HOCHDORF : Interim report 2022

Interim Report

2022

Strategic transformation accelerated - challenging global economic situation - measures begin to take effect

Dear Shareholders,

As expected, the HOCHDORF Group's half-year result remains unsatisfactory, with a loss of CHF -15.9 million (EBIT) on net sales revenue of CHF 145.7 million (up 3.8% on 2021). The operating revenue position, which was already displeasing in the 2021 annual results, was accentuated by the negative cost developments for raw materials and energy in the first half of the year. The measures immediately introduced by the new management - both product range/customer portfolio streamlining and price adjustments - were unable to impact the first half of 2022 for contractual rea- sons. The Board of Directors and Group Management have made substantial changes to the structure and organisation in order to accelerate the strategic change.

The first half of 2022 was marked by the continuing challenge of reducing legacy issues while at the same time exploiting new business potential. HOCHDORF conducted intensive price negotiations, adjusted contracts and reorganised its sales and marketing organisation to make it more efficient. Our aim is clear: HOCHDORF must increase its gross margins and productivity to become less dependent on volume business and milk costs. In doing so, the company is transforming itself from a milk processor into a specialist for high-margin "functional foods" - ingredients and milk products for specific nutritional requirements - and alternative protein products. HOCHDORF is retaining a consistent focus on the rapidly changing market and nutrition trends. Based on its proven technological expertise in the Swiss market, the company will also align itself much more closely with the primary milk processors in the future. At the same time, HOCHDORF is creating a corporate culture that promotes innovation and embraces change.

Our greatest challenge in this regard is the prudent use of the scarce resources currently available. Until the restoration of positive operating profitability, the first goal is to secure the financial stability and liquidity that the company needs in this phase of transformation. As our valued shareholders, we are well aware that you have endured many exhortations to bear with us in recent years. We are therefore keen to emphasise at this point that the current restructuring measures will fundamentally change the company; it is no longer a question of optimising what already exists. HOCHDORF is well-placed to meet the future challenges in the market: the company is positioned as a technology competence centre for smart nutrition in a consumer environment that is undergoing very lasting and rapid change. In addition to milk-based specialities, there is also increasing consumer demand for alternatives to milk proteins. HOCHDORF's existing expertise and high capacity for innovation are excellent foundations for a successful transition.

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HOCHDORF Interim Report 2022

Letter to the shareholders

We would like to take this opportunity to thank you for placing your trust in us, the new management and the new organisa- tion. At the same time, we would like to thank our committed employees, who are actively building the future of the company by embracing its potential.

Kind regards

Jürg Oleas	Ralph P. Siegl
Chairman of the Board of Directors	CEO and Delegate of the Board of Directors

Letter to the shareholders

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Review and outlook

Setting an important course

In the first half of 2022, important decisions were made both internally and externally in terms of the strategic focus and new appointments were made to key positions. At the end of January 2022, Ralph Siegl took over the function of CEO and Delegate of the Board of Directors. The Board of Directors considers this dual function to be very effective and useful in the current extremely challenging situation. The expansion of the Group Management to include the two specialist areas of "Sales and Marketing" (Head: Gerina Eberl-Hancock, Chief Revenue Officer) and "Innovation, Research & Development" (Head: Lukas Hartmann, Chief Innovation Officer) as of 1 May 2022 was another important step in view of the upcoming challenges in these areas. Alongside the improvements to commercial terms, the new management also focused on further measures to improve process efficiency, on the review and redesign of the purchasing policy and working capital management, and on increasing the professionalism of various core processes in human resources and production planning. The new management has also decided to postpone the relocation to a production site in Sulgen announced previously. It aims to focus all resources in the short term on improving the use of capital, reducing complexity and making productive use of the production facilities available at the Hochdorf site. This does not exclude gradual measures to focus on Sulgen with regard to operational optimisation.

Milk: in high demand

Another important component that influences the HOCHDORF Group's operating result is the Swiss milk price. This has only developed in one direction for years: upwards. Since 2018, the price of regular (non-organic) milk has risen by 11 per cent. Specifically, the milk price increased by 5 centimes per kilogramme in April 2022, and organic milk prices rose by a further 7 centimes in July. Together with the strong Swiss franc and global inflationary tendencies and despite the successor solution to the "Schoggi Law", this creates challenges in export price acceptance by international customers. At the same time, a lot of milk is currently used in cheese production, which severely limits the availability of the milk quantities required to produce milk powder. These are all reasons that reinforce the HOCHDORF Group's "Food for Life" strategy as a technology company: reducing dependence on milk as a raw material and taking account of the long-term nutritional trends towards plant-based alternatives.

Global economic situation increases raw material costs

In the first half of 2022, the HOCHDORF Group was able to make further important progress in setting the course for financial stability and strategic transformation. However, the economic situation made conditions significantly more challenging. After the negative impact of the coronavirus pandemic on operating performance in the last financial year, this trend continued in the first half of 2022. The war in Ukraine, but also the measures to combat the pandemic in China, made important basic production materials more expensive and affected the timing of availability. At the same time, prices for energy, packaging materials and logistics rose massively.

Negative operating result, as expected

On the basis of the negative operating result at the end of 2021, the tightening of the framework conditions in the first half of 2022 led to additional negative effects as expected. Immediate measures were taken that allowed the gross margin to be maintained. Price negotiations and contract adjustments were the focus in the first half of the year; these have only had a positive impact so far on the result in the Baby Care division. Some contractual agreements that are currently low-margin for HOCHDORF do not expire until the end of 2022 or 2023. Pragmatic solutions are being sought with customers in order to relieve the tight liquidity situation as best as possible. The Food Solutions division contributed to the overall result with sales of CHF 118.3 million (up 5.2% compared to 2021), while the Baby Care division reported -1.6% of the previous year's level with CHF 27.4 million. Alongside the successful launch of a white label product in the goat milk powder segment, product innovations were characterised by a large number of new formulations and several vegan variants in the Baby Care division (see also: division reports/research & innovation). The business focus for the new management is now clearly on the gross margin as well as sales targets.

Internal cost discipline is high thanks to the Optima project, which has been running for two years. The HOCHDORF Group is facing rising energy costs, with an increase of 69.9 per cent compared to the first half of 2021. To increase its attractiveness as an employer in a challenging transformation phase, HOCHDORF is taking a new approach and planning a remuneration programme for its management staff that is more strongly geared to the quantitative achievement of targets and the

Overview |

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HOCHDORF Interim Report 2022

Review and outlook

sustainable increase in company value. This LTI (long term incentive) programme is based on current industry standards and is expected to be introduced on 1 January 2023.

Launch of innovation and industry partnerships

As a result of an expanded target group approach and communication initiatives since March 2022, HOCHDORF has recorded a significant increase in general and specific enquiries related to technology and product partnerships. Our planned intensified cooperation with one of the largest Swiss milk processors and cheese producers, Emmi, also creates new potential in this regard. Existing large international customers are showing interest in innovations such as vegan milk powder substi- tutes, for use in chocolate for example. As the only manufacturer in Switzerland to process liquid whey into high-quality protein and lactose products, HOCHDORF is also gaining momentum at its Whey Competence Centre in Sulgen. An important ingredient in protein shakes, sports nutrition and supplementary food products, whey is currently undergoing an image change that HOCHDORF is helping to shape.

Outlook: second half of 2022 - focus on liquidity management and transformation

Ensuring the company's financial competence and stability while consistently implementing operational corrective measures have absolute priority for the HOCHDORF Group in the second half of the year. Discussions will continue with financial partners and shareholders. To the extent that it is not possible for existing shareholders to support this transformation phase with additional capital, alternative financing options must be examined. Here, HOCHDORF is hoping for new impetus on the capital market, not least through expansion into new market segments such as specialist adult foods, whey powder concentrates and alternative proteins. The company will increase its presence at equity conferences such as Investora and other platforms. Intensive contract negotiations with existing suppliers and customers will also define the second half of the year. This will improve the gross margin significantly and sustainably.

With the combined impact of the tougher global economic situation and the consequences for raw material, energy and logistics prices and energy availability, the HOCHDORF Group expects a challenging second half of the year and a result in 2022 that will not yet fully reflect the impact of the transformation efforts that have been made. In the event of gas supply bottlenecks, the company has the option of switching to oil at the Hochdorf site. For the Sulgen site, we are currently examining options in terms of the extent and speed of any potential switch to oil or liquid gas.

Review and outlook

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