Notes to the consolidated financial statements

Emmi does not publish segment results since this would cause significant competitive disadvantages towards customers as well as 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, Spain (excl. Lácteos Caprinos S.A.), Chile, Brazil, Tunisia, France, Mexico and Canada. The business division Europe incorporates those in Germany, Italy, the Netherlands, the UK, Austria, Belgium and Lácteos Caprinos S.A. in Spain (sold on 18 December 2020). 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.

The inrease in the position Other operating expenses is primarily due to the loss on the sale of the majority stake in Lácteos Caprinos S.A. in the reporting period.

Net accruals for current income taxes increased from CHF 23.4 million in 2019 to CHF 29.3 million in 2020. Deferred income taxes are calculated for every company using the effective applicable tax rate. As at 31 December 2020, the resulting weighted average tax rate was 16.8 % (adjusted and unadjusted, previous year: 17.8 %). Deferred income taxes include recognised tax claims from tax loss carryforwards amounting to CHF 3.5 million (previous year: CHF 7.1 million).

The average tax rate adjusted for the tax effect on the sale of the majority stake in Lácteos Caprinos S.A. amounted to 16.0 % in the reporting year.

The net change of recognised tax claims from tax loss carryforwards increased the income tax expenses of the reporting period by CHF 3.6 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. There are no treasury shares that need to be considered in the calculation of the average number of shares outstanding.

Earnings per share of CHF 35.21 include the loss on the sale of the majority stake in Lácteos Caprinos S.A. By excluding this non-recurring effect, earnings per share amounted to CHF 37.86.

Other prepayments and accrued income of the year under review and the previous year consist mainly of prepayments, various refunds, as well as accrued income for advertising costs and milk.

The carrying amount of loans and other receivables from third parties includes impaired loans in the amount of CHF 1.6 million (unchanged on the previous year).

All intangible assets were acquired. 

Other accrued liabilities and deferred income of the year under review and the previous year comprise in particular contributions to brand organisations, expected earn-out payments for acquisitions, energy costs, 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 (2020: CHF 6.3 million, 2019: CHF 6.6 million) and provisions for pending legal matters and business disputes (2020: CHF 2.6 million, 2019: CHF 7.7 million). In all cases, the likelihood of such events occurring has been assessed at above 50 %.

The companies acquired in 2020 and 2019 reported the following main balance sheet items at the date of acquisition and are fully consolidated:

The business combination of the Chilean Emmi group Surlat with its competitor Quillayes announced in 2019 was closed on 15 January 2020. As part of the transaction, both parties contributed their existing Chilean companies into Quillayes Surlat S.p.A., in which Emmi subsidiary Kaiku holds a 51.5 % stake. Quillayes produces cheese, yogurt, butter and cream and has also established itself in the distribution of imported branded products.

Emmi acquired 100 % of the shares of Chäs Hütte Zollikon GmbH on 29 July 2020. The company is active in trading and selling dairy products and other food items.

Emmi acquired 87.71 % of US-based Indulge Desserts Group on 6 October 2020. This acquisition enables Emmi to participate in the American dessert market, which is the largest and fastest-growing in the world, extends Emmi’s footprint to the United States and opens up new distribution opportunities for its Italian speciality desserts.

Emmi acquired 100 % of the shares of Immobiliare Ro.Se S.p.A. based in Pero (Italy) on 3 November 2020. Along with the company, a property in Pero that had been rented to that date was also acquired.

On 8 October 2019, Emmi acquired a stake of 66 % in the Leeb Group, based in Wartberg (Austria). The companies are specialised in the production of dairy and fresh products based on organic goat’s and sheep’s milk, and organic vegan products.

On 24 October 2019, Emmi increased its stake in the Laticínios Porto Alegre Group, based in Ponte Nova (Brazil), from 40 % to 70 % and therefore now controls this group. The group ranks amongst the five largest dairies in its main market of Minas Gerais, with strong positions in the product categories of cheese, fresh cheese, UHT milk, butter and whey powder.

On 31 October 2019, Emmi fully acquired the Pasticceria Quadrifoglio Group, based in Piumazzo (Italy). With the acquisition of the Quadrifoglio Group, Emmi has further strengthened its existing dessert network in Italy.

The companies sold in 2020 or 2019 reported the following main balance sheet items at the date of disposal:

On 18 December 2020, Emmi disposed of its majority stake in the Spanish goat’s cheese producer Lácteos Caprinos S.A. The company generates annual revenues of EUR 10 million with about 40 full-time equivalents. The loss on this transaction amounted to CHF 14.6 million (pre-tax) or CHF 14.2 million (post-tax) respecitvely, and is included in other operating expenses and income tax expenses in the income statement.

On 3 April 2019, Emmi sold its Swiss trading and supply company Emmi Frisch-Service AG to the Transgourmet Group. The negative net sales effect of this transaction amounted to around CHF 40 million in 2019. In addition, around 160 employees joined the Transgourmet Group. This transaction did not have a significant impact on consolidated results.

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 a number of Group companies with minority interests. At the same time, put options have been granted in general to the counterparties. These options are not recognised in the balance sheet as they represent derivatives on equity instruments of the own organisation, which are explicitly excluded from the scope of Swiss GAAP FER 27. The strike price of these options is generally based on the corresponding enterprise value at the exercise date and cannot currently be reliably measured. The exercise date varies depending on the agreement. The maturities range from short-term to unlimited options.

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. 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 2020 and 2019, 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 8, 9, 11, 12, 15, 16 and 17).

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 Central Switzerland Milk Producers Cooperative (ZMP) and 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., Los Angeles, US, 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 2020, Emmi Wohlfahrtsfonds (welfare fund) owned a total of 6,000 shares of Emmi AG (unchanged versus 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 liberalisation 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 minimised by strictly focusing on the strategy and its implementation.
• Currency risk: Currency movements represent a significant risk for the Emmi Group, which has a tendency to increase based on the continuing internationalisation of business activities. 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 products made from 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 with 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.

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. 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.

From the balance sheet date until the consolidated financial statements were approved by the Board of Directors on 1 March 2021, no other major events occurred which could have adversely affected the validity of the consolidated financial statements for 2020 or which would have to be disclosed.