Modest organic growth

Emmi achieved modest organic growth overall in the first six months of the 2019 financial year, coming in at 1.6 %. While organic growth in Switzerland was solid at 0.5 % and in the business division Americas on target at 4.3 %, in the business division Europe it fell short of expectations – amounting to 0.7 % overall – due to lower sales at Gläserne Molkerei in Germany. Sales of Emmi Caffè Latte performed very well across all business divisions. Pleasing gains were also recorded in strategically relevant niche markets such as Italian dessert specialities and goat’s milk products. The emerging markets of Chile, Mexico and Tunisia additionally proved to be important drivers of growth in the first half of 2019.

In the first six months of the 2019 financial year, Emmi generated net sales of CHF 1,663.3 million, compared with CHF 1,674.8 million in the previous year, a decline of 0.7 % overall. Adjusted for currency and acquisition effects, organic growth was 1.6 % (forecast for the full year from February 2019: 2 % to 3 % growth).

The overall negative acquisition effect of 0.9 % is attributable to the following negative factors:

• Sale of Emmi Frisch-Service AG (Switzerland, 3 April 2019)
• Disposal of part of the trading goods business (Switzerland, 1 January 2018):
  Emmi also took over a trading goods business from Coop when it purchased its cheese centre in Kirchberg in 1998. Part of this trading goods business, which involves Coop maintaining direct business relationships with the suppliers, was sold back to Coop in 2018, with the corresponding sales transferred to the buyer over two years until the end of 2019.

As positive factor to mention is the acquisition of a blue cheese production facility (US, 28 February 2019).

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

Sales development Switzerland

The business division Switzerland generated net sales of CHF 810.5 million, down 2.4 % on the prior-year value of CHF 830.3 million. Adjusted for the divestment effects indicated above, this translates into organic growth of 0.5 %, which is at the upper end of the full-year growth forecast published by Emmi in February 2019 of 0 % to 0.5 %. The business division Switzerland accounted for 48.7 % of Group sales.

Sales of dairy products (milk, cream and butter) in the first half of 2019 rose from CHF 327.8 million to CHF 335.4 million, up 2.3 % year-on-year, or 3.2 % after adjustment for divestment effects. This was supported by higher sales of milk and cream, which offset declining butter sales in spite of the ongoing overall strong pressure on prices.

In the cheese segment, sales contracted from CHF 207.8 million to CHF 193.8 million. This corresponds to a drop of 6.7 %, or 1.3 % in organic terms. The decrease primarily affected cheese varieties, reflecting the continued increase in cheese imports versus the first half of 2018 coupled with the general price pressure in this product segment. This was contrasted by gains by various cheese specialities such as Luzerner Rahmkäse, Scharfer Maxx and Le Petit Chevrier.

In fresh products, sales saw a year-on-year decline from CHF 171.8 million to CHF 167.0 million, equivalent to 2.8 %. Even adjusted for divestment effects the decline still amounted to 1.1 %. This negative trend was mainly driven by losses for private label products (yogurts and ice-cream). Emmi Caffè Latte and Energy Milk recorded significant growth, however.

Sales of fresh cheese fell from CHF 54.4 million to CHF 53.0 million, a decline of 2.6 %, attributable to the aforementioned divestment effects. In organic terms, the result was an increase of 2.2 %. The growth was shouldered in particular by protein-enriched quark and the relaunch of the “Toni’s” brand (cheese spread and mozzarella).

Powder/concentrates generated sales of CHF 29.4 million, compared with CHF 31.2 million in the previous period. This corresponds to a decline of 5.9 %, reflecting lower milk powder volumes sold.

In other products/services, sales decreased from CHF 37.3 million to CHF 31.9 million, down 14.6 %. Again, this is chiefly due to divestment effects (decline of 3.8 % in organic terms).

Sales development Americas

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

Sales in the business division Americas rose from CHF 502.2 million to CHF 518.4 million in the first half of 2019, a year-on-year increase of 3.2 %. Adjusted for currency and acquisition effects, this corresponds to organic growth of 4.3 %. This value is in line with the full-year forecast from February 2019 of 4 % to 6 %. The US, Chile, Tunisia and Mexico markets were the main driver of the positive sales performance, with the business division Americas accounting for 31.2 % of Group sales.

The cheese segment generated sales of CHF 217.2 million, compared with CHF 199.7 million in the previous year. This corresponds to an increase of 8.8 %. The positive acquisition effect is due to the purchase of a blue cheese production facility in the US. In organic terms, sales grew by 2.8 %, boosted by the trading business of Mexideli, Emmi Roth sales of Swiss cheese, the goat’s cheese business in the US and locally produced cheese in Chile.

Sales of dairy products declined from CHF 142.1 million to CHF 138.0 million, which, however, is attributable exclusively to negative currency effects. Adjusted for these currency effects, organic growth was 5.2 %, primarily a result of the good sales performance in Tunisia (milk, butter) and Chile (milk, cream).

Sales of fresh products fell by 2.6 % from CHF 103.9 million to CHF 101.2 million. This amounts to organic growth of 3.4 % when adjusted for the ongoing strong negative impact of currency effects. Positive influencing factors included gains in France with Italian dessert specialities, in Chile with yogurt and milkshakes, and in Spain with Emmi Caffè Latte. By contrast, sales growth was dealt a slight blow by only moderate sales in Spain of yogurts and yogurt drinks, hampered by persistently strong competition.

At CHF 7.5 million and CHF 2.3 million, respectively, sales of fresh cheese and powder/concentrates were of marginal importance for the division. The growth of 26.3 % (in organic terms, 22.7 %) in the fresh cheese segment is chiefly attributable to the positive performance of Mexideli (mozzarella and other fresh cheeses).

Other products/services posted an increase in sales of 8.5 % (7.7 % in organic terms), up from CHF 48.2 million to CHF 52.2 million.

Sales development Europe

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

In the business division Europe, sales in the first half of 2019 were CHF 279.9 million, down 2.7 % on the prior-year figure of CHF 287.6 million. Excluding currency effects, which were negative overall, the result was moderate organic growth of 0.7 %, which is still below Emmi’s full-year forecast of 1 % to 3 %. Significantly lower sales of dairy products at Gläserne Molkerei in Germany were the main reason for this contraction. The fresh products and powder/concentrates segments, by contrast, recorded substantial growth in terms of the division as a whole. The business division Europe accounted for 16.8 % of Group sales.

In fresh products, sales in the first half of 2019 climbed from CHF 124.8 million to CHF 129.2 million, a year-on-year increase of 3.5 %, or 7.0 % in organic terms. This result was boosted in particular by sales of Emmi Caffè Latte in all European markets as well as by dessert specialities in Italy. Onken yogurts, meanwhile, recorded declining sales in both Germany and the UK.

The cheese division posted sales of CHF 54.7 million. This represents a decrease of 5.0 % – or 1.6 % in organic terms – versus the previous year’s figure of CHF 57.5 million, depressed primarily by declining exports of Emmentaler AOP from Switzerland to Italy. Individual cheese specialities, by contrast, for example Kaltbach in Germany, posted a positive performance.

Sales of dairy products fell by 19.1 % from CHF 57.8 million to CHF 46.8 million. In organic terms, the decrease was 16.2 %. The main contributing factor was significantly lower sales at Gläserne Molkerei in Germany, where a combination of decreased volumes of milk processed and a generally lower price for organic milk caused a considerable contraction in sales.

Sales of fresh cheese declined by 1.7 % from CHF 26.2 million to CHF 25.7 million. Adjusted for negative currency effects, this equates to organic growth of 1.8 %, driven primarily by higher sales of goat’s milk fresh cheese at Bettinehoeve in the Netherlands.

Sales generated by the powder/concentrates segment rose from CHF 15.5 million to CHF 21.2 million, corresponding to growth of 37.5 %, or even 42.4 % in organic terms. This jump is primarily attributable to goat’s milk powder sales at the trading company AVH dairy in the Netherlands.

In other products/services, the smallest product group in terms of figures, the business division Europe generated sales of CHF 2.3 million, compared with CHF 5.8 million the year before.

Sales development Global Trade

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 business division Global Trade accounted for 3.3 % of Group sales.

The business division Global Trade generated CHF 54.5 million in the first half of 2019. This is down 0.4 % year-on-year, when the figure stood at CHF 54.7 million.

The declines in the two key segments fresh products and cheese are primarily attributable to lower sales of yogurt drinks and fondue. The appreciation of the Swiss franc also had an adverse impact here. The rise in the area of powder/concentrates is a consequence of higher milk powder exports.

Gross profit

Gross profit amounted to CHF 604.9 million in the period under review. This constitutes a slight increase of CHF 0.4 million over the prior-year level of CHF 604.5 million, which is positive in light of the decline in sales of CHF 11.5 million. Negative currency effects and the overall negative acquisition effects dented gross profit, meaning the positive development was due to organic growth, especially in the business division Americas, and the generally improved gross profit margin. The Group’s gross profit margin was increased from 36.1 % to 36.4 %. The focus on strong market concepts and the consistent implement­ation of rationalisation and productivity measures once again played a key role in counteracting the height­ened price pressure on the customer side.

Operating result

Year-on-year operating expenses increased by CHF 3.6 million to CHF 447.0 million (previous year: CHF 443.4 million). Compared to net sales, they rose from 26.5 % to 26.9 %.

Personnel expenses fell in the first half of 2019 by CHF 0.7 million to CHF 231.4 million (previous year: CHF 232.1 million). This decline mirrored the development in sales, as a result of which the ratio between personnel expenses and sales remained constant at 13.9 %.

Other operating expenses amounted to CHF 215.6 million in the period under review, compared with CHF 211.3 million the year before. This equates to a year-on-year increase both in absolute terms (CHF 4.3 million) and in relation to sales. Marketing and sales expenses totalled CHF 63.3 million, thus remaining practically constant versus the prior-year period (CHF 63.2 million). Expenses for maintenance and repair also remained stable. Compared to this, expenses for logistics as well as for energy, operating material and supplies rose sharply in some areas and it proved a challenge to pass on the corresponding price increases to customers. Overall, total other operating expenses in relation to net sales were up year-on-year from 12.6 % to 13.0 %.

Other operating income came in at CHF 1.6 million, unchanged versus the prior-year period.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) fell in the reporting period by CHF 3.1 million or 1.9 % to CHF 159.6 million, down from CHF 162.7 million in the previous year. The EBITDA margin contracted slightly from 9.7 % to 9.6 % owing to the disproportionate increase in other operating expenses versus sales.

Depreciation on property, plant and equipment recorded a marginal decline from CHF 48.4 million in 2018 to CHF 47.1 million in the period under review, attributable to the expiry of the useful lives of certain assets in Switzerland. This constitutes a slight decrease also as a proportion to sales, from 2.9 % the previous year to 2.8 % this year. Amortisation on intangible assets likewise fell slightly from CHF 19.4 million to CHF 19.1 million.

Earnings before interest and taxes (EBIT) were CHF 93.5 million in the period under review, CHF 1.5 million or 1.6 % below the previous year’s EBIT of CHF 95.0 million. The EBIT margin also contracted slightly to 5.6 %, down from 5.7 % the year before.

Non-recurring effects in the 2019 half-year results

No significant non-recurring effects were recorded in the period under review. For this reason, Emmi has opted not to disclose adjusted earnings.

In the prior-year period, by contrast, the sale of the minority stake in the US-based Icelandic Milk and Skyr Corporation (“siggi’s”) had a significant impact on the income statement, resulting in a pre-tax gain of CHF 78.2 million or CHF 56.9 million after taxes in the first half of 2018. The gain from this sale is included in the position “Income from associates and joint ventures”. This increased earnings before taxes (EBT) in the same period last year by CHF 78.2 million and net profit by CHF 56.9 million.

Income from associates, financial result and income taxes

Income from associates and joint ventures practically broke even in the period under review. In year-on-year comparison after adjustment for the non-recurring effect from the sale of the minority stake in “siggi’s”, the result increased by CHF 1.4 million.

The financial result (net financial expenses) fell by CHF 0.2 million versus the previous year to CHF 3.0 million. The slight rise in net interest expenses was more than offset by lower currency losses and higher other financial income.

Income taxes amounted to CHF 14.5 million in the period under review, compared with adjusted income taxes of CHF 14.4 million in the first half of 2018. The tax rate for full year 2019 is forecasted at 16.0 %.

Net profit

Profit including minority interests was CHF 76.0 million, on a par with the profit adjusted for the proceeds from the sale of the minority interest in “siggi’s” in the prior-year period.

The share of minority interests in profit totalled CHF 3.0 million, down CHF 0.9 million year-on-year.

After the deduction of minority interests, net profit was CHF 72.9 million, compared to the net profit of CHF 72.1 million in the same period of 2018 adjusted for the gain on the sale of the minority stake in “siggi’s”. Adjusted net profit rose by CHF 0.8 million or 1.1 % accordingly. The net profit margin was increased to 4.4 % (previous year, adjusted: 4.3 %). Net profit per share recorded a commensurate rise and at the end of the first half of 2019 stood at CHF 13.63 (previous year, adjusted: CHF 13.48).

Assets, financing and cash flow

Total assets as at 30 June 2019 were down by 3.9 % or CHF 109.4 million compared with 31 December 2018 to CHF 2,711.1 million. This change is due mainly to the decrease in cash and cash equivalents resulting primarily from the repayment of a bond of CHF 100.0 million. Operating net working capital was CHF 522.5 million, up CHF 35.4 million versus 31 December 2018. By contrast, fixed assets declined by CHF 68.5 million, chiefly on the back of the reclassification of a loan previously recorded under loans and other receivables in the non-current assets to other receivables in the current assets. On the funding side, the reduction in current liabilities can be explained by the repayment of a bond of CHF 100.0 million, which was partially offset by the reclassification of a loan from non-current to current liabilities. The equity ratio rose to 61.9 %, up from 58.7 % as at 31 December 2018. This is a consequence of higher profit versus the distributed dividend in combination with lower total assets. Net debt thus contracted further from CHF 101.8 million as at 31 December 2018 to CHF 93.6 million as at 30 June 2019.

Cash inflow from operating activities amounted to CHF 103.2 million, a decrease of CHF 16.7 million compared with the previous year (CHF 119.9 million). The lower operating result and higher investments in net working capital were responsible for this development in approximately equal shares. Trade receivables and other receivables, prepayments and accrued income saw a less pronounced decrease overall compared with 31 December 2018 than in the prior-year period. Net working capital was also adversely affected by the sharper year-on-year reduction in trade payables. This is again attributable to the payment of trade payables at the end of 2017 to avoid negative interest rates. Conversely, the increase in other payables, accrued liabilities and deferred income was up and the increase in inventories slightly down on the prior-year period, which partially offset the negative repercussions of the change in net working capital. Overall, however, the development in net working capital resulted in a lower operating cash flow year-on-year. Cash inflow from investing activities recorded an outflow of CHF 47.7 million in the first half of 2019, compared with an inflow of CHF 39.1 million in the previous year, primarily as a result of the sale of the minority stake in “siggi’s”. A CHF 17.3 million higher outflow resulted due to investments in property, plant and equipment; added to this, the level of investment in the prior-year period was unusually low. Excluding the outflow of funds resulting from acquisition activities, the level of free cash flow generated in the first half of 2019 amounted to CHF 61.7 million, compared with CHF 94.3 million in the prior-year period. The lower operating cash flow and higher investments in fixed assets contributed to this development in approximately equal shares. Cash outflow from financing activities amounted to CHF 146.9 million in the first half of the year (previous year: CHF 45.5 million), attributable primarily to the repayment of a bond of CHF 100.0 million and dividend payments to shareholders and minority interests totalling CHF 49.0 million. Owing to the flows of funds described above, cash and cash equivalents declined compared with 31 December 2018 by CHF 93.9 million, from CHF 451.4 million to CHF 357.5 million.

Outlook for 2019 as a whole

Emmi confirms its EBIT forecast of CHF 215 to 220 million for the 2019 financial year, yet expects slightly lower organic growth of 1.5 % to 2.5 % instead of 2 % to 3 %. This correction is chiefly due to lower sales at Gläserne Molkerei in Germany.

Emmi is positioning itself for ongoing strong competition in the second half of 2019. Pressure on prices in the Swiss retail business will remain high. The appreciation of the Swiss franc coupled with current political developments will also expose the company to substantial additional risks, which Emmi will counteract with its robustness and strong diversification.

Emmi made great strides in implementing its strategy in the first half of 2019 by strengthening important growth and niche markets. Moreover, important brand concepts such as Emmi Caffè Latte performed very well. It will, however, be very challenging to compensate for the decline in sales at Gläserne Molkerei.

Based on the current outlook, Emmi therefore forecasts organic sales growth for full year 2019 of 1.5 % to 2.5 % (previously 2 % to 3 %). Organic sales growth in Europe is expected to come in at -1.0 % to 1.0 %, down from the previous level of 1 % to 3 % in the wake of the developments at Gläserne Molkerei. Emmi is sticking to its current forecasts for the business divisions Switzerland and Americas.

Alongside its EBIT forecast communicated in February 2019, Emmi also confirms the net profit margin projected at that time of 4.7 % to 5.2 %.