Dear Shareholders,

At the end of April we decided to invest in a new line of spray towers in Sulgen for infant formula production. In July we were able to sign a memorandum of understanding to acquire a majority stake in one of our largest customers. The first decision illustrates our increased capacities and the second our forward integration. But many other things happened as well in the first half of 2016.

The implementation of the announced Strategy 2016-2020 is already well under way. In the first half of the year, new products suited for the strategy were developed and have already been launched on the market in some cases; otherwise, important decisions were made. The biggest highlight happened a few days after the midpoint of the year: We signed a memorandum of understanding to acquire a majority stake in one of our largest customers. We will start, however, by explaining the turnover and income figures in the first half of 2016.

Higher income with slightly less turnover

In total the HOCHDORF Group processed slightly less milk, whey, milk permeate and cream, at 415.9 million kg, than in the same period last year (previous year: 421.4 million kg; -1.3%). Milk production in Switzerland was 3.5% above the level in the previous year, whilst we have processed just short of 30% more whey at the Sulgen plant. The plants in Switzerland were running at full capacity. In Germany and Lithuania, the liquid intake declined somewhat due to the difficult situation on the milk market.

Gross sales revenue is CHF 278.4 million and thus somewhat lower than the amount of CHF 284.3 million in the previous year. The main reason for this is the ongoing drop in milk prices, which also partially led to lower product prices in the Dairy Ingredients business area. The HOCHDORF Group as a whole sold 125,604 tons of products (-0.1% compared to the previous year).

The gross profit margin on the income side was a solid 24.1% (previous year: 22.3%). In absolute terms, this means a gross profit of CHF 70.7 million (+10.8% compared to the previous year). We were able to significantly increase EBITDA to CHF 18.4 million and also EBIT to CHF 13.1 million. The net profit totalled a pleasing CHF 11.0 million (previous year: CHF 4.1 million) Since performance in the first half of the year is normally better in regard to turnover and profit than the second half, these good income figures for the current situation may not be projected over the entire business year.

Forward integration going well

At the annual results press conference in 2016, we presented our Strategy 2016-2020. It includes, among others, the forward integration in the Baby Care business area. In July we were able to sign a memorandum of understanding for the acquisition of a majority stake in Pharmalys Laboratories SA.

According to the memorandum of understanding, the current owner shall retain an equity stake in the company as a minority shareholder in future and continue to work as CEO. The next step is to negotiate a purchase/sale agreement. After that, open questions will be clarified and the necessary measures will be taken in order to allow the HOCHDORF Group to take a successful first step closer to the end consumer.

In order to successfully launch the forward integration, we are also dependent on the support of our shareholders. For this reason we will convene an extraordinary Annual General Meeting in Q4 2016 if the planned schedule can be kept and a purchase/sale agreement is signed. To finance the transaction, a conditional capital increase is planned; the purchase price shall be paid mostly in the form of shares. In addition, we plan to apply for an increase to the restriction to voting rights from currently 5% to 15% in future. We will notify shareholders promptly about the future course of action.

Difficult situation on the milk market

The milk market worldwide did not recover from its price low in the first half of the year, as expected. Unfortunately, prices actually even went in the opposite direction initially. Numerous countries intervened more or less heavily in the milk market. At our plants in the eurozone, we produce, for example, skimmed milk powder for government intervention. The high quantities of milk in Switzerland also led to relatively high storage quantities that will be sold in the coming months.

Since the middle of June, the quantity of milk has decreased significantly, particularly at our Swiss plants. In the coming months we also expect significantly lower quantities of milk than in the spring months, before the quantity increases again in the last quarter. Milk prices recovered somewhat from their absolute nadir shortly before the end of June. Due to high inventories around the world and ongoing slow demand, we do not expect a significant recovery in prices this year.

Strategic project work

The IonEx plant was switched over to operating business as planned. It will produce lactose for our infant formula in future. The warehouse logistics project is running according to plan, with the second phase of construction work having begun. The Board of Directors also gave the green light to another major project in Sulgen: This involves the construction of spraying tower line 9 (Project T9) and an additional tin filling line to expand the production and filling capacities for infant formula "made in Switzerland". The system should enter the test phase in Q4 2017. The planning work is already on course.

At the beginning of June, the first kids food products developed by us were launched on the Swiss market by one of our partners. This has let us take an important step forward in the area of kids food. Additional healthy diet products for children and youths will follow in the coming months.

The project to expand capacity at the Hochdorf site is also going according to plan. As of next spring we will be capable of processing a larger quantity of milk in Hochdorf. Other important projects include the development of base powder and instant milk powder. In Prenzlau, the first higher-quality milk powder products were produced and presented to potential customers. We anticipate that we will be able to deliver the first quantities regularly toward the end of the year.

Outlook

In the second half of the year, we will continue to work hard on the outlined strategically important projects. The forward integration project will certainly take precedence over the others.

The gross sales revenue for the year is now forecast to fall slightly, to between CHF 540 and 580 million, due to the ongoing low milk prices and their impact on product prices in the Dairy Ingredients area. However, we are raising our EBIT forecast, which is expected to be in the range of 4.0 to 4.2% of production revenue.

Kind regards from your BEST PARTNER
HOCHDORF Holding Ltd

Josef Leu
Chairman of the Board of Directors

Dr Thomas Eisenring
CEO

Thomas Eisenring (EN)
Dr Thomas Eisenring CEO
Josef Leu (EN)
Josef Leu Chairman of the Board of Directors