business year 2016

The Lindt Difference is the guideline and the secret of success for the daily manufacturing of our premium-chocolates.

dear shareholders

Once again, we are delighted to report another successful financial year in 2016. As in previous years, our Group continued to grow at a faster pace than the overall chocolate market, expand its market shares in many large and smaller countries, and increase Group sales in line with our target growth range. This reflects the measures we have taken to consistently and sustainably build our brands. Our premium quality and continuous innovation cater for the growing demands of the modern consumer.

It is particularly gratifying that this success was achieved in one of the most challenging years in the last two decades. A poor harvest season in 2015/2016 led to record prices for our two most important raw materials, cocoa beans and cocoa butter. The prices of other key ingredients such as sugar and milk also remained at very high levels. Political and economic uncertainty dampened consumer sentiment in many of our most important markets. The environment was made even tougher by the increasing price pressure from our trading partners, whose sales promotions are increasingly built on aggressive price offers.

Lindt & Sprüngli again managed to continue its solid growth pattern: consolidated Group sales increased to CHF 3.901 billion, which equates to sales growth of 6.8% in Swiss francs. Whereas the US dollar strengthened against the Swiss franc, pound sterling weakened. This resulted in a slightly positive currency translation effect of 0.8% in consolidated sales. The Lindt & Sprüngli Group therefore achieved organic sales growth of 6.0%, which is within the strategic target range of 6% to 8%. Excluding Russell Stover, the Group’s organic sales growth improved to 7.4%. Thanks to a positive seasonal effect, consolidated sales recorded much stronger growth in the second half of 2016 (7.0%) than in the first half of the year (4.4%).

The “Europe” segment achieved overall organic sales growth of 7.4% in local currencies. Growth was particularly pleasing in the subsidiaries in our two biggest European chocolate markets, Germany and the UK. They managed to accelerate once again on last year’s impressive growth rate and attain double-digit sales growth. The other European countries also reported positive results. Among the smaller subsidiaries, Scandinavia, Russia, Czech Republic, and Poland all achieved double-digit growth.

The American chocolate market as a whole declined in 2016 for the first time in many years, despite a more stable general economic situation. The premium chocolate segment also experienced a much weaker rate of growth, which in turn resulted in slower progress for Lindt & Sprüngli in North America. Organic sales growth increased to 3.4% in the NAFTA region. The adjustments to Russell Stover’s product portfolio and promotions strategy also had a negative impact on sales during the financial year, while at the same time laying the long-term foundation for profitable growth in future. With its three leading brands – Lindt, Ghirardelli, and Russell Stover – Lindt & Sprüngli is clearly positioned as No. 1 in America’s premium chocolate segment. Cooperation between the US subsidiaries Lindt, Ghirardelli and Russell Stover was enhanced in 2016. The establishment of a new subsidiary, Lindt & Sprüngli (North America) Inc., helps to support the three US subsidiaries in centralized tasks such as sales promotions, logistics, and IT, while at the same time creating synergy effects.

Business performance in the segment “all other markets” was very dynamic. Total sales in this segment rose by 10.2%. The results achieved in Japan and Brazil were particularly impressive, with high double-digit sales growth mainly due to the opening of our own shops and cafés. Lindt also achieved good growth in Australia. One highlight to report here is the official opening of the new Marsden Park facility in July 2016 by Ernst Tanner and Mike Baird, Prime Minister of New South Wales. The strategy of geographic expansion pursued over previous years is starting to pay off. We are today represented around the globe by 24 subsidiaries and branches, as well as a network of over 100 independent distributors.

During the past financial year, our own chocolate shops and cafés once again proved to be a great success factor, and contributing double-digit sales growth in Global Retail. Not only are these extremely well perceived by consumers, but they also have a big impact on our brand familiarity and image values. They enable us to consistently communicate our key brand values such as premium quality, Swiss tradition, product diversity, our commitment to sustainability, and to allow them to be actively experienced. We managed to generate over 50 million consumer contacts over the course of the last financial year. In 2016, we once again beat our strategic target of 30 new openings every year. With more than 60 new chocolate shops and cafés, mainly in Europe, Canada, Brazil, and Japan, our network has already grown to around 370 retail outlets.

The success of the Lindt & Sprüngli Group is based on our uncompromising commitment to high quality in all areas of our business activity. For us, quality always has top priority. Lindt & Sprüngli is one of the few chocolate manufacturers to keep control over every step of the production process, from the selection of the finest cocoa varieties through to the finished product. This gives us an important competitive advantage and lays the foundation for the unique chocolate experience that a steadily growing number of consumers expect from the Lindt brand. The popularity of our premium products is reflected especially in the success of our three strongest brands: Lindor, Excellence, and Gold Bunny. During the year under review, for example, sales of our Lindor range passed the CHF 1 billion sales mark for the first time. Key for our premium quality are the following five steps: the selection and blending of the finest and sustainable cocoa beans, the roasting of beans using a technique refined over decades, the truly melting texture of the chocolate achieved by the “conching” method ­invented by Rodolphe Lindt in 1879, the use of high-quality ingredients from the world’s finest regions, and the expertise of Lindt’s Master Chocolatiers in creating the ultimate chocolate products. Together these five elements provide what we like to call the Lindt Difference, which is explained in more detail here.

Our uncompromising commitment to quality includes a sustainability promise. The key aspects include traceability of raw materials we use and the verification of sustainability standards. We reached an important milestone in this respect in 2016: the entire supply chain for cocoa beans from Ghana is now traceable and verified. Ghana is very important for the company, as we source our entire supply of consumer cocoa beans from this west African country. This is where we launched our first Lindt & Sprüngli Farming Program in 2008. The aim of this program is to achieve a long-term improvement in farming practices and the livelihood of farmers and their communities. Organization of farmers in groups and ensuring traceability together provide the basis for all the measures undertaken to improve living conditions. That’s why it is important to know the farmers who grow the beans and the prevailing local conditions. We are working towards an entire global cocoa supply chain that is traceable and verified by 2020. Our positive experiences in Ghana have encouraged us to launch similar Lindt & Sprüngli Farming Programs in recent years in Ecuador and Madagascar.

The solid growth achieved by our Group companies has helped to build the foundation for another successful performance over the past year: in 2016 the Group’s operating profit (EBIT) rose again by 8.4% to CHF 562.5 million (previous year: CHF 518.8 million). The operating margin also improved from 14.2% in the previous year to 14.4%. Net income increased by 10.2% to CHF 419.8 million (previous year: CHF 381.0 million), providing a return on sales of 10.8% (previous year: 10.4%). Operating cash flow rose to CHF 515.4 million (previous year: 488.9 million). The Group balance sheet is still very solid.

Thanks to the strong result in 2016 and in recognition of the continuing trust placed in the company by our shareholders, we would like to continue our dividend policy. The Board of Directors will be proposing to the 119th Annual General Meeting scheduled for April 20, 2017, a 10% increase in the dividend to CHF 880.– per registered share (CHF 300.– from the approved capital contribution reserve [agio] and CHF 580.– from available retained earnings) and CHF 88.– per participation certificate (CHF 30.– from the approved capital contribution reserve [agio] and CHF 58.– from available retained earnings).

Far-sighted leadership is vital for the long-term success of the Lindt & Sprüngli Group. This has meant a number of key personnel changes at the top of the company over the course of the past year. On October 1, 2016, Dr Dieter Weisskopf, our long-standing Group CFO, took over the role of CEO. As Executive Chairman, Ernst Tanner will in future concentrate on the Group’s long-term strategic direction. Three new members have joined the existing Group Management team. We are proud to have been able to expand our Group Management with internal people who have already made a valuable contribution to the success of our company and provide the important element of continuity. The new management structure sets the course for a successful future. The new Group Management will consist of eight members: Dr Dieter Weisskopf, Martin Hug, Andreas Pfluger, Rolf Fallegger, Kamillo Kitzmantel, Dr Adalbert Lechner, Alain Germiquet, and Guido Steiner. Together they form a highly experienced leadership team for our Group. Uwe Sommer deserves our special thanks. After making a unique contribution towards the success of the Lindt & Sprüngli Group over the past 23 years, he has decided to retire and leave the company as of April 30, 2017.

Dedicated and motivated employees are the foundation of our strong corporate culture and underpin the success of the Lindt & Sprüngli Group. In 2016, we conducted a global employee survey for the fifth time. The excellent feedback from the survey clearly underlines the staff engagement and confidence in the company, while at the same time providing us with valuable suggestions for improvements. On behalf of the Board of Directors and Group Management, we would like to personally thank all our staff for their exceptional commitment in a challenging environment.

Millions of consumers enjoy our premium products every day and put their trust in us, for which we are grateful. Particularly when it comes to the quality of our products, we also owe a debt of gratitude to our business partners and suppliers. Last but not least, we would also like to thank our shareholders, whose continuing trust and capital are integral to our business activity.

outlook

Despite a very challenging year, the Group has managed to continue its success story: we were able to further strengthen our position as market leader in the attractive premium chocolate segment, while at the same time taking the opportunity to launch new initiatives in our core markets, push ahead with optimization on the operational front and make far-sighted personnel changes at the top management level. This has laid the foundation for a very promising future for the company.

Over the coming years we are counting on a gradual improvement in consumer sentiment and a more stable situation on commodities markets. Assuming such a scenario, we are confident of being able to achieve our strategic goals over the coming financial years.

In last year’s Annual Report, we mentioned that the charitable foundation, the Lindt Chocolate Competence Foundation, had applied for a building permit for the Chocolate Competence Center at our Kilchberg headquarters. Building consent was granted in autumn 2016, and we are delighted to report that construction work already got under way in January 2017. This is the first step in creating a multimedia “chocolate experience” which includes a chocolate museum, shop and café, as well as a “Chocolateria” and a pilot plant that can be used for research and educational purposes. The opening of the new complex, which is scheduled for 2020, will strengthen Switzerland’s international standing as a center of excellence for chocolate making. It will provide international visitors with all the information they need about Swiss chocolate and Switzerland’s chocolate manufacturing industry.

Ernst Tanner Executive Chairman of the Board of Directors and Dr Dieter Weisskopf CEO of the Lindt & Sprüngli Group in front of a visualization of the planned Chocolate Competence Center.

Ernst Tanner

Executive Chairman of the Board of Directors

Dr. Dieter Weisskopf

CEO Lindt & Sprüngli Group