«HOCHDORF becomes a global niche player in the premium segment»
Dr Thomas Eisenring, the 2015 financial year saw the removal of the minimum exchange rate of the Swiss franc against the euro by the Swiss National Bank and the international collapse of milk prices. How did the HOCHDORF Group manage in this situation?
We weathered the removal of the minimum exchange rate against the euro quite well by immediately initiating suitable measures; however we lost a key account, but this did not affect us so badly in view of our limited capacity. What has remained, of course, are the currency losses on our inventories. It was mainly in Germany that we felt the effect of the international collapse in milk prices, but here we have the good fortune to have hardly any permanent contracts for the supply of milk; we buy our raw materials on the spot market. So the damage was fairly limited.
How satisfied are you with the financial result achieved in this situation and what are the most important factors that have led to this result?
In view of the framework conditions in 2015 and our current business model, we can be satisfied. In my opinion, the main drivers are price stability in Baby Care accompanied by lower commodity prices and the adjustment of milk prices in Dairy Ingredients. There was certainly a negative effect from the milk situation in Germany.
What, in brief, were the specific challenges in the three business areas, Dairy Ingredients, Baby Care and Cereals & Ingredients?
In Dairy Ingredients, the main challenges were to defend our position in Switzerland and to find a solution to the huge Schoggi law gap looming as a result of the SNB decision.
In Baby Care we had to make the most of the very limited capacity at our disposal. We virtually pulled out all the stops in order to get as much as we could out of our plants.
In Cereals & Ingredients, the focus was on integrating the newly acquired Marbacher oil mill. A further priority consisted in developing the new product portfolio for Kid’s Food.
On the subject of increasing efficiency in production, from which projects do you expect improvements in results in the current financial year?
Cost efficiency is always an issue for us. A project is currently underway at our plant in Prenzlau where we intend to save a seven-figure sum. We are expecting further significant improvements from the streamlining of the supply chain and our investment in new capacity at the Hochdorf location.
Today, Dairy Ingredients comprises four production plants operating in three different political and economic environments. What synergies can nevertheless be exploited?
In principle every plant must be profitable in itself. Synergies mainly result from the general optimisation of capacity and by-products. In the high season for milk, for instance, certain products can be manufactured in inward processing in Germany if capacity is scarce in Switzerland. There are also synergies between the plants. In the case of protein production in Lithuania, for example, cream is produced as a by-product which can be used in Germany as a raw material for the production of butter.
Let's change the subject to Cereals & Ingredients. Here too, a plant had to be integrated in 2015. What synergies can already be exploited between the location in Switzerland and the one in Germany?
Synergies can be exploited by consolidating administrative activities; we have also moved unused equipment from Switzerland to Marbach. However, in principle we purchased the plant in Marbach because our future expansion into Kid's Food and winning additional orders for wheat germ can hardly be achieved from Switzerland. Product costs in Marbach are lower than in Switzerland.
Capacity is to be expanded at the Hochdorf location. How far has this project progressed and what products are produced with the additional milk that can add value?
The project will be completed by the beginning of 2017 and will bring economies of around CHF 500,000 Swiss francs, solely by saving energy. On the product side, we will benefit from a pure volume effect through our standard product range in the area of Dairy Ingredients.
At the location in Prenzlau, there was initially talk of converting the existing drying capacity and the half-yearly report mentioned the construction of a new spray tower. What were the reasons for not producing any infant formula in Prenzlau for the time being?
This really was a case of good luck. When we calculated our future capacity requirements in 2013, this was based on the forecasts at the time from our most important customers in the area of Baby Care. Now you must know that our most successful customers are relatively young companies that have not been in this business for very long. Then last year we found that the forecasts of around 10,000 tonnes, which were made at the time, were too low; it must be noted that these were all customers who use their Swiss origin as a marketing instrument. So the conversion of the existing tower in Prenzlau that was originally envisaged was no longer on the cards as it was too small. An alternative major investment in a larger tower, at a plant where no infant formula has ever been produced, would simply be too big a risk. Besides, the fastest-growing group of customers were those who prefer products of Swiss origin.
At the same time, in our Strategy 2016-2020 we set out a product initiative to replace skimmed milk powder, where margins are weak, with base powder and instant milk. Both products can be manufactured on the present tower in Prenzlau with just a few modifications. The decision in favour of this change of strategy was therefore a very easy one to take, as this is far more in line with market requirements.
Does this change of plan mean that net profit as a percentage of production revenue will not rise as announced from financial year 2017?
This change of plan will have no negative effect on profit growth; on the contrary, it will enable us to accelerate the process of making the plant in Prenzlau profitable.
The Baby Care segment can look back on a year of no growth. When can growth be expected again in this area?
As mentioned a number of times, we have reached the limits of our capacity here. With the existing business model, we will only be able to grow again from 2017. If we manage to accomplish forward integration, we will be able to make considerable progress even in the current financial year. It should not be forgotten that without the effect of exchange rates, we would have posted growth in terms of turnover.
Forward integration is a very important strategic project . How far has this project progressed?
This project is already very advanced. We expect that we will soon be able to announce more details.
Why is the HOCHDORF Group focusing on markets in Asia and the MEA region in the case of forward integration? What are the most important features of these markets that one has to bear in mind?
Markets in Asia are naturally very attractive due to their sheer size, but the competition is correspondingly tough. In addition to this there are market risks; in China; for instance, besides the high legal uncertainty, you also have to take account of the huge cost of cultivating the market.
We find the Asian markets to be very attractive and will also remain active there, but the MEA markets are the ones to concentrate on for forward integration. Although these markets are smaller, they are more accessible to us and tend to involve fewer risks.
How does the HOCHDORF Group intend to integrate a possible target company and address the specific features of the market?
There is a perfectly simple principle here: «Never stop a running engine». The candidates for integration are very successful companies who know exactly what they are doing on the market side. These companies must continue to function in exactly the same way on the market side. Our task will be to create more structure in the administrative area and to bring this business model to new markets. We have created the Global Marketing & Sales function specifically for this purpose.
In the half-yearly report, there was also a brief mention of the Kid's Food project. What exactly lies behind this project name, and what opportunities is the HOCHDORF Group expecting it to bring?
The «Kid’s Food» project is intended to extend our product range from pure infant formula into the area of toddlers and children. Everyone now understands that healthy infant formula is important for a child's development, and suppliers have positioned themselves accordingly. Today there is a broad range of healthy infant formulas on the market. However, if we look at the food in terms of the baby's age, it is our opinion that the market for healthy food is underdeveloped in this area. Such products not only need to be healthy, they have to taste good as well. We can see a strong demand for such products and this is where we see the great potential of catering for babies as they develop into toddlers and young children.
The HOCHDORF Group is currently engaged in several challenging projects. What do you think are the greatest risks that HOCHDORF has to face?
I consider the risks to be well manageable in the case of the acquisition and integration projects. In the case of the investment projects, especially investments in the expansion of capacities for the production of infant formula, I see the main challenge in the expansion of our organisation. We must realise that we have to create around 40-50 new jobs and produce closely in line with pharmaceutical standards. This will challenge us to our limits.
Alongside these projects, day-to-day business continues. What is the order situation like in the individual business areas?
The situation is stable in the area of Dairy Ingredients; we have manged to renew all the important contracts in 2016; we are not expecting any surprises. What greatly pleases us is that we have been able to conclude a number of interesting deals in addition.
In Baby Care the situation could soon be termed dramatic. Some customers by the middle of 2016 will already have the same volume of orders as for the whole of 2015. We need to watch the situation in China very closely. It is quite possible that limits will be placed on the maximum number of brands per manufacturer. But any possible decline in China would be more than made up for by other orders.
We are not expecting any surprises in Cereals & Ingredients. At the moment we still have a volume problem in Marbach, but here we have initiated various measures that promise an improvement.
A new strategy was also defined in 2015. Which, from your point of view, are the three central issues?
Our vision is to become a global niche player in the various premium segments, with profitability significantly above average. In addition to cost efficiency, which we still need to increase, we are pursuing two main approaches, the product offensive and the at least partial development towards becoming a business-to-consumer company. The latter not only includes forward integration, but also the development and marketing of products for which we only deliver the ingredients today. This aim is to implement this policy primarily in rapidly growing, unsaturated markets, in other words in the APAC and MEA regions.