Granarolo Group 2013 Directors’ Report (Translation from the Italian original which remains the definitive version) 2013 Directors’ Report 1 Granarolo Group 2013 Directors’ Report Dear Shareholders, Welcome to the shareholders’ meeting called for the approval of the 2013 financial statements. As always, we will present to you, in addition to Granarolo S.p.A.’s separate financial statements, the Group consolidated financial statements, which give a more comprehensive view of the results for the year. The Directors’ Report on Granarolo S.p.A. and the Group is presented in a single document as permitted by Article 1, paragraph 2, letter d) of Legislative Decree No. 32 of February 2, 2007. Positive signs in the global context; in Italy the turnaround is slow The global economy overall has shown signs of improvement and exhibits moderate growth. In the latest forecasts of January, the International Monetary Fund revised its 2014 global trade growth forecast upwards by 0.3%, translating into a 0.1% improvement in global output. Growth has been driven by the more advanced and industrialised economies, in particular the United States, Germany and Japan, and to a lesser extent – although not to be discounted – the emerging economies. A recovery is in place, although of a contained, fragile, uncertain - and particularly – uneven nature. For Italy, the only positive figures related to the recovery in industrial production, which after 26 consecutive months of decline saw a turnaround from September 2013 – which was also confirmed in the following months. However, labour market conditions remain weak, as does business lending, and the figures for new VAT registration numbers and the self-employed income tax volumes declined. Italy is the only advanced economy to see a downwards revision in the International Monetary Fund’s 2014 GDP growth estimate. The latest figures indicate a 0.6% increase, against the +1% forecast by the government in September 2013. The Italian economic picture varies greatly according to the sector and regional location of enterprises. Larger scale industrial enterprises report an improved outlook, as do those with a greater international focus, while smaller companies, those in the services sector and those in the south of the country continue to suffer. The performance of areas where business clusters allow also smaller very specialised companies to progress together with their parents is an interesting development. Despite the first signs of labour market stabilisation and an increase in the number of hours worked, conditions remain difficult. The unemployment rate, which usually lags behind general economic trends, reached 12.3% in Q3 and 12.6% in 2 Granarolo Group 2013 Directors’ Report Q4. Since 2008, Italy has lost one million jobs - with unemployment among the young reaching 41%. Entire Italian regions are now industrial and employment wastelands. The haemorrhaging of respected brands representing Italian know-how for foreign operators continues, while the number of investors choosing Italy as their new industrial base is minimal. Inflation in Italy has continued to drop – more than that forecast just a number of months ago - reaching 0.7% in December. Core inflation - calculated excluding the more volatile components - reduced to 0.9%. The demand weakness contained prices fixed by businesses to a greater degree than in the past; the increase in VAT in October was minimally transferred onto final sales prices. Italy has undergone a collective crisis of confidence and hardship, while the need is apparent for the country’s leaders to work together to resolve the difficulties. Many events have occurred in recent months, with the elections and the subsequent extensive impasse for the forming of the new government creating tensions in parliament and across the country and the judgment by the Constitutional Court on the electoral law among the most significant. All these events took place while the world was looking elsewhere. As we discuss our accounts, the country has a new leader and a new government, ambitious targets and a new direction. It is not our place to carry out political analysis obviously - however it remains very true that Italian enterprises and households need a strong Government and - particularly - a system that works. We consider that a sober approach is required, tempering the desire to innovate, while the need is apparent to put the expectations of the individual behind that of the collective reconstruction project. The primacy of the rule of law must be restored at every level of public and private life to avoid an ethical decay which would be even worse than the economic crisis. The agro-food chain - a strategic asset for Italy With over 1.5 million enterprises and more than 3.2 million employees, the Italian agro-food chain considered in its broadest sense, from agricultural production to distribution to retail, is a strategic asset for Italy as the agro-food sector in Italy means employment, wealth and regional and local development. Particularly however, it develops the quality of the food that we eat, culture, enjoyment and social cohesion. In other words - the Italian lifestyle which is envied worldwide. The numbers speak for themselves. Considering also related activities, the supply chain accounts for approx. 14% of Italian GDP, while accounting for a similar percentage of jobs and on which every year agro-food businesses spend Euro 76 billion for gross remuneration (salaries and wages). 3 Granarolo Group 2013 Directors’ Report Another Euro 23 billion concerns annual investments and more than Euro 20 billion the net amount that the chain pays to the State in terms of taxes (after government grants have been deducted, which as is widely known, are significant within the agricultural sector). In summary, the socio-economic value generated cannot be equalled by other sectors – as highlighted by, in a more technical manner, for every Euro of food produced in the domestic economy, a “return” of Euro 2.22 is generated: in other words, for every Euro of demand for food, Euro 2.22 is put into circulation for the other sectors – from transport, to energy, to distribution. Five agricultural ministers in five years is testament to the fact that the country does not believe, beyond the television shows produced, in the extraordinary potential of sustainable development. The processing industry and supply chain owe their growth to the capacity of businesses to develop the most significant and varied gastronomical heritage existing globally. The quantification of such a legacy is almost impossible and the protected origin products are the principal ambassadors for this significant and coveted component of the «Made in Italy” food brand globally. In 2013, Italy is nearly unrecognisable: domestic consumption has collapsed also in terms of food goods and for the first time operators throughout the chain must contend with a new marketplace in which domestic demand has declined. However, the foreign markets have now become the key for the future of the Italian food sector. Although for more than ten years food sector exports have continually grown, reaching today more than Euro 31.8 billion (+67% between 2002 and 2012), the crisis in Italian food consumption in recent years has forced companies to seek markets further afield. Globally, better lifestyles are being adopted by an increasing number of consumers, in particular in the larger emerging Economies (the BRIC countries, the UAE, Southeast Asia etc.). The consumption models of these markets are changing, with a gradual westernisation of diets: 2020 estimates indicate China as the leading global market in value terms for food consumption, with approx. USD 4,000 billion of food and beverage expenditure (from the current USD 800 billion), compared to USD 3,000 billion for the EU and the United States. The development path for Italian agro-food businesses has therefore been signposted and points towards increased internationalisation, while for many of these businesses (in particular the smaller businesses which, however, represent the majority of the production base) these challenges are outside of their scope, particularly in light of the competitive and structural delays which are a feature of the Italian business environment and whose effects are amplified in the global arena. This explains the lower export share of our food businesses (20% of revenues), in comparison with Germany (28%) and France (25%). 4 Granarolo Group 2013 Directors’ Report Results and challenges for the future The re-launch of the country will increasingly be based on the agro-food sector, through its quality, through the Made in Italy reputation and the capacity to thrive on international markets, our capacity to compete, together with an artistic heritage and a tourism sector which can again establish Italy as the Country the whole world knows and appreciates. For a company like Granarolo, which in the past has achieved all its growth domestically, looking only to Italy is no longer an option as the crisis at home has changed the marketplace. Granarolo began to look beyond Italy in 2012 with a plan which takes the company to 2016 and based upon four pillars: - expansion; - product diversification; - market diversification; - country diversification. If Granarolo had not realised that a radical change was needed, the Company would be in serious difficulties as the Italian milk market (fresh and UHT) has year-on-year reported contractions - prompted by the collapse of our economy and a change in consumer preferences. A process of further diversification in favour of the dairy sector is planned, which today already accounts for 31% of revenues, while only 18% in 2011 – particularly in the hard cheeses segment which will allow us to achieve our ambitious export support plan. 2013 was a particularly complex year, although satisfying results were posted: revenues amounted to close to Euro one billion, growing 7.6% on 2012. The net profit however reduced 26.2% compared to 2012.