48 2016 ANNUAL REPORT 2016 ANNUAL REPORT 49

GOVERNANCE AND RESULTSGOVERNANCE AND RESULTS

EMPLOYEES The Group employed on average (including temporary staff, and at fully consolidated entities) 19,307 employees in 2016 compared with 18,911 in 2015, a rise of 2.1%. There was no impact of change in Group structure. Their deployment by business segment was as follows:

Cheese Products: 71.5%; Other Dairy Products: 24.8%; and Unallocated employees: 3.7%.

CAPITAL EXPENDITURE The Group s investment in tangible and intangible fixed assets rose by 14.3% in 2016, to 180.3 million compared with 157.7 million in 2015. Its deployment by business segment was as follows:

Cheese Products: 57.5%; Other Dairy Products: 38.3%; and Unallocated investment: 4.2%.

Acquisitions of subsidiaries amounted to nil in 2016 com- pared with 55.9 million in 2015.

RESEARCH AND DEVELOPMENT SAVENCIA Fromage & Dairy has always considered research and development expenditure as key to innovation and thereby to growth of its businesses. Consistent with our busi- ness culture and operating principles, development activities are organized into technological divisions in order to meet the specific requirements of each business. They are trans- versally coordinated and focus on balanced diet and the exploitation of milk s nutritional qualities.

All research and development expenditure is classified by nature and charged to profit or loss as incurred.

FINANCIAL POSITION The Group s balance sheet continues to reflect a sound financial position.

Equity rose by 90.8 million, or 7.1%, compared with 2015, to 1,361.7 million.

Net borrowings fell by 48.4 million to 340 million and represent 25% of equity compared to 30.6% as of December 31, 2015.

The financial ratios imposed by the Group s covenants have been respected.

SAVENCIA Fromage & Dairy has no significant exposure to financial market risks. As in the past, its foreign exchange risks are limited by the policy of locating production units close to their commercial markets. Interest rate risks are limited by a policy of prudent hedging.

EVENTS AFTER THE YEAR-END No material event has occurred since the year-end.

OUTLOOK The uncertainties with regard to foreign currency volatility and the world dairy economy, and the destructive price war between distributors, will continue to have strong impact in 2017. World consumption will also continue to be affected by the slowdown in economic activity of the emerging coun- tries.

Within this context SAVENCIA Fromage & Dairy, confident in its long-term strategy and in the work of its teams, will pursue its efforts of adaptation and competitiveness. The development of specialty products and of international operations will remain the engines of its growth.

The continuous constructive and transparent dialogue engaged in with the Group s partners shareholders, milk producers, distributors and industrial customers will remain critical to meeting the challenges of the world of tomorrow.

Net sales achieved outside France rose from 69.5% of total sales in 2015 to 70.3% in 2016.

Current operating profit rose by 23.2% to 187.1 million. Current operating margin amounted to 4.2% of net sales, compared to 3.4% in 2015, reflecting:

Improved volume mix in certain activities and volume resistance on the part of our strategic brands;

Excellent international performance reflecting positive price and volume factors;

The pursuit of initiatives for rationalization.

These favorable impacts were however affected by: The weakness of world prices for industrial products for most of the year, affecting in particular our selling prices for milk ingredients;

The impact of the fall in the price of milk and the continuous pressure on retail prices in particular in France and all over Europe more generally;

A difficult economic environment in certain zones and in particular in South America.

Cheese Products: Cheese Product net sales rose by 0.4% compared with 2015, to 2,611.7 million or 59.1% of SAVENCIA Fromage & Dairy s total consolidated net sales. It amounted to 58.6% in 2015.

The change reflects favorable volume and mix, with the development of our international activities essentially out- side Europe, partially offset by a generalized unfavorable price effect, related to the fall in the price for milk in Europe, and by continuing pressure on retail prices.

The change in net sales breaks down as to: Organic growth(3) of +1.5%; and A -1.1% unfavorable foreign exchange impact mainly reflect- ing the weakening of the currencies of Latin America, of the yuan and of the pound sterling.

In France, net sales fell as the result of a significant pricing impact only partially offset by the volume resistance of our strategic brands.

Elsewhere in Europe, net sales were also down as a result of negative pricing in most of our markets. Volume was mod- estly positive overall but variable depending on the country. Certain countries, faced with severe economic difficulties, have suffered falls in consumption. And even the undoubted impetus of our strategic brands has not sufficed to avoid any impact at all on selling prices.

Internationally, net sales have been penalized by foreign exchange, but organic growth has been particularly buoyant in the USA and Asia with both positive volume and mix factors. In South America, the economic crisis seen in Brazil in particular has continued to impact consumption and therefore depleted the Group s volumes within a context of inflation.

Current operating profit amounted to 156.1 million, 17.3 million more than in 2015 (+12.8% of organic growth), with current operating margin which rose from 5.3% to 6%, nota- bly reflecting improvement in our product portfolio and reinforced international activity.

Other Dairy Products: Other Dairy Product net sales fell by 1% compared with 2015, to 1,941.8 million or 43.9% of SAVENCIA Fromage & Dairy s total consolidated net sales (44.2% in 2015).

The change in net sales breaks down as to: Organic growth of +4.1%. International growth has com- pensated for the fall in the French market which for most of the year (however attenuated during the 4th quarter) suffered from the weakness in world prices for industrial products; and

An unfavorable foreign exchange impact of -5% mainly reflecting the deprecation against the euro of the Argentine peso and Chinese yuan. There was no change in Group structure for Other Dairy Products.

Current operating profit for Other Dairy Products rose to 47 million, compared with 33.1 million in 2015, with organic growth of 42.5%. Current operating margin rose from 1.7% to 2.4%. The progression was concentrated on the Group s international operations. Current operating profit for Ingre- dients fell despite the increased prices for industrial products towards the end of the year.

Unallocated items: Unallocated items depleted current operating profit by - 16 million compared with - 20 million 2015. They mainly comprised holding company costs.

Non-recurring items amounted to - 6.1 million compared with - 33.2 million in 2015. They mainly comprised impairment losses for certain assets in Brazil, a country traversing a difficult political and economic situation, as well as restructuring costs and provisions for the Group s ongoing performance improve- ment plans, partially offset by insurance proceeds for losses and by the liquidation of a US pension plan.

Operating profit amounted to 181 million, up 52.6% over 2015.

Net financial expense amounted to 28.1 million, com- pared with 26.4 million in 2015, with an unfavorable foreign exchange impact partially offset by the impact of lower inter- est rates and net debt.

The Group s share of results of associates, net of taxation, amounted to 6.7 million compared with 8.9 million in 2015.

Corporate income tax amounted to 47.7 million, up 8.5 million over 2015 and reflecting an effective tax rate of 29.9% compared with 38.7% in 2015. The change essentially trans- lates a fall in non-tax deductible expenditure in 2016 and a reduced deferred tax charge as a result of the fall announced in the rate of French corporate income tax.

Net income for continuing operations amounted to 111.9 million compared with 62.1 million in 2015.

There was no net income from operations discontinued, sold or in process of sale.

SAVENCIA Fromage & Dairy s consolidated net income for the year attributable to equity holders of the parent com- pany amounted to 104.5 million, compared with 57 mil- lion in 2015.

(3) Organic growth measures the change of a given aggregate, like-for-like for Group structure and foreign exchange rates, after the adjustments for foreign exchange and Group structure described above.