Hochdorf facing ‘serious crisis’

The company said it performed significantly worse than expected in the reporting period, which was mainly due to the negative performance of its 51% subsidiary Pharmalys, resulting in a massive fall in profits.

The reassessment of business risks at Pharmalys also meant that considerable debt provisions had to be made. Combined with additional value adjustments that had become necessary, this resulted in total a company loss of CHF63.6m ($64.9m).

The newly formed board of directors and the senior management team are working to restructure and realign the Group. Hochdorf said its future can be secured if the steps announced last month are implemented quickly and consistently, alongside debt restructuring measures that have been introduced.

The Hochdorf Group processed 374.8m kg of milk, whey, cream and buttermilk (liquid quantity) in the first half of 2019, 2.6% more than in the previous year (365.3 million kg). Uckermärker Milch GmbH is responsible for this increase. There was a corresponding increase of 3.9% in volume sold to 86,661 tonnes (previous year 83,374 tonnes).

The gross operating profit fell significantly to a low of CHF36m/$36.7m) (compared to CHF82m/83.7m the previous year). Combined with increased operational expenses and greater amortisations, there was a negative EBITDA of CHF39.4m ($40.2m) and a negative EBIT of CHF52.4m ($53.5m), compared to a positive EBIT of CHF2.9m ($3m) the previous year. The higher operating expenses are largely attributable to the sharp rise in costs at Pharmalys Laboratories SA.

The new plants in Sulgen led to higher amortisations compared to the previous year. Additional amortisations or provisions were made for the shutdown and the planned dismantling of production plants in Hochdorf – two spray towers with outdated technology (in terms of safety requirements) and the VIOGERM production plants – as well as intangible assets (Snapz brand). The group’s financial results were debited with a value adjustment of outstanding loans of €10m ($11m) for the planned sale of Uckermärker Milch GmbH.

Overall company results for the reporting period therefore stood at CHF-63.6m/$64.9m (after minority interests CHF-43.4m/$44.3m corresponding to a loss per share of CHF-30.89/$31.54). Net debt increased by almost CHF20m ($20.4m) to CHF174.2m ($177.9m); the equity ratio therefore fell to 38.5% (previous year 48.8%).

Dairy Ingredients

The amount of milk, cream, whey and permeate (liquid quantity) processed in the first half of the year showed an increase of around 2.6% to 374.8m kg (previous year 365.3m kg). This led to net sales revenue of CHF201.9m/$206.2m (previous year CHF188.2m/$192.1; +7.3%). The increase in sales was due to higher sales volumes, including destocking, and in part to higher international selling prices for skimmed milk powder.

The Dairy Ingredients Division of Hochdorf Swiss Nutrition Ltd (HSN) continued the seasonal price reductions introduced last year in the high milk season. HSN said it was only just able to pay competitive milk prices.

Combined with the low milk volume in the initial months, this led to lower milk receipts (150.3m kg in the first half of 2019 compared with 166.3m kg in the previous year). Nevertheless, delivery was always guaranteed. The overall processed liquid quantity fell by 3.6% to 221.6m kg (previous year 229.7m kg). The system change was completed as of January 1, 2019 and the threat of negative effects on results largely offset.

Uckermärker Milch GmbH processed 153.2m kg of liquid (previous year 117.8m kg). Milk volumes in particular rose sharply by 40% (136.9m kg compared to 97.8m kg in the previous year), helped by the acquisition of several regional direct suppliers. This will increase the quantities of own milk, while reducing dependence on the spot market. Protein prices recovered in the first half of the year, while butter prices fell gradually over this period.

Baby Care

The Baby Care Division performed below expectations for the first half of the year and achieved a low net sales revenue of CHF30.3m ($30.9m) compared to the previous year (CHF77.1m/$78.7m), a drop of 60.7%, mainly due to the slump in sales in Pharmalys and the CHF 35.5m ($36.3m) in debtor provisions. The allowances were mainly made for receivables from Pharmalys Laboratories SA.

The company said that, as expected, capacity utilization at the new production and filling line at HSN was still relatively low. The first contracts with new customers were signed and the first products have now been produced. Capacity is just at the planned level. There was a longer, planned shutdown for a technical retrofit at spray tower line 8, which then influenced the production volumes available.

Pharmalys Laboratories SA achieved a considerably lower net sales revenue for the first half of the year compared to the previous year's performance. As a result of discussions about financing growth, Pharmalys reduced its distributor inventories and accordingly ordered less, which led to significantly lower overall sales for both Pharmalys and the Baby Care Division at HSN. In contrast, costs at Pharmalys increased massively in the first half of 2019, resulting in a significantly negative operating result.

Bimbosan AG recorded a result above expectations in the first half of the year. The integration of the subsidiary acquired last year is progressing according to plan and with positive results. Bimbosan successfully maintained its strong home market position despite increasing competition. New registrations in export markets were launched and sales increased in existing foreign markets.

Cereals & Ingredients

The Cereals & Ingredients Division achieved net sales revenue of CHF10.6m ($10.8m) in the first half of 2019, a drop of 34.9% on the previous year. The company attributed the slump to the discontinuation or reduction of the first unprofitable business activities and to lower product sales. At the same time, it said, promising new products were developed and some have already been launched on the market.

Realignment

Hochdorf said it will concentrate on the further development of the high-growth Baby Care business, while at the same time examining all strategic options for Pharmalys, and on the further optimisation of the Dairy Ingredients Division.

The measures and timelines for the realignment of the Hochdorf Group announced on July 8, 2019 also relate to the prompt sale of Uckermärker Milch GmbH, the strategy review of the Dairy Ingredients Division and the discontinuation of the Cereals & Ingredients Division with the evaluation of the strategic alternatives for the individual subsidiaries.

In particular, Hochdorf said the major shareholding in Pharmalys Laboratories SA presents major challenges. It said the business model does not provide Hochdorf with any transparency or influence on relevant parts of the value chain. Financing net current assets is also extremely capital intensive, which presents an additional challenge. These are some of the reasons why the board is urgently reviewing all options for Pharmalys.