Notes to the consolidated half-year financial
statements as at 30 June 2016

As of 1 January 2016, the Group applied the following changes to existing standards that were published by the end of 2015 and are binding for consolidated financial statements after 1 January 2016:

New rules for reporting revenue: Amendments to Swiss GAAP FER framework concept, FER 3 and FER 6

The new rules in the area of reporting revenue specify how income is reported, measured and recognised. The framework concept, FER 3 and FER 6 were amended in this regard. The changes mean that income is to be reported when a service was provided or a tangible or intangible asset was delivered and the benefits and risks as well as the power of disposal were transferred to the buyer. Furthermore, it defines that net revenue from goods and services involves revenues from ordinary operating activity, which includes the value of the provided service or product after the deduction of reductions in revenue. Only the value of the service provided by the company itself is reported in the case of brokerage transactions. In the case of business incidents with multiple, separate components, they must be reported and measured separately. Furthermore, the most important sources of revenue and their recognition must be explained in the Notes to the financial statements.

The long-standing accounting principles in the HOCHDORF Group are already in compliance with the new rules for reporting revenue in accordance with Swiss GAAP FER accounting standards. The amendments will not have any impact on the reporting of turnover in the Group, and the amounts from previous years do not have to be adjusted.

Turnover and revenue recognition

Net sales include the receipt of economic benefits from the sale of goods and services within the scope of ordinary business activity during the reporting period. Reductions in revenue such as discounts, rebates and other price reductions as well as duties paid to third parties such as commissions, fees and any value-added taxes must be deducted from reported net sales. All inter-group turnover is eliminated in the consolidation process.

Turnover is booked when a Group company has transferred the definitive benefits and risks that are associated with ownership of the sold products and the power of disposal to the customer, and the ability to collect the receivables resulting from such is adequately secured. Turnover from the provision of services is reported in the accounting period in which the service was provided. The consideration of reductions in revenue for customers takes place in the same period as the turnover that caused these reductions in revenue in accordance with the terms and conditions of the order. The HOCHDORF Group does not have any brokerage transactions or business events with multiple, separate components.

These consolidated financial statements consist of the unaudited half-year financial statements for HOCHDORF Holding Ltd. and its subsidiaries for the reporting period ending on 30 June 2016. The consolidated interim financial statements were created in conformity with existing guidelines based on the accounting recommendations of Swiss GAAP FER 31 (supplemental recommendations for listed companies) and with the consolidation and measurement principles described in the 2015 consolidated annual financial statements. Revenue taxes are calculated based on an estimate of the revenue tax rate expected for the whole of 2016. The consolidated half-year financial statements are to be read in conjunction with the consolidated financial statements prepared for the business year ending on 31 December 2015, as this represents an updated version of the last complete financial statements. The consolidated half-year financial statements were approved by the Board of Directors on 11 August 2016.

There were no changes to the scope of consolidation during the reporting period.

The HOCHDORF Group is involved in legal proceedings on account of its subsidiaries Uckermärker Milch GmbH and Marbacher Ölmühle GmbH. Both legal disputes concern deliveries of goods. Corresponding provisions were created for both proceedings.

HOCHDORF Swiss Nutrition Ltd had to post a performance bond in the amount of EUR 1,311,667 for its deliveries to Egypt. The customer can lodge a claim under the performance bond only in the event of non-delivery by HOCHDORF.

HOCHDORF Holding Ltd signed a memorandum of understanding in July 2016 with Pharmalys Invest Ltd for the acquisition of 51% of Pharmalys Schweiz Ltd, Pharmalys Tunisie Sàrl and Pharmalys Afrique Sàrl. The HOCHDORF Group is implementing its strategy of forward integration with its intent to purchase these companies so that it can do business itself in the end consumer market.

Performance in the first half of the year is normally better in regard to turnover and income than the second half. The main reason for this is the seasonal nature of milk quantities, with the most productive period occurring between April and June. However, variations between the two halves of the year can differ highly when compared over several years.

Income for the first half of 2016 was characterised by somewhat higher liquid intake (227 million kg vs. 212 million kg in the previous year) at Swiss plants, the improvement in capacity utilisation at the main plants, and continued high prices for A milk in Switzerland, which were largely accepted on the market. Lower turnover across the Group is the result of companies in Germany and Lithuania, which had strategically less liquid intake due to the difficult milk market situation in the EU (189 million kg vs. 209 million kg in the previous year). Uckermärker Milch GmbH (UMP) was able to achieve positive earnings despite the very difficult milk market situation in the EU and particularly in Germany thanks to the production of intervention milk powder. In the area of butter and curd, the company was also able to hold its own and achieve reasonable contribution margins. The market overall and thus the situation for UMP will remain difficult in the second half of the year. Future developments are difficult to predict in particular with respect to the intervention. HOCHDORF Baltic Milk UAB (HBM) was not able to repeat its positive earnings in previous years. HBM is not only affected by the overall EU market. Political intervention by authorities has made it necessary to adjust milk prices, which has led in turn to falling margins and negative earnings. We expect an improvement in the situation during the second half of the year, however. HOCHDORF Swiss Nutrition Ltd was able to boost its operating income despite difficult market conditions. The quantity produced by the Group rose by 2.5% in comparison to the same reporting period in the previous year, and the quantity sold fell slightly by 0.1%. The cash flow from operating activities, with seasonal variations due to the build-up of receivables and inventory, was CHF -17.0 million (previous year: CHF -11.8 million). The high level of inventory due to seasonal variations will fall again in the second half of the year. At CHF 11.0 million, cash outflow from investing activities in the first half of the year was a little higher than in the previous year (CHF 10.9 million). The Group was able to defend its position quite well in a difficult market environment.  We remain optimistic about the outlook for the second half of the year. Future trends in world market prices are still unclear, with a current upward tendency, which means that the shortfall in "Schoggi law" funding will be somewhat reduced.

As a result of possible competitive disadvantages compared with unlisted and large listed competitors, customers and suppliers, the presentation of segment results pursuant to Swiss GAAP FER 31/8 was dispensed with.

The Swiss milk market is small and tightly knit, with few key companies and providers. Milk production is in the hands of just a few organisations. On the processing side, the market is shaped by four large dairies, along with cheesemakers. On the customer side, the chocolate industry segment is predominant, likewise with just a few large producers. In the area of infant formula (based on milk), only one other firm produces infant formula for the Swiss and international market apart from the HOCHDORF Group.

The balance sheet total increased from CHF 340 million as at 31/12/2015 to CHF 360 million as at 30/06/2016. During the same period, net debt rose from CHF 21.3 million to CHF 55.9 million due to the decline in liquidity for investments in net current assets and for investments in property, plant and equipment. The equity ratio fell slightly from 56.6% as of 31/12/2015 to 55.0% as of 30/06/2016. The syndicated loan covenants have been complied with in full.