Notes to the consolidated half-year financial
statements as at 30 June 2019

1. Accounting principles

These consolidated financial statements comprise the half-yearly statements for HOCHDORF Holding Ltd and its subsidiaries for the reporting period ending on 30 June 2019. The statutory auditors conducted a review of the consolidated half-year financial statements. The consolidated interim financial statements were prepared in conformity with existing guidelines based on the accounting recommendations of Swiss GAAP FER 31 (complementary recommendation for listed companies), and with the consolidation and measurement principles described in the consolidated annual financial statements for 2018. Income taxes are calculated based on an estimate of the income tax rate expected for 2019 as a whole. The consolidated half-year financial statements are to be read in conjunction with the consolidated financial statements prepared for the business year ended 31 December 2018, 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 19 August 2019.

2. Changes in the scope of consolidation

In the reporting period, the scope of consolidation underwent the following changes:

Consolidated companiesCurrencyCapital in thousandCapital shares and votes
Thur Milch Ring AG, Ermatingen, SwitzerlandAcquisition as of 01.01.2019CHF17056.47%0%
HOCHDORF South Africa (PTY), Cape Town, South AfricaSale as of 30.06.2019ZAR4500%90%

For further information on the purchase of Thur Milch Ring AG, see section 7. For further information on the sale of HOCHDORF South Africa (PTY), see section 8.

3. Currency translation rates in CHF

 Income statement average exchange ratesRates on the balance-sheet date
January to June 2019January to June 201830.06.201931.12.2018
EUR 11.12731.6591.11241.1269
USD 10.99550.96680.97830.9858
TND 10.33420.39160.33970.3294
UYU 10.02940.03300.02770.0304
ZAR 10.07040.07810.06950.0685

4. Contingent liabilities


5. Events after the balance-sheet date


6. Explanatory remarks about the interim financial statements

Despite the initial consolidation of the income statement of Thur Milch Ring AG and the deconsolidation of HOCHDORF South Africa (PTY) Ltd, most of the previous year's figures are directly comparable.

In terms of turnover and profit, the performance in the first half of the year is usually inferior to that of the second half. This mainly due to the seasonal increase in the milk supply from March to mid-June, which results in higher inventories, and the significantly higher sales of infant formula of Pharmalys Laboratories SA in the second half of the year. In terms of orders and deliveries, the Pharmalys business is much more intensely focused on the second half of the year. However, when compared over several years, there can be considerable variations between the two halves of the year.

The result of the first half of 2019 is marked by the ongoing price distortions between fat and protein in the EU and the overcapacities in the German milk market and the associated high price pressure from the retail trade. This has also had a significant influence on the Swiss situation and thereby on the "Schoggi Law" in particular and the contributions under this law. This has been further exacerbated by the new market regulation in force since 1 January 2019, which means that less funds are available for the "Schoggi Law", which has significantly increased the pressure on domestic prices. As the largest supplier of roller-dried whole milk powder to the chocolate industry, HOCHDORF has been hardest hit by this development and has had to adjust milk prices accordingly. As a result of this, as well as the lower milk volume in the 1st quarter due to last summer's drought, the Group recorded correspondingly lower milk receipts; supply security was always assured nonetheless. As a consequence, the Dairy Ingredients (DI) division closed the first half of the year with a negative result. This was despite the measures taken to reduce costs and adjust the portfolio. The senior management team decided, among other things, to shut down the spray towers Niro 2 and Niro 3 in Hochdorf at the end of 2019 due to pending high investments in safety technology. The shutdown causes additional depreciation of around CHF 0.5 million as well as costs for dismantling and conversion of around CHF 0.5 million.

The Baby Care (BC) division performed well below expectations for the first half year, with the low returns mainly attributable to Pharmalys. In-market sales are still growing according to Pharmalys, but due to discussions about financing growth, the company has reduced its distributors' inventories accordingly and placed few new orders and product call-offs. This led to massively lower sales both in Pharmalys and in the BC division of HOCHDORF Swiss Nutrition. By contrast, costs in Pharmalys rose sharply, resulting in a significantly negative operating result. In addition, an allowance of CHF 32.2 million had to be made due to the high level of overdue receivables from Pharmalys and the lack of control over distributors and thus over inventories. In addition, a provision of CHF 3.0 million was made for operating business within HOCHDORF Swiss Nutrition. Overall, the results for HOCHDORF Swiss Nutrition and Pharmalys Laboratories are thus significantly below the previous year. As expected, Bimbosan AG, acquired in 2018, is developing positively. The international expansion of the Bimbosan brand has started according to plan and is beginning to bear fruit.

The newly-acquired subsidiaries are not developing as planned in the Cereals & Ingredients (CI) Division. In addition, the traditional business in the CI Division, with its complexity and small quantities, caused increasing problems in optimising production capacities. The Board of Directors has therefore decided to discontinue the CI Division and to continue producing only a few profitable product groups, integrating them into the DI Division. This decision will lead to the cessation of wheat germ production in Hochdorf and to the sale of subsidiaries abroad. The discontinuation of wheat germ production means an additional depreciation of around CHF 1.5 million and costs for dismantling and conversion of around CHF 0.5 million. In addition, the value of the "Snapz" brand at CHF 2.35 million as reported in Snapz Foods AG's balance sheet was written off in full. The subsidiary HOCHDORF South Africa was sold and deconsolidated retrospectively as of 30.6.2019. The sale resulted in an EBIT capital gain of CHF 0.45 million and a currency gain of CHF 0.02 million.

For the second half of the year, the Group expects milk receipts to remain tight, with higher sales and earnings, particularly in the BC and DI Divisions. The restructuring work for DI continues as before. This means that there is work still to be done with regard to sales and milk prices in particular, but also in product expansion and portfolio streamlining. Uckermärker Milch GmbH (UMP) is only just holding its own in difficult circumstances. The Board of Directors has therefore decided to look for a buyer for UMP and appropriate negotiations have now begun. A provision of EUR 10 million has been set aside for the transaction.

Due to the seasonal increase in receivables and inventories, the cash from operating activities amounted to CHF –29.0 million (previous year CHF –114.3 million). At CHF –4.4 million, cash flow from investment activities in the first half of the year was significantly lower than in the previous year (CHF –51.7 million) due to lower investments and the acquisition of Bimbosan AG in the previous year.

The balance sheet total reduced from CHF 575.2 million as at 31 December 2018 to CHF 564.3 million as at 30 June 2019. In the same period the net debt increased from CHF 156.7 million to CHF 174.2 million. For this reason, the equity ratio fell from 48.8% as at 31 December 2018 to 38.5% as at 30 June 2019.

7. Acquisition of Thur Milch Ring AG

HOCHDORF Holding Ltd acquired 56.47% of the shares in Thur Milch Ring AG, based in Ermatingen, Canton Thurgau, on 15 January 2019, effective retrospectively from 1 January 2019, thus gaining control over the company and completing the entire value chain for the Baby Care segment. The company is a milk purchaser from local milk producers.

The composition of net assets acquired was as follows:

PositionTotal in TCHF
Cash and cash equivalents406
Accounts receivables1,981
Other receivables including deferred assets26
Financial assets246
Accounts payables–2,078
Other short-term liabilities including deferred liabilities–384
Identified net assets197

This transaction resulted in goodwill amounting to CHF 13 thousand, which were recognized directly in equity. The purchase price of CHF 125 thousand was largely paid in cash.

8. Sale of HOCHDORF South Africa (PTY) Ltd

On 8 July 2019, HOCHDORF Holding Ltd sold a 90% share of HOCHDORF South Africa (PTY) Ltd, located in Cape Town (South Africa), as part of the reorganisation of the Cereals & Ingredients Division. The company was exclusively active in producing and selling chocolate.

The composition of net assets sold was as follows

PositionTotal in TCHF
Cash and cash equivalents28
Accounts receivables60
Other receivables including deferred assets9
Other fixed assets656
Accounts payables–2
Other short-term liabilities including deferred liabilities–7
Non-current financial liabilities–1,419
Provisions for deferred taxes–23
Identified net assets–466

When the company was formed in 2015, no goodwill arose in connection with the purchase price allocation, which, according to our guidelines would have had to be recognised in equity. The sale resulted in a total value correction of CHF 468 thousand, CHF 447 thousand of which were posted through EBIT and CHF 21 thousand were posted through exchange rate gains. The sale price also amounted to the equivalent of CHF 1.467 million (USD 1.5 million).

In 2018, the company generated net sales of CHF 341 thousand with EBIT of CHF –243 thousand. The half year ending 30.6.2019 resulted in net sales of CHF 188 thousand with an EBIT of CHF –53 thousand and a net profit of CHF 151 thousand. The net profit resulted from a loan waiver by HOCHDORF Holding Ltd in the amount of CHF 389 thousand.

9. Earnings per share

Earnings per share, basic

Weighted average shares outstanding1,404,7661,405,882
Net profit after minority interests–43,390,735–2,231,758
Earnings per share in CHF, basic–30.89–1.59

To determine the earnings per share, the earnings due to the HOCHDORF Group shareholders are divided by the average number of outstanding shares. Treasury shares are not included in the calculation of the average outstanding shares. The weighted average number of shares is based on the total of all transactions in the reporting year and additions due to the creation of new registered shares from the conversion of the convertible bond.

Earnings per share, diluted

Weighted average shares outstanding, basic1,404,7661,405,882
Dilution effect of convertible bond 1717,137717,137
Weighted average shares outstanding, diluted2,121,9022,123,019
Net profit after minority interests–43,390,735–2,231,758
Interest paid on convertible bond 2167,45684,786
12% tax effect (interest on convertible bond*0.12/1.12)–17,942–9,084
Net profit after minority interests, diluted–43,241,221–2,156,056
Earnings per share in CHF, diluted 3–30.89–1.59
  1. The dilution is calculated from the mandatory convertible bond of CHF 218.49 million and the conversion price of CHF 304.67, from which a maximum of 717,136 new shares are generated. The conversion period runs from 3 January 2018 to 13 March 2020. As of 30 June 2019, the entire mandatory bond was therefore outstanding.
  2. In this case, only the accrued interest on the external capital component for the current business year is taken into account in the interest costs. The actual interest payments are offset against the external capital component of the discounted interest payments.
  3. Due to the negative earnings after minority interests, the diluted earnings per share correspond to the basic earnings per share.

10. Breakdown of net sales by product groups, regions and Divisions

The segment reporting must be adjusted accordingly in the statements and assessment at the level of net sales revenue by the formation of provisions for risks from the operating business of HOCHDORF Swiss Nutrition Ltd of CHF 3.0 million and Pharmalys Laboratories SA of CHF 32.2 million. Net sales of infant formula are effectively higher by this amount.

By product groups

TCHFFirst half of 2019First half of 2018
Milk products/cream119,17949.07%114,51840.67%
Milk powder80,46533.13%75,54226.83%
Infant formula37,59015.48%74,97526.62%
Bakery/confectionery goods2,3180.96%2,3680.84%
Other products/services–3,539–1.46%3,6121.28%

By region

TCHFFirst half of 2019First half of 2018
Middle East/Africa12,5805.18%54,03419.19%
America, others1,9240.79%7,3032.60%

The remaining turnover comprises deliveries to customers who export the goods and where the destination country is not separately recorded.

By Division

TCHFFirst half of 2019First half of 2018
Dairy Ingredients201,93483.15%188,16466.82%
Baby Care30,28912.47%77,08327.37%
Cereals & Ingredients10,6414.38%16,3475.81%

As a result of possible competitive disadvantages compared to non-listed and large listed competitors, customers and suppliers, presentation of the segment results was waived, pursuant to Swiss GAAP ARR 31/8. The Swiss milk market is small and tightly knit with few key companies and providers. The supplier side (milk producers) is organized within several milk producer organisations. On the processing side, the market is dominated by the cheeseries and four large dairies. 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 company apart from the HOCHDORF Group produces infant formula for the Swiss and international market.

11. Key figures

TCHF (unless otherwise stated)20192018Change
January to June
Processed milk and whey in million kg374.8365.3+2.6%
Net sales revenue242,864281,594–13.1%
Earnings before interest, taxes, depreciation and amortisation (EBITDA)–39,40113,051n/a
As % of production revenue–15.5%4.3%
Earnings before interest and taxes (EBIT)–52,3902,932n/a
As % of production revenue–20.6%1.0%
As % of production revenue–25.0%–0.7%
Staffing levels at 30 June (nominal)666678–1.5%

12. Discontinued Division

In the press release dated 8 July 2019, the Board of Directors announced its intention to discontinue the Cereals & Ingredients (CI) Division. The CI Division, which was originally established to provide milk-independent support, is being discontinued due to a lack of critical size and scalability. Valuable product categories such as non-milk-based special spray products and health supplements will be integrated into Dairy Ingredients and will be continued. The evaluation of strategic alternatives for the subsidiaries Marbacher Ölmühle GmbH, Snapz Foods AG and Zifru Trockenprodukte GmbH should be completed by the end of the year. The 90% interest in HOCHDORF South Africa Ltd. was sold retrospectively as of June 30, 2019 to African Chocolate Café Ltd. 

The CI Division generated net sales of CHF 30.6 million and an EBIT of CHF –2.4 million as at 31.12.2018. As at 30.06.2019, net sales amounted to CHF 10.6 million with an EBIT of CHF –5.1 million.


13. Assessment as a going concern

13.1. Background

In October 2016 the HOCHDORF Group acquired 51% of Pharmalys Laboratories SA. The final purchase price was calculated in accordance with the purchase agreement by multiplying the company's operating results (EBIT) in 2016 and 2017. Sales at Pharmalys rose by more than 50% in 2017. The operating result increased by almost 150% in the same year. Due to the multiplication clause mentioned above, this resulted in a very high purchase price of CHF 245 million and, as a consequence, a high level of external dept. Orders and sales in 2018 and 2019 were well below expectations. Sales were CHF 61.1 million in 2016, CHF 92.3 million in 2017, CHF 77.5 million in 2018 and CHF 24.5 million in the first half of 2019, more than 50% below budget. The operating result achieved was clearly negative in the first half of 2019.

Pharmalys Laboratories SA presents the HOCHDORF Group with major challenges. The business model does not give the HOCHDORF executive bodies any transparency or influence over the value chain of the company, which operates primarily in emerging markets in Africa and the Middle East. Major activities such as finance, sales and consulting have been outsourced to third parties. The majority of sales are handled through distributors in which the seller of Pharmalys, who is currently Vice Chairman of the Board of Directors of Pharmalys and owns 49% of its shares, holds a majority or a significant stake.

The business model is extremely capital-intensive due to the necessary financing of net current assets by the HOCHDORF Group and represents an additional challenge. This, combined with a significantly negative development of the operating result in the first half of 2019, raises the Group's level of debt and has a significant impact on liquidity.

In addition, there are CHF 56.1 million in receivables from Pharmalys in emerging markets, which are largely overdue and extremely difficult to collect. These outstanding debts represent another significant risk. The company therefore had to set up appropriate allowances in the first half of 2019.

For the reasons stated above, the Pharmalys business model in its current form cannot be managed successfully and sustainably within the HOCHDORF Group. The Board of Directors is reviewing all the options for Pharmalys as a matter of urgency.

The realignment of the HOCHDORF Group announced on 8 July 2019 also includes focusing on the high-growth Baby Care Division, with the sale of the production plant in Germany and the development of a new strategy in the Dairy Ingredients Division. The Cereals & Ingredients Division will be discontinued due to a lack of critical size and scalability, with some of the business activities integrated into Dairy Ingredients or divested.

13.2. Debt restucturing 

In spring 2019 it became apparent that some financial covenants of the existing credit facility could not be met. In May 2019, a waiver was negotiated with the banks to temporarily suspend the financial covenants. The waiver was approved and the syndicated loan of CHF 151 million was extended until 31.10.2019. As a result of this short-term extension, the total liabilities from the syndicated loan (CHF 151 million) were reclassified from long-term financial liabilities to short-term financial liabilities. It was agreed with the banks to maintain the existing line of CHF 151 million and to cancel the unused limits in the existing syndicated loan of tranche A (CHF 10 million) for use by HOCHDORF Holding Ltd and tranche C (CHF 30 million) for use by Pharmalys Laboratories SA.

The Board of Directors is working on the sale of subsidiaries to reduce net debt.

In addition, a detailed and comprehensive action and medium-term plan for the entire Group is being drawn up with external support. 

At the same time negotiations on the provision of a new credit line of CHF 40 million as tranche D with HOCHDORF Swiss Nutrition Ltd as the new, additional borrower in return for collateral in the form of promissory notes and accessories (plants/installations) as well as a guarantee from HOCHDORF Holding Ltd are in process.

13.3. Uncertainties 

The syndicate banks only extended the credit facilities until the end of October 2019. The success of the restructuring and the maintenance of sufficient liquidity is subject to considerable, material uncertainties and depends on the following conditions: 

  • Successful implementation of the planned restructuring measures
  • Extension of syndicated loan of CHF 151 million as at 31 October 2019 

Because the measures outlined above may not be implemented in full and on time, there are significant doubts for the group to continue as a going concern.

It is also important that the additional credit facility of CHF 40 million in the form of tranche D can be completed.

Today, the Board of Directors and the senior management team expect that the proposed measures can be implemented and that long-term financial stability can be secured. For this reason, the Board of Directors and senior management team believe that a continuation of the HOCHDORF Group can currently be assumed.