«With the forward integration we are also now responsible for brands.»
Dr Thomas Eisenring, the 2016 business year is now one for the books. How satisfied are you with the business year as a whole?
Fundamentally, I am very satisfied. However, I am of the opinion that we could have done even better.
What circumstances prevented even better results?
It is no secret that we had to deal with very difficult market conditions in the EU; we, too, are not immune to them. We reduced volumes there in order to avoid the worst. Furthermore, we incurred restructuring costs at Marbacher Ölmühle, which we did not anticipate.
Despite the difficult market conditions, the financial results of the HOCHDORF Group were better than ever before in its history. What factors led to these outstanding results?
The most important factor was very certainly the strong results at HOCHDORF Swiss Nutrition. All three business divisions made a contribution to the good earnings, with the results in the Cereals & Ingredients and Baby Care divisions coming in significantly above expectations. We were able to increase our productivity once again.
What, in brief, were the specific challenges in the three business divisions, Dairy Ingredients, Baby Care and Cereals & Ingredients?
In the Dairy Ingredients division, we had somewhat less milk in Switzerland in the second half of the year, and it was not always easy to fulfil all customer contracts. In the EU we had to deal with extreme price fluctuations, e.g. in the area of cream and butter, which made profitable business impossible, above all in the second half of the year.
In the Baby Care division we also had difficulties with our capacities again this year, but we were able to achieve and sell one month's more production than in the prior year; since everyone did a good job. Otherwise, the new Food Safety Law in China kept us on tenterhooks that importing infant formula would be much more difficult.
In the Cereals & Ingredients division, we face very important decisions. In 2016, Cereals & Ingredients generated outstanding results; certain contracts, however, will run into the future, and we gave strategic consideration in 2016 to various options with regard to how the division should be developed in future. When we have the right business model here, it could become a big thing.
The forward integration is an important part of the strategy, and a first step was taken with the majority stake in Pharmalys. What impact will this majority stake have on HOCHDORF?
With the acquisition of the majority stake in Pharmalys, we are also now responsible for the brands «Primalac» and «Swisslac»; our responsibility has therefore increased significantly. We will also have to deal with these brands and develop them; that is new for HOCHDORF. On the other hand, we will see big changes in margins; I am assuming that our absolute EBIT will rise significantly this year.
How are you planning to integrate the Pharmalys companies in the HOCHDORF Group? And what new tasks must HOCHDORF specifically overcome?
Fundamentally, I do not like this term «integration of Pharmalys in the HOCHDORF Group». Pharmalys will not become HOCHDORF or vice-versa. A new company will emerge out of this that wants to generate value for all involved parties. The important thing is that we integrate all administrative processes at HOCHDORF and safety-relevant aspects are controlled and monitored. Our corporate governance must naturally also apply to all. If, however, it is a matter of marketing infant formula in countries in the MEA region, then it involves processes that we can hardly affect.
Can the distribution channels from Pharmalys be used for other HOCHDORF products? If yes, for what products is that planned?
Yes, and work is well under way here. One of the most important projects for me is the development of instant milk that is also consumed after baby age. Here, however, we still have some work to do. In April, HOCHDORF South Africa will have diabetes chocolate ready for the market, and it will be sold through the Pharmalys distribution network. In the Cereals & Ingredients division, there will be numerous other products that are suited for sales through this network; they include, for example, our healthy crisps and dietary supplements.
Internationalisation always has a human component. HOCHDORF will turn into an inter-cultural company. To what extent will this affect the corporate culture of HOCHDORF?
Today we are already an inter-cultural company; this will clearly become more intensive, but is fundamentally nothing new for us. The different perspectives resulting from the various business models are much more interesting. As we formulated the press release upon closing the deal, I paid attention, for example, to meeting the requirements according to stock corporation law, while Amir Mechria, the Managing Director of Pharmalys, also saw it as a promotional message.
Key word Strategy 2016 – 2020: How satisfied are you with the implementation – independently of the forward integration?
I am not very satisfied with the result of our product offensive, even if we can celebrate some limited success. But we should not forget that we are using a limited number of resources and doing things we have never done before and doing them in a technical environment that we are not entirely familiar with. But Rome was not built in one day.
The can lines and tower 8 areas have developed well. At Niro 4 in Hochdorf, we have somewhat rolled back capacity utilisation for the benefit of food safety, which has also increased efficiency as measured on the good end product, however. Where I still see potential is in purchasing; we must also improve there.
What is the strategic focus for HOCHDORF in 2017?
Fundamentally, we will systematically continue our Strategy 2016 – 2020. In 2017, I see us focusing on cross-selling in the Pharmalys network, developing the business model in the Cereals & Ingredients division, and ensuring the systematic profitability of the Dairy Ingredients division across all locations.
In the area of infant formula, HOCHDORF is investing in a new spray tower line for the production of high-quality infant formula. The line should be ready for production in the first quarter of 2018. When will the new spray tower line operate at full capacity? What measures are being taken so that the tower can be filled as quickly as possible?
We assume that the new tower will run at full capacity in 2022. We can expand certain projects such as the tenders in Egypt, but we also have a very promising project pipeline. Furthermore, we have created the position of Chief Sales Officer, which does not deal with anything other than new customer acquisition.
Where are the greatest opportunities, risks and challenges in the Baby Care division in 2017?
Fundamentally, we have gained the greatest opportunities in this area with the acquisition of the majority stake in Pharmalys.
A challenge that we can handle quite well, however, is that of formulations. We must change them so that they are in compliance with the new requirements for the EU and are state-of-the-art from a scientific perspective. We are also focusing on increasing capacity, process optimisation of the facilities and the preparatory work for process development of the new production line.
The new regulation in China is not quite without risks. It stipulates that, in future, every brand available on the market must undergo an approval procedure. This procedure will be introduced this year and it involves some uncertainties. In addition, the registration process for each individual brand is relatively elaborate.
In the Dairy Ingredients division, HOCHDORF wants to increasingly invest in special powder such as instant milk powder, for example. Where are these products produced and for what markets are they interesting?
We can produce less complex powder for industrial applications in Prenzlau. We expect that we will be able to use the existing special towers from partners for high-quality powder in the business-to-customer area. There is enough spraying capacity on the market, and we do not need to develop our own to start with.
The foreign plants in Dairy Ingredients enjoyed a strong tailwind in 2016. What measures are taken so that these plants will also be able to withstand market changes in future?
Fundamentally, it is very difficult in the EU to react quickly enough to market conditions, above all, if the volatility is as great as it was last year. Since we are not organised as a cooperative (Genossenschaft) and cannot compensate with the milk price, there is only one long-term solution: we must manufacture products with higher added value.
You want to increase investments in Kids’ Food and in your own brands in the Cereals & Ingredients division. What are the next steps and what is to be expected in the current business year?
We need a location in the EU for the Cereals & Ingredients division. In Switzerland, we have more than double the costs that we have in Germany, for example. Furthermore, we must have all the technologies in our own company for Kids’ Food products, preferably even in the same plant. We are in the evaluation phase of various alternatives and I hope that we will be able to put our money where our mouth is this year.
The Marbacher Ölmühle has belonged to the HOCHDORF Group since 2015. How is the plant integrated into the Group, and what is still needed?
The Marbacher Ölmühle was basically a construction site in 2016; a good example of the fact that acquisitions can have their pitfalls despite serious due diligence. For the most part, we have replaced half the staff and completely changed the order structure. With the current set-up, I am of the opinion that Marbacher Ölmühle will achieve its targets.
With the forward integration, the risks for the HOCHDORF Group have also certainly increased. What do you think are the greatest risks that HOCHDORF has to face?
I am often asked this question and have my own opinion on this. Fundamentally, it is correct that our players are strewn across the entire world, and we assume responsibility for our own brands. At first, this sounds riskier than before. But another critical aspect changed with the forward integration: in the past, Pharmalys was simply one of our customers and we had minimal influence. Today, we have direct influence on all of Pharmalys's activities and can co-shape the entire development; I feel a lot better as a result of this.
I see the greatest risks as lying elsewhere. After the decision to invest in more capacity for the production of infant formula in Switzerland rather than in Germany, a new business model had to be found for our plant in Prenzlau. Today, the plant operates with almost 200 million in turnover and is thus close to the red. That is risky. Furthermore, I am worried about the labour market in Switzerland. It is becoming increasingly difficult to find qualified staff who want to work in four-shift operations.
In addition to strategic projects, the daily business will continue. Can you sum up what the market and order situation is like in the individual business areas?
The order situation is good in all areas. Obtaining orders is usually not the problem; a much more critical question is the price. I am not expecting any quantity or price surprises in 2017.