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.

Income from associates and joint ventures totalling CHF 78.3 million mainly includes the (pre-tax) gain made on the sale of the minority stake in “siggi’s” of CHF 79.4 million. Adjusted for this effect, income from associates and joint ventures amounted to CHF -1.1 million (previous year: CHF 3.6 million). A major reason for this development is the loss of the profit share in “siggi’s” due to the sale of our minority stake. Please refer to note 7 for the tax effect of the “siggi’s” transaction.

The average tax rate adjusted for the tax effect on the sale of the minority stake in “siggi’s” amounted to 13.7% in the reporting year.

Net accruals for current income taxes decreased from CHF 23.7 million in 2017 to CHF 22.6 million in 2018. Deferred income taxes are calculated for every company using the effective applicable tax rate. As at 31 December 2018, the resulting weighted average tax rate was 19.9 %. Adjusted for the above-mentioned non-recurring effect, the weighted average tax rate was 18.0 % (previous year: 18.1 %). Deferred income taxes include recognised tax claims from tax loss carryforwards amounting to CHF 8.5 million (previous year: CHF 13.0 million).

The net change of recognised tax claims from tax loss carryforwards increased the income taxes of the current period by CHF 4.5 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.

Earnings per share of CHF 43.60 include the gain on the sale of the minority stake in Icelandic Milk and Skyr Corporation (“siggi’s”). By excluding this non-recurring effect, earnings per share amount to CHF 32.80.

Other prepayments and accrued income consist mainly of various refunds, accrued promotion costs and prepayments for milk and insurance premiums.

The carrying amount of loans and other receivables from third parties includes impaired loans in the amount of CHF 1.7 million (previous year: CHF 3.6 million). Due to payments received for loans which were already impaired and reclassifications to currents assets, the total impairment on loans has been reduced by CHF 1.9 million in comparision with the previous year’s reduction of CHF 0.6 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 restructuring provisions relate in particular to anticipated costs in connection with the decision to reorganise business activities.

Other provisions include amongst other things liabilities for staff expenses in foreign countries as required by law (2018: CHF 6.8 million, 2017: CHF 5.1 million) and provisions for pending legal matters and business disputes (2018: CHF 2.9 million, 2017: CHF 4.4 million). In all cases, the likelihood of such events occurring has been assessed at above 50 %.

In the year under review, Emmi did not aquire new companies. In 2017, the acquired companies 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 consequently obtained control over it. Mexideli is Mexico’s leading importer of premium food products – e.g. speciality cheese.

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 or other payables in the current liabilities respectively. 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 a maximum of CHF 18.4 million (previous year: CHF 18.3 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.

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 2018, Emmi Wohlfahrtsfonds (welfare fund) owned a total of 6,000 shares of Emmi AG (unchanged to previous year).

Business transactions with related parties are based on arm’s length conditions. All transactions are reported in the consolidated financial statements for 2018 and 2017, 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 these financial statements (see notes 9, 10, 12, 13, 16, 17, 18 and 19).

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 acquired in the previous year 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.

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 market launch of milk alternatives, threaten 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.
• Trade agreements: The drafting of trade agreements in countries in which Emmi operates presents both opportunities and risks for the company. Switzerland is currently engaged in various talks aimed at negotiating new trade agreements or renegotiating existing ones, but progress is slow. As a result, the Swiss dairy industry is increasingly lagging behind its competitors – especially those from the European Union – on the international market in terms of market access conditions. Negotiations that are unfavourable for Emmi could potentially also lead to heavy import pressure in Switzerland. A suspension of the bilateral agreements with the European Union would make it harder for Swiss export products to gain access to the market (e.g. due to the reintroduction of customs duties on cheese), posing a considerable risk. Meanwhile, the future structure of trade agreements between the European Union and the UK could also have significant ramifications for Emmi. 

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 the Euro, the US dollar and the British pound.

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.

Acquisition of a blue cheese production site in the US

On 4 January 2019, Emmi announced the purchase of a blue cheese production site from the Great Lakes Cheese Company in the US. Emmi is thus gaining capacity and know-how for the production of blue cheese in the US and at the same time extending its value chain. The transaction includes the factory, the related land and the production facilities in Seymour, Wisconsin. The 50 employees at the production site currently produce almost 3.5 million kilograms of cheese. The transaction is expected to be completed in the first quarter of 2019.

Sale of Emmi Frisch-Service AG

On 31 January 2019, Emmi announced that it will sell its Swiss trading and supply company Emmi Frisch-Service AG to the Transgourmet Group. The sales of this company amount to approximately CHF 110 million on a full-year basis. In addition, around 160 employees will join the Transgourmet Group. Emmi does not expect this transaction to have a significant impact on the Group’s results in the following year. The completion of the transaction is subject to the approval of the Swiss Competition Commission.

From the balance sheet date until the consolidated financial statements were approved by the Board of Directors on 27 February 2019, no other major events occurred which could have adversely affected the validity of the financial statements for 2018 or which would have to be disclosed.