In this letter to the shareholders, we will address two aspects of the strategy and its implementation in depth: the acquisition of the majority stake in the Pharmalys Group and the planning and realisation of the investments in Sulgen. Along with the standard content, you will find the sustainability report published every two years at the end of this annual report. We would like to start by reporting on the solid earnings.
Very good results achieved
In comparison to business year 2015, the HOCHDORF Group can present some record earnings for 2016. Earnings before interest and taxes (EBIT) were CHF 22.5 million or 4.1 % of the production revenue. This number is quite impressive for a company that does business in the food industry, mostly in the business-to-business segment. Five years ago, in business year 2011, the HOCHDORF Group achieved an EBIT of just CHF 1.9 million or 0.5 % of the production revenue. Primarily, Swiss business contributed to the record-high result in 2016. The foreign factories felt the full force of the stormy weather in the milk market due to their product range. In an industry comparison, we have mastered the challenging market situation on the international level quite well, however. The Group earnings of CHF 19.4 million are also at a record level (PY CHF 13.0 million).
On account of our success and in light of the major investments, we propose to the Annual General Meeting a slight increase of ten centimes in the dividend payout to CHF 3.80. This will let us continue what we consider to be a cautious dividend policy aimed at sustainability.
Majority stake in Pharmalys
Forward integration, and thus taking a step closer to the end consumer, is a central part of the strategy set at the beginning of 2016. This step is important for a sustainable improvement in the earnings of HOCHDORF. After intensive negotiations, we signed the contract on 25 March 2016. On 19 December 2016, the contract was finalised after an extraordinary Annual General Meeting and the fulfilment of additional mutual closing conditions. As a result, HOCHDORF Holding Ltd has acquired a 51 % stake in Pharmalys Laboratories SA and the jointly formed Pharmalys Africa S.à.r.l. The investment in Pharmalys Tunisie S.à.r.l. will start at 49 %. HOCHDORF will acquire the remaining 2 % after completing an «approval process» by the state of Tunisia.
For the financing of the majority stake, HOCHDORF Holding Ltd will issue a three-year mandatory convertible bond for CHF 218.49 million at the end of the March 2017. HOCHDORF will provide information about the details of the mandatory convertible bond in due time.
HOCHDORF in new realms
By taking a step closer to the end consumer, the HOCHDORF Group is not navigating in new waters from a historical perspective. In its 120 year history, the HOCHDORF Group has repeatedly worked closer to or farther from the market for end consumers, for example, with the brand Heliomalt or even earlier with the brand Bébé. For us, the integration of Pharmalys means: «Never stop a running engine!» On the market side, Pharmalys must continue to run just as it did before. HOCHDORF's task is to create more structure in the administrative area, sell existing products that are of interest to the markets through the Pharmalys distribution channels and introduce the business model in new markets. In addition, meaningful reporting systems must be established. The respecitve integration work has been underway since the beginning of 2017.
High performance spray tower line
At our location in Sulgen, we have been not only producing, but also building for some time. The high rack storage area has been covered since the end of 2016 and the installation of the technical equipment has begun. To enable us to cover future demand for Swiss-made infant formula, the Board of Directors approved the construction of an additional spray tower line for infant formula with a performance of roughly 32,000 tonnes and the installation of additional can filling lines and a high rack storage area in Sulgen. The work is being planned, and the handover of the new lines to production continues to be scheduled for the first quarter of 2018. The staff required for the line will be recruited this business year and trained at the existing spray tower line.
The project for increasing capacity at the Hochdorf site is running on schedule. The new lines will be available for the coming milk season. In Prenzlau, an investment was made in a higher performance filing line for buttermilk and put into operation as scheduled. In Marbach, the expansion of production capacities was completed this spring.
Strategy will continue
With the new strategy adopted at the beginning of 2016, the HOCHDORF Group set significantly higher target margins. The forward integration and the product offensive are two important points that must be pursued persistently. In the case of the forward integration, we have decided to move forward with one customer to achieve the goals more quickly. With a majority stake in the Pharmalys Group, we will achieve an important milestone. In the area of the product offensive, we were also able to achieve some success, but must still improve in the future. Above all, the time from development to market, i.e. to sale in stores, must still be reduced significantly.
Change in the Board of Directors
I was elected to the Board of Directors of HOCHDORF Holding Ltd for the first time at the Annual General Meeting in 2002. Since 2014, I have been active as Chairman of the Board of Directors for this exciting company. In 14 years, the HOCHDORF Group has changed substantially and I look back proudly on the goals we have achieved. In the spirit of the successfully implemented new Strategy 2016 – 2020, however, it is now time to make room for other people on the Board of Directors and for me to step down. I would like to thank you for the confidence which you have had in me and which I was continually aware of during my term in office.
Likewise, Meike Bütikofer will also step down from the Board of Directors at the coming Annual General Meeting. She has used her marketing knowledge and her experience in the area of strategic development to support the HOCHDORF Group during her eight years. We would like to thank Meike Bütikofer for the good collaboration and wish her much success and all the best in the future.
The Board of Directors has decided to reduce the board to seven members again. We recommend the election of Ulrike Sailer to the Board of Directors at the Annual General Meeting. She has many years of international experience in the areas of marketing, sales and brand positioning and can use her knowledge to support the HOCHDORF Group on the path to getting closer to the end consumer.
We recommend the election of Dr Daniel Suter as Chairperson at the Annual General Meeting on 5 May 2017.
The integration of the Pharmalys companies in the HOCHDORF Group will have a substantial impact on the balance sheet and the income statement. International milk markets have also substantially recovered in recent months. Accordingly, we anticipate fairly stable milk quantities and slightly higher prices. In the current business year, we anticipate gross sales revenue of CHF 635 – 670 million and an EBIT as a percentage of production revenue between 6.1 and 6.6 %.
Without reliable suppliers, without the energetic and reliable dedication of our employees, without customers purchasing our products and without the support of our shareholders, the outstanding results in 2016 would not have been achieved. Therefore, we would like to thank you greatly for the confidence you have shown in us and for your support of the HOCHDORF Group.