Notes to the consolidated financial statements

Emmi does not publish segment results since this would cause significant competitive disadvantages towards stakeholders, non-listed and larger listed competitors both in Switzerland and abroad.

The business divisions are not defined strictly according to geographical considerations. The business division Americas includes the Emmi Group companies in the US, Canada, Chile, Mexico, Spain (excl. Lácteos Caprinos S.A.), France and Tunisia. The business division Europe incorporates those in Italy, Germany, Austria, Belgium, the Netherlands, the UK and Lácteos Caprinos S.A. in Spain. The business division Global Trade primarily comprises direct sales from Switzerland to customers in countries in which Emmi has no subsidiaries. These include the Asian and eastern European markets, most South American countries and the Arabian Peninsula.

Amortisation of goodwill related to investments which are accounted for using the equity method is included in the position “Income from associates and joint ventures” of the income statement.

With CHF 23.7 million, net accruals for current income taxes remained largely unchanged in comparision with the previous year (previous year CHF 22.4 million). Deferred income taxes are calculated for every company using the effective applicable tax rate. As at 31 December 2017, the resulting weighted average tax rate was 18.1 % (previous year 18.7 %). Deferred income taxes include recognised tax claims from tax loss carryforwards amounting to CHF 13.0 million (previous year CHF 6.0 million).

The net change of recognised tax claims from tax loss carryforwards decreased the income taxes of the current period by CHF 7.0 million.

Earnings per share is calculated by dividing the net profit attributable to the shareholders of Emmi AG by the average number of shares outstanding. Treasury shares (if any) are not included in the average number of shares outstanding.

Other prepayments and accrued income consist mainly of various refunds, accrued promotion costs, VAT and prepayments of insurance premiums, as well as in the previous year a prepayment in relation with the acquisition activity.

The carrying amount of loans and other receivables from third parties includes impaired loans in the amount of CHF 3.6 million (previous year CHF 4.2 million). Due to payments received for loans which were already impaired, the total impairment on loans has been reduced by CHF 0.6 million in comparision with the previous year’s reduction of CHF 2.9 million.

All intangible assets were acquired. Amortisation of goodwill related to investments which are accounted for using the equity method is included in the position “Income from associates and joint ventures” of the income statement.

Other accrued liabilities and deferred income of the current and previous period comprise in particular contributions to cheese brand organisations, energy, advertising costs, HGV road tax and various services.

The CHF 250 million bond for 2011 to 2017 was repaid on 30 June 2017. To refinance this bond and for general corporate financing purposes, new variable and fixed-interest debt in Swiss francs and euros have been issued. On 21 June 2017 a variable-interest bond between 0.00 % and 0.05 % was issued in the amount CHF 100 million with a term of 2 years and a fixed-interest bond at 0.50 % was issued also in the amount of CHF 100 million with a term of 12 years. On 21 July 2017 Schuldscheine (promissory notes) denominated in euro totaling 100 million were paid up (EUR 70 million variable based on a 6-month EURIBOR at initially 0.50 %, and EUR 30 million for 7 years fixed at 1.42 %).

The restructuring provisions recognised as at 31 December 2017 relate in particular to anticipated costs in connection with the decision to reorganise business activities.

Other provisions include in particular provisions for pending legal matters and business disputes (2017: CHF 4.4 million, 2016: CHF 6.6 million), and liabilities for staff expenses in foreign countries as required by law (2017: CHF 5.1 million, 2016: CHF 4.7 million). In all cases, the likelihood of such events occurring has been assessed at above 50 %.

The companies acquired by Emmi in 2017 and 2016, respectively, reported the following main balance sheet items at the date of acquisition:

On 4 January 2017, Emmi fully acquired the American family company Jackson-Mitchell, Inc., based in Turlock (US). This firm is a leading supplier of goat’s milk and evaporated and powdered goat’s milk in the US.

On 12 January 2017, Emmi acquired a stake of 80 % in Lácteos Caprinos S.A., based in Campillo de Arenas (Spain). This firm is specialised in the manufacture of semi-finished products (curd) for goat’s cheese manufacturers. 

On 1 March 2017, Emmi fully acquired Italian dessert specialist Italian Fresh Foods S.p.A., based in Lasnigo/Como (Italy).

On 8 October 2017, Emmi increased its stake in Mexideli 2000 Holding S.A. de C.V., based in Mexico City (Mexico), from 50 % to 51 % and as such obtained control over it. Mexideli is Mexico’s leading importer of premium food products – e.g. speciality cheese.

On 2 February 2016, Emmi acquired a stake of 60 % in the Dutch Bettinehoeve Group, based in Etten-Leur, the Netherlands. In connection with this transaction, AVH dairy trade B.V. increased its stake in Goat Milk Powder B.V. from 50 % to 60 % and as such obtained control over it.

On 19 May 2016, Kaiku Corporación Alimentaria increased its stake in SDA Chile, S.A. based in Santiago (Chile), from 45 % to 98 % and as such obtained control over it.

On 31 May 2016, Emmi fully acquired the cheese company Cowgirl Creamery Corporation and Tomales Bay Foods, Inc. (jointly “Cowgirl”), based in Petaluma (US). The company is specialised in the production of organic speciality cheeses.

Similar to the underlying transactions, currency forwards used to hedge future cash flows are not recognised in the balance sheet. The result of these derivative instruments is recognised in the income statement upon occurrence of the transaction hedged. Derivative financial instruments used to hedge balance sheet positions in foreign currencies are recognised as securities in the current assets. Corresponding changes in value are recognised in the financial result.

Emmi also has options to acquire additional shares in associates and joint ventures. At the same time, rights to sell their shares were granted to some counterparties. For these purchase and selling rights, the prices agreed are generally based on fair market value at the time of exercise. Currently, these options cannot be reliably measured and are therefore not recognised in the balance sheet.

Emmi is involved in legal disputes in connection with ordinary operating activities. Although the outcome of the lawsuits currently cannot be predicted with certainty, Emmi assumes that none of the disputes will have any significant negative impact on the operating activities or on the Group’s financial situation. Expected outgoing payments are provided for accordingly. Emmi is committed, in relation to the application for a government grant, to indemnify a third-party investor for damages up to CHF 18.3 million (previous year CHF 19.1 million) in case Emmi does not comply with the conditions attached to the grant. As at the date of the financial statements, the Group had no major contingent assets.

Furthermore, there are milk purchase agreements which are not quantifiable.

The long-term commodity contracts are purchase agreements for coffee which will be settled at the market price valid in the period of delivery.

Business transactions with related parties are based on arm’s length conditions. All transactions are reported in the consolidated financial statements for 2017 and 2016, and consist of deliveries of products and raw materials, loans, and services to and from related parties. The corresponding receivable and payable balances are reported separately in the financial statements (see notes 8, 9, 11, 12, 15, 16, 17 und 18).

Milk purchases from the main shareholder are included in cost of materials under transactions with shareholders. These are made at arm’s length conditions. Emmi Group is jointly and severally liable within the scope of VAT Group taxation for the associated liabilities of the Genossenschaft Zentralschweizer Milchproduzenten ZMP and ZMP Invest AG.

Part of the purchase price for the minority interest in Mittelland Molkerei AG was paid to the seller, AZM Verwaltungs AG, in the form of shares in Emmi AG. For this purpose, Emmi purchased 61,132 shares at market value from its main shareholder, ZMP Invest AG.

Other transactions

The compensation paid to members of the Board of Directors and Group Management is disclosed in the compensation report of Emmi AG.

As at 7 June 2016, Capital Group Companies, Inc. informed us that it owned 268,500 shares of Emmi AG (5.019 %). No further disclosure notifications have been made since.

As at 31 December 2017, Emmi Wohlfahrtsfonds (welfare fund) owned a total of 6,000 shares of Emmi AG (unchanged to previous year).

The Board of Directors of Emmi AG has the ultimate responsibility for risk management, while implementation is delegated to Group Management. Irrespective of the type of risk, there is a generally applicable risk management process. As part of a formal process, significant business risks are assessed in workshops and individual interviews according to the extent of the potential damage and their likelihood of occurrence. This process is divided into two sub-processes: risk analysis and definition of measures. The first sub-process includes risk identification, assessment and classification. Risks are classified according to whether they are strategic, operational, financial or compliance-related. The second sub-process, definition of measures, covers how to deal with risks and the creation of a catalogue of measures per risk, as well as risk reporting.

The Board of Directors of Emmi AG approved the risk assessment in the year under review and monitors implementation of the measures defined by Group Management. No exceptional risks that went beyond normal limits were identified during the assessment. The process is repeated annually. The following risks, among others, were identified as significant risks to the Emmi Group:

• Milk price difference internationally: The milk price difference between Switzerland and other countries continues to have a negative impact on the sales of domestically produced products both in Switzerland, as the volume of imported milk products increases, and abroad. Although full liberalization of the Swiss milk market remains a long-term risk, this is absorbed through targeted and sustainable growth abroad. Any risks related to the international growth of the Emmi Group are minimized by strictly focusing on the strategy and its implementation.
• Currency risk: Although currency movements are currently less volatile than in previous years, in particular uncertainties related to Brexit and the corresponding impact on the British pound continue to be a risk for the Group. We aim to achieve natural hedges with purchases in foreign currencies. Furthermore, in-line with the Emmi strategy, expenditure and production in foreign currency zones are being increased through capital expenditures and acquisitions.
• Price pressure: National and international product tenders, as well as a potentially successful entry to the market of milk alternatives, are threatening to result in price erosion, which could lead to a loss of margin mainly for generic products. If the prices of Emmi products remain stable in foreign currency, this may lead to a margin loss. If prices increase, market shares might be lost. However, the successfully established Emmi brands offer long-term value creation potential.

The Emmi Group is exposed to various financial risks through its business activities, including credit, liquidity and other market risks. Credit risks are managed by means of continual monitoring of day-to-day business and appropriate risk assessment when closing a transaction. Liquidity risk is managed by means of central cash management, which ensures that the planned liquidity requirement is covered by corresponding financing agreements. Other market risks, such as currency and interest rate risks, are partially hedged using derivative instruments. The non-hedged part is consciously borne as a risk. The currencies which are of particular relevance to the Emmi Group are EUR, USD and GBP.

To ensure that the consolidated financial statements comply with the applicable accounting standards and are reported accurately, the Emmi Group has set up effective internal control and management systems, which are reviewed regularly. The accounting and valuation include estimates and assumptions regarding the future. These are based on the knowledge possessed by the respective employees and are regularly examined with a critical eye. Where a financial position includes a major valuation uncertainty that could lead to a significant change in the carrying amount, this uncertainty is disclosed accordingly in the Notes. However, no risks that could lead to a significant correction to the company’s assets, financial position or results of operations as reported in the annual accounts were identified as at the balance sheet date.

Sale of investment in The Icelandic Milk and Skyr Corporation

On 1 February 2018, Emmi sold its 22.1 % stake in The Icelandic Milk and Skyr Corporation (“siggi’s”) to Lactalis. The parties have agreed not to disclose details of the contract. The transaction will have a positive effect on Emmi’s net income in the mid double-digit million Swiss francs range in the financial year 2018.

Increase of stake in Centrale Laitière de Mahdia, S.A.

On 10 January 2018, Emmi announced that Kaiku, an Emmi subsidiary based in San Sebastián (Spain), is increasing its stake in Centrale Laitière de Mahdia SA (Vitalait), based in Mahdia (Tunisia), from 45.4 % to 54.7 %. As a result, Emmi, which holds 73.4 % of the shares in Kaiku, will have a 40.2 % stake in Centrale Laitière de Mahdia SA. In a second step in 2021, Kaiku will increase its stake by another 9.34 %. Emmi’s stake will then increase to 47.1 %. The transactions have no impact on Emmi’s net sales and EBITDA, since Centrale Laitière de Mahdia SA was already controlled and therefore fully consolidated by Emmi before these transactions. The parties have agreed not to disclose the purchase price or any other details of the contract. 

From the balance sheet date until the consolidated financial statements were approved by the Board of Directors on 2 March 2018, no other major events occurred which could have adversely affected the validity of the annual financial statements for 2017 or which would have to be disclosed.