Strong rise in 2010 operating profit with 10 per cent higher revenue FrieslandCampina

16 March 2011

Royal FrieslandCampina N.V. can look back on a good year 2010. Compared to 2009, net revenue rose by 10% to almost 9 billion euro. Profit grew by 57% to 285 million euro. Sales volumes increased and sales prices were higher. The more favourable market conditions, particularly in Asia and Africa, played a major role in these improvements. The Ingredients and Consumer Products International business groups made a strong contribution to the increase in revenue and operating profit. Cheese & Butter saw an improvement in the operating profit. Thanks to FrieslandCampina’s good results and the higher guaranteed price, the milk price for the member dairy farmers, which fell in 2009, increased by 25% in 2010.

Higher net revenue and net profit

  • Net revenue increased 10% to 8,972 million euro (2009: 8,160 million euro) due to improved sales of consumer products in Asia and Africa and special ingredients as well as price increases
  • Higher volumes in Asia and Africa. In Europe declining dairy consumption put pressure on volume. The market share of most brands were expanded or maintained
  • Operating profit up by 68% to 434 million euro (2009: 258 million euro)
  • Solvency up by 2.4 percentage points to 39.1%
  • Profit up by 57% to 285 million euro
  • Cash flow from operating activities down by 342 million euro to 444 million euro as a result of an increase in working capital due to higher prices of raw material and end products

Milk price rises due to higher guaranteed price and higher performance premium

  • Guaranteed price up by 22.7% to 32.39 euro per 100 kilos of milk (excl. VAT, at 4.41% fat and 3.47% protein)
  • Performance premium more than doubled to 1.23 euro per 100 kilos
  • Milk price for the Cooperative’s member dairy farmers up 25% to 33.62 euro per 100 kilos (excl. VAT, at 4.41% fat and 3.47% protein)

In line with strategy
Cees ‘t Hart, CEO of Royal FrieslandCampina N.V.: “The year 2010 ended with a good result. The market share of most brands were improved or maintained. Volumes rose. Both the revenue and the operating profit increased in line with our ambition to grow and create value. In 2010 the merger between Friesland Foods and Campina which started at the end of 2008 was completed. There is a clear focus on growth, further professionalisation of the organisation and cooperation. Our market focus and efficiency have improved, so that FrieslandCampina is now ahead of schedule in realising its synergy objectives.”

Strengthening market positions
In 2010 more was invested in the branded products. Compared with 2009, spending on advertising and promotions rose by 12% to 395 million euro. In Asia and Africa this led to both volume growth and larger market shares. In Asia the performance of Frisian Flag and Friso was remarkably good. In Europe the market share of a number of brands, including Chocomel, Fristi, Landliebe, Campina, Friso, NoyNoy Cheese, Milli Mia and Milner cheese, increased.

Higher milk price
The milk price for Zuivelcoöperatie FrieslandCampina’s (dairy co-operative) members rose by 25% to 33.62 euro (excluding VAT) per 100 kilos (at 4.41% fat and 3.47% protein). The 2010 guaranteed price was 32.39 euro, an increase of 23% compared with 2009. The performance premium that FrieslandCampina paid its member dairy farmers based on FrieslandCampina’s result was 1.23 euro per 100 kilos of milk supplied – more than double the 0.59 euro paid in 2009. In addition, 0.73 euro per 100 kilos of milk was added to the registered reserve compared with 0.35 euro in 2009. Thanks to the higher guaranteed price and FrieslandCampina’s higher operating profit, the total payment to the member dairy farmers per kilo of milk supplied rose in 2010 from 27.34 euro to 34.35 euro, an increase of 26%.

Improved market conditions
Compared with 2009, global demand for dairy products from both consumers and industrial customers recovered in 2010, particularly from the second quarter of the year onwards. This acceleration in demand was due to a further recovery of the global economy, the low levels of stock held by various customers and the lower supply of milk products to the global market due, primarily, to droughts. China showed a sharp rise in demand for milk powder and ingredients. In Russia substantial growth for consumer products went hand in hand with a drop in milk production due to a heat wave and forest fires in the summer. In Germany and the Netherlands consumption was reasonably stable, but in countries such as Greece, Romania and Hungary economic setbacks put volumes under severe pressure. In the second half of 2010 the export of dairy products to countries outside Europe received an impulse from the weaker euro against other currencies. This made European dairy products more competitive compared to products from other regions. The price levels of the different commodities, such as skimmed and full-cream milk powder, whey powder, butter and foil cheese remained above the 2009 level for virtually the entire year. These price levels are also guidelines for the price developments of other dairy products.

Higher net revenue and increased volume
In 2010 FrieslandCampina’s net revenue rose by 10% to 8,972 million euro (2009: 8,160 million euro). More than half of the revenue growth, namely 470 million euro, was attributable to higher prices. The increase in sales volume accounted for 213 million euro of the increased revenue and 173 million was due to the positive effect of currency movements. On average, the US dollar and several Asian currencies that are important for FrieslandCampina were stronger against the euro than in 2009. The sale of a number of activities in 2009 as stipulated by the European Commission in connection with the merger of Friesland Foods and Campina had a negative effect on revenue.

The net revenue of the Consumer Products International business group (Asia, Africa, the Middle East and export) rose by 20.3% to 2,277 million euro (2009: 1,893 million euro). This increase was achieved through a combination of volume growth, price rises and currency effects. The net revenue of Consumer Products Europe rose by 1.5% to 3,269 million euro (2009: 3,222 million euro). Growth was achieved in Russia. In most other markets, volumes were lower and prices were under pressure due to increased promotional support. Despite the difficult market conditions, the market share of most of the brands was expanded or maintained. Cheese & Butter’s net revenue rose by 7.3% to nearly 2,355 million euro (2009: 2,195 million euro). The increase was due to higher prices for both cheese and butter and the increasing export of cheese. The volume of cheese produced and sold was lower, partly due to the sale of the Bleskensgraaf cheese factory, but this was offset by the higher cheese and butter prices. The net revenue of Ingredients rose by 37% to 2,062 million euro (2009: 1,505 million euro). The higher income from special ingredients for the food industry, such as milk powder and caseinates, contributed towards the rise in revenue.

Improved operating profit
Operating profit amounted to 434 million euro, an increase of 68% compared to the 258 million euro in 2009. The higher milk price for the member dairy farmers was mainly compensated by higher selling prices. In addition, synergy benefits made a positive to the development of the operating profit. In 2010, the advertising and promotional costs increased by 40 million euro. The restructuring costs decreased in 2010 by 96 million euro compared to 2009.

One extremely positive development was the improvement of the operating profit of the Ingredients business group. This business group managed to turn around a negative operating profit in 2009 into a positive contribution of 99 million euro (2009: -20 million euro). This was achieved thanks to higher selling prices as well as good results from special ingredients.
The Consumer Products International business group’s operating profit rose by 23% to 356 million euro (2009: 290 million euro), mainly because there was ample scope in the first months of 2010 to pass on raw materials price increases to the market, especially in the first months of 2010. The business group also profited from positive currency effects.
Consumer Product Europe’s operating profit fell by 26% to 126 million euro (2009: 170 million euro). The major causes were pressure on volumes due to stable to declining demand for dairy products as a result of the bad economic conditions, increased promotional expenses and higher raw materials prices which could only be partially passed on to the market.
The Cheese & Butter business group’s operating profit improved by 36% to –63 million euro (2009: -98 million euro). Compared with 2009, the operating profit of the Cheese Specialities and Cheese operating companies improved thanks to higher selling prices and lower production costs. The Butter operating company had to cope with pressure on margins because the relatively fast price increases for milk fat could not be sufficiently passed on to the market. This resulted in a negative operating profit for this operating company.

The cost of raw materials, consumables and goods for resale rose by 690 million euro (13.6%) to 5,779 million euro. The cost of purchasing milk from member dairy farmers rose by 674 million euro (28.3%) to 3,054 million euro (2009: 2,380 million euro) due to the higher milk price and an increase in the volume of milk produced by the Cooperative’s member dairy farmers. The volume rose by 1.6% to 8.8 billion kilos (2009: 8.7 billion kilos). During the year under review, the total amount of milk processed, including non-member milk, was 10.3 billion kilos, 4.5% less than the 10.8 billion kilos processed in 2009.

Personnel costs remained the same at 817 million euro. The average number of employees fell by 2.7% to 19,484 (FTEs). This was due to the post-merger amalgamation of activities both at offices and production facilities, which led to redundancies. Pension costs were reduced by 6 million euro, while wages and salaries and social security charges increased marginally.

Advertising and promotional expenses rose by 43 million euro to 395 million euro in order to reinforce the positions of the brands and increase market share. Research & Development expenses rose by 6 million euro to 61 million euro. Energy costs fell by 26 million euro.

Profit before taxes rose 72% from 220 million euro to 378 million euro. Tax expense rose from 38 million euro to 93 million euro due to increased profit before taxes and the recognition in 2009 of non-recurring income from the capitalisation of offsettable losses. The effective tax rate rose from 17% to 24%. After the deduction of taxes, a profit of 285 million euro was achieved compared with 182 million euro in 2009.

Improved financial position
At the end of 2010, group equity amounted to 2,071 million euro compared with 1,749 million euro at the end of 2009. The 322 million euro increase was due primarily to the good results. The Company’s equity rose by 309 million euro to 1,961 million euro.
An amount of 192 million euro was added to the Company’s reserves. An amount of 65 million euro will be reserved in the form of fixed member bonds registered in the names of member dairy farmers (0.73 euro per 100 kilos of milk compared with 0.35 euro in 2009). Solvency (group equity as a percentage of the balance sheet total) amounted to 39.1% at the end of 2010. Compared with the end of 2009 (36.7%), this was an improvement of 2.4 percentage points. The effect of the increased group equity on solvency was partially negated by the increased balance sheet total, which was mainly due to the increased working capital.

The course is set
The company’s strategic course for the coming years has been set with the adoption of the route2020 strategy. Clear choices were made in the product groups and markets with growth potential, but also in respect of creating an efficient and effective organisation that is capable of making the most of market opportunities on a global scale. Sustainable entrepreneurship plays a key role in the strategy. Cees ‘t Hart: “The growing demand in the world market for healthy and sustainably produced food opens up great opportunities.”
FrieslandCampina firmly believes that consistently following the principles of Corporate Social Responsibility will, in the long term, make an important and material contribution towards sustainable value creation for all stakeholders.This concerns improvements to the value chains for milk, food security and public health – not only through the nutritious dairy products themselves but also through various initiatives to make people, and especially young people, more aware of the importance of a healthy lifestyle, healthy food and healthy exercise.

Global demand for dairy is expected to pick up slightly in 2011, especially as a result of increasing consumption in the emerging countries. Dairy consumption in Europe is expected to remain under pressure. Small fluctuations in supply and demand on the international dairy market can have major consequences for the price development of commodities like milk powder, basic cheese and butter. This also influences price levels in other product categories. If the costs of raw milk and other raw materials go up, margins could come under pressure unless these price increases can be promptly and sufficiently passed on in the selling prices. The moment at which the price and duration of contracts are fixed can have a substantial effect on the achieved selling price and margin development.
For FrieslandCampina, the year 2011 will be dedicated to pursuing the goals of the route2020 strategy. We will strive to achieve growth in dairy based beverages, baby and infant food, branded cheeses and specialised ingredients. Investments are envisioned in the field of production capacity expansion, machinery replacement, efficiency improvements and innovation. The innovation programmes are linked to the value-drivers for value growth and the selected benefit platforms. Research & Development expenses are expected to increase slightly.
FrieslandCampina’s financial base is such that all energy can be focused on achieving the plans in the context of the route2020 strategy. The human resources policy will be geared to demographic developments in the different regions with a view to realising the required staffing levels. Staff training and education will have the same focus. The restructuring of several production facilities announced in 2009 and 2010 will lead to a reduction in the number of employees in Europe. A stronger focus on Corporate Social Responsibility throughout the dairy production chain should contribute towards sustainable value creation for all stakeholders. No statement is being made regarding the expected result for 2011.

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