First half of 2009: reasonable performance in challenging dairy market

31 August 2009


The first six months of 2009 were characterised by difficult economic conditions worldwide. Both selling prices and volumes of dairy products sold were being weighed down as a result. This led to a 15 percent drop in Royal FrieslandCampina’s revenue to 4.1 billion euros. Operating profit fell 8 percent, landing at 110 million euros. Profit for the first half of 2009 was up 30 percent, rising to 78 million
euros thanks to an improved performance on finance income and costs, and share of profit of associates. Both branded products and industrial labels performed well. Owing to disappointing selling prices of basic products, such as milk powders, caseins (milk protein) and cheese in particular, the milk price paid to dairy farmers has come under severe pressure. Due, in part, to this development, FrieslandCampina paid its member farmers a guaranteed price of 26.04 euros, exclusive of VAT, per 100 kilograms of milk for the first half of 2009. This represents a 32 percent drop compared with the same period last year.

Highlights, first half of 2009

  • Economic crisis leading to falling demand for, and drop in selling prices of, basic dairy products
  • Revenue down 15 percent to 4.1 billion euros due to weaker demand for consumer products and ingredients, and lower selling prices. Currency movements weighing down earnings by 19 million euros on balance
  • Operating profit down 8 percent, dropping to 110 million euros due, in part, to the lower valuation of inventories
  • Good results posted by the Consumer Products International and Consumer Products Europe business groups
  • Earnings achieved by the Cheese & Butter and Ingredients business groups adversely affected by low selling prices of basic products such as milk powders, caseins and cheese
  • Profit up 30 percent to 78 million euros thanks to improved performance on finance income and costs, and share of profit of associates
  • Cash flows from operating activities up thanks to cost control, lower investments, working capital management and lower milk prices
  • Solvency ratio up from 30.0 at the end of 2008 to 35.1 percent at 30 June 2009, attributable to strengthened equity position and lower total assets
  • Guaranteed milk price for member dairy farmers down 32 percent to 26.04 euros per 100 kilograms of milk, exclusive of VAT
  • Pro forma performance payment for first half of 2009 at 0.34 euros per 100 kilograms of milk, exclusive of VAT
  • Merger: geographical spread and broad product portfolio bringing more balance and stability
  • Merger: integration well on schedule with first merger synergies achieved one year sooner than planned thanks to purchasing benefits, and lower personnel expenses and overheads


Encouraging first half of the year

Cees ’t Hart, Chief Executive Officer of Royal FrieslandCampina, described the first half-year earnings of the newly merged company as “encouraging, given the difficult dairy market”. However, at the same time he also noted that “the guaranteed milk price for our member dairy farmers is at a worryingly low level’’.
Says ’t Hart: “The half-year figures show a clear division between branded products and industrial specialties on the one hand, and basic products on the other. We managed to achieve good results, under the circumstances from both our branded products and our industrial specialties. Branded products showed a particularly positive trend in South East Asia and Africa, and we saw volumes grow and market share increase in most countries in these regions. In Europe we managed to improve our market position. We are particularly concerned about trends in prices for basic products such as milk powders, caseins and cheese. The selling prices for basic products such as milk powders, caseins and cheese are exceptionally low due to lagging demand. The price levels not only have a major impact on our results, they also determine to a significant extent the guaranteed price for our member dairy farmers.

Market conditions
In the first half of 2009, demand for dairy products from both consumers and industrial customers dropped further around the world due to the economic crisis, although there were differences between regions and product categories. In Europe, fewer dairy products were consumed and used, where Asia showed growth stagnation. The strong euro and the weak dollar got in the way of exports of dairy products outside the European Union (EU) because prices were high relative to price levels in other regions. Selling prices of milk powder, caseins and cheese were under heavy strain in the first half of 2009. This then had a gradual effect on price developments in other product categories as well. Supermarkets in Europe are again starting to focus on price competition, which is causing more and more pressure on selling prices of dairy products in the supermarket segment.

Revenue
Revenue for the first half of 2009 came to 4.1 billion euros, down 714 million euros (15 percent) from the first half of 2008 (4.8 billion euros). The Consumer Products International business group (Asia, Africa, the Middle East, export) saw its revenue increase by 4 percent to 951 million euros, mainly as a result of volume growth. The other business groups experienced a drop in revenue. Consumer Products Europe recorded a fall in revenue by 18 percent to 1.4 billion euros because of lower selling prices and dropping demand, which led to lower volumes. Its market share did grow. Cheese & Butter saw its revenue drop by 20 percent to 1.0 billion euros. This was due to lower selling prices as well as to falling volumes of products sold, especially where cheese was concerned. Ingredients posted a drop in revenue by 16 percent to 593 million euros, which was primarily attributable to a sharp decrease in selling prices of basic products such as milk powder and caseins. Volumes of products sold increased in this business group because of higher production levels of low-fat milk powder due to a drop in demand for milk by other business groups and more milk supplied by member dairy farmers.

Earnings and profit
FrieslandCampina’s operating profit was down 8 percent in the first half of 2009, dropping to 110 million euros (first half of 2008: 119 million euros). Operating profit as a percentage of revenue was 2.7 percent (first half of 2008: 2.5 percent).

Consumer Products International’s share in operating profit was particularly noteworthy. This business group managed to increase its operating profit by 97 million euros, lifting it to 135 million euros (first half of 2008: 38 million euros). Consumer Products Europe also delivered an excellent performance, recording a rise in operating profit to 109 million euros (first half of 2008: 72 million euros) thanks to cost control and cuts, and achievement of synergies. The drop in FrieslandCampina’s earnings was due mainly to the decrease in operating profit at Ingredients, which went from an operating profit of 80 million euros in the first half of 2008 to an operating loss of – 45 million euros for the first six months of 2009. Cheese & Butter’s posted an operating loss of – 55 million euros (first half of 2008: – 25 million euros). At both business groups, the drops were caused mostly by plummeting selling prices of products such as milk powder, caseins and cheese. Another factor that played a role was the lower valuation of inventories as a result of lower prices of raw materials and milk, and depressed selling prices. The results realised on the sales of Nijkerk Dairy B.V., the ice-cream activities in Romania and ingredients activities in Argentina had no material effect on results.
Operating expenses dropped 15 percent to 4.0 billion euros in the first half of 2009. A total of 1,182 million euros was distributed in milk payments, 30 percent less than in the same period of 2008. Non-recurring expense items include restructuring costs for an amount of 8 million euros, which comprise not only the restructuring costs associated with the merger, but also the costs of the announced closures of the facilities in Oud Gastel and Oldenzaal in 2010. Contrary to earlier announcements that the first concrete merger synergies were not expected until 2010, the first cost savings were already achieved in the first six months after the merger because measures were sped up. Lower purchase, staff and overhead costs were the result. The merger led to 150 redundancies in the Netherlands.
Finance income and costs, and share of profit of associates improved, rising 31 million euros from – 50 million euros to – 19 million euros. The drop in financial costs is largely attributable to lower dividend payments by DMV Fonterra Excipients. Another factor in the drop in finance costs was an increase in cash flows from operating activities, mostly as a result of lower working capital levels. A lower rate of interest was paid and share of profit of associates improved strongly.
The income tax expense stood at 13 million euros (first half of 2008: 9 million euros) owing to a better financial performance outside the Netherlands.
Profit for the first six months of 2009 came to 78 million euros. Despite the lower operating profit, this is 30 percent up from profit for the first half of 2008 (60 million euros), the most important reason for the improvement being a better performance on finance income and costs, and share of profit of associates.
Of profit for the period, an amount of 24 million euros is attributable to interest on member bond loans, 4 million euros to holders of perpetual notes, 22 million euros to minority interests and 28 million euros to Zuivelcoöperatie FrieslandCampina U.A., the equity holder.

Cash flows
Cash flows from operating activities rose sharply to 269 million euros (first half of 2008: – 94 million euros), mainly as a result of improved working capital levels thanks, on the one hand, to lower prices and to the positive effects of structured working capital management on the other. Some investment plans were put on hold because of economic developments and for the purposes of strengthening the equity position. Investments in land, buildings, plants, equipment and intangible assets amounted to 87 million euros (first half of 2008: 105 million euros).

Financing structure
FrieslandCampina raises loans from different groups of lenders (members, banks and investors). This is beneficial to the company’s flexibility. Most of the loan capital funding has been contracted from Dutch and foreign banks. The majority of bank loans are comprised of unconditional credit facilities worth 1 billion euros. The current credit facilities will expire over the next 12 months. Agreement was reached with financial institutions in August 2009 about refinancing the credit facility for an amount of 1 billion euros. The fees payable to the banks for the new facility exceed the current fees, which will lead to higher finance costs.

Strengthening the financial position
Group equity stood at 1.6 billion euros at 30 June 2009 (year-end 2008: 1.5 billion euros). Equity was strengthened by retaining earnings and having member farmers and former members convert 36 million euros worth of subordinated Campina bonds into member bonds – free. In addition, equity was boosted by the one-off conversion of 110 million euros of a loan from Zuivelcoöperatie FrieslandCampina U.A. into Royal FrieslandCampina N.V. equity.
The solvency ratio (group equity as a percentage of total assets) was 35.1 percent, up 5.1 percentage points from year-end 2008 (30.0 percent). This was attributable, on the one hand, to the efforts to strengthen equity and to lower total assets (mainly as a result of lower working capital levels) on the other.
Net debt fell to 1.2 billion euros, a drop by 267 million and 397 million euros compared with year-end 2008 (1.5 billion euros) and with the first half of 2008 (1.6 billion euros) respectively. This is due, in large part, to the lower borrowing requirement as a result of lower working capital levels and the partial repayment of the debt to Zuivelcoöperatie FrieslandCampina U.A. The company meets the requirements imposed by lenders, as expressed in financial ratios.

Milk price paid to member dairy farmers
For the first half of 2009, FrieslandCampina paid a guaranteed price of 26.04 euros, exclusive of VAT, per 100 kilograms of milk at 4.41 percent fat and 3.47 percent protein (first half of 2008: 38.17 euros). Based on the profit disclosed in this half-year report, the pro forma performance payment will be 0.34 euros and the pro forma milk price will be 26.38 euros per 100 kilograms of milk. In calculating the performance payment, profit based on the guaranteed price is reduced by interest paid on the perpetual notes, interest on the member bonds (fixed and free), and minority interests, and then divided by the volume of member milk supplied. It should be noted that, in calculating the performance payment per 100 kilograms of milk based on full-year profit, allowance should be made for a volume of milk supplied that will be about twice as high on an annual basis. Interest paid on member bonds and minority interests was up from the first half of 2008. For the full year 2008, FrieslandCampina’s milk price (guaranteed price plus performance payment) amounted to 36.37 euros, exclusive of VAT. The pro forma retained earnings registered to member farmers amounted to 9 million euros. In the first half of 2009, 34 million euros was paid in interest on member bond loans.

FrieslandCampina has great concerns about the implications for its member farmers of the downward trend in selling prices of dairy products, which also impacts the level of the guaranteed price paid to members. FrieslandCampina supports the measures taken by the European Commission to use all market control options available to support and stabilise the dairy market. Country-level measures may result in some support for milk price levels in the short term, but they do not offer a sustainable solution in the longer run. A level playing field throughout the EU (with the same rules applying in all EU Member States) is key, especially for FrieslandCampina, which sells about 25 percent of its member milk outside the EU.

Outlook
FrieslandCampina does not expect any key changes in the economy in the second half of 2009. The market will remain challenging. Selling prices of basic dairy products in particular are expected to remain under pressure, owing to sluggish demand. Due to the volatility of the markets and the many uncertainties, FrieslandCampina cannot, however, make any specific forward-looking statements about the company’s financial performance for the full year 2009.

Key figures

 

Results
in millions of euros

First
half
2009

First
half
2008

Year
2008

Revenue

4,104

4,818

9,454

Operating profit

110

119

248

Profit for the period

78

60

135

Guaranteed price in euros per 100 kilograms of milk

26.04

38.17

35.89

Pro forma performance payment in euros per 100 kilograms of milk (1)

0.34

0.45

0.48

Pro forma milk price in euros per 100 kilograms of milk (1)
(exclusive of VAT, at 4.41% fat and 3.47% protein)

26.38

38.62

36.37

Balance sheet
in millions of euros

30 June
2009

30 June
2008

31 December
2008

Total assets

4,680

5,253

4,930

Group equity

1,642

1,615

1,480

Equity attributable to the equity holder of the parent

1,552

1,541

1,395

Net debt (2)

1,227

1,624

1,494

Cashflow
in millions of euros

First
half
2009

First
half
2008

Year
2008

Net cash flows from/used in operating activities

269

-94

315

Investments in property, plant and equipment and tangible assets

87

105

240

Depreciation and amortisation

104

110

219

Other information

First
half
2009

First
half
2008

Year
2008

Solvency ratio (group equity as a % of total assets)

35.1

30.7

30

Volume of milk supplied by members
(in millions of kilograms))

4,439

4,374

8,589

(1) The performance payment and milk price stated are of an indicative nature and are based on profit for the first six months. The final performance payment and milk price will be determined on the basis of the profit figures for the full year.

(2) Net debt represents non-current interest-bearing borrowings and current borrowings less cash and cash equivalents.

You can download the complete half-year report here.