First half of 2010: Increased revenue and profit

31 August 2010


Royal FrieslandCampina N.V. enjoyed a positive first half year of 2010. Compared with the first half year of 2009, revenue rose 5.5 percent to 4.3 billion euros. Profit doubled to 156 million euros. In particular, the sale of basic and special ingredients to the food industry and consumer products in Asia and Africa contributed to the positive results. Brands such as Frisian Flag (Indonesia), Peak (Nigeria), Foremost (Thailand) and Friso (baby and infant foods) did extremely well. Within cheese, Noord-Holland and Milner cheese performer well. The guaranteed price for milk supplied by the member farmers of FrieslandCampina rose by 16 percent to 30.25 euros per 100 kilograms of milk. The performance payment based on the first half year will be 1.33 euros per 100 kilograms of milk. Thus, the pro forma milk price (guaranteed price plus performance payment) amounts to 31.58 euros per 100 kilograms of milk.

Highlights, first half year 2010

  • Revenue rose by 5.5 percent to 4.3 billion euros (first half year 2009: 4.1 billion euros) due to higher sales of consumer products in Asia and Africa,sales of special ingredients and also as a consequence of higher selling prices for products such as foil cheese, milk powder and caseinates (milk proteins)
  • Currency movements had on balance a positive effect on revenue in the amount of 51 million euros
  • Operating profit doubled up to 238 million euros (first half year 2009: 110 million euros)
  • Profit doubled to 156 million euros (first half year 2009: 78 million euros) due to improved margins and volume growth
  • The cash flow from operational activities dropped to 49 million euros (first half year 2009: 269 million euros) as a consequence of the increase in working capital resulting from higher prices.
  • The solvency ratio (group equity as a % of total assets) increased to 37.2 percent (end 2009: 36.7 percent), attributable to the stronger equity position
  • The pro forma performance payment quadrupled to close to 1.33 euros per 100 kilograms of milk excluding VAT (first half year 2009: 0.34 euros per 100 kilograms of milk)
  • The pro forma milk price (guaranteed price plus performance payment) rose by 19.7 percent to 31.58 euros per 100 kilograms of milk (first half year 2009: 26.38 euros per 100 kilograms of milk)


First half year satisfactory

Cees ’t Hart, Chief Executive Officer of Royal FrieslandCampina, is satisfied with the performance in the first half of 2010. ’t Hart: “We are doing well in the market. Furthermore, the strong rise in profits is clear proof of the success of the merger. As a merged company we are able to take advantage of the developments in the market more easily and more efficient. We are therefore ahead of realising our synergy goal. Volume growth in Asia and Africa is progressing well. Particularly in Asia we were able to gain from the economic recovery and pass on the increased raw material prices through to our selling prices. The lower exchange rate of the euro compared with many local currencies and the dollar was also beneficial. With the growing demand for dairy products around the world and the slight drop in the supply of milk, the price levels for products such as milk powder and foil cheese recovered well compared with the poor performance in 2009. This is also reflected in improved profits of the business groups Ingredients and Cheese & Butter, where Ingredients now has a positive operating profit and Cheese & Butter has narrowed the loss. The development of consumer activities in Europe is however disappointing. In this region both revenue and profit growth are under pressure. The economic recovery in Europe lags behind developments in other areas in the world. In addition, there is fierce competition and consumers continue to be cautious with their spendings.

Increase in revenue
Revenue in the first half year 2010 amounted to 4.3 billion euros. Compared with the same period of 2009 (4.1 billion euros), this is a rise of 224 million euros (5.5 percent). Revenue increased by 15.9 percent in the business group Consumer Products International (Asia, Africa, the Middle-East, export), reaching 1.1 billion euros. The rise in revenue was achieved in part by volume growth and price rises but was also due to currency effects. At Consumer Products Europe, revenue dropped by 2.3 percent to 1.4 billion euros. While growth was achieved in Russia, most other markets experienced lower volumes and pressure on prices. The market shares of most brands are stable. Cheese & Butter achieved an increase in revenue of 2.1 percent to arrive at nearly 1.1 billion euros. This increase is the consequence of higher prices for both cheese and butter and the positive level of cheese exports. The amount of cheese produced and sold was lower, partly as a consequence of the sale of the cheese plant Bleskensgraaf. At Ingredients, revenue rose by nearly 11 percent to reach 658 million euros. The higher selling prices of special ingredients for the food industry and of products such as milk powder and caseins made a significant contribution to the increased revenue.

Improved operating results and profit
The operating profit for the first half of 2010 was 238 million euros. This was more than double the figure for the same period of 2009 (110 million euros). The operating profit as a percentage of revenue amounted to 5.5 percent (first half year 2009: 2.7 percent).

The contribution of the business group Ingredients to the operating profit was particularly positive. The business group managed to convert a negative operating profit in the first half of 2009 to a positive contribution of 43 million euros (first half year 2009: -45 million euros). This was due mainly to the positive results achieved by special ingredients and the higher selling prices of standard products that resulted in improved margins.
Consumer Products International delivered very good results. This business group achieved an improvement in operating profit of 46 percent (62 million euros) to arrive at 197 million euros (first half year 2009: 135 million euros). During the first months of 2010 the business group was able to pass the price increases for raw materials through to the market and also to profit from the positive exchange rate.
Consumer Products Europe had a drop in operating profit of 48 percent (-52 million euros) to 57 million euros (first half year 2009: 109 million euros). The main reason for this are the lagging margins on cream and butter products at FrieslandCampina Professional. In order to maintain the market shares of the branded consumer products, a relatively large number of price promotions were necessary.

The business group Cheese & Butter had a negative operating profit of -31 million euros. However, compared with the same period of 2009 (-55 million euros), this was an improvement of 24 million euros (44 percent) as the consequence of better results at Cheese Specialties and Cheese. This ended in a neutral result of the cheese activities. At Butter, the margins were under pressure because the market was not able to absorb the relatively fast rising prices for milk fat. This resulted in a negative operating profit for this operating company.

Operating expenses rose in the first half of 2010 by 2.6 percent to 4.1 billion euros. A total of 1.3 billion euros was devoted to milk payments (first half year 2009: 1.2 billion euros). This is 9 percent up on the same period of 2009. Savings have been achieved in the area of purchasing as a consequence of the merger. Greater flexibility in milk processing also contributed to a reduction of costs as a consequence of the merger.

The results from joint ventures and associates fell in the first half year 2010 compared with the same period of 2009, from 11 million to 8 million euros. This is due in particular to lower profits of the European associates. Betagen in Thailand achieved an improved operating profit.

The balance of finance income and costs rose further by 5 million, resulting in costs of 35 million euros. The costs of a put option on DMV Fonterra Excipients rose as a consequence of the higher dividend payments to the holder of the put option. As a result of the issue of the private placement, the finance costs increased while net interest charges fell.

Income tax expense amounted to 55 million euros (first half year 2009: 13 million euros). The higher taxes were due to, among other things, the capitalisation of losses in Germany in 2009 and changes in tax rates in Hungary in 2009.

Profits over the first half year 2010 amounted to 156 million euros (first half year 2009: 78). The main reason for the improved profit are better returns at Ingredients, Consumer Products International and Cheese & Butter.

Of the profit, 108 million euros were appropriated to the equity holder of Royal FrieslandCampina N.V., i.e. Zuivelcoöperatie FrieslandCampina U.A., 15 million euros were appropriated to interest on member bond loans, 4 million euros to holders of perpetual notes and 29 million to minority interests.

Cash flow
The cash flow from operational activities fell to 49 million euros (first half year 2009: 269 million euros). This is mainly the consequence of the increase in working capital due to the increase and higher prices of the inventory and due to the increase in accounts receivable as a consequence of higher selling prices. Purchases of land, buildings, plants, equipment and intangible assets amounted to 75 million euros (first half of 2009: 87 million euros).

Financing
FrieslandCampina raises funds from various groups of financers (farmer members, banks and investors). This is beneficial to the company’s flexibility. Most of the borrowed funds come from Dutch and foreign banks. The majority of bank funds are received via a committed credit facility worth 1 billion euros. In May 2010, agreement was reached with all fourteen banks that participate in the Revolving Credit Facility to improve the conditions of the facility agreed in 2009 by reducing interest surcharges and extending the term to 31 August 2013. The credit facility remains unchanged at 1 billion euros. The adjustment was achieved on the basis of the developments in the market and the improved credit worthiness profile of the company. FrieslandCampina has placed a private loan of 196 million dollars with institutional investors in the United States and one of 25 million euros with a European investor. The Senior Notes have a term of seven or ten years and are intended to replace short-term debts with banks by long-term debt.

Strengthening the financial position
Group equity stood at 1.9 billion euros at 30 June 2010 (year-end 2009: 1.7 billion euros). Equity was strengthened by retained earnings over 2009.
The solvency ratio (group equity as a percentage of total assets) was 37.2 percent, (year-end 2009: 36.7 percent).
Net debt at 30 June was 937 million euros. This is an increase of 95 million euros over the year-end 2009 figure (842 million euros), and a drop of 290 million euros compared with the first half of 2009 (1.2 billion euros). The increase compared with year-end 2009 figure results from higher working capital. The drop compared with the first half year 2009 figure results from the lower borrowing requirement as a consequence of lower working capital levels.

Milk price paid to member dairy farmers
During the first half of 2010, FrieslandCampina paid a guaranteed price of 30.25 euros, exclusive of VAT, per 100 kilograms of milk at 4.41 percent fat and 3.47 percent protein (first half of 2009: 26.04 euros, whole year 2009: 26.40 euros). Based on the profit disclosed in this half-year report, the pro forma performance payment will be 1.33 euros (exclusive of VAT) and the pro forma milk price will be 31.58 euros per 100 kilograms of milk exclusive of VAT (first half year 2009: 26.38 euros, whole year 2009: 26.99 euros per 100 kilograms of milk). In calculating the performance payment, the profit based on the guaranteed price is reduced by interest on the member bonds, the interest paid on the perpetual notes and minority interests, and then divided by the volume of milk supplied by the members. It should be noted that, in calculating the performance payment on an annual basis, allowance should be made for a volume of milk supplied on an annual basis. Of this sum, 25 percent is paid to the members in cash as a performance payment,15 percent is retained and registered to the member farmers and 60 percent is retained in the company.

Outlook
The economic outlook is at the moment uncertain. Minor fluctuations in demand and supply on the world market could have major consequences for the price developments of dairy products. Also for this reason, FrieslandCampina cannot make a definite statement concerning the results to be expected for the whole year 2010.