Pleasing organic sales growth

In the first half of 2018, Emmi reported Group sales of CHF 1,674.8 million, up from CHF 1,600.2 million in the same period of the previous year. This corresponds to an increase of 4.7 %. Adjusted for currency and acquisition effects, this resulted in growth of 2.4 % (full-year forecast from March 2018: 1.5 % to 3 % growth).

The overall positive acquisition effect of 0.7 % is due to the following positive factors:

• Acquisition of Italian Fresh Foods (Italy, 1 March 2017)
  
• Increased stake in Mexideli (Mexico, 8 October 2017)

Negative factors include:

• Disposal of shares in Venchiaredo (Italy, 31 July 2017)
• Disposal of part of the trading goods business (Switzerland, 1 January 2018):
  When it acquired the Kirchberg cheese centre in 1998, Emmi also took over a trading goods business from Coop. Part of this trading goods business, through which Coop directly maintains business relationships with suppliers, has now been sold back to Coop.

Developments in the business divisions Switzerland, Americas, Europe and Global Trade are explained in the following.

Sales development Switzerland

Sales in the business division Switzerland amounted to CHF 830.3 million, a decline of 0.9 % compared to the previous yearʼs level of CHF 838.2 million. In organic terms, i.e. adjusted for divestment effects, this resulted in growth of 0.5 %. This is at the upper end of the full-year sales forecast of 0 % to 0.5 % announced by Emmi in March 2018.

Sales of dairy products in particular performed well. The divestment effect is a result of the sale of part of the trading goods business. The business division Switzerland accounted for 50 % of Group sales.

Sales of dairy products (milk, cream and butter) increased from CHF 312.8 million to CHF 327.8 million in the first half of 2018. This translates into growth of 4.8 % compared to the same period of the previous year. A significant proportion of this is attributable to milk price developments.

In the cheese segment, sales declined from CHF 219.2 million to CHF 207.8 million, a fall of 5.2 %, or 2.4 % in organic terms. This development reflects cheese imports, which were up 3.2 % on the first half of 2017 (source: TSM Treuhand). The decline primarily concerned AOP cheeses. By contrast, speciality cheeses such as Kaltbach, Der Scharfe Maxx, Le Petit Chevrier and Luzerner Rahmkase saw growth.

In fresh products, sales fell from CHF 175.3 million in the previous year to CHF 171.8 million, a decrease of 2.0 %. Caffè Latte, Energy Milk and Jogurtpur in particular made positive contributions, while Yoqua and private labels in retail declined.

Sales of fresh cheese declined from CHF 56.7 million to CHF 54.4 million, down 4.1 %, which reflects the sale of part of the trading goods business. In organic terms, sales increased by 2.5 %. It can be assumed that the warm spring months boosted fresh cheese consumption somewhat.

Powder/concentrates generated sales of CHF 31.2 million, a decline of 6.8 % (previous year: CHF 33.5 million), reflecting the lower milk powder prices.

Sales of other products/services fell from CHF 40.7 million to CHF 37.3 million, which corresponds to a drop of 8.1 % (organic decline of 4.0 %).

Sales development Americas

The business division Americas includes the US, Canada, Chile, Mexico, Spain (excluding Lácteos Caprinos), France and Tunisia.

Sales in this business division improved over the first six months of 2018 from CHF 442.3 million to CHF 502.2 million, up 13.5 % year-on-year. In organic terms, i.e. adjusted for currency and acquisition effects, this represents growth of 5.6 %, which is in line with Emmiʼs expectations. The full-year forecast from March 2018 was 4 % to 6 %. The positive sales performance is attributable to the largest non-European markets: the US, Chile and Tunisia. The business division Americas accounted for 30 % of total sales.

The cheese segment generated sales of CHF 199.7 million, compared to CHF 180.4 million in the previous year. This corresponds to an increase of 10.7 %. The positive acquisition effect is due to Mexideli. In organic terms, sales grew by 3.7 %. Cowʼs milk cheese in the US, including significantly higher exports of Le Gruyère AOP from Switzerland, had a positive impact. By contrast, the goatʼs cheese business was slightly below expectations.

Sales of dairy products rose from CHF 130.2 million to CHF 142.1 million. This growth of 9.1 % or 7.9 % in organic terms is a result of the good sales performance in Chile and Tunisia.

Sales of fresh products rose by 6.9 % from CHF 97.2 million to CHF 103.9 million. Organic growth amounted to 4.0 %. Factors making a positive contribution included growth in Tunisia and at Redwood Hill in California. By contrast, sales of Caffè Latte in Spain stagnated due to the pressure of private labels, and traditional yogurts recorded a downwards trend.

At CHF 5.9 million and CHF 2.4 million, respectively, sales of fresh cheese and powder/concentrates were marginal.

Other products/services posted an increase in sales of 51.4 % (9.9 % in organic terms), up from CHF 31.8 million to CHF 48.2 million. The positive acquisition effect is due to Mexideli.

Sales development Europe

The business division Europe includes Italy, Germany, Austria, Belgium, the Netherlands, the UK, and Lácteos Caprinos in Spain.

The business division posted sales of CHF 287.6 million in the first half of 2018, compared to CHF 259.3 million in the weak same period of the previous year. This corresponds to growth of 10.9 %. Excluding currency and acquisition effects, organic growth amounted to a pleasing 5.8 %. Sales therefore exceeded expectations considerably (full-year forecast: 1 % to 3 %). This positive performance is attributable to significant sales increases in fresh products, dairy products and powders/concentrates. The acquisition effects are due to Italian Fresh Foods (fresh products) and Venchiaredo (fresh cheese). The business division Europe accounted for 17 % of Group sales.

In fresh products, sales increased from CHF 105.7 million in the same period of the previous year to CHF 124.8 million, corresponding to growth of 18.1 %. The positive acquisition effects were due to Italian Fresh Foods. In organic terms, growth was 5.7 %. This is attributable in particular to higher sales in the dessert business of Rachelli, Italian Fresh Foods and A-27 as well as very strong Caffè Latte sales. By contrast, sales of Onken yogurts declined slightly.

Dairy products posted an increase of 16.6 % in sales from CHF 49.6 million to CHF 57.8 million. In organic terms, growth was 7.3 %. This rise is primarily due to higher sales at Gläserne Molkerei.

The cheese segment generated sales of CHF 57.5 million. Compared to CHF 53.4 million in the previous year, this represents an increase of 7.7 %. By contrast, the segment reported a slight decline of 0.8 % in organic terms, probably due to the high temperatures in the early summer. Individual speciality cheeses such as Kaltbach in Germany were nevertheless able to post growth.

Sales of fresh cheese declined by 30.0 %, from CHF 37.4 million to CHF 26.2 million. The negative acquisition effects are due to Venchiaredo. In organic terms, the segment reported a decline of 1.1 %.

In the smaller product segments of the business division Europe, powder/concentrates achieved sales of CHF 15.5 million and other products/services CHF 5.8 million. The significant growth in the powder/concentrates segment is attributable to higher sales of goatʼs milk powder (AVH dairy).

Sales development Global Trade

The business division Global Trade includes direct sales from Switzerland to customers in countries where Emmi has no companies, including the Asian and Eastern European markets, most South American countries and the Arabian Peninsula. The business division Global Trade accounts for 3 % of Group sales.

Sales in this business area amounted to CHF 54.7 million in the first half of 2018. Compared to CHF 60.4 million in the previous year, this constitutes a decrease of 9.5 % or 9.0 % in organic terms.

Growth in the cheese segment is a result of higher sales in Russia. The declines in fresh products and dairy products are due to declining sales in China and lower butter exports. The increase in powder/concentrates reflects significantly higher milk collection in Switzerland and the associated rise in milk powder exports.

Gross profit

Gross profit amounted to CHF 604.5 million in the reporting period, corresponding to a rise of CHF 27.4 million (previous year: CHF 577.1 million). This increase is primarily due to the organic growth in the business divisions Americas and Europe as well as an overall favourable development of exchange rates and acquisition effects. The gross profit margin was unchanged year-on-year at 36.1 %. The successful implementation of further cost-cutting and productivity measures offset the negative effects of increased pressure on prices.

Operating result

Operating expenses rose by CHF 21.1 million to CHF 443.4 million (previous year: CHF 422.3 million) in the period under review. Recently acquired companies and the euro, which was considerably stronger against the Swiss franc compared to 2017, contributed significantly to this result. In relation to net sales, operating expenses rose slightly disproportionately from 26.4 % to 26.5 %.

Personnel expenses increased by CHF 11.1 million to CHF 232.1 million in the first half of 2018 (previous year: CHF 221.0 million). Compared to the development in sales, this meant a slight increase from 13.8 % to 13.9 %.

Other operating expenses rose by CHF 10.0 million to CHF 211.3 million (previous year: CHF 201.3 million). Given the continuing challenging conditions, a strong focus on costs is also required in financial year 2018. Marketing and sales-related expenses were not affected by this, however. They increased year-on-year by CHF 4.0 million to CHF 63.2 million (previous year: CHF 59.2 million). Logistics costs and expenses for maintenance and repairs were also above the previous yearʼs level, while other operating expenses were lower. In relation to net sales, total other operating expenses were constant at 12.6 %.

Other operating income fell by CHF 0.3 million to CHF 1.6 million (previous year: CHF: 1.9 million).

Earnings before interest, taxes, depreciation and amortisation (EBITDA) increased by CHF 6.1 million to CHF 162.7 million, up from CHF 156.6 million in the previous year. The EBITDA margin declined slightly from 9.8 % to 9.7 %.

Depreciation on property, plant and equipment rose from CHF 47.4 million in 2017 to CHF 48.4 million in the period under review and was therefore unchanged as a proportion of sales. Amortisation on intangible assets remained at almost the same level as in the previous year and therefore grew at a slightly lower rate than net sales. Additional amortisation of goodwill was largely offset by lower amortisation of other intangible assets.

Earnings before interest and taxes (EBIT) amounted to CHF 95.0 million in the period under review, which was CHF 4.6 million higher than the previous yearʼs EBIT of CHF 90.4 million. The EBIT margin was unchanged at 5.7 %.

Non-recurring effects in the 2018 half-year results

The sale of the minority stake in The Icelandic Milk and Skyr Corporation “siggiʼs” had a significant impact on the income statement. The sale resulted in a pre-tax profit of CHF 78.2 million (USD 80.9 million) or CHF 56.9 million (USD 58.9 million) after taxes. This profit will change again slightly in the second half of 2018 due to minor adjustments to the purchase price. The profit in Swiss francs also depends on the future performance of the CHF and USD currency pair.

The profit from this sale is included in the position “Income from associates and joint ventures”. Accordingly, earnings before taxes (EBT) rose by CHF 78.2 million and net profit by CHF 56.9 million. Shareholders benefited from the sale through a special dividend in spring 2018.

No significant non-recurring effects were recorded in the same period of the previous year.

Income from associates, financial result and income taxes

Income from associates and joint ventures totalling CHF 76.8 million mainly includes the profit made on the sale of the minority stake in “siggiʼs” of CHF 78.2 million. The adjusted income from associates and joint ventures thus fell by CHF 2.3 million year-on-year.

The financial result (net financial expenses) declined significantly by CHF 4.0 million versus the previous year to CHF 3.2 million. This reduction was achieved thanks to the significantly lower net interest expenses as a result of the successful refinancing in 2017. Currency losses totalled CHF 1.0 million and were therefore lower than in the previous year (CHF 1.5 million).

Adjusted for the non-recurring effect from the sale of the minority stake in “siggiʼs”, income taxes amounted to CHF 14.4 million, a decrease of CHF 0.7 million year-on-year (previous year: CHF 15.1 million). The expected tax rate for full-year 2018 is 16.0 %, compared to 15.2 % in financial year 2017.

Net profit

Profit including minority interests totalled CHF 132.9 million and was affected significantly by the gain on the sale of the minority stake in “siggiʼs”, which amounted to CHF 56.9 million after taxes. As a result, adjusted profit including minority interests amounted to CHF 76.0 million, up CHF 7.0 million year-on-year.

Minority interests accounted for CHF 3.9 million of profit, an increase of CHF 0.9 million on the previous year, mainly due to the acquisition of Mexideli in the second half of 2017.

After deduction of minority interests, net profit was CHF 129.0 million and adjusted net profit was CHF 72.1 million (previous year: CHF 66.0 million). Adjusted net profit therefore increased by CHF 6.1 million or 9.3 %. The adjusted net profit margin rose to 4.3 % (previous year: 4.1 %). Adjusted earnings per share also increased accordingly to CHF 13.48 (previous year: CHF 12.34).

Assets, financing and cash flow

Total assets as at 30 June 2018 were up by 1.8 % or CHF 49.7 million compared to 31 December 2017, to CHF 2,746.7 million (previous year: CHF 2,697.1 million). This change is mainly due to the increase in cash and cash equivalents, which were again impacted significantly by the sale of the minority stake in “siggiʼs”. Operating net working capital amounted to CHF 525.5 million, up CHF 19.3 million compared with 31 December 2017. By contrast, non-current assets declined by CHF 69.2 million. The main reason for this was a low level of investments in the first six months of 2018. However, investments in property, plant and equipment are likely to rise significantly in the second half. With regard to financing, the adjustments between short and long-term liabilities were due to a bond issued in the amount of CHF 100 million, which will mature in June 2019. The equity ratio rose to 57.2 %, from 56.4 % as at 31 December 2017. This too is mainly due to higher net profit resulting from the non-recurring effect from the sale of the minority stake in “siggiʼs”. This non-recurring effect also led net debt to decrease from CHF 338.4 million as at 31 December 2017 to CHF 229.7 million as at 30 June 2018.

Cash inflow from operating activities amounted to CHF 119.9 million, an increase of CHF 6.3 million compared with CHF 113.6 million in the previous year. Alongside a slightly increased operating result, this was mainly attributable to the improvement in operating net working capital compared to the same period of 2017. Trade receivables were reduced more significantly since 31 December 2017 than in the same period of the previous year, while trade payables saw a less pronounced decrease year-on-year. However, these positive cash flow effects compared to the previous year were partially offset by a greater increase in inventories (particularly cheese and butter). The development of net working capital resulted overall in a higher operating cash flow than in the same period of 2017. Cash inflow from investing activities amounted to CHF 39.1 million in the period under review, compared to an outflow of CHF 293.0 million in the previous year. The cash inflow resulting from investing activities is attributable to the sale of the minority stake in “siggiʼs”. Furthermore, the cash outflow for acquisitions was CHF 16.2 million, which is significantly below the amount in the same period of 2017 (CHF 260.0 million). A similar effect, but to a far lesser extent, also occurred with regard to investments in property, plant and equipment, which were CHF 15.8 million lower year-on-year. Not including the cash flows from acquisition activities, the free cash flow generated in the first half of 2018 amounted to CHF 94.3 million, compared to CHF 80.6 million in the same period of 2017. Cash outflow from financing activities totalled CHF 45.5 million in the first six months of 2018 and was the result of dividend payments to shareholders and minority interests as well as cash inflows from current and non-current financial liabilities. The same period of the 2017 saw a net cash inflow of CHF 32.4 million due to the refinancing. As a result of these cash flows, cash and cash equivalents increased, up by CHF 117.9 million to CHF 330.5 million, compared with CHF 212.6 million as at 31 December 2017.

Outlook for 2018 as a whole

Emmi is bracing itself for a continuing highly competitive environment in the second half of 2018. The growth curve in sales is likely to flatten as it will be difficult to outperform the strong fourth quarter of 2017, particularly in Europe and Switzerland. It should be noted in this regard that 1 October 2018 marks one year of the positive sales effects in Switzerland resulting from the higher milk price and additional listings of Caffè Latte. These effects will therefore be absent from this date. Furthermore, it is currently difficult to assess the consequences of the dry weather on milk volumes and the subsequent influence on sales of the business divisions Switzerland and Europe.

In view of the current situation, Emmi expects to be able to achieve the sales targets communicated in March 2018 at Group level and in the business divisions Switzerland and Americas. The forecasts for the business division Europe have been revised upwards to between 2 % and 4 % (from 1 % to 3 %). The EBIT and net profit targets continue to be considered realistic.