2019 – a year of adjustments

HOCHDORF faced a variety of challenges in the 2019 business year. The Board of Directors was largely reconstituted at the 2019 Annual General Meeting. New appointments were also made to Group Management. In economic terms, the difficulties emerging in the 2018 business year with Pharmalys Laboratories SA (Pharmalys) became more acute and presented the Group with existential challenges. It has been possible to secure the Group's financing by extending the syndicated loan. The sale of subsidiaries (particularly Pharmalys) helped to further consolidate the Group's financial position. However, it was still necessary to undertake additional value adjustments to plant, financial assets, receivables and goods in the 2019 financial statement. The Group therefore posted a significant fall in profitability for 2019. HOCHDORF remains in a challenging situation, making it necessary to press ahead with adjustments to its subsidiaries. Lower sales and reductions in revenues meant that net sales fell by 18.6% to CHF 456.8 million. The EBIT amounts to CHF –265.3 million.

The Baby Care division in turn posted low sales in the 2019 business year, particularly for Pharmalys Laboratories SA, but also for HOCHDORF Swiss Nutrition Ltd in its third-party business. Utilisation of both towers in Sulgen is at a low level, which makes this the biggest challenge facing the Group in the future. The Dairy Ingredients division posted stable sales and was a key element in securing the Group's business activities in 2019. However, the market environment remains very challenging. Lower processing volumes and the development in export subsidies (Schoggi Law) in particular exerted pressure on the result. The Board of Directors decided to give up the third business division, Cereals & Ingredients. This resulted in appropriate plant amortisations; the outphasing of customers and products is underway. Bimbosan AG achieved positive results but the picture was more negative for the remaining subsidiaries, with Uckermärker Milch GmbH again posting disappointing results.

The market environment in Europe remains largely unchanged compared to last year. The milk market is still characterised by high processing capacities and high milk quantities, with demand remaining the same. The Board of Directors has therefore decided to begin the process of selling Uckermärker Milch GmbH. It has also decided to sell the companies Zifru Trockenprodukte GmbH and Snapz Foods AG.

A positive outlook for development in the Middle East/Africa region remains the main focus of activities in the Baby Care division. Business relations with Pharmalys will be maintained despite the sale of the company. The loss of a significant customer is a source of regret although this was partly offset by the acquisition of some new customers in 2019.

Asia continues to offer the greatest market potential for Baby Care. China in particular is an attractive market of growing significance. In 2019, HOCHDORF succeeded in passing the audits demanded by the Chinese authorities; permission to supply to China should be officially granted in the first half of 2020.

Due to lower sales and the value adjustments undertaken, gross profit has fallen significantly compared to the previous year from CHF 171.8 million to CHF 61.8 million. The gross profit margin is now 14.1% (previous year 30.0%).

Operating costs have increased slighted compared to the previous year. Costs incurred are too high compared to sales and volume produced and so appropriate cost cutting initiatives have been implemented. The higher costs at Pharmalys, which are included until deconsolidation at the end of November 2019, also have an impact. Bimbosan AG also represents an additional change, which was only included in the income statement for eight months in 2018. The sale of HOCHDORF South Africa did not have a significant impact. The number of employees fell compared to the previous year from 694 to 618.

HOCHDORF's operating profitability suffered a significant fall for the reasons outlined above as well as the sale of subsidiaries and the impairments on the fixed assets of subsidiaries. EBIT fell to CHF –265.3 million in the 2019 business year. However, we remain convinced that the general orientation of the Group is correct and that the volume and results can be increased sustainably, particularly in the Baby Care division. The Dairy Ingredients division remains a challenge, especially as a result of the changes to the new «Schoggi Law».

The strengthening of the Swiss franc and massively increased interest costs with the banks have led to an overall negative financial result of CHF 8.3 million. Around CHF 2 million is attributable to exchange rate losses. It should also be noted that the interest expense for the mandatory convertible bond and the hybrid bond in the Swiss GAAP FER financial statements will not be recorded in the income statement.

In the 2019 business year, no tax credits were created from the losses posted which resulted in a tax expense despite the losses. In addition, the deferred tax provisions at Uckermärker Milch GmbH and Zifru Trockenprodukte GmbH were released due to the planned sales.

Earned capital was reduced from CHF 30.4 million to CHF –34.8 million. The considerably lower operating results have a significant impact in this regard. Compared to the previous year, cash flow from operating activities shows an improvement from CHF –81.3 million to CHF –15.4 million. This is mainly due to the deconsolidation of the Pharmalys companies and the reduction of receivables and inventories. The item Inventories also includes value adjustments due to damage claims.

Investments of CHF 8.6 million were undertaken in the past business year, focusing mainly on the renewal of production plants. This amount is significantly below the ordinary amortisation. This cautious approach to investment is not sustainable.

Free cash flow was positive again in the 2019 business year. This was mainly due to the net cash flow from the sale of the Pharmalys companies. We expect a positive free cash flow again for 2020.

Net debt fell from CHF 141.3 million to CHF 113.3 million compared to December 2018. The hybrid bond and the mandatory convertible bond are classed as equity and do not affect net debt.

The equity ratio increased to 54.6% compared to the end of 2018 (48.8%). The main reason for this is the deconsolidation of the Pharmalys companies and the associated repayment of borrowed capital. In addition, there was a fundamental change due to the sale of the Pharmalys companies and the «revival» of the lost goodwill, which was however balanced by the negative overall result. The HOCHDORF Group's financing will improve significantly once it receives the remaining purchase price from the sale of the Pharmalys companies in 2020. This provides a good foundation for the company's continued growth.

In its current position, HOCHDORF continues to have the potential to achieve further growth. We are aware that political uncertainties in Switzerland and abroad, as well changed market conditions in the most important sales regions, may have an impact on the Group's revenue position.

Jürgen Brandt
CFO