Diversity in geographical markets, broad range of value-added products and brands prove added value
Considering the market conditions, Royal FrieslandCampina N.V. delivered a good performance in 2008. The new company, which ensued from the merger between Friesland Foods and Campina, pays its member dairy farmers a milk price of 36.37 euros per 100 kilograms of farm milk (exclusive of VAT) for 2008, up 4.4 percent on 2007. Revenue was up 446 million euros to 9.5 billion euros. The profit for 2008 is 135 million euros. The diversity in geographical markets, the broad range of value-added products and the brands proved their added value. Conversely, commodities (milk powder, butter and some of the cheese in our range) had it very difficult. The global recession adversely affects price developments. Consequently, FrieslandCampina takes additional measures in the fields of capital expenditure, cost control and production efficiency.
• Milk price for member dairy farmers rises to 36.37 euros per 100 kilograms of farm milk (exclusive of VAT). Guaranteed price 35.89 euros, performance payment 0.48 euro (exclusive of VAT, at 4.41 percent fat and 3.47 percent protein)
• Good financial performance of value-added products in the Consumer Products Western Europe, Consumer Products International and Ingredients business groups
• Disappointing results for the Cheese & Butter business group due to lower selling prices for commodities such as cheese and butter as a consequence of imbalance between supply and demand
• Profit for the year 135 million euros, down by 121 million euros (the profit figures for 2008 and 2007 are not fully comparable due to divergent milk price calculation methods)
• Revenue up by 5 percent (446 million euros), rising to 9.5 billion euros due to price increases and the effect of the acquisition of Satro
• Cash flows from operating activities reach 315 million euros (+81 million euros)
• Solvency ratio 30.0 percent (2007: 32.8 percent)
• 25 million euros (0.29 euro per 100 kilograms of milk) reserved in the form of fixed member bonds registered in the names of member dairy farmers
• 71 million euros added to the general reserve
Brands prove added value
Cees ‘t Hart, CEO of Royal FrieslandCampina N.V.: “The diversity in our geographical markets, our broad range of value-added products and our brands prove their added value, enabling us to pay our member dairy farmers a good milk price in the difficult year 2008. The global economic recession is bound to affect price developments in the market, our results and, hence, the milk price for member dairy farmers in 2009. Accordingly, cost savings, capital expenditure restrictions and production efficiency should be key this year. The current economic situation also offers opportunities, specifically because we just merged. Our pooled innovative power and our staff’s milk expertise should enable us to properly meet customers’ and consumers’ requirements, both in the area of consumer products and that of dairy ingredients.”
Market conditions – Consumer demand dropped in Asia and Africa, in particular, in the first half of 2008 due to the high prices of dairy products. In addition, demand decreased as a consequence of the use of alternatives for basic dairy products by customers. In combination with a gradually increasing global milk production, this resulted in imbalance between production and demand, which, in turn, led to stocks building up around the world. Consequently, prices for milk powder, whey powder, butter and cheese were put under pressure. The weak US dollar also made competition on the world market difficult for eurozone countries. During the year under review, selling prices for cheese, butter and milk powder dived, resulting in selling prices for fresh and long-life dairy also gradually being put under pressure. In Asia and Africa, margins recovered in the second half of the year, due to the decreasing purchasing costs of milk, milk powder and butter.
The credit crunch and, in its wake, the tanking economy only marginally affected revenue growth and results in 2008. In the last months of the year, trading parties evidently became more cautious when it came to placing orders. In combination with the plentiful supply of dairy products due to the increased global milk production, this led to pressure on prices.
Revenue – Revenue was up 446 million euros to 9.5 billion euros on 2007 (9.0 billion euros). All four business groups contributed to this. Revenue growth was 9 percent for the Consumer Products International business group, 7 percent for Ingredients, 3 percent for Cheese & Butter and, for Consumer Products Western Europe, revenue growth stopped at 1 percent.
Milk price – The milk price for 2008 is 36.37 euros (exclusive of VAT) per 100 kilograms of milk (at 4.41 percent fat and 3.47 percent protein). The guaranteed price for 2008 is 35.89 euros (exclusive of VAT). The performance payment amounts to 0.48 euro per 100 kilograms of milk. In addition, 0.29 euro per 100 kilograms is reserved in members’ names. The milk price for 2007 amounted to 34.85 euros (exclusive of VAT). This milk price is based on the average milk prices of Friesland Foods and Campina in 2007, which were determined using divergent methods.
Profit – The profit for 2008 is 135 million euros. This is 121 million euros short of the profit for 2007 (256 million euros). Not all profit figures for 2008 and 2007 can be compared due to divergent milk price calculation methods. The main cause of the decline in profit was the substantial pressure on the margins of commodities such as cheese, butter and milk powder. Value-added products performed better, as is evident from the results of the Consumer Products Western Europe, Consumer Products International and Ingredients business groups.
Operating profit – FrieslandCampina’s operating profit for 2008 is 248 million euros (2007: 373 million euros). The cost of raw materials and consumables, and goods for resale amounted to 6.4 billion euros in 2008 (2007: 6.0 billion euros). In 2008, approximately 11.4 billion kilograms of milk were processed, 8.6 billion kilograms of which were supplied by member dairy farmers in the Netherlands, Germany and Belgium. In 2007, 11.7 billion kilograms were processed in total, 8.7 billion kilograms of which were supplied by member dairy farmers. The employee benefits expense amounted to 796 million euros in 2008. In 2007 it was 776 million euros. The number of employees was 20,568 in 2008 (2007: 20,774). The external costs of the merger came to 28 million euros. These costs mainly pertained to the costs of legal support in connection with the competition process of the European Commission and advisory fees. The income tax expense plummeted to 15 million euros (2007: 68 million euros). The main reasons for this are the lower results realised in some countries and the utilisation of offsettable losses.
Cash flows – Cash flows from operating activities increased by 81 million euros to 315 million euros (234 million euros in 2007) as a result of improved working capital levels. In 2007, working capital increased. A great deal of attention was paid to this undesirable development in 2008, which clearly bore fruit. The special working capital reduction programmes resulted in a decrease in inventory volumes. The value of the inventory dropped as a consequence of decreasing prices. The decrease in amounts receivable also resulted in an improvement of working capital. Investment in property, plant, equipment and intangible assets amounted to 240 million euros (2007: 304 million euros).
Group equity – Group equity amounted to 1.5 billion euros at year-end 2008 (2007: 1.7 billion euros). In 2008, the depositary receipts for Class B shares of Friesland Foods were cancelled. Seventy-one percent of those depositary receipts for Class B shares were converted into free member bonds, which form part of FrieslandCampina’s group equity. The remaining value of the depositary receipts for Class B shares was paid in cash. In addition, an amount of 78 million euros was paid in dividends for 2007 in 2008. Group equity increased as a result of the addition to reserves of 71 million euros from the profit for 2008. In addition, an amount of 25 million euros was reserved in the form of fixed member bonds registered in the names of member dairy farmers. The company also issued bonds worth 475 million euros to Zuivelcoöperatie FrieslandCampina U.A.
Solvency ratio – The solvency ratio (group equity as a percentage of total assets) was 30.0 percent (2007: 32.8 percent). Net debt amounted to 1,494 million euros in 2008 (2007: 1,343 million euros). Net debt rose due to, among other causes, the cash payments made as part of the cancellation of the depositary receipts for Class B shares. The company meets the requirements imposed by lenders, expressed as financial ratios.
Reserve – An amount of 71 million euros was added to the company’s general reserve. An amount of 25 million euros is reserved in the form of fixed member bonds registered in the names of member dairy farmers (0.29 euro per 100 kilograms of milk). Hence, the total addition to equity is 96 million euros.
Performance by business group
FrieslandCampina has concentrated its commercial activities in four business groups: Consumer Products Western Europe, Consumer Products International, Cheese & Butter and Ingredients. Its product range consists of milk, baby and infant food, milk-based drinks, yoghurts, desserts, cheese, butter, cream, milk powder, dairy-based ingredients, fruit juices and fruit-based drinks.
Consumer Products Western Europe – The Consumer Products Western Europe business group (2008 revenue: 3.0 billion euros) saw a sharp increase in its financial performance compared with 2007. The business group’s operating profit amounted to 181 million euros. An important angle for this business group is the health and wellness segment. In the Netherlands, this angle resulted in increasing sales for Campina Optimel, Campina Vifit and Goedemorgen!. Fresh products such as milk, yoghurt and custards had it difficult, because supermarkets increasingly focus on their private labels. This did not stop Campina from becoming the largest brand in Dutch supermarkets for the seventh time in a row in 2008. Appelsientje managed to maintain its position as market leader, as did Chocomel/Cécémel.
Results in Germany improved considerably, due to the focus on value-added dairy products. Landliebe was successfully repositioned. Campina Optiwell Control had it rough, but the desserts sold under the Campina Puddis brand had an excellent year. The professional market was characterised by increasing competition, but the Debic brand reinforced its leading role as the trust brand for the European foodservice market.
Revenue generated by Consumer Products International was 2.5 billion euros in 2008. Its operating profit amounted to 166 million euros. The business group underperformed compared with 2007. Developments in the first half of 2008 were key causes for the underperformance. High raw material prices could be reflected in selling prices gradually or in phases only. The situation improved in the second half of 2008.
In Nigeria, FrieslandCampina achieved volume growth, as well as yet another increase in Peak’s market share. In Vietnam, sales of the Dutch Lady and Friso brands increased and market share grew. In Thailand, Foremost managed to increase market share and Betagen’s market position improved. In Malaysia, the dairy market shrank, but the company managed to increase its market share. In Russia, both sales and volumes increased and the company’s market share increased. The health and wellness segment is given increasing attention in Russia as well. On the very competitive Greek market, sales increased and market share grew.
The year 2008 was challenging for the Cheese & Butter business group. Revenue amounted to 2.5 billion euros. Its operating profit was minus 77 million euros, an underperformance compared with 2007. The main cause for this was diving selling prices of cheese and butter due to the large supply in Europe throughout the year.
The naturally matured Gouda cheese performed well most of the year. Foil cheeses clearly showed price decreases due to decreasing demand and increasing supply. Although value-added products were also subject to the trend of falling prices, Milner improved its sales as well as its market position. The butter market was characterised by falling prices, in particular in the second half of 2008.
Revenue generated by the Ingredients business group was 1.4 billion euros in 2008. Its operating profit was 69 million euros. The business group underperformed compared with 2007. This mainly has to do with low milk powder selling prices.
FrieslandCampina Domo’s sales levels went up markedly. The improvement was achieved thanks to the marketing of new products and concepts. The specialties volume growth continued, as more and more functional products, such as Vivinal GOS, are used in infant foods. Margins of standard products were under pressure.
Despite rising purchase prices and stagnating sales, FrieslandCampina Kievit, which specialises in encapsulation technology, succeeded in repeating the sound result achieved in 2007. FrieslandCampina DMV had a difficult year. Prices of basic dairy products were still high in the first half of 2008, which caused a considerable drop in demand, as customers sought cheaper alternatives. FrieslandCampina Dairy Feed, FrieslandCampina Creamy Creation and joint venture DMV-Fonterra Excipients posted good results in 2008.
Outlook for 2009
The current economic developments create a high level of uncertainty in the business community and among consumers. The lack of confidence, which has ensued from the credit crunch, has led to a recession in many countries. Selling prices of, in particular, standard dairy products (commodities) are under pressure around the world, primarily due to reluctant demand among customers. Short-term and medium-term developments are very difficult to forecast. For 2009, additional measures have been taken in the fields of capital expenditure restrictions, cost control and production efficiency. No statement is being made on the expected result for 2009.