Emmi Investor Day Jörg Riboni CFO Emmi Group Berne ... file1 Key initiatives in financial...

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Key initiatives in financial managementStatus quo and cornerstones of future development

Emmi Investor DayJörg RiboniCFO Emmi Group

Berne, 3 November 2015

Organic decline in sales lower than expected, income above expectations

§ Net sales CHF 1,563 million− Decline of 3.8 % (organic: decline of 1.7 %) − Negative currency effect: CHF 57 million

§ Adjusted EBIT CHF 85 million*− Increase of 14.3 %− EBIT margin 5.4 % (1HY 2014: 4.6 %)

§ Adjusted net profit CHF 47 million*− Increase of 3.1 %− Net profit margin 3.0 % (1HY 2014: 2.8 %)

*2015: EBIT and net profit adjusted for non-recurring effects of CHF -0.5 million and CHF -0.4 million respectively. These are attributable to the extraordinary sale of property, plant and equipment.

2014: EBIT and net profit adjusted for non-recurring effects of CHF -34.5 million andCHF -35.4 million respectively. These are attributable to the extraordinary impairment in Italyless the extraordinary gains on the sale of property, plant and equipment.

Key figures for the first half of 2015

Page 2Emmi Investor Day 2015, Berne: Presentation of Jörg Riboni, CFO Emmi Group

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Financial outlook

Key financial management initiatives

Current financing profile

Looking back: Half-year 2015 performance

Organic decline in sales lower than expected, income above expectations

§ Net sales CHF 1,563 million− Decline of 3.8 % (organic: decline of 1.7 %) − Negative currency effect: CHF 57 million

§ Adjusted EBIT CHF 85 million*− Increase of 14.3 %− EBIT margin 5.4 % (1HY 2014: 4.6 %)

§ Adjusted net profit CHF 47 million*− Increase of 3.1 %− Net profit margin 3.0 % (1HY 2014: 2.8 %)

*2015: EBIT and net profit adjusted for non-recurring effects of CHF -0.5 million and CHF -0.4 million respectively. These are attributable to the extraordinary sale of property, plant and equipment.

2014: EBIT and net profit adjusted for non-recurring effects of CHF -34.5 million andCHF -35.4 million respectively. These are attributable to the extraordinary impairment in Italyless the extraordinary gains on the sale of property, plant and equipment.

Key figures for the first half of 2015


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Sales as planned, adjusted earnings higher than previous year

Amounts in CHF million 1HY15* 1HY14** 1HY13*** 1HY12 1HY11Net sales 1,563 1,625 1,567 1,339 1,310Earnings before interest, taxes, depreciation and amortisation (EBITDA)as % of net sales

142.5

9.1

132.7

8.2

119.3

7.6

109.3

8.2

101.0

7.7

Earnings before interest and taxes (EBIT)as % of net sales

84.95.4

74.34.6

65.04.2

61.74.6

57.04.4

Net profitas % of net sales

46.63.0

45.22.8

39.02.5

39.32.9

35.22.7

Headcount (full-time equivalents) 5,307 5,310 5,112 3,820 3,614

Overview of key figures for the first half of 2015

Page 5

* 2015: EBITDA and EBIT adjusted for non-recurring effects of CHF -0.5 million and net profit of CHF -0.4 million. These are attributable to the extraordinary sale of property, plant and equipment.

** 2014: EBITDA adjusted for non-recurring effects of CHF 1.1 million, EBIT of CHF -34.5 million and net profit of CHF -35.4 million. These are attributable to theextraordinary impairment in Italy less the extraordinary gains on the sale of property, plant and equipment.

*** EBITDA and EBIT adjusted for non-recurring effects of CHF 2.4 million and net profit of CHF 2.0 million. These are attributable to the extraordinary gains on the sale of property, plant and equipment.

Emmi Investor Day 2015, Berne: Presentation of Jörg Riboni, CFO Emmi Group

Savings and efficiency measures take effect

in CHF million 1HY15 1HY14 ∆ in %Personnel expensesas % of net sales

201.712.9

202.612.5

-0.4

Marketing and sales-related expensesas % of net sales

59.8

3.8

61.8

3.8

-3.2

Occupancy expenses, maintenance, leasing

30.1 33.5 -10.1

Energy, operating materials and supplies

30.2 32.9 -8.2

Logistic expenses 43.8 46.4 -5.6Other operating expenses 34.2 34.3 -0.3Operating expensesas % of net sales

399.825.5

411.525.4

-2.8

Overview of operating expenses

Page 6

§ Total operating expenses and marketing and sales-related expenses unchanged from previous year (in % of net sales)

§ Significantly lower expenses for maintenance, occupancyexpense, energy and logistics

§ Positive influence from divestments in 2014


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Financial outlook



Looking back: Half-year 2015 performance

Financial position: Capital structure and key financial figures

Balance sheet total CHF 2,405 million

Liabilities CHF 1,110 million(of which interest bearing CHF 570 million)

Equity CHF 1,295 million

Position as per 30 June 2015

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Key financial figuresEquity ratio 53.9 %• Net debt: CHF 216 million• Net debt / EBITDA: 0.8 • Invested capital: CHF 1,931 million

§ A strong equity base and low debt factor are the prerequisites for financing further international growth§ Potential for further leverage§ Objective to increase capital turnover

Healthy funding


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Financial position: Balanced financing at competitive costs

Debt maturity profile

Total financial debt CHF 570 million

Promissory notes CHF 23 million

Straight bonds CHF 450 million

Bilateral bank credits and loansCHF 97 million

Committed credit linesCHF 70 million

Debt overview 30.06.2015

§ Average funding costs p.a.: 2.2 %§ Percentage of fixed interest rates: 93 %§ Duration: 5.7 years§ Funding currencies: 80% CHF, 6% EUR, 8% USD, 6% other


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Growth potential through acquisitions

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§ The current financial situation provides a sound basis to support Emmi’s strategy for further international growth

Acquisition power

Conclusion

§ Acquisition power based on current financials: > CHF 500 million§ Annual free cash flow > CHF 120 million § Potential to increase capital


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Financial outlook



In retrospect: Half-year 2015 performance

Emmi Investor Day 2015, Berne: Presentation of Jörg Riboni, CFO Emmi Group page 12

Organisational structure since 1 January 2014

The structure takes the increasing internationalisation into account

Corporate Development

CEOCEO

Switzerland Europe(Austria, BeNeLux, Germany,

Italy, UK,)

Americas(Chile, Canada, France, Spain,

Tunisia, USA)

Global Trade Model

DrinksSpeciality cheeseSpoonableDesserts

Finance / Legal

Corporate Communications & IR

HRInternational Operations

Quality / Security / Environment

Global Categories & Marketing (incl. R&D coordination)

Global Initiatives

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Page 13

Financial management initiatives (extract)

§ Strong Swiss Franc: Implementation of measures to mitigate effects § Fx-Management: Continuous optimisation§ Value Management: Increased focus on value creation§ Re-assess transfer pricing concept§ Harmonising systems and processes (e.g. OneERP)


Emmi exports Swiss products worth CHF 450 million

Effects of the strong Swiss franc

Switzerland

Americas

Europe

Global Trade

§ Business division Americas: mainly Spain & USA

§ Business division Europe: Exports to Italy, Germany, Austria, Benelux

§ Business division Global Trade: All exports


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Unlike its competitors, Emmi paid a higher milkprice (in euros)

Milk prices June 2015

Primary and secondary effects are significant

Page 16

Primary effects − Declining sales and income outside Switzerland in response to fall in value of euro

− Valuation losses on monetary balance sheet positions − Lower purchasing costs in euro (positive)

Secondary effects − Loss of volume following price increases abroad− Loss of volume in Switzerland due to shopping tourism and

downturn in tourism− Price adjustments, import pressure

Strength of the franc: consequences for net profit


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Range of measures implemented quickly and systematically

Strong Swiss franc: measures aimed at mitigating effects

Page 17

Price increases abroad

Emmi savings

Measures by third parties: suppliers in Switzerland/abroad

All parts of the value chain made their contributionMeasures succeeded in offsetting losses



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The key points

§ Natural Hedging: The most significant part of the potential transactional Fx-exposure of the Group is covered thanks to the alignment of income and cost structures in different currencies:

− Location selection: International diversification over the last few years with significant local production sites such as in Italy, Spain, Tunisia, Chile, USA and others

− Procurement in currencies similar to customer billing currencies− Choice of contract currencies in order to further reduce the exposures

§ The remaining transactional Fx-exposure mainly derives from the export business out of Switzerland

§ In addition, the Group faces significant translation effects, which especially impact sales given the fact that organic sales growth mainly comes from the businesses outside Switzerland

Fx-Management of Emmi Group

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The key points

§ Fx-exposure is concentrated in few entities:− the export business from Switzerland to Emmi entities abroad is invoiced in the

currency of the receiving entity− the financing of entities with internal loans is denominated in the functional

currency of the receiving entity

§ Fx-exposure with impact on P&L derives from: − recognised exposures (balance sheet items)− committed exposures (e.g. acquisitions, capex)− non-committed but expected exposure (purchases and sales based on forecasts)− translation of P&Ls of entities reporting in foreign currencies

§ Fx-exposure with direct impact on Equity derives from:− translation of net assets of entities reporting in foreign currencies− Equity-loans in foreign currencies

Page 20


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Hedging policy to further mitigate Fx-exposure

§ Continuously increase share of natural hedges

§ Mitigate remaining risks with financial instruments− Treasury committee (Group Treasurer/CFO/CEO) regularly meets and

defines/reviews hedging strategy− Recognised exposure with impact on P&L is hedged to a significant extent− Committed exposure are also hedged to a significant extent− Expected cash flows of the next 12 months are hedged up to 75%

§ Translation effects are not hedged with financial instruments but measures such as dividend distribution, stringent net working capital management, financing in local currency


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Page 21

Financial management initiatives (extract)

§ Strong Swiss Franc: Implementation of measures to mitigate effects § Fx-Management: Continuous optimisation§ Value Management: Increased focus on value creation


Alignment between the shareholder’s and the management’s perspective

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Managing operations

Value communication

Managingexpectations

Shareholder’s perspective Management’s perspective

TotalShareholder Return

ROIC WACC InvestedCapital- xCapital

gains Payments Market Cap./+

Economic Profit

Revenue growth

Cost efficiency

Capitalefficiency

Alignment


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Relation between Economic Profit and the Enterprise value

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§ The Enterprise Value is equal to the sum of operating Invested Capital and the present value of future Economic Profits

EnterpriseValue

Present value of future Free Cash

Flows (DCF)InvestedCapital

Present value of future Economic

Profits

Market value of equity (market capitalization)

Interest bearing debt ROIC > WACC


§ In the last few years Emmi invested significantly in the international expansion and production capacity increases to allow future growth

− Invested capital grew significantly

− Past investments have to pay off in the future

§ Emmi as a consumer goods company has traditionally a strong focus on sales & marketing

− Growth also has to be profitable

− Profitable growth has to be seen in relation to the invested capital

§ Realizing an adequate ROIC is a prerequisite for financing our strategy and therefore ensuring that the strategy can be successfully as well as sustainably implemented

Why Emmi decided to establish a value-based management approach


The main reasons

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Emmi Economic Profit


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EMEP = ( ROIC _ WACC ) x Invested Capital

Spread method

Residual income method

Emmi Economic Profit = NOPAT _ (Invested Capital x WACC)

Growth Cost efficiency Capital efficiency

Financial value drivers

§ Emmi Economic Profit combines all value drivers from the operating activity and is therefore a good indicator for value-based performance measurement


Focusing on all value drivers with EMEP

Page 26

EmmiEconomic

Profit (EMEP)t=0

Change ofEMEP due to

growth

Change ofEMEP due to cost

efficiency

Change ofEMEP due to

capital efficiency

EmmiEconomic

Profit (EMEP)t=1

Traditional focus on income statement

Additional focus on Invested Capital

NWCmanagement

Capital utilization

Investments Acquisitions

§ The EMEP-level can be affected on all value drivers:− Growth: change in sales− Cost efficiency: change in margin− Capital efficiency: change in capital employed and the respective cost of capital.


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Visualization fosters understanding of local management / employees

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Growth

Cost efficiency

Capital efficiency

Every employee can contribute in its area of expertise to improve the EMEP

Net revenue Operating EBIT

Operating EBIT margin(x)

Operating financial income(+)

NOPAT

Calculatory Taxes (30.0%)(+)

ROIC

Ø Operatives net working capital Ø Net working capital ∅ Invested Capital

(/)WACC

(-)Emmi Economic Profit (EMEP)

(+)Ø Trade receivables Ø Tangible and intangible

assets(+)

∅ Invested Capital(x)

(+)Ø Inventories Ø Financial assets

(+)

(-)Ø Trade payables Ø Cash and marketable assets

(+)Cost of Capital

Ø Other current assets(+)

Ø Accruals (net)(+)

WACC


Essential success factors for the sustainable implementation

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1 Creditability Commitment and involvement of the top management

Practicability Business-oriented definition of key performance indicators

Transparency Management information concerning value creation on all levels

Competence Training for decision-makers

Responsibility Value creation results from an empowerment of the local decision-makers

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3

4

5


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§ Growth measures

– Price increases, rebate policy etc.– Volume increases (innovations, new products, new clients / markets / channels

etc.)

§ Cost efficiency / margin improvement measures

– Reduce COGS / optimize supply chain: question materials consumed; re-negotiate conditions with suppliers; improve production process efficiency

– Appropriate Fx-hedging– Question every single Opex position / budget (zero-based budgeting approach)– Carefully consider marketing and sales spending effectiveness– Reduce overhead costs in % of net sales– Reduce fixed costs in order to increase operating flexibility (e.g. FTEs)– Lower depreciation / amortisation as consequence of capital efficiency measures

The contributions of different departments


Examples

§ Capital efficiency measures

– Net working capital management– Reduction days sales outstanding (e.g. increase collection efforts)– Higher inventory turnover (e.g. optimisation of production planning)– Increase days payables outstanding (e.g. re-negotiate terms with suppliers)

– Delay replacement Capex as long as possible / meaningful– Analyze potential rationalisation and growth Capex in detail if financially worthwhile– Carefully consider financial investments (e.g. investments in associates, loans etc.)– Analyze outsourcing opportunities– Assess sale of non-operating assets– Re-think about your operating cash needs and re-discuss dividend policy with

Group Treasury

Examples how different departments contribute


Examples

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Value Management key findings

2 To improve EMEP we focus on all value drivers (growth, cost efficiency and capital efficiency).

1 Emmi Economic Profit (EMEP) incorporates all value drivers including risk-adequate cost of invested capital.

3 Revenue and profit figures are still key elements of the performance measurement, but focus on invested capital needs to strengthened

4 Implementation of value management is a cultural change which needs time

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6 Still significant potentials with respect to cost management / efficiency gains and capital management

Management reporting / remuneration has to be aligned with the main KPIs which affect growth, cost and capital efficiency

Emmi Investor Day 2015, Berne: Presentation of Jörg Riboni, CFO Emmi Group Page 31

Summary

Financial outlook



In retrospect: Half-year 2015 performance

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Sales target unchanged, income targets adjusted

Outlook for 2015

(Figures assume constant raw milk prices)

Page 33

Organic growth for2015, earnings

Forecast March 2015

Organic growth for2015, earnings

New forecast

Sales Group -3 % to -2 % Unchanged

Sales Switzerland -3 % to -2 % -4 % to -3 %

Sales Americas 3 % to 5 % Unchanged

Sales Europe -6 % to -4 % -4 % to -2 %

EBIT, CHF million 150 to 160 170 to 180

Net profit margin just under 3 % just over 3 %


(Figures assume constant raw milk prices)

Medium-term objectives

2 % – 3 % organic growth per year for the Group

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Organic Growth, earnings

Sales Group 2 % – 3 %

Sales Switzerland 0 % – 1 %

Sales Americas 6 % – 8 %

Sales Europe 1 % – 3 %

Net profit margin Just over 3 %


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