Emmi : Considerable increase in sales, slightly lower profitability

Category: Switzerland

Lucerne, 28 August 2013 - Emmi posted net sales of CHF 1,566.6 million in the first half of 2013 - an increase of 17.0 % year-on-year. Adjusted earnings before interest and taxes (EBIT) increased by 5.3 % to CHF 65.0 million, while adjusted net profits declined by 0.8 % to CHF 39.0 million, resulting in an adjusted EBIT margin of 4.2 % (prior year: 4.6 %) and an adjusted net profit margin of 2.5 % (prior year: 2.9 %). This result is a reflection of the strong pressure on prices in Switzerland and various European markets. Emmi confirms its forecast for 2013 as a whole of Group-wide sales growth of 8 to 10 %, EBIT of CHF 140 to 155 million and a net profit margin of around 3 %.

Emmi again reported solid growth in its core business in the first six months of 2013. Group-wide, Emmi increased its net sales to CHF 1,566.6 million in the first half, compared with CHF 1,339.2 in the prior-year period (+17.0 %).The company's forecasts with regard to the economic environment proved correct: pressure on prices remained high - not only in Switzerland - in spite of generally increasing milk prices. These current trends impacted on the income situation, as price increases in various markets could only be passed on with a slight delay. The markets in which Emmi is active performed very differently: while consumer sentiment was subdued in southern Europe, sales in the US, Tunisia, Chile and the Far East developed well.

Urs Riedener, CEO of Emmi, commented: "The sales trend in our core business is on track. Income has been affected, not entirely unexpectedly, by strong competition, particularly in the Swiss market. Nonetheless, we will achieve our sales and earnings targets for 2013."

Successful defence of market position in Switzerland
In Switzerland, net sales fell by 1.6 % to CHF 890.5 million (prior year CHF 905.3 million). This decline takes into account the sale of the stake in Nutrifrais SA. In organic terms, i.e. adjusted for this divestment effect, the fall was only 1.1 %. Declines in Switzerland were therefore lower than expected and Emmi was able to slightly expand its market share in the core retail trade business. This is an impressive development, particularly given the falling retail sales of dairy products in Switzerland, which declined 2.7 % on a value basis in the first half of 2013 (source: Nielsen). Adjusted for divestment effects, sales in dairy products (+0.4 %), fresh products (+2.1 %) and powder/concentrates (+13.8 %) all increased, while those in cheese (-1.0 %), fresh cheese (-3.1 %) and other products and services (-27.8 %) declined.

Factors driving growth in the Swiss business were Emmi Caffè Latte, Mix-it Müesli, Jogurtpur and good day in fresh products, as well as the Kaltbach cheeses, raclette cheese and Le Gruyère AOC. Falling sales were attributable in particular to the trading business, the disposal of the stake in Nutrifrais SA (pro rata effect of CHF 4.5 million) and the termination of the frozen goods logistics business (pro rata effect CHF 3.3 million).

Successful cheese business boosts international sales
In the international business, Emmi achieved sales growth of 55.8 % to CHF 676.1 million (prior year CHF 433.9 million). Adjusted for acquisitions and currency effects, this results in an organic decline in sales of 1.5 %. Emmi's core business performed well and according to the planning in key markets and product groups, while the sharp decline in butter and milk exports led to a drop in sales of CHF 32 million. Excluding these export effects, international organic growth was 6.5 %.

Adjusted for acquisition and currency effects, sales in Emmi's international business increased in the areas of cheese (+4.4 %), fresh cheese (+3.4 %), fresh products (+2.7 %) and other products and services (+13.3 %). Sales declined in dairy products (-35.0 %) and powders/concentrates (-77.6 %), which is unsurprising given the sharp fall in exports of butter and milk powder.

The growth in sales in the international business is mainly attributable to the increase in the stake in Spanish company Kaiku with effect from 1 July 2012. Emmi was also able to grow thanks to higher cheese exports, sales growth in locally produced cheeses in the US and the good performance of desserts from A-27 and of Emmi Caffè Latte. The company increased exports of cheeses, including specialities such as Le Gruyère AOC, Appenzeller® and Kaltbach. Germany, the UK and the US were growth markets in terms of cheese.

Emmi's international business accounted for some 43 % of total sales, of which 30 % was accounted for by products exported from Switzerland and 70 % by products made locally by Emmi subsidiaries.

Operating result reflects pressure on margins and lower milk volumes
Gross operating profit rose by 12.0 % in the first half of 2013 to CHF 521.1 million (prior year CHF 465.2 million). By contrast, the gross profit margin fell to 33.3 % (prior year 34.7 %). The main factor behind this was the fall in margins due to pressure on prices in Switzerland.

Operating expenses increased by 12.9 %, to CHF 402.2 million (prior year CHF 356.2 million). The fact that the share of the gross margin reduction could be offset by lower operating costs in relation to sales was pleasing. The additional expenditure compared to the prior year is largely attributable to the increased stake in Spanish group Kaiku and the acquisition of French company Diprola. Under operating expenses, personnel expense increased by 11.4 % and other operating expense by 14.5 %.

Adjusted for extraordinary effects, operational earnings before interest, taxes, depreciation and amortisation (EBITDA) rose by 9.1 % to CHF 119.3 million (prior year CHF 109.3 million) and adjusted earnings before interest and taxes (EBIT) increased by 5.3 % to CHF 65.0 million (prior year CHF 61.7 million). However, due to the reduction in gross profit margin, the adjusted EBITDA margin declined (from 8.2 % to 7.6 %), as did the adjusted EBIT margin (from 4.6 % to 4.2 %).

The increase in borrowing year-on-year due to acquisitions led to higher financial expenses, while tax rates remained stable. Emmi posted a 0.8 % lower adjusted net profit of CHF 39.0 million in the first half of 2013 (prior year CHF 39.3 million). Accordingly, the adjusted net profit margin was 2.5 % (prior year 2.9 %).

One-time effects from exceptional gains from the disposal of fixed assets
The positive one-time effects in the first six months of 2013 were the result in particular of the strategic decision to pull out of frozen goods logistics. As a consequence, the frozen goods logistics site in Kriens was sold. The services required by Emmi will now be purchased. The extraordinary effect from the sale of the site was CHF 2.4 million on EBITDA and EBIT and CHF 2.0 million on net profit. In the prior year period, the one-time effects were largely due to the disposal of the former Butterzentrale site in Lucerne (CHF 18.9 million on EBITDA and EBIT and CHF 15.4 million on net profit).

Outlook for 2013 as a whole
Emmi expects the market situation to change little in financial year 2013. In Switzerland, high import pressure, retail tourism, declines in the food service sector and competitive prices will continue to shape the business. The average milk price will be higher in the second half of 2013 compared to the previous year period, while other raw material prices are likely to remain close to their current level.

In the international business, Emmi continues to expect positive consumer sentiment in the US and other markets outside of Europe. In Europe, the southern European markets will continue to contract, while consumption in the other European markets relevant to Emmi is likely to remain stable.

Emmi believes that the targets published in March can still be achieved. We continue to expect an unchanged EBIT of between CHF 140 and 155 million and a net profit margin of around 3 % while Group wide sales is expected to increase by 8 to 10 % (previous estimate 6 to 8 %).

Key figures

*After adjustment of CHF 2.4 million (EBITDA, EBIT) and CHF 2.0 million (net profit) in the first half of 2013, and CHF 18.9 million and CHF 15.4 million respectively in the first half of 2012 relating to one-time effects on net profit. These effects result from extraordinary gains on the disposal of fixed assets.