Interim Financial Report

Transcription

1 Interim Financial Report at June 30, 2018

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3 Contents BOARD OF DIRECTORS, BOARD OF STATUTORY AUDITORS AND INDEPENDENT AUDITORS... 3 FINANCIAL HIGHLIGHTS... 5 REPORT ON OPERATIONS... 7 REVENUE AND PROFITABILITY... 7 Europe North America Latin America Africa Oceania REVIEW OF OPERATING AND FINANCIAL PERFORMANCE Parmalat Group Parmalat S.p.A FINANCIAL PERFORMANCE Structure of the Net Financial Position of the Group and Its Main Companies Change in Net Financial Position ENTERPRISE RISKS MANAGEMENT ACQUISITIONS INFORMATION ABOUT PARMALAT S SECURITIES Performance of the Parmalat s Stock Stock Ownership Profile CHARACTERISTICS OF THE SECURITIES HUMAN RESOURCES Group Staffing CAPITAL EXPENDITURES RESEARCH AND DEVELOPMENT OTHER INFORMATION CORPORATE GOVERNANCE KEY EVENTS IN THE FIRST HALF OF EVENTS OCCURRING AFTER JUNE 30, BUSINESS OUTLOOK GLOSSARY PARMALAT GROUP CONDENSED CONSOLIDATED SEMIANNUAL FINANCIAL STATEMENTS AT JUNE 30, FINANCIAL STATEMENTS AT JUNE 30, Consolidated Statement of Financial Position Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Cash Flows Changes in Consolidated Shareholders Equity NOTES TO THE CONDENSED CONSOLIDATED SEMIANNUAL FINANCIAL STATEMENTS Foreword Principles for the Preparation of the Condensed Consolidated Semiannual Financial Statements New Accounting Principles and Interpretations Endorsed by the E.U. but not yet in Effect New Accounting Principles, Amendments and Interpretations Published by the IASB not yet Adopted by the E.U Effects Deriving from the Adoption of IFRS Use of Estimates Seasonality of the Group s Businesses Scope of Consolidation Venezuela Argentina Related-party Transactions Notes to the Statement of Financial Position Assets Notes to the Statement of Financial Position Liabilities Guarantees and Commitments Legal Disputes and Contingent Liabilities at June 30, Notes to the Income Statement Other Information CERTIFICATION OF THE CONDENSED CONSOLIDATED SEMIANNUAL FINANCIAL STATEMENTS PURSUANT TO ARTICLE 81-TER OF CONSOB REGULATION NO (WHICH CITES BY REFERENCE ARTICLE 154-BIS, SECTION 5, OF THE UNIFORM FINANCIAL CODE) OF MAY 14, 1999, AS AMENDED PARMALAT GROUP REPORT OF THE INDEPENDENT AUDITORS Contents 1

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5 Board of Directors, Board of Statutory Auditors and Independent Auditors Board of Directors Chairperson Gabriella Chersicla 1 Chief Executive Officer and General Manager Jean-Marc Bernier 2 Directors Pier Giuseppe Biandrino 34 Nicolò Dubini 345 Angela Gamba 345 Patrice Gassenbach Umberto Mosetti 3 Michel Peslier Elena Vasco 35 Board of Statutory Auditors Chairman Pierluigi De Biasi 6 Statutory Auditors Franco Carlo Papa Barbara Tadolini Independent Auditors KPMG S.p.A. Parmalat S.p.A. A company subject to guidance and coordination by B.S.A. S.A Gabriella Chersicla is a senior officer of the Company, pursuant to implementation criterion 3.C.2 of the Corporate Governance Code approved by the Corporate Governance Committee. Chairperson Gabriella Chersicla is an independent Director pursuant to Article 147-ter, Section 4, of Legislative Decree No. 58 of February 24, 1998 (TUF), which makes reference to Article 148, Section 3, of the TUF. 2 Elected by the Shareholders Meeting on April 19, Independent Director pursuant to Article 3 of the Corporate Governance Code for Listed Companies, in the edition of July 2015, as approved by the Corporate Governance Committee sponsored by Borsa Italiana, and Article 147-ter, Section 4, of Legislative Decree No. 58 of February 24, 1998 (TUF), which makes reference to Article 148, Section 3, of the TUF. 4 Member of the Control and Risk Committee, which also functions as the Related-party Transaction Committee. 5 Member of the Nominating and Compensation Committee. 6 Elected by the Shareholders Meeting on April 19, Board of Directors, Board of Statutory Auditors and Independent Auditors 3

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7 Financial Highlights Income Statement Highlights (amounts in millions of euros) PARMALAT GROUP First half 2018 First half 2017 Change at current exchange rate & scope of consolid. (includ. Venezuela) Change at constant exchange rate & scope of consolid. (exclud. Venezuela) - NET REVENUE 3, ,274.0 (7.3%) (0.9%) - EBITDA (20.8%) (15.1%) - EBIT (56.3%) (55.9%) - NET PROFIT % (38.6%) - EBIT/REVENUE (%) NET PROFIT/REVENUE (%) (amounts in millions of euros) PARENT COMPANY First half 2018 First half 2017 Change - NET REVENUE % - EBITDA % - EBIT % - NET PROFIT % - EBIT/REVENUE (%) NET PROFIT/REVENUE (%) Statement of Financial Position Highlights (amounts in millions of euros) 6/30/18 12/31/17 PARMALAT GROUP - NET FINANCIAL ASSETS ROI (%) ROE (%) EQUITY/ASSETS NET FINANCIAL POSITION/EQUITY (0.1) (0.1) PARENT COMPANY - NET FINANCIAL ASSETS 19.4 (24.2) - ROI (%) ROE (%) EQUITY/ASSETS NET FINANCIAL POSITION/EQUITY (0.0) Indices computed based on income statement data and financial position data averaged between the beginning and the end of the period. Financial Highlights 5

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9 Report on Operations Revenue and Profitability NOTE: The data are stated in millions of euros and local currency. As a result, the amount of changes and percentages could reflect apparent disparities caused exclusively by the rounding of figures. At the global level, the first half of 2018 brought a consolidation of the economic growth trend, alongside the beginning of a normalization of the monetary policies pursued by the main central banks. The recent trade policy decisions implemented by the U.S. administration introduced some elements of uncertainty, the outcome of which will also depend on the countermeasures that will be adopted by the main trading partners (China, Europe and the NAFTA area in particular). Among the main countries where the Group operates Brazil confirmed its return to moderate growth, albeit in an uncertain political context ahead of the presidential elections in October. In addition, a protracted strike in the transportation sector in May significantly undermined expectations of economic growth for the year as a whole. In Venezuela, however, the situation remains highly critical, as all macroeconomic indicators continue to be extremely negative. In a particularly significant development for the Group, the generalized decrease in the cost of raw milk that characterized the first three months of the year diminished in the second quarter. On the foreign exchange front, an across-the-board appreciation of the euro versus the main currencies used by the Group generated a negative translation impact on both revenue and the bottom line. Parmalat Group The table below shows the highlights of the Group s results in the first half of 2018 compared with the same period last year: First Half (amounts in millions of euros) Variance Varian.% Net Revenue 3, , % EBITDA % EBITDA % ppt Net revenue totaled 3,033.6 million euros, or 7.3% less than the previous year, and EBITDA decreased to million euros, down 20.8% compared with million euros in Changing foreign exchange dynamics had a significant impact on the translation of the data of subsidiaries and, consequently, for a better understanding of the Group s performance compared with the first half of the previous year, some analyses, in addition to using constant exchange rates and scope of consolidation, exclude the results of the Venezuelan subsidiary, given the uncertainty that characterizes the situation in that country, the massive devaluation of the local currency and the high level of inflation. Report on Operations Revenue and Profitability 7

10 With data stated at constant exchange rates and comparable scope of consolidation, obtained by excluding the results of the activities acquired in 2017 (La Vaquita in Chile, Karoun in the United States and Silac in Italy) and those of the Venezuelan subsidiary, the Group s performance, as shown in the table below, reflects a decrease both in terms of net revenue and profitability: Constant exchange rates and excluding Venezuela First Half (amounts in millions of euros) Variance Varian.% Net Revenue 3, , % EBITDA % EBITDA % ppt Constant scope of consolidation, exchange rates and excluding Venezuela Overall, net revenue show a reduction of 0.9%, with a positive contribution from the Europe, Africa and Oceania sales regions offset by decreases in North America and Latin America. EBITDA decrease by 15.1% overall, contracting mainly in Canada and Australia; Europe was the only exception, posting a gain in profitability. The reduction in profitability reported by the Group is the result of several factors, some related to conditions in its target markets and others attributable to adverse developments in some of the countries where the subsidiaries operate. The sales mix continued to deteriorate in some of the Group s sales region, with a reduction in the volumes of more profitable branded products. A noteworthy development was the seasonal effects that affected during the first half stock valorization in particular in Canada, the negative trend in the Powdered products and milk segment, which had a particularly penalizing effect on performance in North America and Australia. On the other hand, all the main subsidiaries that operate in the Europe sales region reported an increase in profitability, due to sales gains, careful pricing policies, favorable terms for the procurement of raw milk and the ongoing implementation of an efficiency boosting program. In Latin America, the Group continued to implement activities to reorganize production activities, logistics and to review sales policies, while pursuing a revamping of the product line carried out at recently acquired entities. During the first half of 2018, strikes in some countries, including Brazil (national strike by truckers) and South Africa (internal strikes), caused delays in production activities and significant problems with product distribution and procurement. Lastly, there continue to be problems in some countries with waste and product losses and in the logistics area. 8 Report on Operations Revenue and Profitability

11 Like for Like Net Revenue and EBITDA The diagram below presents the main variables that determined the evolution of net revenue and EBITDA in the first half of 2018, compared with the previous year. Report on Operations Revenue and Profitability 9

12 Data by Geographic Region (amounts in millions of euros) First Half 2018 First Half 2017 Delta % Region Net Revenue EBITDA EBITDA % Net Revenue EBITDA EBITDA % Net Revenue EBITDA Europe % +14.0% North America 1, , % -22.0% Latin America % -30.0% Africa % -34.5% Oceania % -97.6% Other 1 (10.2) (5.2) n.s. (8.2) (6.7) n.s. n.s. n.s. Group excl. hyperinflation 2, , % -19.8% Hyperinflation in Venezuela 48.7 (14.8) n.s (16.3) n.s. n.s. n.s. Group 3, , % -20.8% Regions represent the consolidated countries. 1. Includes other non-core companies, eliminations between regions and Group's Parent Company costs. Net Revenue by Geographic Region Latin America 19% Africa 7% Oceania 17% North America 38% Europe 19% In order to improve comparability with the 2017 data, the table below presents the Group s results at constant exchange rates and comparable scope of consolidation and excluding Venezuela: (amounts in millions of euros) First Half 2018 First Half 2017 Delta % Region Net Revenue EBITDA EBITDA % Net Revenue EBITDA EBITDA % Net Revenue EBITDA Europe % +15.2% North America 1, , % -17.7% Latin America % -7.4% Africa % -32.9% Oceania % -97.4% Other 1 (10.2) (5.2) n.s. (8.2) (6.7) n.s. n.s. n.s. Group (constant exch. rates/ scope of consolidation) 2 3, , % -15.1% Regions represent the consolidated countries. 1. Includes other non-core companies, eliminations between regions and Group's Parent Company costs. 2. Excluding Venezuela, new activities consolidated in the first half of 2017 (Chile) and during the second half of 2017 (Karoun in the US and Silac in Italy) 10 Report on Operations Revenue and Profitability

13 Data by Product Division (amounts in millions of euros) First Half 2018 First Half 2017 Delta % Division Net Revenue EBITDA EBITDA % Net Revenue EBITDA EBITDA % Net Revenue EBITDA Milk 1 1, , % -10.0% Fruit base drinks % -27.8% Cheese and other fresh products , % -12.6% Ingredients and Other (17.7) n.s (2.9) n.s. +5.0% n.s. Group excl. hyperinflation 2, , % -19.8% Hyperinflation in Venezuela 48.7 (14.8) n.s (16.3) n.s. n.s. n.s. Group 3, , % -20.8% 1 Includes milk, cream and béchamel 2 Includes fruit base drinks and tea 3 Includes yogurt, dessert, cheese 4 Includes other products and Group's Parent Company costs Net Revenue by Product Division First Half 2018 First Half 2017 Fruit base drinks 2 2.5% Cheese and other fresh products % Cheese and other fresh products % Ingredients and Other 4 2.9% Fruit base drinks 2 2.7% Ingredients and Other4 2.6 % Milk % Milk % 1 Includes milk, cream and béchamel 2 Includes fruit base drinks and tea 3 Includes yogurt, dessert, cheese 4 Includes other products In order to improve comparability with the 2017 data, the table below presents the Group s results at constant exchange rates and comparable scope of consolidation and excluding Venezuela: (amounts in millions of euros) First Half 2018 First Half 2017 Delta % Division Net Revenue EBITDA EBITDA % Net Revenue EBITDA EBITDA % Net Revenue EBITDA Milk 1 1, , % -8.9% Fruit base drinks % +10.0% Cheese and other fresh products , % -5.3% Ingredients and Other (19.8) n.s (2.9) n.s. n.s. n.s. Group (constant scope of consolid. and exchange rates) 5 3, , % -15.1% 1 Includes milk, cream and béchamel 2 Includes fruit base drinks and tea 3 Includes yogurt, dessert, cheese 4 Includes other products and Group's Parent Company costs 5. Excluding Venezuela, new activities consolidated in the first half of 2017 (Chile) and during the second half of 2017 (Karoun in the US and Silac in Italy) Report on Operations Revenue and Profitability 11

14 Europe First Half (amounts in millions of euros) Variance Varian.% Net Revenue % EBITDA % EBITDA % ppt The Europe sales region includes the companies that operate in Italy, Russia, Portugal and Romania. Italy accounts for about 85% both of the net revenue and EBITDA of the Europe sales region. Results with data at constant exchange rates show revenue increasing by 3.5% and EBITDA up by 15.2% compared with the same period last year. The devaluation of the ruble versus the euro had a negative impact on the sales region s revenue and EBITDA amounting to about 8 million euros and 0.5 million euros, respectively. The profitability of the Europe sales region was boosted by a positive sales trend and lower costs for the procurement of production components, raw milk in particular. Italy During the first half of the year, the Italian economy continued to grow at a moderate pace supported both by an upturn in internal demand and acceleration by the other Eurozone economies. Uncertainties deriving from the position of the new government regarding Italy s role within the European Union and the Eurozone introduced some reasons for concern including, in particular, a significant widening of the BTP/Bund spread. Market and Products The slump in consumption that affected the milk market continued in the first half of the year, causing a negative trend with a particularly strong impact on the Pasteurized Milk and UHT Milk segments. Despite these challenging market conditions, Parmalat succeeded in gaining market shares, confirming its position as the leader in both segments, thanks to the contribution of the Zymil brand. The UHT Cream market contracted both on a volume and value basis; nevertheless, Parmalat further strengthened its market share, confirming its position as the category leader, thanks mainly to a positive performance in the Light and Small Size product categories. The Yogurt category was adversely affected by a decrease in consumption compared with the same period last year, showing the impact of a negative trend both on a volume and value basis. Within the overall market, volumes were up in the innovative segments of Greek Yogurt, Lactose-free Yogurt and Organic Yogurt. Parmalat suffered a slight reduction of its market share, with the Zymil brand continuing to hold steady during the reporting period. The trend was negative in the Fruit Beverage category, with market volumes declining compared with the same period last year. Parmalat, despite a slight reduction in market share, was still able to maintain its position within the competitive arena, confirming its status as the third player in this category. With data on a comparable scope of consolidation and excluding Silac s contribution, the Parent company and the Italian subsidiaries reported volumes in line with the first half of 2017, with gains in the main value-added product categories and decreases in the Fruit Juice Beverage and Pasteurized Milk categories. Net revenue increased, confirming positive results for the Zymil and Chef brands, particularly in the Small Size and Light Cream categories, supported by investments in advertising. 12 Report on Operations Europe

15 EBITDA improved thanks to a policy of price increases, a favorable trend in the cost of raw milk and the effects of a program to boosts the efficiency of industrial activities and logistics. Russia The sluggish economic recovery that got under way in 2017 after the recession of the previous two years continued in the first half of The strength of the ruble versus the other reference currencies, except for the euro, a sustained upward trend in the price of natural resources and the normalization of the inflation rate are the main factors characterizing the economic recovery and supporting the upturn in consumption. With data in the local currency, the results of the local subsidiary show strong gains in net revenue and sales volumes compared with the same period last year, thanks to the reactivation of some important contracts, achieved despite highly competitive market conditions. EBITDA were also higher than in the same period last year, boosted by an improved sales mix and the positive effects of a different raw milk procurement strategy that resulted in increased procurement volumes purchased on more favorable terms. Portugal Portugal is one countries that recovered most vigorously from the deep financial crisis of the previous years, launching a virtuous cycle in which the local economy benefits not only from a sustained increase in internal consumption and investments, but also from robust demand by the main European trading partners. Sales volumes and net revenue were up sharply compared with the first half of last year; the profitability of the local subsidiary also improved significantly, thanks to a positive sales trend and a conservative commercial and industrial policy. Romania Recently, Romania has been reporting the highest growth rates within the European Union, driven mainly by rising internal demand bolstered by an increase in real wages, low inflation, a positive job market, low interest rates and improved value of real estate assets. Consumption by households contracted slightly at the beginning of the year but spending continued to grow at an impressive rate. Sales volumes and net revenue increased compared with the first half of last year, with the best gains recorded by products with a high value added; the profitability of the local subsidiary was in line with the level achieved in the same period last year. Report on Operations Europe 13

16 North America First Half (amounts in millions of euros) Variance Varian.% Net Revenue 1, , % EBITDA % EBITDA % ppt The North America sales region includes the subsidiaries that operate in the United States and Canada, with the latter accounting for about 60% of the region s revenue. During the previous year, the Group strengthened its presence in the United States with the acquisition of Karoun, a group specialized in ethnic dairy products. The weakening of the U.S. dollar and Canadian dollar versus the euro had a negative impact on revenue and EBITDA amounting to about 97.5 million euros and about 8.1 million euros, respectively. In the first half of 2018, with data at constant exchange rates and scope of consolidation, excluding the contribution of the Karoun Group, the net revenue of the North America sales region shows a decrease of 1.7%, while EBITDA contracted by 17.7% compared with the first half of 2017, due to the performance of the Canadian subsidiary. Canada The Canadian economy continues to show positive growth rates in line with the other developed countries; consequently, the central bank began to implement a process to normalize its monetary policy, in line with the actions taken by the U.S. Federal Reserve. Recent trade tensions with the United States, which thus far did not have a significant impact on the growth of the economy, are a source of uncertainty for the second half of the year. Market and Products Overall, the trend remained negative in the milk market during the first six months of 2018, due mainly to a negative performance in its most important Standard Milk segment, while the Premium Milk segment showed an increase in volumes. Parmalat was able to maintain its competitive position, confirming its rank as the third player in this category. Consumption was down slightly in the Yogurt market. Within this category, volumes continued to grow at a sustained pace for Drinkable Yogurt and Greek Yogurt. Despite a loss in market share, the local subsidiary was able to retain its position within the competitive arena. The Cheese category posted an increase on a volume basis compared with the same period last year. A decrease in consumption in the Natural and Processed segments was offset by a positive performance in the Snack and Natural Slices segments. For the Cheese category as a whole, Parmalat reported a loss in market share, but was able to confirm its position within the competitive arena, with a significant gain in its value market share in the Snack segment. Parmalat reported sales volumes virtually unchanged compared with the same period last year, despite a steady decrease in volumes in the Pasteurized Milk category. With data stated in the local currency, the subsidiary shows a reduction in revenue, with profitability also decreasing, mainly due to a negative effect connected with stock valorization, a deterioration of its sales mix, coupled with the loss of an important customer in the cheese category, a negative performance in the Powdered Milk segment and higher costs incurred to resolve difficulties in bringing on stream some production facilities. 14 Report on Operations North America

17 United States of America The tax reform enacted in 2017 added a further stimulus for an economy that has been growing steadily for some years, with the first signs of an upturn in inflation causing the U.S. Federal Reserve to begin a decisive process to normalize a monetary policy that had been expansive thus far. The semester that just ended was characterized by the start on multiple fronts of a protectionist trade policy, the long-term consequences of which for the national and global economy are still to be determined, particularly in light of the countermeasures that will be adopted by the main trading partners (China, Europe and the NAFTA area in particular). Market and Products In the first half of 2018, considering a market perimeter comprised exclusively of the cheese categories in which the local subsidiary operates, consumption grew steadily thanks to a significant increase in promotional activities throughout the entire category. Parmalat was able to hold unchanged its competitive position, despite a minor loss in market share. Among the three market categories in which the local subsidiary continues to be the market leader, only the Soft Ripened Cheese category showed a positive growth trend, but the performance was negative for the Ricotta and Chunk Mozzarella segments. On the other hand, Parmalat increased its value market shares for Ricotta and Chunk Mozzarella but suffered a reduction in the Soft Ripened Cheese category. The Mozzarella and Grated Cheese segments showed a growth trend on a volume basis compared with the same period last year. The local subsidiary, having entered these market segments only recently, has a marginal position, but enjoyed significant growth in the Grated Cheese category. The Fresh Mozzarella, Gourmet Spreadable Cheese, Snack Cheese and Gourmet Cheddar Cheese segments posted growth both on a volume and value basis, compared with the same period last year. The local subsidiary suffered a reduction in value market share in all categories, but was nevertheless able to maintain its second place market position in the Fresh Mozzarella and Gourmet Spreadable Cheese categories. The Feta Cheese segment contracted both on a volume and value basis. Despite a significant loss in market share, the local subsidiary was able to hold unchanged its competitive position. The U.S. subsidiary reported increases in sales volumes compared with the first half of Net revenue decreased but profitability improved slightly, despite the negative performance of the Powdered Products segment. The marketing strategy implemented to strengthen the Group s brands and the efficiency process applied to operating costs, particularly in the industrial and logistic areas, are continuing. Report on Operations North America 15

18 Latin America Excl. hyperinflation in Venezuela First Half (amounts in millions of euros) Variance Varian.% Net Revenue % EBITDA % EBITDA % ppt The Latin America sales region includes the subsidiaries that operate in Brazil, Mexico, Venezuela, Colombia, Ecuador, Paraguay, Uruguay, Argentina and Chile; in addition, commercial companies operate in Peru, Bolivia and Guatemala. In 2017, the Group further increased its presence in this region with the acquisition of production activities in Chile. When restated at constant exchange rates and comparable scope of consolidation, excluding Chile and the contribution of Venezuela, the data show a revenue decrease of 8.5% and a 7.4% reduction in EBITDA compared with last year s first half, due mainly to the effect of a deterioration in the product sales mix in the main countries of the sales region. More specifically, during the first half of 2018, Brazil was affected by protracted strikes in the transportation sector, with a negative impact on the procurement of raw materials and the manufacture and distribution of products. Brazil The economic recovery, while hampered by the difficulties deriving from a confused political situation ahead of the October presidential election, stalled in May due a strike in the transportation sector that severely undermined economic growth expectations for the full year. The uncertainty engendered by the current situation and, even more so, by the potential outcomes of the upcoming election produced a significant and constant weakening of the Brazilian currency throughout the first half of the year. A reduction in the inflation rate and lower interest rates are factors that helped support internal demand in the course of the year. Market and Products The UHT Milk market posted attractive growth, both on a volume and value basis. The local subsidiary maintained its value market share and confirmed its position as the market leader. Consumption was down in the Yogurt market; in this context, Parmalat held relatively steady, maintaining unchanged its competitive position. The Cheese segment, the second largest in terms of volume among those in which the local subsidiary operates, performed particularly well in the first half of In this context, Parmalat significantly increased its value market share, strengthening its second-place competitive position. While operating within the context of an ongoing reorganization of its activities, with data in the local currency, the local subsidiary reported a decrease in volumes and revenue, with EBITDA also declining compared with the same period last year In May, Brazil was adversely affected by strikes by truckers that paralyzed production and distribution activities. The local subsidiary felt the impact of this situation, with sales volumes and margins decreasing, despite an improvement in overhead costs and the ongoing implementation of a plan to enhance efficiencies and synergies, particularly in the logistics area. In a market that remains highly competitive, the product portfolio was revamped with the relaunching of some historical brands, through the introduction of new products in the milk and yogurt segments. 16 Report on Operations Latin America

19 Mexico The concerns tied to uncertainty in trade relations with the United States were heightened at the beginning of June when the Economy Minister announced that, in response to U.S. tariffs on imported steel and aluminum, Mexico would apply tariffs on food items, including cheese, exported by the United States. The victory of the candidate Lopez Obrador in the recent presidential election could be a source of discontinuity in Mexico s policies, also at the macroeconomic level. However, the recent strengthening of the local currency, which had weakened significantly in the months leading to the election, shows that the financial markets are not discounting radical changes. Market and Products Despite a positive trend in the cheese market, the local subsidiary reported a decrease in sales volumes of the more profitable products and faced challenges in the production area. Venezuela The macroeconomic and political situation was and will continue to be highly volatile, in the climate of precarious equilibrium that persisted after the April presidential election, which did not resolve the impasses that immobilize the country. The inflation rate and the currency exchange rate continue to deteriorate steadily. In this context, the volumes sold by the local subsidiary decreased. Net revenue and EBITDA, stated in the local currency and excluding the effect of accounting for hyperinflation, were up strongly compared with the first half of 2017, reflecting the adjustments made to price lists to account for the country s high level of inflation. Colombia The upturn in oil prices, good international relations and one last stimulus provided by the monetary policy of the central bank supported the Colombian economy, as it sought to leave behind the slowdown that peaked in A persisting stagnation of internal demand counterbalanced the effect of an increase in government spending ahead of the legislative and presidential elections that were held in May and again in June for the runoff. The economic results of the local subsidiary show an increase in sales volumes and revenue compared with the previous year. Even though sales increased, EBITDA remained negative. The local subsidiary was adversely affected by a negative sales mix effect, caused by highly competitive market conditions, which prevents the achievement of an adequate level of profitability despite the ongoing implementation of efficiency boosting programs. Report on Operations Latin America 17

20 Other Countries in Latin America During the first half of last year, the Group began direct operations in Chile, having acquired, through the La Vaquita subsidiary some companies that operate in the cheese market segment and which achieved positive results in the first half of the current year. In Ecuador, sales volumes and net revenue, stated in the local currency, decreased compared with the previous year, but EBITDA were in line with the same period last year. In Paraguay, sales volumes rebounded strongly compared with the first half of the previous year, mainly due to gains in the UHT Milk category, which accounts for almost 90% of the overall volume. Revenue and EBITDA also improved. The subsidiaries that operate in Uruguay and Argentina, part of the Esmeralda Group acquired in 2015, reported a revenue gain in Argentina but a reduction in Uruguay, while EBITDA contracted in both cases, despite organizational programs implemented both at the sales market and production levels. 18 Report on Operations Latin America

21 Africa First Half D (amounts in millions of euros) Variance Varian.% Net Revenue % EBITDA % EBITDA % ppt The Africa sales region includes the subsidiaries that operate in South Africa, Zambia, Botswana, Swaziland and Mozambique. South Africa accounts for more than 85% of the net revenue of the entire sales region. The devaluation of the region s local currencies versus the euros, including specifically the South African rand, had a negative translation effect on the consolidated data shown above, reducing net revenue and EBITDA by about 10.5 million euros and 0.2 million euros, respectively; with data stated at constant exchange rates, the region s results show a revenue increase of 3% and a reduction of about 33.0% for EBITDA. South Africa The country s economy appears to have stalled for some time. The already structurally high unemployment levels continued to worsen, reaching peaks well above 50% for youth unemployment. The political situation, for a long time a factor that aggravated the macroeconomic context, gave indications of a turnaround in February with the election of Cyril Ramaphosa as President of the Republic and a redoubled commitment to tackle the challenging reforms that the country needs. Market and Products The UHT Milk category (comprised of White Milk and Flavored Milk) shows a strongly positive trend, with an increase in consumption, thanks mainly to two factors that fostered this positive performance: deflation and a shift in consumer preference from Fresh Milk to UHT Milk. Both White Milk and Flavored Milk benefitted from a positive growth trend. In this context, Parmalat succeeded in taking advantage of the positive trend in both segments, increasing its market shares, confirming its second-place position in the UHT Milk segment and retaining the market leader position in the Flavored Milk segment. The cheese market enjoyed a positive trend compared with the same period last year, with growing sales volumes for the Hard Cheese and Processed Cheese. Even though it lost some market share, the local subsidiary held firmly to its market leader position. The Yogurt category showed stable volumes and growth on a value basis compared with the same period last year. Parmalat increased its value market share and strengthened its second-place competitive position, The local subsidiary reported increases in sales volumes and net revenue, with data in the local currency, despite a protracted strike in June. EBITDA for the period, also with data in the local currency, decreased compared with the same period last year due to a deterioration of the sales mix, difficulties in bringing on stream some production facilities and the effects of a strike, which caused loss of production and a greater percentage impact of overheads. Zambia In Zambia, the second largest market in the Africa sales region, volumes and net revenue, stated in the local currency, increased compared with the same period last year, thanks to an improved sales policy. The profitability of the local Report on Operations Africa 19

22 subsidiary was negative due to an increase in the costs paid for production components that could not be offset with the recent price increases, the beneficial effect of which will be realized in the second half of the year, and to some problems in the organizational, industrial and logistics areas that the local subsidiary is addressing with action plans the effects of which are not yet fully visible. Other Countries in Africa Insofar as it concerns the other African countries (Swaziland, Mozambique and Botswana), volumes and revenue showed overall growth, while profitability improved significantly compared with first half of last year, with the exception of Mozambique, where the situation remains unfavorable in the country s challenging economic context. 20 Report on Operations Africa

23 Oceania Despite weak internal consumption, the fundamentals of the local economy remain good, particularly thanks to the positive impact of the mining sector, which benefitted from outstanding economic condition since the middle of the reporting period and after stabilizing in 2017, following a four year contraction. Market and Products The Pasteurized Milk category grew on a volume basis, but held steady on a value basis. Parmalat - while maintaining leadership and co-leadership positions in the pasteurized milk, flavored milk, UHT milk and dessert categories, thanks mainly to a strong performance by the Pauls brand - reported a sharp contraction in profitability due to a deterioration of the sales mix and a negative performance in the powdered milk segment. The Flavored Milk segment grew both on a volume and value basis in the first half of Parmalat confirmed its position as the second player in this category. The Yogurt category continued to grow both in volume and value terms, driven mainly by the Greek Yogurt segment, which performed particularly well. Despite this positive trend, Parmalat lost some market share, but held steady to the third-place position within this category. The Dessert market showed gains both on volume and value basis. The local subsidiary increased its market share, thanks to the performance of the Pauls brand, and strengthened its leadership position in this category. The table below shows the results for the first half of 2018 compared with the same period last year: First Half D (amounts in millions of euros) Variance Varian.% Net Revenue % EBITDA % EBITDA % ppt The devaluation of the Australian dollar versus the euro had a negative translation effect of about 46.3 million euros on net revenue and a negligible impact on EBITDA. With data at constant exchange rates, the results show net revenue increasing by 4.4% and EBITDA decreasing by 97.4% compared with the first half of With data at constant exchange rates and comparable scope of consolidation, volumes and net revenue show an improvement compared with the first half of 2017, despite the steady growth of private labels and the resulting deterioration of the sales mix. Profitability was down sharply due to the deterioration of the sales mix, an increase in the cost of production components, not fully offset by price list adjustments, and a negative performance in the Powdered Milk segment. The process for the reorganization of local activities that got under way last year, following the latest acquisition in the Yogurt and Dessert segments, is continuing. Report on Operations Asia Pacific 21

24 Review of Operating and Financial Performance In order to allow a better understanding of the developments that characterized the first half of 2018, the economic data are presented showing specific sources of discontinuity, including: - the change in scope of consolidation caused by acquisitions, including the La Vaquita Group acquired in March 2017, the Karoun Group acquired in May 2017 and the Silac business operations acquired in July 2017; - the change related to Venezuela; - data on a comparable scope of consolidation and excluding Venezuela. Parmalat Group Net revenue decreased to 3,033.6 million euros, or million euros less (-7.3%) compared with 3,274.0 million euros in the first half of With data at constant exchange rates and scope of consolidation and excluding the Venezuelan subsidiaries, the reduction in net revenue amounts to 29.5 million euros (-0.9%). More specifically, in the first half of 2018, net revenue decreased mainly in North America and Latin America, but increased in Europe, Africa and Australia. EBITDA totaled million euros, or 38.5 million euros less (-20.8%) than the million euros earned in the first six months of With data at constant exchange rates and scope of consolidation and excluding the Venezuelan subsidiaries, the EBITDA decrease amounts to 28.4 million euros (-15.1%). A deteriorating sales mix, determined by a reduction in the volumes of more profitable products, and external factors such as a national strike by truckers in Brazil and an unfavorable price trend for powdered milk account for this decrease. EBIT amounted to 38.4 million euros, down 49.5 million euros compared with the 87.9 million euros reported in the first half of With data at constant scope of consolidation and excluding the Venezuelan subsidiaries, EBIT show a decrease of 51.0 million euros. A deterioration in the performance of the industrial operations and the writedowns of intangible assets recognized during the period further to an impairment test update performed at December 31, 2017 (14.8 million euros) are the main reasons for this decrease. Depreciation and amortization of non-current assets totaled million euros (93.3 million euros in the first half of 2017). The increase compared with the previous year is mainly due to the impairment losses recognized further to the abovementioned impairment test and the consolidation for the full reporting period of the companies acquired in The profit attributable to owners of the parent amounted to 39.5 million euros, or 9.1 million euros more than the 30.4 million euros earned in the first half of With data at constant scope of consolidation and excluding the Venezuelan subsidiaries, this item shows a decrease of 11.1 million euros. A deterioration in the performance of the operations and higher impairment losses (14.8 million euros) recognized further to the abovementioned impairment test, offset in part by the tax benefit, in terms of lower taxes, deriving from the patent Box in Italy, account for most of this decrease. Operating working capital increased to million euros, or 64.6 million euros more than the million euros reported at December 31, This increase is chiefly the result of the higher inventory of finished goods held by the Canadian subsidiary, due to seasonal factors that characterize its business, involving an increase in cheese production earlier in the year, in anticipation of higher sales in the later months. This increase was offset in part by negative foreign exchange translation differences due to the appreciation of the euro versus the currencies of the main countries where the Group operates. Net invested capital totaled 2,966.0 million euros, in line compared with 2,966.5 million euros at December 31, The increase in operating working capital was almost entirely offset by negative foreign exchange translation differences due to the appreciation of the euro versus the currencies of the main countries where the Group operates. 22 Report on Operations Review of Operating and Financial Performance

25 The net financial position amounted to million euros, down 86.9 million euros compared with million euros at December 31, The main reasons for this decrease include: the cash absorbed by operating activities for 57.5 million euros (57.5 million euros at June 30, 2017) attributable primarily to seasonal factors; the cash absorbed by financing activities for 11.0 million euros; the payment of dividends for 14.8 million euros; and a negative foreign translation effect for 6.1 million euros. The equity attributable to owners of the parent decreased to 3,117.5 million euros, for a reduction of 85.8 million euros compared with 3,203.3 million euros at December 31, 2017, mainly due to the effect of translating into euros the financial statements of companies operating outside the Eurozone for million euros and the 2017 dividend declared by the Shareholders Meeting on April 19, 2018 totaling 13.0 million euros. This decrease was partially offset by the profit for the period attributable to owners of the parent amounting to 39.5 million euros. Report on Operations Review of Operating and Financial Performance 23

26 Parmalat Group RECLASSIFIED CONSOLIDATED INCOME STATEMENT (in millions of euros) First half 2018 (A) Δ scope of consolidation (June 2018 vs June 2017) 1 (B) Δ Venezuela (June 2018 vs June 2017) (C) First half 2018 pro forma at current exchange rates (D=A-B-C) First half 2017 REVENUE 3, , ,297.5 Net revenue 3, , ,274.0 Other revenue (0.3) OPERATING EXPENSES (2,903.0) (49.1) (12.4) (2,841.5) (3,109.7) Purchases, services and miscellaneous costs (2,486.2) (42.7) (14.2) (2,429.3) (2,671.0) Personnel expense (416.8) (6.4) 1.8 (412.2) (438.7) Subtotal (1.9) Impairment losses on receivables and other provisions (2.1) (0.0) 0.7 (2.8) (2.7) EBITDA (1.2) Depreciation, amortization and impairment losses on non-current assets (103.9) (2.2) 1.0 (102.7) (93.3) Other income and expense: - Litigation-related legal expenses (0.6) (0.0) (0.0) (0.6) (1.0) - Miscellaneous income and expenses (3.7) (0.0) (0.0) (3.7) (2.9) EBIT (0.2) Net financial income/(expense) 26.1 (0.2) Other income from (Charges for) equity invest PROFIT BEFORE TAXES Income taxes (24.6) (0.3) (3.2) (21.1) (59.5) PROFIT FOR THE PERIOD The difference in scope of consolidation between June 2018 and June 2017 refers to the La Vaquita Group acquired in March 2017, the Karoun Group acquired in May 2017 and the Silac business operations acquired in July Attributable to: Non-controlling interests (0.4) - (0.2) (0.2) (0.2) Owners of the parent Continuing operations: Basic earnings per share (in euros) Diluted earnings per share (in euros) Note: See the Glossary provided at the end of the Report on Operations for the definition of income statement components. 24 Report on Operations Review of Operating and Financial Performance

27 Parmalat Group RECLASSIFIED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in millions of euros) 6/30/18 12/31/17 NON-CURRENT ASSETS 2, ,997.8 Intangible assets 1, ,368.8 Property, plant and equipment 1, ,459.5 Non-current financial assets Deferred tax assets NON-CURRENT ASSETS HELD FOR SALE, NET OF CORRESPONDING LIABILITIES NET WORKING CAPITAL Inventories Trade receivables Trade payables (-) (831.5) (891.1) Operating working capital Other assets Other liabilities (-) (167.3) (174.6) INVESTED CAPITAL NET OF OPERATING LIABILITIES 3, ,427.3 EMPLOYEE BENEFITS (-) (91.8) (91.6) PROVISIONS FOR RISKS AND CHARGES (-) (352.9) (361.4) PROVISION FOR LIABILITIES FOR CONTESTED PREFERENTIAL AND PREDEDUCTION CLAIMS (7.6) (7.8) NET INVESTED CAPITAL 2, ,966.5 Covered by: EQUITY (1) 3, ,221.8 Share capital 1, ,855.1 Reserve for creditor challenges and claims of late-filing creditors convertible into share capital Other reserves and retained earnings 1, ,191.9 Profit for the period Non-controlling interests NET FINANCIAL POSITION (2) (168.4) (255.3) Loans payable to banks and other lenders Other financial assets (-) (171.6) (237.8) Cash and cash equivalents(-) (377.1) (476.1) TOTAL COVERAGE SOURCES 2, ,966.5 (1) A schedule with a reconciliation of the result and shareholders equity at June 30, 2018 of Parmalat S.p.A. to the consolidated result and shareholders equity is provided in the Notes to the Consolidated Financial Statements. (2) A breakdown of the financial statement items included in the composition of the Net financial position is provided in the Other Information section of the Notes to the Consolidated Financial Statements. Note: See the Glossary provided at the end of the Report on Operations for the definition of statement of financial position components. Report on Operations Review of Operating and Financial Performance 25

28 Parmalat Group STATEMENT OF CHANGES IN NET FINANCIAL POSITION IN THE FIRST HALF OF 2018 (in millions of euros) First half 2018 First half 2017 Net financial position at beginning of period (255.3) (334.4) Changes during the period: - Cash flow from operating activities for the period (20.1) (26.1) - Cash flow for acquisitions Cash flow from other investing activities Accrued interest expense Cash flow from settlements Dividend payments Miscellaneous items 3.0 (30.1) - Translation effect Total changes during the period Net financial position at end of period (168.4) (63.4) BREAKDOWN OF NET FINANCIAL POSITION (in millions of euros) 6/30/18 12/31/17 Loans payable to banks and other lenders Other financial assets (-) (171.6) (237.8) Cash and cash equivalents (-) (377.1) (476.1) Net financial position (168.4) (255.3) RECONCILIATION OF CHANGE IN NET FINANCIAL POSITION TO THE STATEMENT OF CASH FLOWS (Cash and Cash Equivalents) (in millions of euros) Cash and cash equivalents Other financial assets Gross indebtedness Net financial position Opening balance (476.1) (237.8) (255.3) Cash flow from operating activities for the period (20.1) - - (20.1) Cash flow from investing activities New borrowings 1 (62.0) Loan repayments (145.1) - Accrued interest expense Cash flow from settlements Dividend payments Miscellaneous items Translation effect (6.8) 6.1 Closing balance (377.1) (171.6) (168.4) 1 See Note (15) to the Consolidated Financial Statements. 26 Report on Operations Review of Operating and Financial Performance