Letter from the chairman Financial results 4 Non Financial Statement 14 Viscofan on the stock market Events after the balance sheet date, alternative performance measures, GRI indicators table and contained in law 11/2018 Management report Annual Report on Corporate Governance INDEX LETTER FROM THE CHAIRMAN FINANCIAL RESULTS 2 CONTEXT 6 CHANGES IN THE SCOPE OF CONSOLIDATION 7 2018 RESULT ANALYSIS 8 BASIS OF PRESENTATION 16 MATERIALITY 17 BUSINESS MODEL 21 94 CORPORATE GOVERNANCE 34 RISK MANAGEMENT 56 COMMERCIAL MANAGEMENT 60 102 MANAGEMENT OF THE SUPPLY CHAIN 68 LABOUR MANAGEMENT 71 DEFENCE OF HUMAN RIGHTS 82 ENVIRONMENT 84 OUR RELATIONSHIP WITH THE COMMUNITY 92 NON-FINANCIAL INFORMATION STOCK MARKET EVENTS AFTER. APM AND GRI TABLE prepares us for the expected growth in these technologies without the need for significant additional investments. The casings market continues to grow every year, now exceeding 60 billion meters per year, and with it our commitment to reach millions of homes around the world. This is a challenge that involves solving new challenges and finding opportunities wherever they may occur. Proving once again that our vocation for growth has no borders is the recent acquisition of Globus in Australia and New Zealand, curiously in the geographical antipodes of Spain, where our Group was founded more than 40 years ago. Other examples of new horizons, this time technological, are the aforementioned plant 4 in Cáseda, the acquisition at the beginning of the year of Transform Pack, a Canadian company specialising in the transfer of ingredients, which opens doors to new Letter from concepts of added value in the sector, and our progress in more diversified areas such as collagen hydrolysates and the Chairman bioengineering, where in 2018 we were approved by the Spanish authorities to conduct clinical trials in human hearts, a sample of our ability to make innovative Dear Shareholder, opportunities that open up in a world as products with the highest quality dynamic as the current one. standards. We have hit the half-way mark on our 2016-2020 MORE TO BE strategic plan, Last year’s letter highlighted the record Our company is prepared to grow and a period in which Viscofan has been time construction of the new cellulose better adapt to this environment than strengthened as the leading casing and fibrous plant in Cáseda (Spain), and any other company in our sector, and company with the deployment of this year, I’m pleased to let you know this is backed by achievements that are initiatives that involve a very in-depth that this new technology is already a detailed throughout this annual report: transformation. reality: it is no longer a pilot project, and excellent production and safety numbers now sells its products with high levels of in practically all our plants, improvement Far from being content with the customer acceptance, with productive in market share, distance of profitability leadership position we have achieved, we and quality ratios that improve from the main casing producers, solid have maintained our road map with the significantly compared to our previous balance sheet and generation of cash conviction that only those companies standard. These results encourage flow to support our growth plans, capable of leading technology, us to complete the final modules in without renouncing new highs in service and costs will be able to face order to achieve a critical mass that shareholder remuneration, are some the challenges of the sector and the maximises investment returns and indicators of this improvement. ANNUAL REPORT VISCOFAN 2018 VISCOFAN ANNUAL REPORT 2 INDEX LETTER FROM THE CHAIRMAN FINANCIAL RESULTS Despite this, it has not been an easy payment of 5 million euros from the year. Our transformation has coexisted Having concluded the first amortisation of treasury shares acquired with an environment characterised part of our strategic plan, during the year and which was approved by volatility, as a result of global we are now beginning by the Board of Directors last January. uncertainties, something that has impacted not only our market, but also a phase in which I would like to wrap up by thanking economic and political relations around the results of our you on behalf of the Board of Directors the world. and the entire Viscofan team for your transformation will be support and confidence, and convey my In this sense, our results, even with a more visible commitment to continue promoting new historical maximum revenue, have Viscofan as a leader and benchmark come in below our initial expectations. of sustainable value creation to all our We have grown in volumes in all our applied to our processes to improve our shareholders in this promising future that technologies, accompanying our products, our cost structure and our is presented to us and that we look at commercial activity with a pricing impact on the environment; and being with hope and optimism. strategy that puts into value the benefits present in more countries and continents provided by our casings to customers and than any other company in our sector. consumers, and that adapts to the costs Above all, Viscofan has a formidable in our sector. Once again, the erosion in team of more than 4,600 people who exchange rates, especially the US dollar share values and a commitment to and the Brazilian real, has been the main continuous improvement as a constant difficulty in improving our results on the source of competitive advantage, whom I José Domingo de Ampuero y Osma previous year, together with increases in would like to thank for their tireless work Chairman the cost of raw materials and energy. this year. We have grown and strengthened our Having concluded the first part of our leadership, although the reduction of strategic plan, we are now beginning our expectations has affected stock a phase in which the results of our performance, which has gone from transformation will be more visible. historical highs to annual minimums in Investment needs are significantly the last quarter, causing our share price reduced to around 60 million euros, to fall by 12.5% during the year. Our while we will resume the growth trend in performance has been better than that revenues, EBITDA and pre non-recurring of reference indices such as the Ibex 35, net profit. Increased cash flows in a which dropped by 15%, or the EuroStoxx very healthy balance sheet will allow 600, which dropped 13.2%. us to continue promoting growth and remuneration for our shareholders. In a changing environment, with the imbalances and uncertainties we are Based on the 2018 results, the Board facing, Viscofan once again supports of Directors has approved the largest its commitment to the objectives distribution of dividends in our history: of sustainable development and the a payment of €1.60 per share, to which 2030 agenda by renewing our support must be added €0.13, distributed as for the Global Compact. The non- an extraordinary dividend due to the financial information included in this distribution of the extraordinary benefit integrated annual report shows that from the compensation for patent our transformation process is also a infringement. A direct payment of more success thanks to a solid positioning than 80 million euros, which is 11.6% to guarantee long-term sustainability. higher than that proposed the previous We have built a unique business model year and 28% more than the amount around our values and principles: the distributed before the MORE TO BE largest commercial portfolio in the period began. A direct payment that market; the most advanced technology has been supplemented by the indirect ANNUAL REPORT VISCOFAN 2018 VISCOFAN ANNUAL REPORT 3 NON-FINANCIAL INFORMATION STOCK MARKET EVENTS AFTER. APM AND GRI TABLE Financial results ANNUAL REPORT VISCOFAN 2018 VISCOFAN ANNUAL REPORT 4 INDEX LETTER FROM THE CHAIRMAN FINANCIAL RESULTS ANNUAL REPORT VISCOFAN 2018 VISCOFAN ANNUAL REPORT 5 NON-FINANCIAL INFORMATION STOCK MARKET EVENTS AFTER. APM AND GRI TABLE Context The market of casings grew In 2018, the Viscofan Group has In February 2018, Transform Pack Inc. maintained an intense operational, was acquired in Canada, a company around 2% in volumes investment and commercial activity in specialised in the transfer of ingredients. over the year, likewise line with the initiatives promoted in the The development of this technology MORE TO BE strategic plan focused on makes it possible to provide spices, the growth obtained by achieving triple leadership in service, cost flavours, aromas, and colours from the Viscofan. and technology. casings. Among these initiatives, the start-up In November 2018, Viscofan also of the new cellulose and fibrous plant acquired the Globus companies in in Caseda (Spain) stands out, with Australia and New Zealand for AUD13.3 an accumulated investment of €71.2 million, of which AUD8.7 million were million, of which €20.3 million was disbursed at the end of 2018. The invested in 2018. Group incorporates its main distributor in these countries. Globus has a long Production began in the new facilities in history as a supplier of casings, films the first months of the year, and in less and bags, among others, as well as than twelve months, better ratios of having extensive knowledge in the sale productive speed, efficiency and product of equipment for the food industry, quality have been obtained compared to which will improve Viscofan’s proximity traditional technology, both in cellulose and service in this region that, with this and fibrous casings. acquisition, expands its presence to a new continent. The plant project continues to advance according to the plans in place, about All this investment activity has been one third of the project in cellulose accompanied by a commercial activity has been completed and 80% of the that has sought to combine growth and total planned for fibrous, with the total price improvement amid higher costs of capacity expected to be available in raw materials and energy.