< Previous20 CONSOLIDATED MANAGEMENT REPORTCAPITAL EXPENDITURECapital expenditures totalled EUR 39.1m for the 2017 financial year, EUR 14.8m of which flowed into capacity expansion projects at all locations. R&D REPORTProduct development again contributed to the Company’s sustainable success. In 2017, many new product concepts were developed. One highly successful example is the FRoSTA Crispy Batter fish from the oven (Backofen Fisch Knusprig Kross), which received the “2017 Golden Product of the Year” award from the trade journal Lebensmittel Praxis. We continued to work intensively on many innovative products.ORGANISATION, ADMINISTRATION AND COMPANY STRUCTUREThe proven organisation structure has remained substantially unchanged. Chairman of FRoSTA AG’s Executive Board is Felix Ahlers. As Vice Chairman, Jürgen Marggraf is responsible for the COPACK and Operations segments. Hinnerk Ehlers is in charge of Marketing and Sales for the brand, Foodservice and Home Delivery, as well as HR. The Board function Finance and Financial Controlling is headed up by Maik Busse.The Supervisory Board of FRoSTA AG is chaired by Dirk Ahlers. Oswald Barckhahn is Vice Chairman of the Supervisory Board and Jürgen Schimmelpfennig is the elected workers’ representative. The Supervisory Board appoints the members of the Executive Board and determines their number. The structure and amounts of the remuneration paid to the members of the Executive Board are disclosed in the Notes.RESULTS OF OPERATIONS, NET ASSETS AND FINANCIAL POSITIONMACROECONOMIC ENVIRONMENTIn 2017, the German economy grew by 2.2% and the economies of the EU countries by 2.5%. At 1.4%, inflation in the euro zone continues to be at a comparably low level, with energy prices especially rising faster than average at 3.0% (source: Eurostat 01/2018). The German food retail segment posted growth of 3.6% in the 2017 financial year, which was accounted for largely by the price development (3.3%). Higher prices for milk and butter are partly responsible for this, along with demand on the part of full-range food retailers for higher-quality products and in particular on the part of discounters thanks to listings of branded products (source: GFK Consumer Index 12/2017).The first half of 2017 was marked especially by the euro’s sharp decline against the US dollar. This trend reversed in the course of the year, but was unable to wholly compensate for the negative effect on purchasing prices. DEVELOPMENT OF THE FROZEN FOOD MARKETIn 2017, frozen food sales in the German food retail segment, including hard discounters (Aldi/Lidl/ Norma) increased by 3.9% to EUR 6.5 billion.TotalFRoSTA brandPerformance (2017 vs. 2016)3.9%13.0%2.9%18.6%5.5%50.2%2.9%1.3%Frozen food excluding ice creamFrozen vegetablesFrozen fishFrozen ready mealsThe FRoSTA brand again posted double-digit growth of 13.0% and thus outperformed the market (source: IRi 2017).The awarding of the Anniversary Prize by the German Sustainability Award Foundation in December 2017 will certainly help to further strengthen the trust consumers have placed in us.CONSOLIDATED MANAGEMENT REPORT 21BUSINESS DEVELOPMENTIn 2017, we managed to increase FRoSTA Group revenue by 7.5% to EUR 501m. The main driver of this growth was the sustained positive development of the FRoSTA brand. Group Revenue (in mEUR)48620132014201520162017386408440466501+ 7.5%15AcquisitionCore businessAcquisition of the La Valle degli Orti and Mare fresco brands in Italy from 1 June 2017 made a significant contribution to this result with EUR 15m. Revenue generated by our core business with the FRoSTA brand also grew by 10.4% – despite the temporary delisting of our 500g stir-fry meals by a major customer. The Foodservice business again posted double-digit growth year-on-year. Revenue performance in the Home Delivery and private label segments was slightly down on the previous year.The development projected in the previous year’s forecast was thus exceeded both in the consolidated and in the separate financial statements.The disproportionately high sales increases for the FRoSTA brand and in the Foodservice segment with innovative products contributed to an improvement of the gross profit margin from 38.4% to 39.3%. The gross profit margin is calculated on the basis of Group earnings by subtracting other operating income and the cost of materials (cost of goods sold) from total revenue and dividing by total revenue.Gross Profit Margin (in % of overall performance)2013201420152016201735.838.437.138.439.3+ 0.9%pTo create additional production capacities, extra shifts were introduced in the plants with corresponding subsequent costs. Expenditure on brand-building activities increased by EUR 1.5m in the reporting period.Net interest income/expense showed no significant change year-on-year. The tax rate for FRoSTA AG increased slightly from 31% to 32% as a result of one-time effects from the auditing of the accounts for the years 2010–2014. The consolidated profit for the year totalled EUR 23.4m in the 2017 reporting period, up by EUR 1.8m on 2016. Consolidated Profit/Loss (in mEUR)2013201420152016201712.017.318.221.623.4+ 8.3%With this result, the Company managed to exceed the forecast made at the beginning of the year for the financial year 2017.Capital expenditure totalled EUR 31.6m in the 2017 financial year and was used largely for the expansion 22 CONSOLIDATED MANAGEMENT REPORTof production capacities. To finance extended assets, non-current loans were increased by EUR 11m. Thus the Group was able to fulfil its payment obligations at all times.Capital expenditure (in mEUR)201320142015201620178.416.314.126.039.1+ 50.4%The equity shown in the consolidated balance sheet of FRoSTA AG can be broken down as follows, in each case as at 31 December:Equity (in mEUR)31.12.2016 31.12.2017Exclusive acquisitionSubscribed capital17.417.417.4+ Capital reserves12.812.812.8+ Retained earnings / other reserves 93.9108.3108.4+ Profit for the year21.623.423.1Equity145.7161.9161.7Total assets271.6310.0288.2Equity ratio53.7%52.2%56.1%The balance sheet total of EUR 310m in 2017 significantly exceeded the previous year’s level of EUR 272m. One major impact (EUR 22m) here resulted from the acquisition of the brand business in Italy. The increase in property, plant and equipment (EUR 18m) also had an impact due to the investments in capacity expansion. At 2.5%, capital tied up in core business excluding non-current assets and after deduction of trade payables decreased in line with revenue performance. First effects of the programme to improve internal financing initiated in 2017 are thus being felt.The rise in the balance sheet total was funded by the increase in equity of EUR 16m. Liabilities to banks were increased by EUR 11m through long-term asset financing, and receivables financing within the scope of the ABS programme was increased in the short term by EUR 6m. In addition, the extension of the payment periods of our suppliers also had a positive effect. The equity ratio of FRoSTA AG thus remained at a high level of 52% and for the core business excluding acquisition even increased to 56%. Thus – even with high capital expenditure in the future – FRoSTA retains its financial independence. Equity ratio (in %)2013 2014 2015 2016 2017excl. acquisition> 50%565254555453Overall, the financial position of the FRoSTA Group developed positively in 2017. The revenue, gross profit margin and total profit/loss projections made in the 2016 management report were surpassed, leading to the higher-than-projected operating profit.SEGMENT REPORTINGPERFORMANCE OF THE FRoSTA OPERATING SEGMENTThe FRoSTA operating segment (brand business, some parts of the private label business as well as the Foodservice and Home Delivery service in Europe) enjoyed a positive development in almost all sales areas. Overall, the segment grew by 16%. An important driver of this growth was the acquisition in Italy, which contributed EUR 15.2m in the months from June to December. New, high-impact TV campaigns, coupled with the excellent work of our sales and marketing teams, also generated revenue growth in our core business of 9.3%. This is a very good result, especially given that tough negotiations over terms led to the temporary delisting of our 500g stir-fry meals by a major customer.CONSOLIDATED MANAGEMENT REPORT 23Revenue FRoSTA operating segment (in mEUR)2013* 2014* 201520162017+ 16%202.2227.2263.5*new allocation from 20152013* 2014* 201520162017*new allocation from 2015Net profit/loss FRoSTA operating segment (in mEUR)+ 12%14.217.219.3In the core German market, the FRoSTA brand increased consumer revenue in 2017 by as much as 13% (source: IRi 2017).FRoSTA extended its market leadership (24.1% market share) in the stir-fry segment with growth of 1.3% (source: IRi 2017).Following the excellent prior-period figures, sales revenues for FRoSTA vegetable mixes again achieved double-digit growth of 18.6%. Our international stir-fry vegetables made a significant contribution to this very positive result (source: IRi 2017).In the fish segment, our Backofen Fisch Knusprig Kross, Pfannen Fisch Müllerin Art and our Schlemmerfilets recorded further marked increases. Thanks to the strong combination of TV and promotion campaigns, this segment once again posted exceptional growth of 50.2% (source: IRi 2017). Brand-building activities in other European countries excluding Germany also brought dividends, resulting in double-digit growth for the FRoSTA brand. Due to the high quality of the range, the Foodservice (catering) segment also saw a rise in revenue of 17.4%. Steady growth combined with a positive product mix led to improved profitability in the FRoSTA operating segment. PERFORMANCE OF THE COPACK OPERATING SEGMENT The COPACK operating segment comprises the private label business sales channels with food retailers in Germany, France and Western Europe.Due to the loss of a customer contract in France, this segment showed a slightly negative development. In the other markets, revenue levels were maintained.The expected rise in raw material prices and the ongoing expansion of capacities will make it necessary to increase prices in the future. Revenue COPACK operating segment (in mEUR)2013* 2014* 201520162017– 0.5%237.8 238.9237.6*new allocation from 20152013* 2014* 201520162017*new allocation from 2015Net profit/loss COPACK operating segment (in mEUR)– 7.2%4.04.44.024 CONSOLIDATED MANAGEMENT REPORTSEPARATE FINANCIAL STATEMENTS OF FRoSTA AGThe separate and consolidated financial statements of FRoSTA AG are identical with regard to changes in most balance sheet and income statement items. Any material differences between the financial statements are caused by consolidation of the Polish and Italian subsidiaries and the differences in the financial reporting standards applied. Unlike the consolidated financial statements, which are governed by international IFRS rules, the separate financial statements for FRoSTA AG are prepared in accordance with the provisions of the German Commercial Code (HGB).Sales of FRoSTA AG in 2017 were up by 3.6% on the previous year. This was mainly due to the good sales performance of the FRoSTA brand and the international Foodservice business. Earnings further improved by virtue of the segment mix. The separate financial statements show a profit after tax of EUR 19.0m in accordance with the accounting principles of the German Commercial Code (HGB). The previous year’s figure was EUR 15.5m.Capital expenditure in the 2017 financial year totalled EUR 22.9m. Much of this was spent on expanding and modernising production facilities. The Company was at all times able to meet its payment obligations.The detailed differences between the net income for the year according to the German Commercial Code (HGB) and the consolidated profit for the year according to IFRSs are illustrated below:Reconciliation of 2017 financial statementskEURNet income for the year of FRoSTA AG (HGB)18,953Adjustments to IFRSs: Depreciation and amortisation – 1,946 Pallets1,236 Deferred taxes – 73 Foreign currencies– 24 Other– 132Profit for the year of FRoSTA AG (IFRSs)18,014Total annual profit/loss of subsidiaries included in the consolidated financial statements5,546Effects of the consolidating entries recorded to profit or loss– 208Profit for the year of FRoSTA Group for 201723,352CONSOLIDATED MANAGEMENT REPORT 25The higher depreciation/amortisation figures in the IFRS financial statements result from the fact that fixed assets measured in accordance with IFRSs have a higher carrying amount than in the HGB financial statements, and from different depreciation/amortisation rules and useful lives.The individual financial statements according to generally accepted accounting standards in Germany remain the basis for determining the dividend amount.The Executive Board will propose to the Annual General Meeting to distribute a dividend of EUR 1.60 per share from net retained profits and allocate the remainder to reserves. Based on 6,812,598 shares, less 228 treasury shares not entitled to a dividend in accordance with Section 71b of the German Stock Corporation Act (AktG), this results in a total dividend amount of EUR 10.9m. As a result, 32% of the FRoSTA Group’s profit before tax of EUR 34.4m will be distributed as a dividend and 32% paid as taxes, with 36% being retained by the Company. For all other statements made in the management report, the separate and consolidated financial statements correspond, with the exception of the special characteristics typical of a group. Relating to the disclosures pursuant to Section 289 (4) HGB – where relevant – please refer to the disclosures in the Notes.Overall, the financial position of the FRoSTA Group developed positively in 2017. The revenue, gross profit margin and total profit/loss projections made in the 2016 management report were surpassed, leading to the higher-than-projected operating profit.THE FRoSTA SHAREAppropriation of profits 2017mEURPercentageCurrent company taxes11.1Capital gains tax including solidarity surcharge on dividends 2.9Total taxes14.040.7%Net dividend8.023.3%Retained by the Company12.436.0%Consolidated profit before tax34.4100.0%Key data of the FRoSTA shareMarket segmentOpen Market of Frankfurt Stock ExchangeGerman SIN (WKN)606900ISINDE0006069008Nominal share valueEUR 2.5626 CONSOLIDATED MANAGEMENT REPORTRISK MANAGEMENT SYSTEM/ INTERNAL CONTROL SYSTEMThe risks described affect all segments of the Group.The main features of the internal control and risk management process relevant for the Group’s financial reporting system are presented as follows: FRoSTA has set up an internal control and monitoring system to be enforced by the Group’s Financial Controlling, Accounting, Debtor Management and Human Resources departments. Process-integrated and independent monitoring procedures make up the main components of the control system. Besides manual measures such as the dual-control principle, automatic controls integrated into our SAP-ERP system with its BO analysis tool are also a material component of measures integrated into processes. The strict separation of administrative, executive, accounting and approval functions reduces the likelihood of fraudulent actions. The most important internal control variables at FRoSTA AG in order to secure economic independence are revenue growth, net profit for the year and the equity ratio. The return on investment measures the ratio of the operating result (EBIT) to the average capital employed (fixed assets + inventories + receivables from customers - trade liabilities). The FRoSTA share saw the following development in 2017: in December 2016, the share price was at EUR 58.80 and in December 2017 it was at EUR 79.00. Since March 2017, the FRoSTA share has been traded in the Open Market segment of the Frankfurt Stock Exchange.Key figures for the FRoSTA share20162017Share capital (mEUR)17.417.4Number of shares (in thousand) 6.8136.813Equity carried in the consolidated balance sheet (mEUR)145.7161.9Equity per share (EUR)21.3923.77Share price at year-end (EUR)58.8079.00Year high (EUR)65.2590.50Year low (EUR)39.4054.86Trading volume in shares 516.782583.670P/E ratio (price at year-end/profit for the year)18.5523.03Dividend payout per share (EUR)1.501.60Dividend yield (dividend/price at year-end) 2.6%2.0%Consolidated profit for the year (mEUR)21.623.4Net profit for the year per share (EUR)3.173.43CONSOLIDATED MANAGEMENT REPORT 27Our process-independent monitoring programme includes the internal audits of our quality management officers, internal auditing projects and indeed the Supervisory Board. The compliance and reliability of our corporate accounting is guaranteed by adherence to the work instructions and internal accounting manual, which apply to all relevant Group companies. These regulations also stipulate the material and formal requirements concerning the preparation of the financial statements. Despite the large number of regulations, there is still a possibility of risk, for example as a result of extraordinary or complex transactions.All our managerial staff are actively involved in our risk management system. The system ensures that warning signals are given at an early stage, even in times of crisis.Market-related business risks are naturally borne by the Company itself. These include risks from the development of new products. The Company generally tries as far as possible to transfer any risks not stemming from the Company’s core areas of activity, such as currency, liability and property damage risks, to third parties. In addition to security through insurance, we continuously endeavour to counter cyber risks with the help of modern firewall architecture as well as regular internal and external audits. The risk management system at FRoSTA AG is the subject of a continuous improvement process. REPORT ON RISKS AND OPPORTUNITIESPROCUREMENT MARKETThe production of frozen food involves the use of a wide range of raw materials, the procurement of which can be subject to considerable fluctuation. By cooperating with strategic suppliers we smooth out these fluctuations and avoid dependencies. Due to different geographical locations, our own vegetable production is also largely secured against the effects of inclement local weather conditions that can lead to poor harvests. Despite all this, considerable changes in the prices of raw materials are still possible and, if we are to remain competitive, we cannot always pass these on directly to the customers. This situation presents risks and opportunities. However, price agreements with customers with a term of more than six months increase our risk/opportunity as we are not normally in a position to secure raw material cover for such a long period. As far as possible, we therefore try to avoid contractual or delivery agreements with our customers which go beyond this period. However, competition sometimes makes this impossible.The quality of the raw materials is monitored by audits at our suppliers’ facilities and by checking goods as they arrive at our plants. Quality checks, however, cannot guarantee the absolute safety of raw materials since the thresholds for contamination are becoming ever lower and the checks are only carried out on a random basis.CURRENCY SITUATIONFRoSTA purchases most of its raw materials from international markets. Most of these goods are invoiced in US dollars. We make use of the usual options and futures trading instruments available on the market to hedge exchange rate fluctuations. The aim is to hedge the US dollar requirement from operational planning for the respective following four months.The way these currency hedging instruments are dealt with is precisely stipulated by a set of procedural regulations, and financial controlling instruments are employed to ensure that these are adhered to. In general, a deterioration of the EUR/USD exchange rate results in higher prices for goods purchased – and vice versa. The hedging of exchange rate risks can only compensate to a limited extent for a continually rising US dollar. Opportunities may derive from falling US dollar exchange rates.As part of the risk management process, procurement market and currency risks as the risks with the highest exposure rate for FRoSTA are monitored most closely.28 CONSOLIDATED MANAGEMENT REPORTSALES MARKET The increasing concentration of trade is leading to risks arising from the potential loss of bulk contracts. Our broad customer structure is based on our own brands and private labels, as well as supplying home delivery services, caterers and industrial customers, all of which protects us against excessive fluctuations in individual market segments. Our contracts with our customers normally include items and prices but do not guarantee fixed volumes; this means that FRoSTA carries the risk or opportunity of fluctuating sales to end consumers. The risk of losing outstanding receivables is limited by credit risk insurances with the usual deductibles, a strict reminder system and internal credit limits.The frozen food market is subject to constant change. Our competitors might respond to product trends more quickly or gain technological leads. In close cooperation with our Product Development department, we conduct intensive research to identify market trends. This enables us to produce innovative product concepts to respond to changes or even to initiate changes ourselves within the market. Besides market growth in Germany and Western Europe, there are special opportunities for FRoSTA AG particularly in Eastern Europe. Combined with FRoSTA’s strong market position, the low per-capita consumption in these countries offers good potential for growth.FINANCINGOur financing is dependent on loans. By exercising alternative forms of financing such as selling receivables through asset-backed securities, but also by maintaining an adequate equity base, we aim to reduce our dependence on borrowing and to meet increasingly strict requirements from the capital market. In doing so, we are exposed to interest rate risk on the capital market. By using long-term loans and interest-rate hedging, we can limit the interest rate risk.LEGAL RISKSThere are no legal risks. In its overall assessment, the Executive Board currently does not see any risks that would jeopardise the continued existence of FRoSTA AG and the Group.CONSOLIDATED MANAGEMENT REPORT 29REPORT ON POST-BALANCE-SHEET DATE EVENTSThere have been no events after the reporting date which would have any bearing on the financial year under review. BRANCH OFFICE REPORTFRoSTA AG has the following branch offices:F . Schottke, Bremerhaven, GermanyElbtal Tiefkühlkost, Lommatzsch, GermanyRheintal Tiefkühlkost, Bobenheim-Roxheim, GermanyFORECAST We expect the frozen food market in Europe to continue to enjoy moderate growth. We also expect the catering business (Foodservice) to grow. On the other hand, we are also likely to see a rise in the prices for our raw products, especially fish.Price increases and cost discipline will therefore be necessary to enable us to invest in advertising, necessary working capital and innovative state-of-the art technology. The full effect of the acquisition of the new Italian brands will be reflected in 2018. We are therefore targeting an overall increase in Group revenue and consolidated net profit in line with the trend of the past few years, so as to continue to guarantee our independence through a stable equity ratio in 2018.In the first two months of 2018, we saw an increase in revenue of 4.3% compared to the previous year. We believe we have the personnel and organisational capability necessary to continue to develop FRoSTA AG positively as an independent company. In this endeavour, we will be supported by our long-standing good relations with our customers and suppliers as well as by our dedicated workforce.Bremerhaven, March 2018The Executive BoardNext >