Europe climate change is also linked

to opportunities when it comes to beet cultiva-

tion. An extended growing period that starts

earlier, fewer frost days and faster heating of the

soil hold the promise of rising yields.

Beets compete with other crops when farmers

decide what to plant, which represents a pro-

curement risk in the sugar segment. Our beet

growers’ plans are based on completely fulfilling

the beet delivery rights they were issued.

RISKS ARISING FROM PRICE VOLATILITY OF RAW

MATERIALS In addition to the procurement risks

related to availability, agricultural raw materials

are subject to price fluctuations that cannot

always be directly passed on to the market.

Grain and oilseed market price fluctuations are

driven primarily by fundamental global and re-

gional market data such as availability, demand

and inventories. Markets are very sensitive to

critical thresholds related to the ratio of annual

consumption to inventories, as well as uncer-

tainty about supply and demand factors, and

prices fluctuate accordingly. Over the last few

years, this has been repeatedly observed for

certain products and is in principle again possi-

ble in the future. The price volatility of global

markets is increasingly mirrored in the European

and domestic markets due to expanding global

raw material trading.

Management Report 42

Political measures such as export bans instituted

by key exporting countries can also cause in-

creased short-term price volatility.

For sugar beets, the company normally signs

annual beet delivery contracts each season in

the various cultivation areas. For the 2016/17

sugar marketing year, these contracts for quota

beets reflect the still valid market regulation

requirements regarding minimum prices and

participation of farmers in higher sales revenues.

The prices for non-quota beets are in part de-

rived from sugar sales revenues. Starting in sug-

ar marketing year 2017/18, Südzucker group

will set the price it pays for its total beet re-

quirements based on sugar revenues, without

guaranteeing a minimum beet price. Neverthe-

less, the price set for beets must also take into

consideration the competitiveness of beets

compared to other normal crops.

The refineries in Brčko/Bosnia and

Buzău/Romania convert raw sugar delivered

from third parties into white sugar. The risk of a

fluctuating purchase price for raw sugar is

hedged by means of commodity futures con-

tracts.

For producing bioethanol agricultural products

containing carbohydrates, such as grain and

sugar syrup, are required . Price fluctuations on

global agricultural markets directly impact raw

material costs. To assess the risk of producing

bioethanol, we calculate raw material costs mi-

nus sales revenues from food and animal feed

(according to net raw material costs). Because

grain price fluctuations mainly go hand-in-hand

with an equivalent price change for food and

animal feed containing protein, we are able to

partly offset higher raw material costs with in-

creased sales revenues from these products.

CropEnergies’ business policy will continue to be

to mitigate residual risks of raw material price

increases by entering into long-term supply

agreements and utilizing commodity futures

contracts as a hedge, as well as using alternative

raw materials. Also, the company regularly bal-

ances forward contracts for purchased raw ma-

terials and sales of food, animal feed and etha-

nol. The degree of hedging is determined by the

market situation. However, depending on the

market price situation, the risk that it will not be

possible to secure cost covering hedging trans-

actions or to pass price increases of raw materi-

als on to bioethanol purchasers remains.

The EU ties the promotion of fuels produced

from biomass to compliance with certain sus-

tainability criteria. Bioethanol produced at all of

our plants meet these requirements provided

sustainably produced raw materials are availa-

ble.

Raw material costs are also of key importance to

starch production. Here too, the strategy is to

use physical supply contracts to cover the

planned requirements as well as possible. Hedg-

ing transactions are also used to a limited ex-

tent. There is a risk that higher raw material

costs can be only partially passed on to custom-

ers in the short term.

Procurement risk in the fruit segment is affected

by poor weather and any plant diseases that may

arise. Poor harvests resulting from these factors

can have a negative impact on both the availa-

bility and cost of raw materials. Through its

worldwide presence and knowledge of local

markets, AGRANA’s fruit preparation division is

able to detect regional supply bottlenecks

and/or price volatility early and take steps to

mitigate such situations. In addition, the division

strives to enter into annual contracts where pos-

sible, both on the sales and procurement side.

Fruit juice concentrates, raw material, produc-

tion and distribution risks in the divisions are

managed transregionally.

Management Report 43

Südzucker Group counters energy price risks by

designing its production plants to be capable of

utilizing diverse energy sources in line with the

particular circumstances, with the ultimate goal

of minimizing costs. In addition, investments to

improve the energy efficiency of the production

plants throughout the group are an ongoing

priority. The company utilizes long-term supply

contracts or derivatives to hedge some of the

fuels used during the campaign.

The free-of-charge CO2 certificates allocated in

conjunction with the third trading period in the

EU from 2013 to 2020 will not cover Südzucker

Group’s consumption. Südzucker’s sugar, starch,

inulin and bioethanol production processes for

the period from 2013 to 2019 meet current EU

directives for carbon leakage, and accordingly, a

limited number of CO2 certificates will be allo-

cated free of charge. We are currently not ex-

pecting our carbon leakage status to be can-

celed. The general conditions for the upcoming

fourth trading period for the years 2021 to 2030

are difficult to predict given the current state of

the EU’s legislative process. In view of the EU’s

climate targets – a reduction of greenhouse gas-

es by twenty percent by 2020 and forty percent

by 2030, both referred to the value measured in

1990 – the general assumption is that there will

be a further reduction of the certificates allocat-

ed free of charge starting in 2021.

RISKS ARISING FROM THE PRICE VOLATILITY OF

PRODUCTS The sugar segment is exposed to

selling price risks resulting from price fluctua-

tions in the world sugar market, the EU common

market and animal feed markets. The EU grant-

ed a limited number of export licenses during

the 2016/17 sugar marketing year. Starting in

October 2017, exports are expected to increase

as production volumes rise when the quota

regulations expire and export restrictions are

lifted. This will increase the risk related to world

market price fluctuations. There is evidence that

the EU domestic market will also be increasingly

directly tied to world market prices. For the vol-

umes tied directly to global market prices, we

enter into sugar futures contracts on the ex-

changes in London and New York according to

market conditions. The company thus pays par-

ticular attention to consistency in its sales strat-

egy and long-term planned customer loyalty to

mitigate the volume and price risk for animal

feed.

Another example of price risk is bioethanol pric-

es in Europe, which are affected by various fac-

tors such as supply and demand at the local

level, the price level and availability in the United

States, Brazil and other exporting countries, as

well as general political conditions, and may

thus fluctuate significantly. CropEnergies man-

ages these risks by adjusting the wording and

expiry date of its sales contracts and to the ex-

tent possible, using derivative instruments, as

well as flexibly operating its bioethanol plant in

Wilton, Great Britain, depending on the market

situation and the associated costs and earnings.

European bioethanol prices are currently deter-

mined by price reporting agencies based on very

low volumes, resulting in high price volatility. In

December 2015, European Union trilateral ne-

gotiators reached agreement on implementing a

benchmark directive. It prescribes a transparent

pricing mechanism for determining reference

prices in unregulated markets. EU member

states have been given two years to implement

Management Report 44

the directive. It is expected that implementing

the directive will lead to greater transparency

when setting the price of bioethanol and thereby

to less volatility and greater liquidity for market

prices.

CURRENCY EXCHANGE RISKS Currency exchange

risks arise at Südzucker’s operations when sales

revenues or the cost of materials and/ or mer-

chandise are denominated in a currency other

than the local currency.

In the sugar segment, sugar exports to the

world market are subject to US dollar exchange

rate risks, and are always hedged from the date

of entering the sugar futures contract to the

date of payment receipt. Raw sugar refining is

exposed to currency risks from any raw sugar

purchases denominated in US dollars.

In the special products segment, foreign ex-

change risks arise in the BENEO division from US

dollar sales revenues for which the underlying

production costs are mostly incurred in euros

and Chilean pesos. Sales revenues of the

Freiberger Group in Great Britain are subject to

currency risk related to the British pound ster-

ling, and this risk is increased by the British vote

to exit the European Union. Great Britain sub-

mitted its application to exit the EU on 29 March

2017.

The CropEnergies segment’s raw material pur-

chases and product sales are mainly denominat-

ed in euro. The company is only exposed to

currency risks when purchasing raw alcohol in

US dollars and selling industrial alcohol in euro.

These transactions are hedged using forward

exchange contracts immediately after purchas-

ing the raw alcohol.

The fruit segment’s currency risks relate pri-

marily to volumes sold in euro or US dollars,

whereas raw material and operating expenses

are denominated in the respective local curren-

cy. When raw materials and/or sales are denom-

inated in foreign currencies, the currency risk is

partly hedged using forward exchange con-

tracts.

PRODUCT QUALITY RISKS Serious safety stand-

ards violation incidents for food and other prod-

ucts could damage Südzucker’s reputation and

reduce the volumes of our products. Further-

more, one of our stated objectives is to supply

customers with safe, high quality products at all

times. In order to guarantee this, the company

has a quality management system that docu-

ments responsibilities, activities and processes.

The quality management system covers all pro-

cesses; from the procurement of raw materials,

through the production process itself, to delivery

to customers.

Adherence to all internal and external specifica-

tions is regularly checked within the framework

of the quality management system. The compa-

ny takes any necessary steps to further optimize

its products and processes, which contributes to

further risk minimization.

IT RISKS The management of our group is

largely dependent on sophisticated information

technology. As a result, risks associated with the

security, quality or failure of IT systems are es-

pecially significant. It is likely that external cyber

threats to Südzucker group’s IT system will con-

tinue to increase. We employ qualified internal

and external experts and take appropriate tech-

nical steps to ensure that the IT systems are

properly maintained, optimized, and secured in

particular. To facilitate these efforts, Südzucker

has widely standardized the information systems

and processes used by Südzucker Group.

Management Report 45

PERSONNEL RISKS Südzucker Group competes

intensely with other companies for trained per-

sonnel and is thus exposed to the risk of being

unable to suitably fill vacancies. In order to pro-

tect Südzucker’s position when competing for

qualified employees, we emphasize the attrac-

tiveness of Südzucker Group as an employer

through our human resources management

policies, which aim to encourage specialists and

managers to stay with the company for the long

term. In addition to attractive social benefits and

compensation policies, we offer a wide range of

opportunities at Südzucker Group, such as ad-

vanced and continuing education courses, train-

ee programs and possibilities to work for vari-

ous group companies.

CREDITWORTHINESS AND DEFAULT

RISKS Südzucker could suffer significant losses

if a large number of its customers were unable

to meet their contractual payment obligations.

Südzucker AG counters credit and default risks

associated with outstanding receivables by con-

stantly monitoring the creditworthiness and

payment history of its debtors and setting ap-

propriate credit limits. A group-wide credit

management system continues to be strictly

enforced. Furthermore, risks are capped using

credit insurance and bank guarantees. Default

risks associated with the financial instruments

with which we have entered into hedging trans-

actions also exist.

OTHER OPERATING RISKS Other operating risks

that may arise in the production, logistics, re-

search and development areas are not expected

to have any material impact on the company’s

position. Südzucker also mitigates other operat-

ing risks by constantly monitoring them and

continuously improving its business processes.

COMPLIANCE RISIKEN

GENERAL LEGAL RISKS Various lawsuits are

pending against Südzucker AG and the group’s

companies. Accruals are being formed to cover

the legal costs for these proceedings. Accruals

for the lawsuit risks are built when the likelihood

that the company will be liable and the extent of

the liability can be adequately determined. The

final outcome of individual proceedings may

affect earnings during a particular reporting

period, but the potential associated liabilities

would have no long-term impact on the group’s

assets and financial position.

Südzucker is exposed to potential changes in

the legal environment, particularly as relates to

food and environmental laws. Such risks are

documented without delay, their impact on the

group’s business activities evaluated and appro-

priate action taken if necessary.

RISKS ARISING FROM ANTITRUST LAW There is a

risk that antitrust authorities may interpret the

conduct of company organs and employees as

violating antitrust laws, and that they may initi-

ate proceedings. Such proceedings always nega-

tively impact the company’s reputation and can

result in high fines and potentially, unfounded

claims for compensation from third parties.

Südzucker further strengthened its antitrust law

compliance program again in fiscal 2016/17.

Training courses to prevent antitrust law viola-

tions are conducted at regular intervals. The

program will continue to be rigorously executed,

also taking into account the lessons learned

from the antitrust case concluded in 2014 in-

volving several companies in the German sugar

industry. A groupwide standard on compliance

with antitrust laws at Südzucker Group (Com-

petitive Guideline) has been in force since 1 De-

cember 2014. The objective of this guideline is

to prevent employees from violating antitrust

laws and to provide practical support in the ap-

plication of relevant rules and regulations. This

Management Report 46

includes especially the obligation of all employ-

ees to comply with antitrust legislation.

As described in last year’s annual reports, the

German Federal Antitrust Authority charged

German sugar producers Südzucker AG, Nor-

dzucker AG and Pfeifer & Langen GmbH & Co.

KG with engaging in unlawful practice to restrict

competition, including territorial, quota and

price-fixing agreements. Südzucker accepted

the penalty notice issued on 18 February 2014

as part of a settlement, and paid the fine in or-

der to bring to a close the case and achieve legal

and planning certainty going forward. The case

was based on statements by a crown witness for

the prosecution and had lasted almost five

years. After payment of the fine, the German

antitrust case was closed.

Since closure of the German antitrust proceed-

ings, customers are claiming damages as ex-

pected, due to alleged cartel-related markups.

Südzucker and the two other fined German sug-

ar producers are categorically disputing these

claims, especially since various appraisers have

stated that no customers were disadvantaged

during the timeframe considered by the Anti-

trust Authority. Some customers have made

claims for damages or information before sever-

al German courts against the affected sugar

manufacturers – mostly jointly and severally. All

of these cases remain at an early stage and no

rulings have been made to date.

As outlined in last year’s annual report, in Sep-

tember 2010, the Austrian Federal Competition

Authority referred AGRANA Zucker GmbH and

Südzucker AG to the Vienna cartel court, re-

questing a decision on an alleged violation of

the Austrian Cartel Act. AGRANA and Südzucker

are accused of anticompetitive agreements re-

lating to Austria in connection with the German

antitrust fine. The defendants continue to con-

sider the accusations groundless and dispute

the claims submitted in October 2011 by the

antitrust authorities based on the evidence pre-

sented at the hearings that have been held to

date, even after the latest witnesses took the

stand in September 2014. The Vienna cartel

court has not yet issued a verdict.

CORRUPTION RISKS Risks due to corruption can

arise if Südzucker Group organs or employees

violate laws, internal rules or regulatory stand-

ards recognized by Südzucker and the respec-

tive Südzucker Group company subsequently

suffers damage to its assets or image. The com-

pany follows up on all reports of malpractice.

The compliance program and the compliance

organization were further enhanced in fiscal

2016/17. The management culture focus on

transparency and corporate principles was con-

tinuously enhanced to strengthen the compli-

ance culture. Training was further intensified in

order to ensure that each and every employee

behaves in a proper manner regarding legal

conformity and social ethics. Specific recom-

mendations on selected topics were further de-

veloped and made available to

employees.

FINANCIAL RISKS

Risks due to corruption can arise if Südzucker

Group organs or employees violate laws, internal

rules or regulatory standards recognized by

Südzucker and the respective Südzucker Group

company subsequently suffers damage to its

assets or image. The company follows up on all

reports of malpractice. The compliance program

and the compliance organization were further

Management Report 47

enhanced in fiscal 2016/17. The management

culture focus on transparency and corporate

principles was continuously enhanced to

strengthen the compliance culture. Training was

further intensified in order to ensure that each

and every employee behaves in a proper manner

regarding legal conformity and social ethics.

Specific recommendations on selected topics

were further developed and made available to

employees.

INTEREST RATE RISKS Südzucker Group is ex-

posed to a limited extent to unexpected changes

in interest rates on variable-rate or short-term

financial obligations and investments. Exposure

to these loans and investments fluctuates signif-

icantly over the course of the year because of

campaign-related financing requirements.

Long-term interest rate changes are of minor

importance because of the company’s low in-

debtedness.

CURRENCY EXCHANGE RISKS Financing-related

currency exchange risks are mainly due to intra-

group financing of subsidiaries in currencies

other than the local currency. In Eastern Europe,

Südzucker Group finances its subsidiaries

through intragroup loans denominated in euro.

US dollar financing also occurs in Chile and

Mexico. To a lesser extent, parent companies

also provide financing to subsidiaries in their

differing national currency in the eurozone.

LIQUIDITY RISKS Südzucker is exposed to li-

quidity risk in that it may not be able to raise the

necessary funds to fulfill a payment obligation in

time or at all. Südzucker Group’s liquidity is thus

monitored daily. To the extent that they make

sense economically, the company uses cash

pools, both in Germany and internationally. Ex-

cess cash is also utilized throughout the group.

Südzucker ensures that it has a balanced debt

repayment scheme and reduces its financing

risks by issuing long-term bonds and using

bank credit lines. Risks resulting from cash flow

fluctuations are detected and controlled at an

early stage as part of short, medium and long-

term liquidity planning, which is an integral part

of corporate planning. A commercial paper pro-

gram and approved bank credit lines give

Südzucker access to immediate and adequate

liquidity to meet the seasonal financing re-

quirements associated with sugar campaign

production at any given time.

CREDITWORTHINESS AND DEFAULT RISKS There

are also financial creditworthiness and default

risks associated with financial institutions with

which we have entered into hedging transac-

tions, have deposited funds, have credit lines or

that have provided guarantees on behalf of

Südzucker. These risks increased due to the

financial crisis and we limit them by conducting

our financial business only with banks that have

a high credit rating. Accordingly, we continu-

ously monitor the creditworthiness of the finan-

cial institutions.

RISK OF RATING DOWNGRADE The rating agen-

cies Moody’s and Standard & Poor’s assess

Südzucker’s creditworthiness. Südzucker feels

obliged to maintain a stable investment grade

rating. A downgrade in the assigned rating could

negatively impact the group’s cost of capital for

future financing needs.

Overall risk position

Material risks that could impact the future

growth of Südzucker Group are particularly

those arising from fluctuations in product and

raw material prices, together with the risks as-

sociated with a change in the legal and political

framework under the terms of which the com-

pany operates. The pressure of the world market

price on the price of sugar in the European Un-

ion has increased for the sugar segment. This

pressure will become even greater in future; the

risk associated with fluctuations in EU sugar

prices will thus also increase. The CropEnergies

segment’s result is tied primarily to the price of

Management Report 48

raw materials – particularly wheat – and to bio-

ethanol revenues. In phases of declining bioeth-

anol prices with unchanged or increased grain

prices, losses may be incurred when margins do

not contribute enough to covering costs. When

the variable costs are no longer covered, tempo-

rary production stoppage may become neces-

sary. Because the markets for wheat and bioeth-

anol are relatively independent of each other,

forecasting result development is difficult. Nev-

ertheless, it is not always practical or possible to

hedge all price risks in advance, as this would

reduce the future opportunities for positive price

development. In addition, insufficient liquidity of

price hedging instruments with longer terms

limits their use.

The group’s overall risk position remains un-

changed compared to last year. Nevertheless,

there are still no apparent risks that threaten the

organization’s continued existence.

Opportunities

Rigorously pursuing a corporate strategy aimed

at long term value-based growth also creates

many opportunities for Südzucker Group. This

section outlines opportunities with regard to

business activities in the individual segments

and divisions.

Südzucker is Europe’s leading sugar producer.

The company’s special products (functional in-

gredients for food and animal feed, frozen

products, portion packs and starch), CropEn-

ergies and fruit (fruit preparations, fruit concen-

trates) segments have captured significant mar-

ket shares in their target sectors.

As a result, Südzucker Group will continue to

operate in what will remain strongly growing

international markets that will drive demand for

agricultural commodities, food, animal feed and

energy even higher. Südzucker’s European loca-

tions have advantageous natural geography with

excellent soils, high yields and favorable weath-

er conditions compared to other regions around

the globe. The company enjoys a stable and

reliable foundation for competing internationally

as a result. The expanding global population

and the trend toward high-quality foods should

increase the market opportunities for Südzucker

products, especially in countries with rising liv-

ing standards. With its infrastructure for produc-

ing and marketing bioethanol in Europe, the

group is in an outstanding position to benefit

from the growing European market for fuel from

renewable raw materials.

SUGAR SEGMENT

Südzucker’s competitive position in the Europe-

an Union is excellent due to its concentration on

the top beet growing regions in Europe and the

company will be able to take advantage of the

expiry of the quota regulations to strengthen its

production and market position. Producing in

the European core markets and being close to

industrial customers is also a major advantage

logistics-wise. Additional market opportunities

may rise in the non-food market, such as in bio-

based chemicals.

Additional opportunities will arise from export-

ing sugar outside the EU after 2017, when such

exports will no longer be capped by export re-

strictions. After the expiry of quota regulations,

there will be an opportunity to increase capacity

utilization by extending the duration of the

campaigns. Global sugar consumption is ex-

pected to increase by 2 % to 3 % per annum from

the current more than 180 million tonnes to

more than 200 million tonnes until 2025. This

outlook supports the world market price for

sugar. Still, in the near term other factors, espe-

Management Report 49

cially weather conditions in the main growing

regions for sugar cane and sugar beets, ex-

change rate fluctuations and financial investor

positions will have a significant influence. This

applies especially to the Brazilian real and the

Brazilian government’s ethanol policies, which

can impact the world market price for sugar. The

participation in ED & F Man will also give

Südzucker additional opportunities to participate

in market growth.

SPECIAL PRODUCTS SEGMENT

Südzucker enjoys an excellent position in several

growth markets due to the expansion of its spe-

cial products segment.

BENEO The BENEO division is a key business unit

of the special products segment, which will ben-

efit from the long-term trend toward healthier

dietary habits. BENEO is a leading international

supplier of functional food ingredients for food

and beverages and animal feed. It offers func-

tional carbohydrate product lines – Isomalt,

Palatinose™ – and the functional dietary fibers

inulin and oligofructose. A clearly differentiated

market offering is the special product line based

on ingredients made from rice, which has hypo-

allergenic properties. The division aims to take

advantage of current growth opportunities for

the group by promoting its product lines for new

applications.

FREIBERGER Freiberger Group uses its Europe-

wide leading position as a supplier of customer-

specific convenience products labeled as the

private brands of international trading compa-

nies to tap the resulting growth potential. The

group’s European sales and distribution activi-

ties have been extended to cover the North

American markets.

PORTIONPACK EUROPE As the European market

leader, the company creates, produces and dis-

tributes portion-sized articles. The product

range covers mainly the food sector, but a num-

ber of non-food articles are also available. The

key markets are in food service sectors such as

hotels, restaurants and bars and caterers. Por-

tionPack is expanding its European market share

by growing internally and externally, responding

flexibly to customer demands and continuously

working on product innovations.

STARCH The starch division focuses on high-

value-added specialty products. Innovative, cus-

tomer-oriented products with accompanying

applications consultation, ongoing product de-

velopment and continuous cost optimization are

among the division’s key objectives. Examples

include the leading shares in organic starches

and non-GMO starches for the food industry or

the technical leadership for specialty starches in

the paper, textiles, cosmetics, pharmaceuticals

and construction sectors. Additional market

opportunities for isoglucose and/or starch sac-

charification products can arise in the European

sweetener market starting in 2017.

CROPENERGIES SEGMENT

The segment’s ongoing development and results

are primarily driven by sales revenue growth for

bioethanol, food, animal feed and the costs of

the raw materials used.

Opportunities arise from lower grain prices

and/or higher prices for bioethanol and the food

and animal feed products produced in parallel.

CropEnergies can to some extent avoid the vola-

tility of the grain markets by using sugar syrups

as a raw material. In addition, CropEnergies

benefits by generating sales revenues from high

quality foodstuffs and animal feed, which lowers

net raw material costs and optimizes production

process energy consumption.

Management Report 50

In the medium term, CropEnergies expects that

the agreements reached at the Paris Climate

Summit will result in further growth, also for

renewable energies in the transportation market.

If not, the goals to limit the increase of the

earth’s temperature to 2 °C and cut the con-

sumption of fossil fuels will be impossible to

reach.

As one of Europe’s leading bioethanol produc-

ers, with adequate plant flexibility and capacity,

CropEnergies is well positioned to meet the as-

sociated increased demand. This is in part due

to the successful restart of the production plant

in Wilton in July 2016, which enables CropEn-

ergies to now flexibly deploy the entire produc-

tion capacity according to the market and con-

tract situation.

Additional opportunities for CropEnergies could

arise from a consolidation of the number of

suppliers in the European bioethanol market, as

CropEnergies enjoys competitive advantages

based on its size, locations and technological

leadership.

FRUIT SEGMENT

The AGRANA fruit segment is the world market

leader for fruit preparations for the dairy, ice

cream and baked goods industries and the Eu-

ropean market’s largest producer of fruit juice

concentrates from apples, red fruit and berries.

Growth opportunities arise in countries with

rising incomes, such as Russia, China and Brazil.

A greater emphasis is also being placed on the

American market, the regions of North Africa

and the Middle East.

Internal control and risk

management system as it

applies to accounting systems

ESSENTIALS Südzucker AG’s accounting-related

internal control system aims to ensure that its

financial reporting and accounting practices

comply with recognized standards, are reliable

and effective, and that they truly reflect the

company’s assets, financial and earnings situa-

tion at all times. The system is embedded in the

underlying business processes in all relevant

legal entities and central departments and is

continuously being enhanced. The main ele-

ments of the system are the principles, proce-

dures and controls that ensure thorough and

complete financial reporting; for example, con-

sistent accounting, valuation and balance sheet

procedures, processes and practices throughout

the group.

IFRS REPORTING GUIDELINE Südzucker Group’s

accounting and valuation guidelines, including

the accounting principles as per International

Financial Reporting Standards (IFRS), ensure that

the accounting and valuation systems used for

all business transactions by the German and

foreign subsidiaries included in Südzucker’s

consolidated financial statements are consistent

throughout the group. Südzucker’s internal IFRS

Reporting Guideline ensures that IFRS is applied

as applicable to Südzucker and explains ac-

counting topics. The contents of the IFRS Re-

porting Guideline are prepared centrally and are

regularly updated.

INTERNAL AUDIT SYSTEM AS RELATES TO THE

ACCOUNTING PROCESS The group accounting

process starts with the group’s individual com-

panies. Individual organizational entities prepare

and check their financial statements and send

them to Südzucker AG’s central consolidation

department by uploading the data to the consol-

idation system. Clearly structured authorization

Management Report 51

rules are in place for all of the group’s account-

ing-related IT systems.

Südzucker AG’s central consolidation depart-

ment is in charge of completing the overall con-

solidation and preparing the group management

report and consolidated financial statements. It

also oversees the group’s binding standard chart

of accounts and manages the IT consolidation

tool.

External auditors are regularly appointed as part

of the preparation of the financial statements for

the valuation of provisions, primarily those for

personnel.

Südzucker Group’s internal monitoring system

has two components: controls integrated into

the processes and process-independent con-

trols. There is a strong emphasis on the princi-

ple of segregation of duties and the principle of

dual control, as well as compliance with guide-

lines and rules related to key business process-

es.

Automated validation rules and plausibility

checks, especially in the IT-based consolidation

system, ensure that the data entered by the

individual companies is complete and correct.

Segregating the administrative, executive, ac-

counting and approval functions and making

different persons responsible greatly restricts

the opportunities to engage in criminal activity.

Nevertheless, it is impossible to fully exclude

every eventuality, especially arbitrary personal

decisions with negative ramifications, erroneous

audits, criminal activities or other circumstances.

The monitoring steps taken to ensure proper

and reliable accounting include, for example,

analyzing business developments on the basis

of specific key indicator analyses, as well as

analyzing individual transactions in detail. At the

group level, specific audit activities to ensure

that the group accounting is being properly and

reliably carried out include analyzing and, if

necessary, adjusting the individual group com-

pany financial statements, taking into consid-

eration the external auditors’ reports and/or the

audit debriefings.

Before integrating newly acquired companies,

their internal control systems are quickly

adapted to meet Südzucker Group’s high stand-

ards.

INTERNAL AUDIT The audit committee deals

mainly with compliance, monitoring the ac-

counting process and the annual audit of the
financial statements. It also reviews and verifies
the effectiveness of the internal control systems,
the risk management process and the internal

auditing process. The internal audit department

audits the internal control system, compliance

with legal requirements and internal corporate

guidelines, as well as the risk management sys-

tem. It makes recommendations and develops

any necessary process changes accordingly,

thereby contributing to continuous improvement

of the internal control and risk management

systems.

EXTERNAL AUDIT The external auditor checks

that the early risk identification procedure inte-

grated into the risk management system is en-

tirely suitable for timely identification of exis-

tential risks. The auditor also reports to the su-

pervisory board any material weaknesses found

in the internal control and risk management

system. During the audit of the closing financial

statements, the auditor confirmed that Südzuck-

er’s early warning system is capable of timely

detection of existential risks. The auditor has

not encountered any material weaknesses in the

internal accounting-related auditing system

during its audit.

Management Report 52

Outlook

Given the expiry of quota and minimum beet

price regulations for the EU sugar market effec-

tive 1 October 2017, the forecast is marked by

considerable uncertainty.

We expect moderately rising revenues in fiscal

year 2017/18. The wheat starch factory in Zeitz,

which was started up halfway through last fiscal

year, together with the sugar trading and export

business taken over by our Raffinerie Tirlemon-

toise S.A., Brussels subsidiary and higher sugar

volumes than last year will all contribute to rev-

enue growth.

The trend in the sugar market is that the higher

market prices observed since fall 2016 will gen-

erate higher average revenues. Improved capaci-

ty utilization that will generate economies of

scale and continuing cost reduction measures

lead us to expect a better, but not yet positive

operating result.

Additional operating charges from the wheat

starch plant, together with still lower discount

rates for pension provisions, will negatively im-

pact the result.

While the net interest result, which is based on

favorable average interest rates, will continue to

improve slightly, net income from investments is

expected to remain unchanged.

Net income for the year is expected to be slight-

ly higher than last year.

Management Report 53

Recommendation on

appropriation of profits

The executive and supervisory boards will rec-

ommend a dividend of € 0.45 (0.30) per share to

the annual general meeting on 20 Juli 2017.

With dividend-bearing capital of € 204.2

(204.2) million, this represents a total dividend

pay-out of € 91.9 (61.3) million. The dividend is

scheduled to be paid on 25 Juli 2017.

Concluding declaration

regarding the dependent

company report pursuant to

secion 312 (3) of the stock

corporation act (AktG)

According to notice received from Süddeutsche

Zuckerrübenverwertungs-Genossenschaft eG

(SZVG), Stuttgart, the entity holds a majority

interest in our company through its own hold-

ings of Südzucker shares and the shares it holds

in trust for its associated shareholders. The re-

port in this regard, based on article 312 of the

German Stock Corporation Act, closes with the

following declaration:

“For the legal transactions listed in the report

regarding the relationship to SZVG, the associa-

tion of Association of Süddeutsche Zucker-

rübenanbauer e.V., Ochsenfurt, its regional as-

sociations and beet farmers, our company re-

ceived appropriate compensation for every legal

transaction in accordance with the conditions

known at the time such transactions were un-

dertaken. Measures subject to reporting as per

article 312 of the AktG (German Stock Corpora-

tion Act) were neither undertaken nor neglected

during the reporting year.”

Financial Statements 54

FINANCIAL STATEMENTS

Balance sheet as of 28 February 2017

ASSETS Veränderung

(€ ‘000) Notes 28 February 2017 29 February 2016

Intangible assets 13,711 7,675

Property, plant and equipment 513,414 478,844

Financial assets 2,791,881 2,781,980

Fixed assets 1 3,319,006 3,268,499

Inventories 2 455,287 389,101

Receivables and other

assets 3 965,209 694,468

Securities 4 171,206 209,200

Cash and cash equivalents 4,951 2,452

Current assets 1,596,653 1,295,221

Accrued and deferred items 5 1,374 1,364

4,917,033 4,565,084

LIABILITIES AND SHAREHOLDERS’ EQUITY Veränderung

(€ ‘000) Notes 28 February 2017 29 February 2016

Subscribed capital 204,183 204,183

Capital reserve 1,620,579 1,620,579

Revenue reserves 262,778 259,278

Net earnings available for distribution 91,940 61,327

Shareholders’ equity 6 2,179,480 2,145,367

Special items with an equity portion 7 32,693 34,027

Provisions for pensions and similar

obligations 8 505,151 478,059

Other provisions 9 342,644 323,329

Provisions 847,795 801,388

Liabilities 10 1,857,065 1,584,302

Accrued and deferred items 10

0 0

4,917,033 4,565,084

Financial Statements 55

Income statement

1 Mach 2014 to 28 February 2017

1 M arch 2016- 1 M arch 2015-

(€ ‘000) Notes 28 February 2017 29 February 2016

Revenues 12

1,278,610 1,170,847

Change in work in progress
and finished goods and

internal costs capitalized 13

54,734 -100,114

Other operating income 14 28,154 87,286

Cost of materials 15 -988,089 -804,254

Personnel expenses 16 -218,105 -196,064

Depreciation of

intangible assets

and fixed assets -54,723 -51,458

Other operating expenses 17 -195,995 -215,951

Investment income/expense 18

209,956 214,692

Interest income/expense 19

-31,074 -36,118

Taxes on income 20 11,900 -1,339

Profit after taxes/Net earnings for the year 95,368 67,527

Profit brought forward from the previous year 72 100

Allocations to revenue reserves -3,500 -6,300

Net earnings available for distribution 91,940 61,327
0

Financial Statements 56

Notes to the financial statements

Application of German GAAP (HGB)

The financial statements of Südzucker AG (register court: district court of Mannheim HRB 0042) were

prepared in accordance with the rules of the German Commercial Code (HGB) in the version of the

Accounting Directive Implementation Act (BilRUG) as well as the Stock Corporation Act (AktG).

The income statement has been prepared using the nature of expense method. Certain items in the

balance sheet and income statement have been combined in order to improve the clarity of presenta-

tion. These items are shown separately and described in the notes to the financial statements.

The financial statements have been prepared in euros. Unless otherwise indicated, all amounts are

disclosed in thousands of euros (€ ‘000) or millions of euros (€ million). The previous year’s numbers

are generally put in parentheses in the notes.

Accounting policies

Transactions in foreign currencies are recognized at the historical exchange rate at the time of initial

recognition.

Long-term foreign currency receivables are recognized at the asking price when the claim arises or at

the lower fair value on the basis of the average spot exchange rate on the financial reporting date

(imparity principle). Short-term foreign currency receivables (remaining term of one year or less) and

cash or other current assets denominated in foreign currencies are translated at the average spot

exchange rate at the balance sheet date.

Long-term foreign currency liabilities are measured at the bid price when the liability arises or at the

higher closing rate on the basis of the average spot exchange rate on the financial reporting date

(imparity principle). Short-term foreign currency liabilities (remaining term of one year or less) are

translated at the average spot exchange rate at the balance sheet date.

Exchange gains or losses from different average spot exchange rates between the transaction date

and the balance sheet date are reported under other operating income or expense.

Fixed assets

Intangible assets and fixed assets are measured at acquisition or production cost less depreciation

and write-downs. In addition to the wear and tear of the fixed assets, production costs for internally-

constructed equipment also include the production material, labor costs, and appropriate components

of the overheads required.

Financial Statements 57

Items subject to depreciation according to requirements of German commercial law are depreciated

using the declining-balance or straight-line method.

Intangible assets are depreciated using the straight-line method.

The useful life of goodwill was determined by the economically expected useful life and is based in

particular on the useful life gained through the acquisition of ‘know-how’ (employees, processes,

etc.).

Fixed assets acquired on or after 1 January 2001 were offset at a rate of maximum 20 percent when

depreciated using the declining-balance method. Fixed assets acquired on or after 1 January 2006 to

31 December 2007 were offset pursuant to tax provisions at a rate of maximum 30 percent when

depreciated using the declining-balance method.

Fixed assets acquired after 31 December 2008 were offset at a rate of maximum 25 percent when

depreciated using the declining-balance method. The transition from the declining-balance to the

straight-line method takes place at the date at which the remaining carrying amount distributed in

equal annual amounts over the remaining useful life leads to higher depreciation rates.

The straight-line method was used exclusively for fixed assets acquired or produced on or after 1

March 2010. Südzucker AG exercises the option of using the reduced carrying amount (Bei-

behaltungswahlrecht) pursuant to note 67 (4) sentence 1 of the Introductory Act to the German Com-

mercial Code (EGHGB).

Independently usable movable items of fixed assets subject to depreciation are fully depreciated in

the year of initial recognition if their acquisition or production costs do not exceed € 150. Depreciable

movable assets under fixed assets acquired or produced after 31 December 2007 whose acquisition

or production costs are greater than € 150 but do not exceed € 1,000 were combined into compound

items. Compound items are depreciated at the same rate over a period of five years.

Depreciation of fixed assets and of intangible assets is based on the following useful lives:

Intangible assets 2 to 9 years

Goodwill 10 years

Buildings 10 to 50 years

Technical equipment and machinery 5 to15 years

Factory and office equipment 3 to 10 years

Shares in affiliated companies and the participations are measured at acquisition cost or the lower fair

value. Borrowings are recognized at their nominal amount.

Long-term financial investments are measured at acquisition cost, if applicable, less depreciation of

the respective lower fair value at the end of the financial year.

Lower fair values of fixed assets are accounted for with write-downs if continued impairment is ex-

pected. Write-downs are reversed if the reasons for the write-downs no longer exist.

Financial Statements 58

Current assets

Materials and other supplies are measured according to the principles of valuation on a separate or

standard value basis at acquisition costs with due respect for the lower-of-cost-or-market principle.

Merchandise is measured at acquisition cost with due respect for the lower-of-cost-or-market princi-

ple. Appropriate valuation reductions are made each time realizability is limited.

Finished goods and work in progress are measured in accordance with notes 253 to 256 HGB at pro-

duction costs or at the recoverable net proceeds derived from the sale price with due respect for the

principle of loss-free evaluation. The FIFO method is used in the measurement of finished goods.

Valuation reductions are made if inventory risk arises from extended storage duration or reduced

realizability.

The depreciation of the fixed assets in use (wear and tear), the directly attributable material and pro-

duction costs and the appropriate components of the necessary material and production overheads

are considered when determining production costs for sugar. Interest expense is not included.

Short-term financial investments are reported at acquisition cost, less depreciation of the respective

lower quoted or market price at the end of the financial year.

Receivables and other assets are measured either at nominal value with due respect for the lower-of

cost or-market principle or at discounted value. Individual allowances are made in the estimated

amount of default risk for doubtful receivables. General credit risk is accounted for with general allo-

wances.

CO2 emission certificates allocated free of charge are capitalized with an acquisition value of zero;

certificates acquired for a fee are recognized at their acquisition cost. Provisions are recognized in the

amount of the acquisition cost for the certificates if CO2 emissions exceed the allocated certificates.

Cash and cash equivalents are recognized at their nominal value.

Prepaid expenses

Expenses paid prior to the balance sheet date are classified as an asset and recorded as prepaid ex-

penses insofar as they represent expenses for a particular period after the reporting date.

Financial Statements 59

Subscribed capital

Subscribed capital is recognized at nominal value.

The book value of the treasury stock acquired is deducted on the face of the balance sheet from the

item “subscribed capital” in the preceding column. The difference between the book value and the

acquisition costs for the treasury shares is offset against the available retained earnings. Acquisition-

related costs are recognized as an expense for the fiscal year.

Special untaxed reserves

Special untaxed reserves for differences from increased depreciation permissible according to tax law

and special depreciation as well as regular depreciation on a straight-line or declining balance basis

were recognized until 28 February 2010.

Südzucker AG exercises the option of using the reduced carrying amount (continuation option) pursu-

ant to note 67 (3) s. 1 of the Introductory Act to the German Commercial Code (EGHGB).

Provisions

Provisions for pensions and similar obligations are determined on the basis of biometric probabilities

(Heubeck 2005 G actuarial tables) using the projected unit credit method. The wage and pension in-

flation parameters were adjusted as follows on the basis of current wage and pension inflation and

medium-term projections: The future salary and income threshold increase rates were as in the previ-

ous year set at 2.50 (2.50) percent, of an income threshold trend (“Beitragsbemessungsgrenze”) of

2.50 (2.50) percent, the future pension increase rate at 1.50 (1.50) percent and the average employee

turnover rate at 1.0 (1.0) percent. An actuarial interest rate of 3.97 (4.27) percent was used as a basis

for the discount rate for pension obligations as at 28 February 2017.

This corresponds to the average market interest rate from the past ten financial years determined by

Deutsche Bundesbank for an assumed time to maturity of 15 years. Changes to the discount rate that

affect net income and fair value changes to fund assets are shown in the financial results. The asset

value of the liability insurance is recognized for reinsured obligations from deferred compensation.

Provisions for pensions and similar obligations are offset with existing fund assets (pension liability)

which were recognized at fair value. The fair value of fund assets is the actuarial asset value of the

liability insurance, which corresponds to the historic acquisition costs.

For the measurement of provisions for partial retirement (“Altersteilzeit”), increases are treated as

“payments with compensation character” according to the rules outlined in the latest applicable ver-

sion of IDW RS HFA 3. The discount rate for provisions for part-time early retirement credits is 1.

(2.43) % and 3.16 (3.77) % for anniversary claims. The salary trend corresponds to that of the provi-

sions for pensions and similar obligations.

Other provisions are recognized for uncertain liabilities and imminent losses from pending business

transactions. Provisions are also recognized for maintenance expenses that have been put off and are

made up for within three months in the following financial year. Other provisions are measured in the

Financial Statements 60

amount of the settlement value required according to reasonable commercial assessment that also

includes price and cost increases. Provisions with a remaining term of more than one year are dis-

counted using the market interest rate corresponding to their remaining term.

Liabilities

All liabilities are reported using their settlement value.

Deferred tax

Deferred tax is measured for temporary differences between legal commercial and tax valuations of

assets, liabilities and accrued and deferred items. Interest carry forwards and tax loss carry forwards

are also considered in addition to temporary accounting differences.

Deferred tax is calculated on the basis of the combined income tax rate of 29.1 percent currently ap-

plicable for the Südzucker AG tax group. The combined income tax rate comprises the German cor-

porate income tax (Körperschaftsteuer), the trade tax on income (Gewerbesteuer) and the solidarity

tax (Solidaritätszuschlag).

If applicable, a resulting tax burden is recognized in the balance sheet as a deferred tax liability. If

deferred tax assets are greater than deferred tax liabilities the option of not recognizing any deferred

tax assets is exercised. In the financial year under review deferred tax assets were greater and thus

not recognized.

Research and development expenses

The option of capitalizing development expenses is not exercised.

Research expenses are recognized directly in the income statement as expenses that cannot be capi-

talized.

Creation of valuation units for hedging instruments

Accounting for valuation units is based on the principle that comparable risks from a hedged item are

offset economically by opposite changes in value or cash flows from a hedge. Unrealized gains and

losses are therefore not considered in the scope and for the period in which opposite changes or cash

flows from a hedged item and hedge offset each other.

Hedging instruments are considered a valuation unit with the hedged item if the requirement for the

creation of valuation units is met. When disclosing the market values the amount is applied which

would flow to or from Südzucker AG assuming the hedge were reversed at the balance sheet date. As

hedge transactions only comprise normal market tradable financial instruments, the market value is

derived from quoted prices on exchanges without offsetting any possible value changes relating to

the underlying transaction being hedged.

Net unrealized losses are recognized as an expense provision for valuation units if changes in the

value of the hedged item and hedging instrument relating to the hedged risk result from offsetting.

Financial Statements 61

As a general rule, the effective portions of the valuation units are accounted for using the net hedge

presentation method (Einfrierungsmethode). The gross hedge presentation method (Durchbu-

chungsmethode) is used for hedging of commercial transactions.

Financial Statements 62

Notes to the balance sheet

(1) Fixed assetsIntangible assets

(€ ‘000)

Acquisition or production cost

As of 1 March 2016 111,413 0 111,413

Addition 4,633 4,300 8,933

Disposal -308 0 -308

Transfer 1,177 0 1,177

As of 28 February 2017 116,915 4,300 121,215

Accumulated depreciation

As of 1 March 2016 103,738 0 103,738

Annual depreciation 3,889 179 4,068

Disposal -302 0 -302

As of 28 February 2017 107,325 179 107,504

Net book value

29 February 2016 0 7,675 7,675

28 February 2017 9,590 4,121 13,711
0

Intangible

assets

Concessions,

industrial pro-

perty rights,

licences

Goodwill

Goodwill was acquired in the financial year through the acquisition of sugar, trading and export ac-

tivities from the subsidiary Raffinerie Tirlemontoise S.A., Brussels.

Financial Statements 63

Property, plant and equipment

(€ ‘000)
Acquisition or production cost

As of 1 March 2016 434,439 1,218,580 124,205 82,836 1,860,060

Addition 12,247 51,727 7,937 16,122 88,033

Disposal -1,401 -6,122 -6,953 0 -14,476

Transfer 4,708 77,250 793 -83,928 -1,177

As of 28 February 2017 449,993 1,341,435 125,982 15,030 1,932,440

Accumulated depreciation

As of 1 March 2016 236,934 1,052,916 91,366 0 1,381,216

Annual depreciation 9,770 32,137 8,748 0 50,655

Disposal -711 -5,575 -6,559 0 -12,845

Transfer 0

As of 28 February 2017 245,993 1,079,478 93,555 0 1,419,026

Net book value

29 February 2016 197,505 165,664 32,839 82,836 478,844

28 February 2017 204,000 261,957 32,427 15,030 513,414
0

Land and

buildings

Technical

equipment and

machinery

Other plant,

factory and

off ice

equipment

Advances paid

and construction

in progress

Property, plant and

equipment

Financial assets

(€ ‘000)
Acquisition or production cost

As of 1 March 2016 3,567,200 80 667 3,567,947

Addition 10,000 0 261 10,261

Disposal 0 0 -360 -360

Transfer 0 0 0 0

As of 28 February 2017 3,577,200 80 568 3,577,848

Accumulated depreciation

As of 1 March 2016 785,967 0 0 785,967

As of 28 February 2017 785,967 0 0 785,967

Net book value

29 February 2016 2,781,233 80 667 2,781,980

28 February 2017 2,791,233 80 568 2,791,881
0

Shares in aff iliated

companies
Participations Other loans

Financial

assets

The addition in the shares in affiliated companies relates to a capital increase at Südzucker Verwal-

tungs GmbH, Mannheim, to purchase Terra e.G., Sömmerda.

Financial Statements 64

(2) Inventories

(€ ‘000) 28 February 2017 29 February 2016

Raw materials and supplies 51,809 43,887

Work in progress 116,700 94,398

Finished goods, merchandise 286,778 250,816

455,287 389,101
0

The decline in finished goods as at 28 February 2017 is largely attributable to lower production costs

than in the previous year. Some finished goods had to be written down due to unexpected lower sales

proceeds.

(3) Receivables and other assets

(€ ‘000) 28 February 2017 29 February 2016

Trade receivables 99,497 65,327

thereof with remaining term of more than one year 274 1,055

Receivables owed by affiliated companies 804,763 565,142

thereof with remaining term of more than one year 141,713 160,405

Receivables owed by companies

in which participations are held 81 164

Other assets 60,868 63,835

965,209 694,468

Individual impairments of €’000 10,656 (10,521) have been made for trade receivables totalling €’000

99,497 (65,327).

Receivables from affiliated companies comprise financial receivables from group loans in the amount

of €’000 280,175 (212,005), trade receivables of €’000 53,288 (78,700) and other receivables in the

amount of €’000 471,300 (274,437), which relate to short-term group financing of subsidiaries

(Cash-Pool) of subsidiaries.

Other assets totalling €’000 60,868 (63,835) at the effective date included receivables in the amount

of €’000 0 (23,028) from the reimbursement of production levies from previous years. Also recog-

nized here are the VAT receivables and energy tax reimbursement claims. Positive market values from

sugar derivatives of €’000 20,695 (755) resulted from the centralized export activities.

(4) Securities

(€ ‘000) 28 February 2017 29 February 2016

Shares in affiliated companies 16,200 56,700

Other securities 155,006 152,500

171,206 209,200

Shares in affiliated companies include the shares of AGRANA Beteiligungs AG, Vienna, Austria. The

decline is attributable to the placement of 500 thousand shares of AGRANA Beteiligungs-AG, Vien-

na/Austria, from Südzucker direct holdings as part of a capital increase of the company.

Financial Statements 65

(5) Accrued and deferred items

This item primarily includes accrued interest expense.

(6) Shareholders’ equity

Changes in equity

1 March 2016 Divided for 28 February 2017

(€ ‘000) 2015/16

Subscribed capital 204,183 204,183
Capital reserve 1,620,579 1,620,579

Revenue reserves 259,278 3,500 262,778

Net earnings available for distribution 61,327 61,255 91,868 91,940

2,145,367 61,255 95,368 2,179,480
0 0

Net earnings

for the year

As of 28 February 2017, the subscribed capital is valued at € 204,183,292 and consists of

204,183,292 bearer shares; this exclusively concerns no-par value ordinary shares, each of which

represents a notional holding of € 1 per share. The company had no treasury shares as of the period

end.

As at 28 February 2017, the freely available reserves plus profit carried forward exceed the total

amount of the amounts subject to a distribution restriction. Thus there is no distribution restriction in

relation to the net earnings of the financial year. Südzucker AG did not exercise any accounting op-

tions that trigger a distribution restriction. Südzucker AG did not exercise any accounting options that

trigger a distribution restriction.

(7) Special items with an equity portion

Special untaxed reserves included only impairment losses for tax purposes.

(8) Provisions for pensions and similar obligations

Current obligations for pensions and benefits are reported under provisions for pensions and similar

obligations. The amount required to fund provisions for pensions and similar obligations in the

amount of €’000 507,615 (480,725) is offset against the pension fund assets (funding sources) in the

amount of €’000 2,464 (2,666). The fair value of fund assets is the actuarial asset value of insurance

policies, which corresponds to the historic acquisition costs.

The difference between the recognized provisions in accordance with the corresponding average mar-

ket interest rate derived from the previous ten financial years and the recognized provisions in ac-

cordance with the corresponding average market interest rate from the previous seven financial years

pursuant to section 253 (6) HGB is €’000 63,307.

(9) Other provisions

(€ ‘000) 28 February 2017 29 February 2016

Tax provisions 89,519 99,565

Other provisions 253,125 223,764

342,644 323,329

Financial Statements 66

Tax provisions include additions from income tax expenses for periods not yet completed for tax

audit purposes. Reimbursements and accrual reversals mitigated these charges. Overall, the tax ex-

penses relating to other periods totaled € 1.3 million.

Other provisions comprise obligations for personnel expenses, expenses for exporting beet soil and

recultivation of sludge lagoons and/or earth-moving operations for soil preparation and improve-

ment, risks arising from the EU sugar market regulation, antitrust risks (fines and claims for damag-

es), litigation risks and risk precautions.

Provisions were also recognized for maintenance expenses that were put off in the financial year un-

der review and will be made up for within three months of the following financial year.

The provision for part-time early retirement was recognized for such agreements already concluded

prior to and those already committed as of the balance sheet date. It includes top-up contributions

and accumulated settlement amounts accrued up to the balance sheet date.

(10) Liabilities

28 February 2017 29 February 2016 28 February 2015

(€ ‘000) Total < 1 year > 1 year Total < 1 year > 1 year

Bonds and debt securities
0 0 0 124,981 124,981 0

Liabilities to banks
208,648 61,822 146,826 188,778 17,130 171,648

Trade payables
254,375 254,375 0 200,740 200,740 0

Liabilities to aff iliated companies
1,283,958 247,158 1,036,800 959,763 289,213 670,550

thereof trade payables
18,266 18,266 0 9,846 9,846 0

Liabilities to companies

with which there is a

participating interest 0 0 0 3,910 3,910 0

Other liabilities 110,084 110,084 0 106,130 106,130 0

thereof for taxes 5,357 5,357 0 3,942 3,942 0

thereof for social security
8,452 8,452 0 8,683 8,683 0

1,857,065 673,439 1,183,626 1,584,302 742,104 842,198

As at 29 February 2016, the item “Bonds and debt securities” included short-term commercial paper

for group financing; this is no longer included as at 28 February 2017 due to the higher refinancing

via SZ Finance.

Liabilities to banks amount to €’000 208,648 (188,778), of which €’000 (64,385) have a remaining

term of over five years.

Obligations to beet growers of €’000 205,252 (160,167) are reported under trade payables.

Financial Statements 67

Liabilities to affiliated companies totalling €’000 1,283,958 (959,763) primarily concern borrowing

from bonds issued through Südzucker International Finance B.V., Oud-Beijerland / Netherlands.

Other liabilities primarily include liabilities to insurance institutions, tax liabilities and liabilities from

payroll accounting.

All liabilities are unsecured.

(11) Contingent liabilities, other financial commitments and derivative financial instruments

Of the future liabilities from lease agreements for IT systems, warehouses and factory and office

equipment as well as from company lease agreements, € 9.5 (2.4) million is due within one year, €

37.0 (0.0) million in more than one year – with € 12.8 (0.0) million due in more than five years; € 0.5

(0.5) million relates to affiliated companies and is due within one year. The increase in liabilities from

lease agreements was largely due to the extension of existing and the signing of new lease agree-

ments as part of the improvement to the logistics structure and the expansion of export business.

Other financial commitments from open orders totaled € 11.9 (40.6) million as of the balance sheet

date.

For bonds issued by Südzucker Finance B.V. in favor of the creditors, Südzucker AG issued guarantees

totaling € 400.0 million (€ 400.0 million) and, in the case of the subordinate hybrid bond, a subordi-

nated guarantee totaling € 700.0 million (€ 700.0 million). A further guarantee was issued in favor of

the creditors of BENEO Orafti Chile S.A. for a maximum credit line of USD 25.0 (25.0) million; as of the

balance sheet date the company had accessed USD 9.9 (24.2) million from the credit line. Due to the

financial situation of the companies, utilization of the guarantees issued is not currently anticipated.

Südzucker AG is jointly and severally liable for credit taken out by Rackwitzer Biogas GmbH in the

(original) amount of € 10 million. Utilization is unlikely due to the financial situation of Rackwitzer

Biogas GmbH.

Besides the other financial commitments and contingent liabilities presented, there are no off-

balance-sheet transactions that would be of importance for the financial position of the company.

For a loan in the amount of GBP 12.5 million to a subsidiary, Südzucker AG entered into a currency

swap to hedge the currency risk associated with interest payments and loan repayment. The hedged

item (loan granted in a foreign currency) and the hedging instrument (cross currency swap) are con-

sidered a micro-hedge because together they meet the requirements for hedging a single asset. Ac-

cordingly, no depreciation of the GBP receivable is taken due to currency fluctuations and no provision

is recognized in the event of a negative market value of the hedging instrument. On the balance sheet

date, the cross currency swap had a negative market value of € 2.9 (0.6) million. The maturity dates of

the hedging instrument are 21 October 2016 and 27 March 2019.

Financial Statements 68

Price guarantees were concluded for sugar sales contracts with world market price-based price de-

termination using sugar futures contracts and forex forwards. The hedged item (sugar sales contracts)

and the hedging instruments (sugar futures and forex forwards) are considered a single valuation unit

(micro hedge) because the requirements for the creation of valuation units are met. Accordingly, no

provision is recognized in the case of a negative market value for the hedging instruments (net hedge

presentation method).

World market price-based purchase and sales contracts are concluded for the sugar commercial

transaction; their net position is hedged with regard to price using sugar futures. The hedged item

(sugar commercial transaction) and the hedging instrument (sugar futures) are considered a single

valuation unit (portfolio hedge) because the requirements for the creation of valuation units are met.

The positive market value of the hedged item and the hedging instrument are recognized accordingly

(gross hedge presentation method).

As at 28 February 2017, open sugar futures were concluded with a sugar equivalent of approximately

673 thousand tonnes for price hedging of the 2016 and 2017 campaign. The positive market value

amounts to € +26.5 (+0.3) million; the negative market value is € -17.1 (0.0) million. Positive and

negative market values of € +1.7 (0.0) and € -14.8 (0.0) million, respectively, exist for the associated

forex forwards.

Südzucker uses longer-term supply contracts and derivative hedging instruments (wheat futures) to

hedge raw material prices for the wheat starch plant in Zeitz. Considered here are the future demand

for raw materials or the corresponding framework contracts as the hedged item together with the

hedging instruments as the valuation unit (micro hedge) because the requirements for the creation of

valuation units are met. Accordingly, no provision is recognized in the case of a negative market value

for the hedging instruments (Einfrierungsmethode). As at 28 February 2017, open wheat futures were

concluded with a volume of approximately 83 thousand tonnes of wheat for deliveries in the 2017/18

financial year and the market value totaled € +0.2 (+0.0) million.

The compliance of these parameters is reviewed prospectively, and the effectiveness of the hedge is

assessed regularly as part of the risk management system. The effectiveness test determined that the

significant value-determining parameters (critical terms) such as nominal amounts, currency, begin-

ning, maturity, etc. of the hedged item and hedge are compliant in each case, which is why it can be

assumed that the opposite cash flows will completely offset each other in the future.

Financial Statements 69

Notes to the income statement

(12) Sales

(€ ‘000) 2016/17 2015/16

Classification according to activities

Own production 943,416 932,325

thereof sugar 780,054 798,835

thereof other revenue 163,362 133,490

Revenues from services 161,496 98,166

Merchandise revenue 173,698 140,356

thereof sugar 86,681 102,851

thereof by products 39,290 37,505

1,278,610 1,170,847

Classification according to geographical markets

Germany 784,960 753,799

EU 420,986 404,878

Others 72,664 12,170

1,278,610 1,170,847

Due to the new version of section 277 (1) HGB in the version of BilRUG (HGB new version), the prior

year figures for revenues are not comparable with the year under review because no adjustment is

made to the prior year revenues. The application of section 277 (1) HGB (new version) for the previous

year would have resulted in revenues of €’000 1,214,324.

Starting with the 2016 financial year, income from scrap sales in the amount of €’000 334 (254),

income from the sale of pallets in the amount of €’000 56 (62), income from renting and leasing in

the amount of €’000 2,371 (2,597), income from group allocations in the amount of €’000 33,872

(40,111) and income from canteens and vending machines in the amount of €’000 498 (453) that in

previous years was recognized under other operating income will now be recognized under revenues.

(13) Change in work in progress and finished goods inventories and internal costs capitalized

(€ ‘000) 2016/17 2015/16

50,605 -103,600

Internal costs capitalized 4,129 3,486

54,734 -100,114

Change in finished goods and work in progress

(14) Other operating income

Due to the change in recognition of revenues in accordance with section 277 (1) HGB in the version of

BilRUG (HGB new version), income that was previously recognized under operating income will now be

qualified as revenues. The prior year figures for revenues are therefore not comparable with the year

under review because no adjustment is made to the prior year revenues. If application had been the

same in the previous year, other operating income would have been lower by €’000 43,477, from

€’000 87,286 to €’000 43,809.

Financial Statements 70

Other operating income includes income from prior periods totalling €’000 4,302 (20,075), which

largely resulted from accounting profits and the reversal of provisions. Also included is income from

currency translation totalling €’000 118 (134).

Other operating income included income from the release of special untaxed reserves in the amount

of €’000 1,334 (1,351) and income from the reversal of deferred items totalling €’000 0 (11,890).

(15) Cost of materials

(€ ‘000) 2016/17 2015/16

Cost of raw materials and consumables and

merchandise 845,758 693,491

Cost of purchased services 142,331 110,763

988,089 804,254

The change in recognition of revenues in accordance with section 277 (1) HGB in the version of BilRUG

(HGB new version) requires a reclassification of other operating expenses associated with sales reve-

nues into “cost of purchased services”. The prior year figures for cost of purchased services are there-

fore not comparable with the year under review because no adjustment is made to the prior year ex-

penses. If application had been the same in the previous year, this would have resulted in a cost of

materials of €’000 810,416.

(16) Personnel expenses

(€ ‘000) 2016/17 2015/16

Wages and salaries 155,693 149,061

62,412 47,003

thereof retirement benefits 35,477 20,747

– Service cost 8,746 8,710

– Parameter adjustments, among others 26,731 12,037

218,105 196,064

0 0

Average number of employees during the year

Industrial employees 1,201 1,148

Salaried employees 1,102 1,099

Apprentices 198 199

2,501 2,446

Social contributions and expenses for

retirement and other benefits

(17) Other operating expenses

The change in recognition of revenues in accordance with section 277 (1) HGB in the version of BilRUG
(HGB new version) requires a reclassification of other operating expenses associated with sales reve-

nues into “cost of purchased services”. The prior year figures for other operating expenses are there-

fore not comparable with the year under review because no adjustment is made to the prior year ex-

penses. If application had been the same in the previous year, other operating expenses would have

been lower by €’000 6,162, from €’000 215,951 to €’000 195,789.

Financial Statements 71

Other operating expenses include expenses from prior periods totalling €’000 900 (255). Also includ-

ed are expenses from currency translation totalling €’000 3,705 (175).

Other taxes in the amount of €’000 866 (748) shown under a separate item the annual report for the

previous year are recognized under other operating expenses.

(18) Investment income/expense

(€ ‘000) 2016/17 2015/16

Income from profit transfer agreements 170,790 185,890

Income from investments 39,188 28,803

thereof from affiliated companies 39,188 28,304

thereof from other investments 0 499

Expenses from transfer of losses -22 -1

209,956 214,692

0.00 0.00

(19) Interest income/expense

(€ ‘000) 2016/17 2015/16

Expenses / Income from

other long-term financial

investments and loans 2,575 -2,495

Other interest and similar income 16,349 14,090

thereof from affiliated companies 7,645 12,664

Interest and similar expenses -49,998 -47,713

thereof from discounting -20,632 -21,124

thereof from affiliated companies -25,082 -21,996

-31,074 -36,118
0.00 0.00

Expense from the unwinding of the discount for long-term obligations totaling €’000 20,632 (21,124)

is recognized in the interest result in the year under review. This primarily results from the unwinding

of the discount for provisions for pensions and similar obligations totaling €’000 19,940 (20,209)

and/or non-current provisions for personnel expenses and liabilities totaling €’000 692 (915), which

are netted against income from the fair value measurement of plan assets of €’000 2,464 (2,666).

(20) Taxes on income

Taxes on income comprise tax expense from the current financial year and tax income from previous

years.

Deferred tax assets of € 145.4 million result primarily from higher valuations in the commercial bal-

ance sheet for provisions for pensions, part-time early retirement and anniversaries and other provi-

sions along with loss carryforwards for German corporate income tax (Körperschaftsteuer) and the

trade tax on income (Gewerbesteuer) in comparison to the tax balance sheet.

Financial Statements 72

This compares with deferred tax liabilities of € 19.5 million. They primarily result from higher valua-

tions of financial assets in the commercial balance sheet compared to the tax balance sheet.

In total deferred tax assets exceeded deferred tax liabilities; deferred tax assets were not recognized.

In determining deferred taxes a theoretical tax rate of 29 % is assumed. The reported tax income in

the amount of € 11.9 million comes from the reversal of tax provisions. The effective tax rate for the

2016/17 financial year is 20 %. Differences between the theoretical tax rate and the effective tax rate

largely result from tax reductions from tax-free income and non-deductible operating expenses.

Other disclosures

(21) Research and development expenses

Research and development expenses totalled €’000 20,245 (20,345) and were completely recognized

in the income statement.

(22) Total compensation of the executive board and supervisory board and former executive

board and supervisory board members

The total compensation granted to members of the executive board by Südzucker AG in the 2016/17

financial year amounted to € 2.2 million (€ 2.9 million). The variable component makes up 31 percent

(36 percent) of their remuneration in cash, and depends on the dividend to be approved by the annual

general meeting. Provisions for pensions of € 27.3 million (€ 27.4 million) relate to former members

of Südzucker AG’s executive board and their dependents. Pension payments to former members of

Südzucker AG’s executive board and their dependents amounted to € 3.5 million (€ 2.7 million). Total

remuneration paid to Südzucker AG’s supervisory board for all activities was € 1.6 million (€ 1.2 mil-

lion) in the 2016/17 financial year. The remuneration systems for the executive board and supervisory

board are discussed under “Remuneration” in the Südzucker group management report.

(23) Disclosures pursuant to section 160 (1) No. 8 AktG

There are no security transactions subject to disclosure for the 2016/17 financial year.

(24) Events after the balance sheet

There were no significant changes to the economic environment or to the situation in our industry

after the close of the fiscal year. There are also no other special events for Südzucker AG that would

require reporting.

Financial Statements 73

(25) Consolidated financial statement

As the parent company of Südzucker Group, Südzucker AG has prepared consolidated financial

statements as at 28 February 2017 according to the International Financial Reporting Standards (IFRS)

as adopted by the EU. These are provided to the operator of the German Federal Gazette (Bundesan-

zeiger) for publication.

(26) Shareholdings

Both equity and the annual results of German participations are disclosed uniformly according to the

German Commercial Code (HGB). If a profit and loss transfer agreement exists with the relevant par-

ticipation, the annual results are disclosed as zero. The list of shareholdings is found on pages 1ff in

these notes to the financial statements. Disclosures are presented in compliance with section 313 (

and section 285 No. 11 HGB.

Financial Statements

* Arbeitnehmervertreter

(27) Supervisory board and executive board

SUPERVISORY BOARD

Dr. Hans-Jörg Gebhard, Eppingen

Chairman

Chairman of the executive board of Verband

Süddeutscher Zuckerrübenanbauer e. V.

Memberships in other domestic, statutory supervi-

sory boards

 CropEnergies AG,

Mannheim

 GoodMills Deutschland GmbH, Hamburg

Memberships in comparable German and foreign

supervisory committees

 AGRANA Beteiligungs-AG,

Vienna,

Austria

 AGRANA Zucker, Stärke und Frucht Holding AG,

Vienna, Austria (2. Deputy

Chairman)

 Freiberger Holding GmbH, Berlin

 Raffinerie Tirlemontoise S.A., Brussels, Belgium

 Saint Louis Sucre S.A.S., Paris, France

 Süddeutsche Zuckerrübenverwertungs-

Genossenschaft eG, Stuttgart

(Chairman)

 Vereinigte Hagelversicherung VVaG, Gießen

 Z & S Zucker und Stärke Holding AG, Vienna,

Austria

Franz-Josef Möllenberg*, Rellingen

1. Deputy Chairman

Former Chairman of Gewerkschaft Nahrung-

Genuss-

Gaststätten

Memberships in other domestic, statutory supervi-
sory boards
 CropEnergies AG, Mannheim

Erwin Hameseder, Mühldorf, Austria

2. Deputy Chairman

Chairman of Raiffeisen-Holding Niederösterreich-

Wien reg.Gen.m.b.H.

Memberships in comparable German and foreign
supervisory committees

 Flughafen Wien AG, Vienna, Austria (1. Deputy

Chairman)

 RWA Raiffeisen Ware Austria AG, Vienna, Austria

 RWA Raiffeisen Ware Austria Handel und Vermö-

gensverwaltung eGen, Vienna, Austria

 UNIQA Versicherungen AG, Vienna, Austria

(2. Deputy Chairman)

Group-mandates

 AGRANA Beteiligungs-AG, Vienna, Austria

(Chairman)
 AGRANA Zucker, Stärke und Frucht Holding AG,

Vienna, Austria

(1. Deputy Chairman)

 Leipnik-Lundenburger Invest Beteiligungs-AG,

Vienna, Austria

 Mediaprint Zeitungs- und Zeitschriften GmbH &

Co. KG, Vienna,

Austria

(Chairman)

 Raiffeisen Bank International AG, Vienna, Austria

(1. Deputy Chairman)

 Raiffeisen Zentralbank Österreich AG, Vienna,

Austria (Chairman)

 Raiffeisenlandesbank Niederösterreich-Wien AG,

Vienna, Austria (Chairman)

 STRABAG SE, Villach,

Austria (Deputy Chairman)

 Z & S Zucker und Stärke Holding AG, Vienna,
Austria (Chairman)

Dr. Jochen Fenner, Gelchsheim

Chairman of the executive board of Süddeutsche

Zuckerrübenverwertungs-Genossenschaft eG and

Chairman of the executive board of Verband

Fränkischer Zuckerrübenbauer e.V.

Memberships in comparable German and foreign
supervisory committees
 AGRANA Beteiligungs-AG, Vienna, Austria
 AGRANA Zucker, Stärke und Frucht Holding AG,
Vienna, Austria
 Z & S Zucker und Stärke Holding AG, Vienna,
Austria

Financial Statements 75

* Employee representatives

Helmut Friedl, Egling a. d. Paar

Chairman of the executive board of Verband bayer-

ischer Zuckerrübenanbauer e. V.

Memberships in comparable German and foreign
supervisory committees

 BMG Donau-Lech eG, Mering

Yüksel Gediagac*, Berlin

Chairman of the central works council of Freiberger

Lebensmittel GmbH & Co. Produktions- und Ver-

triebs KG

Veronika Haslinger, Vienna, Austria

Managing director of Raiffeisen-Holding Niederös-

ter

reich-Wien reg.Gen.m.b.H.

Memberships in comparable German and foreign
supervisory committees
 Süddeutsche Zuckerrübenverwertungs-

Genossenschaft eG, Stuttgart

Group-mandates of Raiffeisen-Holding Niederöster-

reich-Wien reg.Gen.m.b.H.

 KURIER Beteiligungs-Aktiengesellschaft, Vienna,

Austria (Chairman)

 Mediaprint Zeitungs- und Zeitschriftenverlag

Gesellschaft m.b.H., Vienna, Austria

 NÖM AG, Baden, Austria

 Österreichische Rundfunksender GmbH, Vienna,

Austria

 Raiffeisen Informatik GmbH, Vienna, Austria

Ralf Hentzschel, Panschwitz-Kuckau

Chairman of the general committee of Verband

Sächisch-Thüringischer Zuckerrübenanbauer e.V.

Memberships in comparable German and foreign

supervisory committees

 Süddeutsche Zuckerrübenverwertungs-

Genossenschaft eG, Stuttgart (Deputy Chairman)

Wolfgang Kirsch, Königstein

Chairman of the executive board of DZ Bank AG

Memberships in comparable German and foreign
supervisory committees

 Adolf Würth GmbH & Co. KG, Künzelsau

Group-mandates of DZ Bank AG

 Bausparkasse Schwäbisch Hall AG, Schwäbisch

Hall (Chairman)

 R+V Versicherung AG, Wiesbaden (Chairman)

 Union Asset Management Holding AG, Frank-

furt/Main (Chairman)

Georg Koch, Wabern

Chairman of the executive board of Verband der

Zuckerrübenanbauer Kassel e.V.

Susanne Kunschert, Stuttgart

Managing partner of Pilz GmbH & Co. KG

Memberships in comparable German and foreign
supervisory committees

 Karlsruher Institut für Technologie, Karlsruhe

 Süddeutsche Zuckerrübenverwertungs-
Genossenschaft eG, Stuttgart

Günther Link*, Oberickelsheim

Chairman of the works council at the Ochsenfurt

plant of Südzucker AG

Bernd Maiweg*, Aahrbergen

Divisonal officer of Gewerkschaft Nahrung-Genuss-

Gaststätten

Joachim Rukwied, Eberstadt

President of Deutscher Bauernverband e.V.

Memberships in other domestic, statutory supervi-
sory boards

 BAYWA AG, München

 R+V Versicherung AG, Wiesbaden

Memberships in comparable German and foreign
supervisory committees

 Buchstelle Landesbauernverband Baden-

Württemberg GmbH,

Stuttgart (Chairman)

 Kreditanstalt für Wiederaufbau, Frankfurt/Main

 LBF-Unternehmensberatungsdienste GmbH,

Stuttgart (Chairman)

 LAND-DATA GmbH, Visselhövede (Chairman)

 Landwirtschaftliche Rentenbank, Frankfurt/Main

(Chairman)

 Messe Berlin GmbH, Berlin

Ronny Schreiber*, Einhausen

Chairman of the works council of the Mannheim

head office of Südzucker AG

Financial Statements
* Employee representatives

Petra Schwalbe*, Berlin

East state area chairwoman of Gewerkschaft Nah-

rung-Genuss-Gaststätten

Memberships in comparable German and foreign
supervisory committees

 Philipp Morris GmbH, München

Nadine Seidemann*, Donauwörth

Member of the works council at the Rain plant of

Südzucker AG

Franz-Rudolf Vogel*, Worms

Chairman of the central works council of Südzucker

Wolfgang Vogl*, Bernried

Manager of the Plattling and Rain plants of Südzuck-

er AG
Group-mandates

 BGD Bodengesundheitsdienst GmbH, Mannheim

Rolf Wiederhold*, Wabern

Chairman of the works council at the Wabern plant

of Südzucker AG

Financial Statements 77

BOARD OF DIRECTORS

EXECUTIVE BOARD

Dr. Wolfgang Heer (Chairman), Ludwigshafen am

Rhein (Appointed until 28 Februar 2018)

Group-mandates
 AGRANA Beteiligungs-AG, Vienna, Austria
(1. Deputy Chairman)
 AGRANA Zucker, Stärke und Frucht Holding AG,
Vienna, Austria (Chairman)
 CropEnergies AG, Mannheim

 ED&F MAN Holdings Limited, London, Great Brit-

ain

 Freiberger Holding GmbH, Berlin (Chairman)

 PortionPack Europe Holding B. V., Oud-

Beijerland, Nederlands

 Raffinerie Tirlemontoise S.A., Brussels, Belgium
 Saint Louis Sucre S.A.S., Paris, France

 Südzucker Polska S.A., Wroclaw, Poland (Deputy

Chairman)
 Z & S Zucker und Stärke Holding AG, Vienna,
Austria (Deputy Chairman)

Dr. Thomas Kirchberg, Ochsenfurt

(Appointed until 31 August 2022)

Group-mandates
 AGRANA Beteiligungs-AG, Vienna, Austria
 BGD Bodengesundheitsdienst GmbH, Mannheim
(Chairman)
 Freiberger Holding GmbH, Berlin
 Raffinerie Tirlemontoise S.A., Brussels, Belgium

 Saint Louis Sucre S.A.S., Paris, France (Chairman)

 Südzucker Moldova S.A., Chisinau, Moldova

(Chairman)

 Südzucker Polska S.A., Wroclaw, Poland

(Chairman)

 Südzucker Versicherungs-Vermittlungs-GmbH,

Mannheim

Thomas Kölbl, Speyer (Appointed until 31 Mai 2019)

Memberships in other domestic, statutory supervi-
sory boards

 EUWAX Aktiengesellschaft, Stuttgart

Memberships in comparable German and foreign
supervisory committees

 Boerse Stuttgart GmbH, Stuttgart

 Baden-Württembergische Wertpapierbörse,

Stuttgart (until 1 March 2017)

Group-mandates



AGRANA Internationale Verwaltungs- und Asset-

Management GmbH, Vienna, Austria

 AGRANA Stärke GmbH, Vienna, Austria

 AGRANA Zucker GmbH, Vienna, Austria

 CropEnergies AG, Mannheim (Deputy Chairman)

 ED&F MAN Holdings Limited, London/Great Brit-

ain
 Freiberger Holding GmbH, Berlin
 PortionPack Europe Holding B. V., Oud-

Beijerland, Nederlands (Chairman)

 Raffinerie Tirlemontoise S.A., Brussels, Belgium
 Saint Louis Sucre S.A.S., Paris, France
 Südzucker Polska S.A., Wroclaw, Poland
 Südzucker Versicherungs-Vermittlungs-GmbH,

Mannheim (Chairman)

Dipl. Ing. Johann Marihart, Limberg, Austria

(Appointed until 31 Januar 2019)

Memberships in comparable German and foreign
supervisory committees

 BBG Bundesbeschaffungsges. m. b. H., Vienna,

Austria

 Österreichische Forschungsförderungsgesell-

schaft mbH, Vienna, Austria (Deputy

Chairman)

 Ottakringer Getränke AG, Vienna, Austria

 Spanische Hofreitschule – Bundesgestüt Piber,

Vienna, Austria (Chairman)

 tecnet equity NÖ Technologiebeteiligungs-Invest

GmbH, St. Pölten, Austria

 TÜV Austria Holding AG, Vienna, Austria

(Chairman)
Group-mandates

 AGRANA Research & Innovation Center GmbH,

Vienna, Austria (Chairman)
 AGRANA Stärke GmbH, Vienna, Austria
(Chairman)
 AGRANA Zucker GmbH, Vienna, Austria
(Chairman)

 AUSTRIA JUICE GmbH, Allhartsberg, Austria

 Freiberger Holding GmbH, Berlin



Österreichische Rübensamenzucht Gesellschaft

m.b.H., Vienna, Austria (Chairman)

Financial Statements

 Raffinerie Tirlemontoise S.A., Brussels, Belgium
(Chairman)
 Saint Louis Sucre S.A.S., Paris, France

Financial Statements 79

(28) Fees for services by the company´s external auditors

The following expenses were incurred in the 2016/17 financial year for services provided by Pricewa-

terhouseCoopers Aktiengesellschaft Wirtschaftprüfungsgesellschaft:

(€ ‘000) 2016/17 2015/16

Auditing services 509 542

Other assurance services 137 13

Tax advisory services 117 14

Other services 24 36

787 605

(29) Declaration of compliance per note 161 AktG

The executive board and supervisory board issued the declaration of compliance relating to the Ger-

man Corporate Governance Code in accordance with note 161 of the German Stock Corporation Act

(AktG) on 19 May 2016. It is available on the Internet via our website at:

(www.suedzucker.de/en/Investor-Relations/Corporate-Governance/).

(30) Proposed appropriation of earnings

Net earnings available for distribution of Südzucker AG amount to €’000 91,940 (61,327). It will be

proposed to the annual general meeting that a dividend of € 0.45 (0.30) per share be distributed and

be appropriated as follows:

(in €) 2016/17

Distribution of a dividend of € 0.45 per

on 204,183,292 shares 91.882.481,40

Profit carried forward 57.738,35

Net earnings available for distribution 91.940.219,75

If on the day of the annual general meeting treasury shares exist, the resolution proposal will be

modified – in the event of a distribution of € 0.45 per qualifying share – to have the corresponding

higher remaining value carried forward.

The dividend is to be paid on 25 Juli 2017.

Financial Statements

* Profit and loss transfer agreement

1) Disclosures for Subgroup / Group consolidated financial statements

2) Disclosures for the last applicable financial closing

3) Exemption pursuant § 264 (3) HGB

4) Exemption pursuant § 264b HGB

5) Voting majority

6) Statement of equity/net earnings based on a period of accounting differing form the calender year

List of shareholdings

Shortcut Lacation Country

Direct

share-
holder

(%)

Equity

€ million

Earnings

after

tax €

million

I. Fully consolidated companies

Sugar segment

Business Unit Sugar

Division Südzucker and sales companies

Südzucker AG SZAG Mannheim Germany

Sudzucker Hellas E.P.E. Agios Dimitrios Greece
SZH 99.94

1.55 0.31
SZV 0.06

Sudzucker Ibérica S.L.U. Barcelona Spanien SZH 100.00 1.51 0.62

SÜDZUCKER DO BRASIL S/A – IMPORTAÇÃO E EX-

PORTAÇÃO (ehemals Hosa Trading Importaçao e

Exportaçao S.A.)

São Paulo Brasil

SZH 100.00

0.35 0.09
SZAG 0.00

Südzucker United Kingdom Limited West Lothian Great Britain SZH 100.00 0.83 1.19

Division Sugar Belgium

Raffinerie Tirlemontoise S.A. RT Bruxelles Belgium SZH 99.41 1.094.06 25.51

Nougat Chabert & Guillot SA NC&G Montélimar France

SOGEL

AF
99.75 4.44 0.68

S.C.I. DU MARINET Upie France

SOGEL

AF
99.75

NC&G 0.25

Rafti B.V. Wijchen Nederlands TSNH 100.00 11.06 1.05

Raftir Nederland Beheer B.V. Groningen Nederlands RT 100.00 6.96 0.06

S.O.G.E.L.A.F. SARL SOGELAF Paris France RT 100.00 22.63 0.00

Tiense Suikerraffinaderij Nederland Holding B.V. TSNH Wijchen Nederlands RT 100.00 2.55 1.51

Tiense Suikerraffinaderij Services g.c.v. Bruxelles Belgium
RT 100.00

998.74 16.68
AGS 0.00

Division Sugar France

Saint Louis Sucre S.A.S. SLS Paris France RT 99.80 112.77 -13.2

Société Française d’Organisation et de Participations

“S.F.O.P.”
Paris France SLS 100.00 15.84 0.00

Division Sugar Poland

Südzucker Polska S.A. SZPL Wroclaw Poland SZH 99.59 399.30 54.57

“POLTERRA” Sp. z o.o. Wroclaw Poland SZPL 100.00 0.84 0.01

Przedsiebiorstwo Rolne “KLOS” Sp. z o.o. Wroclaw Poland SZPLN 100.00 0.30 0.01

Südzucker Polska Nieruchomosci Sp. z o.o. SZPLN Wroclaw Poland SZPL 100.00 -2.68 -0.19

Financial Statements 81

* Profit and loss transfer agreement
1) Disclosures for Subgroup / Group consolidated financial statements
2) Disclosures for the last applicable financial closing
3) Exemption pursuant § 264 (3) HGB
4) Exemption pursuant § 264b HGB
5) Voting majority
6) Statement of equity/net earnings based on a period of accounting differing form the calender year
Shortcut Lacation Country
Direct
share-
holder
(%)
Equity
€ million

Earnings
after
tax €
million

Division Sugar AGRANA

Sugar Austria

AGRANA Zucker GmbH AZ Vienna Austria
AB 98.91

327.22 28.80

AMV 1.09

AGRANA ZHG Zucker Handels GmbH Vienna Austria AZ 100.00 0.61 -0.41

Sugar Romania

AGRANA AGRO S.R.L. Roman Romania
AGR 99.00

0.12 0.11
AZ 1.00

AGRANA BUZAU S.R.L. Buzau Romania
AGR 99.00

0.70 -0.04
AZ 1.00

AGRANA TANDAREI S.R.L. Tandarei Romania
AGR 99.00

0.78 0.00
AZ 1.00

S.C. AGRANA Romania S.A. AGR Bukarest Romania
AZ 98.40

-3.00 -10.79
AIV&A 0.04

Sugar Slovakia

Slovenské Cukrovary s.r.o. Sered Slovakia AZ 100.00 46.35 4.35

Sugar Czech Republic

Moravskoslezské Cukrovary A.S. MC Hrusovany Czech Republic AZ 100.00 76.45 11.15

Sugar Hungary

AGRANA Magyarország Értékesitési Kft. AME Budapest Hungary
MCeF 99.70

5.28 0.09
AZ 0.30

Biogáz Fejleszto Kft. Kaposvár Hungary AME 100.00 0.81 0.36

Koronás Irodaház Szolgáltató Korlátolt Felelösségü

Társaság
Budapest Hungary MCeF 100.00 1.28 0.00

Magyar Cukorgyártó és Forgalmazó Zrt. MCeF Budapest Hungary AZ 87.60 80.05 7.68

Sugar Bulgaria

AGRANA Trading EOOD Sofia Bulgaria AZ 100.00 2.73 0.85

Sugar Bosnia

AGRANA BIH Holding GmbH ABIH Vienna Austria
AZ 75.00

9.32 -0.01
SZH 25.00

AGRANA d.o.o. Brcko
Bosnia Herze-

govina
ABIH 100.00 0.11 -0.01

AGRANA Holding/Other

AGRANA Beteiligungs-Aktiengesellschaft AB Vienna Austria
Z&S 78.34

753.44 72.24
SZAG 2.74

AGRANA Group-Services GmbH AGS Vienna Austria AB 100.00 2.36 1.06

AGRANA Marketing- und Vertriebsservice Gesell-

schaft m.b.H.
AMV Vienna Austria AB 100.00 8.80 0.68

Agrana Research & Innovation Center GmbH Vienna Austria AB 100.00 3.66 0.05

INSTANTINA Nahrungsmittel Entwicklungs- und

Produktionsgesellschaft m.b.H.
Vienna Austria AB 66.67 8.21 0.47

Financial Statements
* Profit and loss transfer agreement
1) Disclosures for Subgroup / Group consolidated financial statements
2) Disclosures for the last applicable financial closing
3) Exemption pursuant § 264 (3) HGB
4) Exemption pursuant § 264b HGB
5) Voting majority
6) Statement of equity/net earnings based on a period of accounting differing form the calender year

Shortcut Lacation Country
Direct
share-
holder
(%)
Equity
€ million

Earnings
after
tax €
million

Division Sugar Moldau

Südzucker Moldova S.A. SZM Chisinau Moldova SZH 83.92 47.21 6.85

Agro Credit S.R.L. Drochia Moldova SZH 100.00 0.02 0.00

Agro-SZM S.R.L. Drochia Moldova SZM 100.00 5.91 0.94

AGRO-BARABOIENI S. R. L.
Baraboi. rl.

Donduseni
Moldova SZM 100.00 0.15 0.04

Division Agriculture

Agrar und Umwelt AG Loberaue A&U Rackwitz Germany SZAG 100.00 28.42 1.77

Rackwitzer Biogas GmbH Rackwitz Germany A&U 100.00 0.03 0.00

Terra e.G. Sömmerda Germany SZVW 100.00 7.94 -0.84

Wolteritzer Agrar GmbH Rackwitz Germany A&U 100.00 0.16 0.00

Zschortauer Agrar GmbH Rackwitz Germany A&U 100.00 0.03 0.00

Zschortauer Futtermittel GmbH Rackwitz Germany A&U 74.00 4.13 0.30

Sugar Other

AHG Agrar-Holding GmbH Mannheim Germany SZAG 100.00 0.03 * 3)

AGRANA Zucker. Stärke und Frucht Holding AG AZS Vienna Austria SZAG 50.00 530.53 48.92

Z & S Zucker und Stärke Holding AG Z&S Vienna Austria AZS 100.00 1)

AIH Agrar-Industrie-Holding GmbH AIH Mannheim Germany SZAG 100.00 0.24 0.00

BGD Bodengesundheitsdienst GmbH Mannheim Germany SZAG 100.00 0.03 * 3)

Sächsisch-Thüringische Zuckerfabriken Verwal-

tungsgesellschaft mbH
Mannheim Germany SZAG 100.00 0.03 0.00

Südprojekt Silo und Logistik GmbH & Co. KG Mannheim Germany SZAG 100.00 36.30 1.00 6)

Südzucker Holding GmbH SZH Mannheim Germany SZAG 100.00 715.77 * 3)

Südzucker International Finance B.V. Oud-Beijerland Nederlands SZAG 100.00 17.96 1.06

Südzucker Tiefkühl-Holding GmbH SZTK Ochsenfurt Germany SZAG 100.00 559.08 * 3)

Südzucker Versicherungs-Vermittlungs-GmbH Mannheim Germany SZAG 51.00 1.54 1.48

Südzucker Verwaltungs GmbH SZVW Mannheim Germany SZAG 100.00 10.03 * 3)

Special productssegment

Division BENEO

BENEO GmbH B Mannheim Germany SZAG 100.00 180.48 * 3)

BENEO Asia Pacific Pte. Ltd. Singapore Singapore BP 100.00 1.40 0.13

BENEO Iberica S.L. Unipersonal Barcelona Spain BO 100.00 0.12 0.02

BENEO Inc. Morris Plains USA BP 100.00 15.09 1.55

BENEO India Private Limited New Delhi India
BP 99.99

0.01 -0.01 B 0.01

BENEO Latinoamerica Coordenaçao Regional Ltda.
Vila Olímpia.

Sao Paulo
Brasil

BO 100.00
0.2 0.01

BP 0.00

BENEO-Orafti S.A. BO Oreye Belgium BR 100.00 273.54 21.10

Financial Statements 83

Earnings
after
tax €
million

B 0.00

BENEO-Palatinit GmbH BP Mannheim Germany
B 85.00

23.58 * 3)
SZAG 15.00

BENEO-Remy N.V. BR
Wijgmaal (Leu-

ven)
Belgium

B 100.00
240.27 4.47 1)

BP 0.00

Veniremy N.V.
Wijgmaal (Leu-

ven)
Belgium BR 100.00 1)

Orafti Chile S.A. Pemuco Chile
BO 99.99

180.11 3.64
BP 0.01

REMY ITALIA S.P.A. Confienza (PV) Italy BR 66.70 0.64 0.05

Division Freiberger

Freiberger Holding GmbH FH Berlin Germany
SZTK 90.00

122.35 * 3)
SZAG 10.00

Alberto Lebensmittel GmbH Berlin Germany FLG KG 100.00 0.03 0.00

Favorit Lebensmittel-Vertriebs GmbH Berlin Germany FLM 100.00 0.09 0.01

Feinschmecker Eiscreme und Tiefkühlkost GmbH Berlin Germany FH 100.00 0.13 0.01

Feinschmecker Feinkost GmbH FF Berlin Germany FLM 100.00 0.09 0.00

Freiberger France S.A.R.L.
St. Didier au

Mont d’Or
France FLM 100.00 -1.68 -1.60

Freiberger GmbH Berlin Germany FLG KG 100.00 0.05 0.00

Freiberger Lebensmittel GmbH FLM Berlin Germany FLG KG 100.00 24.42 * 3)

Freiberger Lebensmittel GmbH & Co. Produktions-

und Vertriebs KG
FLG KG Berlin Germany FH 100.00 52.06 * 4)

Freiberger Osterweddingen GmbH & Co. KG (ehe-

mals Great Star Food Production GmbH & Co. KG)
Sülzetal Germany FLG KG 100.00 0.00 * 4)

Freiberger Polska Sp.z o.o. Warszawa Poland
FLM 99.00

0.69 0.20
FF 1.00

Freiberger UK Ltd. Spalding Great Britain FLM 100.00 7.21 7.23

Freiberger USA Inc. Morris Plains USA FLM 100.00 -0.85 -0.12

Prim AS Tiefkühlprodukte Gesellschaft m.b.H. Oberhofen Austria FLM 100.00 9.77 2.38

Sandhof Limited SL Westhoughton Great Britain FLM 100.00 36.00 18.44

Stateside Foods Ltd. Westhoughton Great Britain SL 100.00 25.35 8.14

Division PortionPack

PortionPack Europe Holding B.V. PPEH Oud-Beijerland Nederlands SZAG 100.00 34.13 1.67

Elite Portion Pack Belgium NV Herentals Belgium
PPEH 100.00

0.29 0.23 PPH 0.00

Hellma Gastronomicky Servis Praha spol. s.r.o. Praha Czech Republic PPEH 100.00 4.16 1.06

Hellma Gastronomie-Service GmbH Nürnberg Germany PPEH 100.00 4.44 * 3)

Hellma Lebensmittel-Verpackungs-Gesellschaft

m.b.H
Vienna Austria PPEH 100.00 0.75 0.19

PortionPack Holland B.V. PPH Oud-Beijerland Nederlands PPEH 100.00 2.18 4.78

SAES The Portion Company. S.L.U.
La Llagosta

(Barcelona)
Spain PPEH 100.00 0.33 0.14

Single Source Limited SSL
Telford /

Shropshire
Great Britain PPEH 100.00 3.69 0.17 1)

Shortcut Lacation Country
Direct
share-
holder
(%)
Equity
€ million

Earnings
after
tax €
million

Central Legal Funding Limited CLF
Telford /

Shropshire
Great Britain SSL 75.00 1)

Santeau Limited
Telford /

Shropshire
Great Britain CLF 100.00 1)

Van Oordt Drukkerij B.V. Oud-Beijerland Nederlands VOP 100.00 0.15 0.00

Van Oordt Landgraaf B.V. Landgraaf Nederlands PPH 100.00 2.36 0.00

Van Oordt the portion company B.V. VOP Oud-Beijerland Nederlands PPH 100.00 14.78 3.42

Division Starch

AGRANA Stärke GmbH AS Vienna Austria
AB 98.91

327.11 61.47
AMV 1.09

S.C. A.G.F.D. Tandarei s.r.l. Tandarei Romania AS 100.00 3.14 0.00

CropEnergies segment

CropEnergies AG CEAG Mannheim Germany SZAG 69.19 431.97 44.27

BioWanze S.A. Bruxelles Belgium
CEAG 100.00

241.72 28.80
CEB 0.00

Compagnie Financière de l’Artois SA CF Loon-Plage France CEAG 100.00 19.99 2.18

CropEnergies Beteiligungs GmbH CEBet Mannheim Germany CEAG 100.00 61.23 * 3)

CropEnergies Bioethanol GmbH CEB Zeitz Germany
CEBet 85.00

72.44 * 3)
CEAG 15.00

CropEnergies Inc. Houston USA CEBet 100.00 0.08 -0.02

Ensus UK Limited Yarm Great Britain CEAG 100.00 52.22 17.89

RYSSEN ALCOOLS SAS RYS Loon-Plage France CF 100.00 9.34 2.04

Ryssen Chile SpA
Lampa. Santiago

de Chile
Chile RYS 100.00 0.36 0.03

Fruit segment

Division Fruit preparations (AGRANA Fruit)

AGRANA Fruit S.A.S. AF Paris France FA 100.00 123.31 19.15

AGRANA Fruit Argentina S.A. Buenos Aires Argentinien
AF 84.82

3.27 0.23
AFSS 15.17

AGRANA Fruit Australia Pty Ltd. AF AUS
Central Mangro-

ve
Australien AF 100.00 21.52 1.36 1)

Agrana Fruit Management Australia Pty Limited Sydney Australien AF AUS 100.00 1)

AGRANA Fruit Austria GmbH AFA Gleisdorf Austria
AF 99.98

19.59 1.41
AIV&A 0.02

AGRANA Fruit Brasil Indústria. Comércio. Importa-

cao e Exportacao Ltda.
Sao Paulo Brasil AFB 100.00 9.71 4.11

AGRANA Fruit Brasil Participacoes Ltda. AFB Sao Paulo Brasil
AF 99.99

6.84 -0.01
AFA 0.01

AGRANA Fruit Dachang Co.. Ltd. Dachang China
AF 75.00

22.22 4.66
AFK 25.00

AGRANA Fruit Fiji Pty Ltd. Sigatoka Fiji AF 100.00 0.72 -0.20

AGRANA Fruit France S.A. Paris France AF 100.00 19.11 1.83

AGRANA Fruit Germany GmbH Konstanz Germany AF 100.00 12.72 2.24

AGRANA FRUIT INDIA PRIVATE LIMITED New Delhi India AF 99.99 1.98 0.00

Financial Statements 85

Earnings
after
tax €
million

AFSG 0.01

AGRANA Fruit Istanbul Gida Sanayi ve Ticaret A.S. Istanbul Turkey AF 100.00 5.83 1.71

AGRANA Fruit Korea Co. Ltd. AFK Seoel South Korea AF 100.00 15.20 1.70

AGRANA Fruit Latinoamerica S. de R.L. de C.V. Michoacan Mexico
AF 99.99

13.04 1.66
AFSG 0.01

AGRANA Fruit Luka TOV Vinnitsa Ukraine AF 99.97 2.55 0.76

AGRANA Fruit México. S.A. de C.V. Michoacan Mexico AFUS 100.00 12.55 3.54

AGRANA Fruit Polska SP z.o.o. Ostroleka Poland AF 100.00 12.19 1.11

AGRANA Fruit Services GmbH AFSG Vienna Austria AF 100.00 11.35 2.22

AGRANA Fruit Services S.A.S. AFSS Paris France AF 100.00 0.15 -0.02

AGRANA Fruit South Africa (Proprietary) Ltd. Johannesburg South Africa AF 100.00 1.64 -0.99

AGRANA Fruit Ukraine TOV Vinnitsa Ukraine AF 99.80 17.93 1.01

AGRANA Fruit US. Inc. AFUS Brecksville Ohio/USA AF 100.00 70.75 2.92

AGRANA Nile Fruits Processing SAE Qalyoubia Egypt AF 51.00 5.67 3.68

Dirafrost FFI N. V. DFFI Herk-de-Stad Belgium AF 100.00 1.70 -1.17

Dirafrost Maroc SARL Laouamra Marocco DFFI 100.00 3.09 0.05

Financière Atys S.A.S. FA Paris France AIV&A 100.00 121.29 15.09

Main Process S.A. Buenos Aires Argentina

Sud 95.00

23.17 0.81 AF 4.75

AFSS 0.25

o.o.o. AGRANA Fruit Moscow Region Serpuchov Russia AF 100.00 31.49 6.78

Sudinver S.A. Sud Buenos Aires Argentina
AF 95.00

3.96 0.00
AFSS 5.00

Yube d.o.o. Pozega Serbia DFFI 100.00 1.16 0.11

Division Fruit juice concentrates(Austria Juice)

AUSTRIA JUICE GmbH AJU Allhartsberg Austria AIV&A 50.01 63.99 8.22

AGRANA JUICE (XIANYANG) CO.. LTD Xianyang City China AJU 100.00 12.26 0.25

AGRANA Juice Sales & Marketing GmbH AJS&M Bingen Germany AJU 100.00 1.72 0.42

AUSTRIA JUICE Germany GmbH Bingen Germany AJS&M 100.00 1.23 0.00

AGRANA Juice Hungary Kft. Vásárosnamény Hungary AJU 100.00 16.22 1.24

AUSTRIA JUICE Poland Sp. z.o.o. Chelm Poland AJU 100.00 44.77 2.85

AUSTRIA Juice Romania S.r.l. (ehemals AGRANA

Juice Romania Vaslui S.r.l.)
Vaslui Romania AJU 100.00 2.35 0.00

AUSTRIA JUICE Ukraine TOV (ehemals AUSTRIA

JUICE Ukraine LLC)
Vinnitsa Ukraine AJU 100.00 3.87 0.58

Fruit Other

AGRANA Internationale Verwaltungs- und Asset-

Management GmbH
AIV&A Vienna Austria

AB 98.91
240.29 8.58

AMV 1.09

Shortcut Lacation Country
Direct
share-
holder
(%)
Equity
€ million

Earnings
after
tax €
million

II. Joint ventures and associated companies

Sugar segment

Business Unit Sugar

Division Südzucker and sales companies

Maxi S.r.l. Bolzano Italy SZH 50.00 5.57 3.70 6)

Division AGRANA Sugar

Sugar Bosnien

“AGRAGOLD” d.o.o. Brcko
Bosnia Herze-

govina
ASB 100.00 2.19 0.08

AGRAGOLD d.o.o. Zagreb Croatia ASB 100.00 1.16 0.06

AGRAGOLD dooel Skopje Skopje Macedonia ASB 100.00 0.25 0.02

AGRAGOLD trgovina d.o.o. Ljubljana Slovenia ASB 100.00 0.82 0.09

AGRANA Studen Sugar Trading GmbH Vienna Austria ABIH 50.00 6.30 2.31

AGRANA-STUDEN Albania sh.p.k (ehemals AGRA-

NA-STUDEN Albania)

Tirane Albania ASB 100.00 0.25 0.15

AGRANA-STUDEN Beteiligungs GmbH ASB Vienna Austria ABIH 50.00 16.05 1.05

Company for trade and services AGRANA-STUDEN

Serbia d.o.o. Beograd
Beograd Serbia ASB 100.00 0.36 0.08

STUDEN-AGRANA Rafinerija Secera d.o.o. Brcko
Bosnia Herze-

govina
ASB 100.00 8.09 0.60

Sugar Übrige

ED&F MAN Holdings Limited London Great Britain SZH 35.00 933.85 66.04 6)

Special productssegment
Division PortionPack

Collaborative Packing Solutions [Pty] Ltd Johannesburg South Africa PPEH 40.00 0.59 0.11

Division Starch Starch

GreenPower E85 Kft Szabadegyháza Hungary HK 100.00 0.77 -0.04

HUNGRANA Keményitö- és Isocukorgyártó és For-

galmazó Kft.
HK Szabadegyháza Hungary AS 50.00 114.98 55.25

HungranaTrans Kft. Szabadegyháza Hungary HK 100.00 3.27 1.08

CropEnergies segment

CT Biocarbonic GmbH Zeitz Germany CEBet 50.00 3.27 0.09

Financial Statements 87

Earnings
after
tax €
million

III. Not consolidated companies and other participations > 20%

Not consolidated companies

Sugar segment

Geschäftsbereich Zucker

Division Südzucker und Vertriebsgesellschaften

S.Z.I.L. LTD Kfar Saba Israel SZH 100.00

Division AGRANA Sugar
Sugar Czech Republic

PERCA s.r.o. Hrusovany Czech Republic MC 100.00 0.06 0.05

DELHIA SHELF s.r.o. Hrusovany Czech Republic MC 100.00 0.00 0.00

Sugar Bosnia

AGRANA Croatia d.o.o. Zagreb Croatia AZ 100.00 0.01 0.01

AGRANA Makedonija DOOEL Skopje Skopje Macedonia AZ 100.00 0.13 0.05 6)

AGRANA Holding/Other
Österreichische Rübensamenzucht Gesellschaft

m.b.H.
Vienna Austria AZ 86.00 1.91 0.01 6)

Sugar Other

Acucar e Alcool do Sul Participacoes Ltda.
Alto de Pinhei-

ros
Brasil

SZH 99.90
0.05 0.00 6)

AIH 0.10

Arbeitsgemeinschaft für Versuchswesen und Bera-

tung im Zuckerrübenanbau Zeitz GmbH
Kretzschau Germany SZAG 80.00 0.04 0.01

Sächsisch-Thüringische Zuckerfabriken GmbH & Co.

Mannheim

Germany SZAG 100.00 0.02 0.00

Südprojekt Immobilienverwaltungsgesellschaft mbH Mannheim Germany SZAG 100.00 0.24 0.01 6)

Südtrans GmbH Mannheim Germany SZAG 100.00 0.10 0.00 6)

Südzucker Beteiligungs GmbH Mannheim Germany SZAG 100.00 0.02 0.00 6)

Südzucker International GmbH Ochsenfurt Germany SZH 100.00 0.03 0.00

Südzucker Reise-Service GmbH Mannheim Germany SZAG 100.00 1.19 0.10

Südzucker Verkauf GmbH SZV Mannheim Germany SZH 100.00 0.03 0.00

Special products segment

Division Starch

AGRANA Skrob s.r.o. Hrusovany Czech AS 100.00 0.08 0.00 6)

AGRANA Amidi srl Sterzing Italy AS 100.00 0.02 0.01

Shortcut Lacation Country
Direct
share-
holder
(%)
Equity
€ million

Earnings
after
tax €
million

Not consolidated joint venures and associated companies

Sugar segment
Geschäftsbereich Zucker
Division Sugar Belgium

Food Port N.V. (formerly Bio-Generator Regio – Leu-

ven – PORT NV)

Tienen Belgium RT 35.71 2.15 -0.10

2)
6)

Division AGRANA Sugar

Sugar Bosnia

SCO STUDEN & CO. BRASIL EXPORTACAO E IMPOR-

TACAO LTDA.
Sao Paulo Brasil ASB 100.00 -0.02 0.00 6)

AGRANA-STUDEN Kosovo L.L.C. Prishtina Serbia ASB 100.00 6)

Sugar Other

Felix Koch Offenbach Couleur und Karamel GmbH

Offenbach Germany SZH 25.10 7.89 1.89
2)

Maritime Investment Holdings Pte. Ltd Singapore Singapore SZH 25.00 9.27 -0.73 6)

Special products segment
Division BENEO

INVITA Australia PTE Ltd Balgowlah Australia BP 35.00 0.22 1.44 6)

Other participations > 20%

Sugar segment
Business Unit Sugar
Division Sugar France

GARDEL S.A. Le Moule France SLS 24.28 50.53 0.17 6)

Eastern Sugar B.V. Breda Nederlands SLS 50.00 0.56 -0.11 6)

Sucrerie et Distillerie de Souppes-Ouvré Fils S.A. Paris France SLS 44.50 45.37 0.06 6)

Division AGRANA Sugar
Sugar Hungary

Cukoripari Egyesülés Budapest Hungary MCeF 44.27 0.13 0.00 6)

Responsibility statement 89

RESPONSIBILITY STATEMENT

To the best of our knowledge. and in accordance with the applicable reporting principles for financial

reporting. the consolidated financial statements give a true and fair view of the assets. liabilities. fi-

nancial position and profit or loss of the company. and the management report of the company in-

cludes a fair review of the development and performance of the business and the position of the com-

pany. together with a description of the principal opportunities and risks associated with the expected

development of the company.

Mannheim. 24 April 2017

T H E E X E C U T I V E B O A R D

Dr. Wolfgang Heer Dr. Thomas Kirchberg

(Chairman)

Thomas Kölbl Johann Marihart

Auditors report

AUDITORS REPORT

We have audited the financial statements – comprising the balance sheet. income statement and the

notes to the financial statements – including the bookkeeping and the management report of

Südzucker AG. Mannheim. for the financial year from 1 March 2015 to 28 February 2017. Bookkeep-

ing and the preparation of financial statements and the management report in accordance with Ger-

man commercial law are the responsibility of the executive board of the company. Our responsibility

is to express an opinion on the financial statements – taking the bookkeeping into consideration –

and on the management report based on our audit.

We conducted our audit of the financial statements in accordance with note 317 of the German Com-

mercial Code (HGB) and generally accepted German standards for the audit of financial statements

promulgated by Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and per-

form the audit such that misstatements materially affecting the presentation of the net assets. finan-

cial position and results of operations in the financial statements. prepared in accordance with Ger-

man generally accepted accounting principles. and in the management report are detected with rea-

sonable assurance. Knowledge of the business activities and the economic and legal environment of

the company and expectations as to possible misstatements are taken into account in the determina-

tion of audit procedures. The effectiveness of the accounting-related internal control system and the

evidence supporting the disclosures in the bookkeeping. financial statements and the management

report are examined primarily on a test basis within the framework of the audit. The audit includes

assessing the accounting principles used and significant estimates made by the executive board as

well as evaluating the overall presentation of the financial statements and 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 financial statements comply with legal require-

ments and give a true and fair view of the net assets. financial position and results of operations of

the company in accordance with generally accepted accounting principles. The management report is

consistent with the financial statements and as a whole provides a suitable view of the company’s

position and suitably presents the opportunities and risks of future development.

Frankfurt am Main, 24 April 2017

PricewaterhouseCoopers GmbH

Wirtschaftsprüfungsgesellschaft

Michael Conrad Olav Krützfeldt

Auditor Auditor

FORWARD-LOOKING STATEMENTS / FORECASTS

This annual report contains forward looking statements based on assumptions and estimates made

by the executive board of Südzucker AG. Although the executive board may be convinced that these

assumptions and estimates are reasonable. future actual developments and future actual results may

vary considerably from the assumptions and estimates due to many external and internal factors. For

example. matters to be mentioned in this connection include pending negotiations relating to the

world trade agreement (WTA). changes to the overall economic situation. changes to EU sugar poli-

cies. consumer behaviour and state food and energy policies. Südzucker AG assumes no responsibility

and accepts no liability that future developments and future actual results achieved will be the same

as the assumptions and estimates included in this annual report.

CONTACTS

Investor Relations

Nikolai Baltruschat

investor.relations@suedzucker.de

Phone: +49 621 421-240

Financial press

Dr. Dominik Risser

public.relations@suedzucker.de

Phone: +49 621 421-428

Südzucker on the internet

More detailed information about Südzucker Group is available at the company’s website:

www.suedzucker.de

PUBLISHED BY

Südzucker AG

Maximilianstraße 10

68165 Mannheim

Phone: +49 621 421-0

http://www.suedzucker.de/

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