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Combined Annual Report and Sustainability Report 2018

Markets

The DMK Group states clearly in its corporate values that all its actions focus on customers and consumers. As a customer-oriented food manufacturer, the company therefore makes products and services rather than raw milk the centre of attention in its product portfolio development. DMK precisely matches the product range for individual consumers and for customers from the retailing, industry and bulk consumers sectors to current trends and the customers’ needs. Its results in the years 2017 and 2018 bear witness to the success of this strategy and shows that a further portfolio shift from standard products to high-quality foods with a high value added, aimed at specific needs and trends, is the right way for the business to go.

Successful expansion of the branded products business

With its stable growth in turnover and profit, the Business Unit Brand gives an impressive demonstration of the swift and sustained success of the new strategic pursuit of higher value added in 2018. In that year, the business unit focused on expanding its MILRAM and Osterland brands, consolidating and further expanding the success of the self-service cheese business, expanding MILRAM Food Service’s market leadership and emotionalising the MILRAM brand.

Evidence of these efforts’ success was the distinction of “Brand of the Century”, awarded to DMK for MILRAM Frühlingsquark by the ZEIT publishing group in November. According to Nielsen, DMK used its many variations of the traditional product to great effect in 2018, increasing its retail turnover by a good 18 percent and thus growing significantly faster than the market. The self-service cheese business rivalled this performance: MILRAM continued its winning streak with a rise in turnover of around 15 percent, while the market as a whole achieved growth just short of 4 percent. DMK also held its market leadership in MILRAM Food Service, with a 5 percent increase in volume.

Positive development in the industry business

The Business Unit Industry, with subsidiaries DP Supply, NORLAC, wheyco and DMK Ingredients, also significantly improved its portfolio’s value added for customers in the year under review. With wheyco, the BU positions itself vis-a-vis customers as a provider of high-quality and profitable whey processing and with applications consultancy, thereby taking responsibility for the entire supply chain.

The company’s whey strategy also targets areas that enable superior value added. These include in particular clinical and infant nutrition. In the period under review, DMK reduced the raw milk for the Business Unit Industry by around 380 million tonnes in the context of its lost volume, and discontinued low-earning products such as skim milk powder.

A concentration on higher value added segments also prevailed in the Business Unit Industry’s 2018 strategy. In particular, DMK expanded this business in Asia and engaged more staff at its Chinese office in Shanghai. As well as China, Japan is also one of the important target markets in Asia. The product portfolio focuses on milk-based and whey-based ingredients for adult and baby foods as well as clinical and sports nutrition, particularly for the Asian markets.

In China, proteins take centre stage as the fastest-growing whey-based ingredients. After 23 percent growth in the Chinese baby food market since 2010, experts expect significant growth in the areas of clinical nutrition and sports nutrition as well in the near future. Because of the Chinese market’s very high quality requirements and the legislation, not all manufacturers of whey derivatives are currently represented in China. DMK has been a recognised quality supplier in China for the past ten years, and is therefore well set to participate in the market growth.

In milk-based ingredients, the business unit’s position in China is particularly achieved through the confectionery, convenience, dairy processing and baby food application segments. These use not only milk powders, but also condensed milk and evaporated milk, industrial cheeses such as mozzarella, and UHT and frozen cream. The business unit thus stands up as a manufacturer of high-quality products “Made in Germany”, with composition and function tailored to customers’ needs, thereby adding successfully to the company’s value creation.

Subsidiary DP Supply continued to flourish in the year under review, mainly thanks to improvements in the supply chain and a focus on value added. DP Supply will also be able to continue its growth in the coming years with the special drying tower in Beesten, which is currently under construction.

The DMK Ingredients brand also set out a roadmap in 2018 for pruning the low-margin products from its portfolio and continued on its growth trajectory in the higher-margin product sector. Despite significant market-related problems in the global whey trade, whey processor wheyco earned a profit in 2018 and was thus a strong contributor.

NORLAC, the German market leader in the area of high-quality milk substitute products for rearing calves, far outperformed its budgeted figures and achieved excellent results. In addition, the company was able to open up a new market in the Netherlands through DMK's merger with DOC Kaas.

Focus on profitable markets

Despite a difficult international market situation at times, particularly for powders, butter and cheese, the Business Unit International succeeded in holding its profit steady year on year in 2018. Its strategic focus on profitable markets means concentrating on business expansion in the three important target regions of Russia, Nigeria and China and reducing its portfolio of countries on the basis of clear profitability criteria.

DMK extended its engagement in Russia further in 2018 and acquired the remaining 40 percent of the shares in IKAM RichArt Holding GmbH. This makes the company the sole shareholder of the Russian cheese manufacturer RichArt Group. RichArt succeeded in increasing its sales volume considerably even in 2017 and developed positively in line with expectations in the reporting period. The DMK subsidiary concentrated on expanding the branded products business, where it generates a large proportion of its turnover. Production capacities were successfully increased in 2018, creating the basis for further growth in the Russian market.

In the context of this business expansion in more profitable markets, DMK stepped up its activities in non-European markets in 2018. The company bundled its resources in promising target countries for this purpose, by parting with several small European and non-European markets. The company recorded volume growth in virtually all South-east Asian markets. In South and Central America, DMK maintained its sales volume despite its concentration on a small number of markets. The European business showed a stable development in 2018, despite very low cheese prices in the first quarter. The business unit concentrated on expanding direct business with European retailers, with branded and private label products. The acquisition of the Dutch company Uniekaas ensured DMK’s access with one of the best-known brands in the neighbouring country of the Netherlands. The authentic products are based on traditional recipes and are produced from 100 percent Dutch cow's milk. To drive the positive development further forward, DMK is revitalising the brand for 2019 with a new, fresh and yet traditionally Dutch design, new recipes and innovative cheese concepts such as snacks and special products for children.

From insight to innovation

For the Business Unit Private Label, the year under review centred around a successful transformation into a product and service provider with a high degree of understanding of consumers, shoppers and categories and an insight-based concept range for retailers. Because being successful depends on the ability to offer customers a relevant benefit. Facts, figures and an understanding of trends and market developments are essential here. Together with DMK’s Innovation Management department, DMK Private Label goes all over the world to discover new trends and integrate them into its own diverse product portfolio. New concepts were developed by this means, and intense work carried out on the details of their design. In combination with Category Management’s data-driven insights, these innovative approaches marry consumers’ wishes with retailers’ requirements. In times when private labels are growing continuously and competing with the established consumer brands, DMK is using the Business Unit Private Label to position itself as a dynamic and customer-centred food manufacturer which thinks in categories as well as identifying and developing high-value potentials together with its food retailer customers.

Since consumers’ sensitivity to nutrition and sustainability aspects is constantly increasing, DMK’s retail partners are also expressing growing demands on qualities and recipes. To satisfy these requirements as one of the food sector’s market leaders, the Business Unit Private Label has embedded the topic of quality as a top management task in the context of a quality offensive. In the area of performance management, the Business Unit Private Label set up sustainable maintenance management and a framework of Overall Equipment Effectiveness (OEE) ratios to steer performance in 2018. Total Productive Maintenance (TPM) was also introduced in all factories to prevent losses and waste. The Business Unit Private Label is planning a continuation of the quality and performance offensives for the current fiscal year.

In the light of the drop in the milk volume, the Business Unit Private Label also adjusted its capacity in the period under review by closing the slicing and packaging unit in Nordhackstedt and the factory in Rimbeck. This allowed it to adapt its production to current and expected raw milk volumes and focus on value-creating areas. The business unit also optimised its cost management. In addition, targeted investments were made in production facilities for particularly popular segments.

Long-term growth area baby food

Having established its focal areas, the Business Unit Baby created the essential requirements for significant medium-term growth in the year under review: DMK is systematically continuing the strategy of increasing value added and driving forward the branded products business with the new production site in Strückhausen, which opened at the beginning of 2019. The company invested 145 million euros in this facility in the years 2017 and 2018, putting in place a high-quality infrastructure and low-energy processes and equipment. The result is one of the most modern baby food factories in Germany. The DMK Group can now process up to 40 million kilos of milk from GMO-free farming every year at Strückhausen to make top-quality powdered baby milk formulae. This investment puts DMK in a position to meet the requirements of leading-edge baby food production not only today, but also going into the future.

A further milestone was the innovative packaging myHumana Pack, which was introduced in October 2018 in Germany, Italy, Spain, Portugal and Poland. DMK developed it as a tailored solution to meet mothers’ needs. To determine them, DMK surveyed approximately 6,700 mothers around the globe and developed an optimum solution in terms of security, ease of handling, attractive design, perfect portioning and anti-bacterial properties.

In the German market, we aim to restore the traditional power of the Humana brand. We have set the direction for this in our core category of milk formulae with huge investments in our Strückhausen factory and our new “myHumana Pack” packaging.

Stefan Eckert, COO DMK Baby

The Humana brand gained market share in a number of countries in 2018, and this development confirms that we have chosen the right path. Humana can boast growth in the Middle East among other areas, and has positioned itself as the market leader in special formulae and infant formulae in the extremely competitive Italian market. Overall, the Business Unit Baby was represented with the Humana brand in more than 50 individual markets in 2018 - by local DMK distribution offices in Germany, Poland, Spain, Portugal and Italy, and mainly by exclusive distribution partners in China and Russia. The principal venues for activities were Europe, the Middle East and the East and Far East regions. In these areas, DMK focuses on Humana milk formulae as well as on food supplements for mothers, babies and toddlers. It also offers a range of solid baby foods.

New brands boost ice cream business

Thanks to the realignment, the Business Unit Ice Cream achieved a significant improvement in profits in the year under review. Expansion of the branded products business and the development of new markets formed the core of our successful activities to systematically implement the defined goals and actions. With great sensitivity to trends, the Business Unit Ice Cream revolutionised its products on the basis of the new strategy and successfully launched new products under the MILRAM and Baileys brands in Germany, Austria and Switzerland: low-fat, high-protein MILRAM Skyr ice cream in apricot-sea buckthorn and raspberry-cranberry varieties, a MILRAM buttermilk ice cream in an 850ml family-size tub in lemon, raspberry and strawberry varieties, Baileys ice cream developed in cooperation with Diageo, which comes in a 500ml tub in Coffee Delight and Chocolate Secret flavours, and as a lolly in Coffee Dream, Caramel Sensation and Chocolate Deluxe. The 500ml tub is a clear growth driver against the background of changing consumer behaviour and a trend towards smaller pack sizes in the family pack category, and grew faster than the total market in 2018.

The Business Unit Ice Cream is continuing the successful expansion of the branded products business in the current fiscal year and has added new products to its range: MILRAM Skyr blueberry-elderberry, Baileys wafer cones and MILRAM Moin ice cream - a new high-end milk ice cream in vanilla, strawberry and chocolate varieties. In the year under review, the Business Unit Ice Cream also successfully attracted prominent partners such as Bahlsen for various ice cream innovations in the 2019 season in addition to the existing successful cooperative ventures. The MILRAM field sales force will then also take over the distribution of the MILRAM and Baileys ice creams, enabling article listing to be expanded within an existing distribution process. Aside from the German market, DMK also focuses on Austria, Switzerland, France, Italy and the UK.

Looking forward together

In the long term, too, customer focus will remain the key driver of change. For this reason, DMK also launched a targeted consideration of a “2030 target vision” at the end of 2018. This vision addresses the way the company sees its future business environment, the relevant trends that will influence the dairy industry in the future, and how DMK can prepare as effectively as possible for these developments. The strategic alignments of the individual business units have to be combined here into a shared strategic target vision with lasting validity. In the current fiscal year, DMK is reviewing the implications of this target vision for the six business units, deriving strategic focal points from it for customers, products and regions, and developing concrete actions for the coming years accordingly.

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