Emmi Reports Rapid Growth in 2006

The integration of Aargauer Zentralmolkerei (AZM) operations into Mittelland Molkerei led to a growth spurt in Switzerland, and Emmi substantially expanded its market position in Italy by acquiring the northern Italian yoghurt producer Trentinalatte.

18/04/07 For Swiss dairy Emmi, 2006 was distinguished by rapid growth, stronger market positions and reinforced competitiveness. Net sales rose to CHF 2,335 million, corresponding to growth of 15.2%. Despite dilution due to acquisitions, Emmi posted net profit of CHF 54.0 million, up CHF 2.6 million on the previous year, and a net profit margin of 2.3%. The integration of Aargauer Zentralmolkerei (AZM) operations into Mittelland Molkerei led to a growth spurt in Switzerland, and Emmi substantially expanded its market position in Italy by acquiring the northern Italian yoghurt producer Trentinalatte as its first production facility outside Switzerland. Organic growth was boosted in particular by innovative brand concepts and speciality cheeses.

For the Shareholders' Meeting on 16 May 2007, the Board of Directors proposes, as in the previous year, the distribution of a gross dividend of CHF 2.60 per registered share.

"Despite high price pressure in a fiercely competitive international market, Emmi succeeded in achieving a growth rate of 15.2% and a net profit margin of 2.3%", says Walter Huber, CEO of the Emmi Group, in reference to the Group's performance in 2006. He adds that "in 2006, Emmi considerably strengthened its market position in key international markets through investments in distribution structures, acquisitions and partnerships." Walter Huber is convinced that "with Mittelland Molkerei in Switzerland, we have established a good basis for securing our success in the ongoing process of European market liberalization."

Despite ongoing intense price pressure in its domestic market and an extremely competitive international environment, Emmi achieved net sales of CHF 2,335 million in 2006, corresponding to growth of 15.2%. This rapid growth is due primarily to the integration of the AZM facility and the acquisition of the Italian yoghurt producer Trentinalatte. Organic growth was achieved with innovative brand concepts and speciality cheeses, as well as classic dairy products within Switzerland. Cheese sales fell slightly by 1.9% overall due to consumer behaviour in the mild months of November and December, the periodically limited availability of Emmentaler and increasing import pressure resulting from market liberalization.

While gross profit rose by 13.8% to CHF 723.9 million, the gross profit margin declined slightly from 31.4% to 31.0% as a result of the lower margins on Mittelland Molkerei products. Operating expenses rose by 14.3% to CHF 585.7 million due to the integration of Mittelland Molkerei, the acquisition of Trentinalatte and production expansion. The increase includes a rise of CHF 36 million (+14.3%) in personnel costs and CHF 37.2 million (+14.3%) in other operating expenses. Investments in marketing and advertising, aimed primarily at strengthening international market positions, were up 11.4% to CHF 94.8 million, and logistics costs increased by 27.0% due to the fresh service offered by Mittelland Molkerei and international expansion.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were up 9.7% to CHF 141.3 million (prior year CHF 128.8 million), while the EBITDA margin fell slightly from 6.4% to 6.1% as a result of acquisitions. Mittelland Molkerei generates slightly lower margins, and the anticipated synergy effects will only be fully realized from 2008. Earnings before interest and taxes (EBIT) rose to CHF 66.5 million (prior year CHF 62.3 million), while the EBIT margin fell slightly from 3.1% to 2.9% due to higher depreciation and amortization in respect of acquisitions and earlier investments. Net profit increased to CHF 54.0 million (prior year CHF 51.4 million). Despite dilution due to acquisitions, Emmi's 2006 net profit margin of 2.3% was on target (prior year 2.5%).

The number of employees increased from 2,765 to 3,300 (on a full-time equivalent basis) due to acquisitions and the further development of international markets.

Emmi posted sales of CHF 1,826 million in its home market of Switzerland (prior year CHF 1,583 million). The marked increase of 15.4% was due in particular to Mittelland Molkerei, which contributed 15.4% or around CHF 243 million to sales growth within Switzerland. Without Mittelland Molkerei, sales of classic dairy products rose by 1.5% and fresh products by 2.3%.

Cheese sales, by contrast, fell by 3.3%, impacted by the mild start to the winter, temporarily limited availability of Emmentaler and increasing import pressure due to market liberalization. Emmi's innovative concepts such as Kaltbach and SwissAlp were a hit with consumers, however, and saw rapid rates of growth.

At 5.1%, the growth in sales of fresh cheese was well above the Swiss market rate, and the 5.9% increase in sales of powder/concentrates was attributable primarily to Mittelland Molkerei. Sales of other products and services were more or less stable, falling by 1.1%.

Outside Switzerland, Emmi increased its sales by 14.6% to CHF 509 million (prior year CHF 444 million). This equates to around 22% of Emmi's overall sales. The northern Italian yoghurt producer Trentinalatte, acquired on 1 July 2006, contributed 6.3% or CHF 28 million to overall growth which, adjusted for acquisitions, amounted to 8.3%. In fresh products, Emmi posted international organic growth of 17.1%. In addition to Trentinalatte, growth drivers included in particular lifestyle and health products such as Caffè Latte and Benecol. Despite the periodically limited availability of Emmentaler, organic growth of 0.9% in the export sales of cheese was achieved thanks to the success of brand concepts. Concepts and specialities such as Kaltbach, Tête-de-Moine AOC and Le Gruyère AOC did extremely well, and sales of processed cheese rose by an impressive 3.7% in an intensely competitive market.

Outside Switzerland, the focus was on expanding international markets and strengthening market positions, with the acquisition of Trentinalatte also enabling Emmi to expand its position in the fresh products segment of the key Italian market.

Through the collaboration with the US cheese specialist Roth Käse, the first measures were taken to further expand Emmi's position in the speciality cheese segment of the US food service business. Emmi now aims to further strengthen its position in the US fresh products market. Following the production partnership with the milk processor Upstate Farms Cooperative in Buffalo (New York), which produces yoghurt for Emmi, Emmi acquired a minority stake in CASP (Contract Aseptic & Speciality Packaging) LLC in Penn Yan (New York) retroactively as of 1 February 2007. The company specializes in the production of aseptic milk products and is to manufacture selected fresh products on behalf of Emmi for the US market.

In Spain, Emmi acquired a minority stake in its cooperation partner Kaiku, the number two in the innovative fresh products segment. The collaboration with Kaiku involves the development and marketing of fresh products in Spain and Latin America. With the founding of its subsidiary in Sweden (Emmi Nordic AB), Emmi has established a basis for developing the Scandinavian markets, which have a high purchasing power.

The focus in 2006 was on investments in competitiveness. Mittelland Molkerei AG, in which Emmi holds a majority interest of 60%, was founded on 1 April 2006 following approval from the Swiss Federal Competition Commission. The relocation of the liquid products line (milk, cream and juices) from Lucerne to Suhr had already been completed by the middle of last year, and butter production will also be moved to Suhr by the end of 2007. The amalgamation of the Lucerne and Suhr operations will enable Emmi to secure competitive structures and the critical mass required to succeed as the European market becomes increasingly liberalized.

In view of the complete liberalization of the cheese market, and with the aim of securing international competitiveness and the Group's leading position in the fondue sector over the long term, the Langnau production facility will be expanded significantly by 2010, with production in Thun being gradually relocated to Langnau from 2008 onwards. Emmi has also invested extensively in expanding cheese production in Landquart and the cheese ageing facility in Moudon.

Emmi's rapid growth in recent years has led not least to a heterogeneous environment with regard to systems and processes. In 2005, Emmi began to update the structures and systems across the entire Group. A major implementation step was completed in 2006 with the introduction of a new standardized order processing system. Thanks to simplified, integrated processes and a reduced level of complexity, Emmi expects to achieve cost synergies in the medium to long term while simultaneously enhancing quality and flexibility in processing.

Emmi got off to a good start in 2007, and will continue throughout the year to pursue its strategic growth and development targets and actively exploit the opportunities arising from market liberalization. In Switzerland, high pressure on prices due to ongoing market liberalization is expected to lead to a slight fall in sales of standard products overall, while growth potential is anticipated from brand concepts and specialities. Outside Switzerland, Emmi aims to systematically expand its market position by means of innovative concepts, strategic partners and acquisitions. Emmi expects to see above-average growth in international markets over the course of the year, due not least to the effect of the Trentinalatte acquisition.