Good result with high milk price for member dairy farmers

14 March 2012

 

  • Net revenue up by 7% to 9.6 billion euro 
  • Milk price for Cooperative members up by 13% to 38.77 euro per 100 kilos
  • Operating profit down by 7% to 403 million euro due to investments in route2020, difficult economic conditions in Europe and negative currency effects
  • Profit down by 24% to 216 million euro due to lower operating profit and incidental higher tax charges; corrected for the amended reservation policy profit down by 13%
  • Cash flow from operating activities up by 14% to 508 million euro 
  • Solvency strengthened (39.4%)


Royal FrieslandCampina N.V. achieved a good annual result with a record milk price. The milk price received by the member dairy farmers rose to 38.77 euro per 100 kilos of milk – an increase of 13% compared with 2010. The net revenue of Royal FrieslandCampina N.V. rose by 7% to 9,626 million euro. As was the case in 2010 the Ingredients and Consumer Products International business groups made important contributions towards the revenue growth and the result.

 

Investments in route2020, difficult economic conditions in Europe and negative currency effects put pressure on the operating profit, which amounted to 403 million euro. Amendments to the reservation policy and the calculation of the guaranteed price for the milk supplied by member dairy farmers had a negative effect of 32 million euro on profit. This resulted in a higher pay-out to the members. Profit for 2011 amounted to 216 million euro.

Cees ’t Hart, Chief Executive Officer Royal FrieslandCampina:
“In 2011 the member dairy farmers received a high milk price. 2011 was an exceptionally good year for Ingredients. Consumer Products International achieved a good result with infant & toddler nutrition, especially in Asia and Africa. This meant that, despite the difficult European market, FrieslandCampina was still able to achieve a relatively good result. FrieslandCampina’s financial basis is solid and provides a good foundation for the achievement of its plans in the context of the route2020 strategy. During 2011 over 376 million euro was invested, primarily in the capacity expansion needed to make future growth possible. Overall within FrieslandCampina the focus was on working hard towards the FrieslandCampina of the future. Both the Company and the Cooperative took major steps in the area of sustainability – one of the cornerstones of route2020. On an annual basis FrieslandCampina is one of the largest Dutch exporters and a major player in the Dutch Agro & Food sector. FrieslandCampina is also increasingly being seen as a global player outside this sector.”

 

Key figures
In millions of euros,
unless stated otherwise

2011

2010

Results

Revenues

9,626

8,972

Operating profit

403

434

Profit

216

285

Balance sheet

Balance sheet total

5,739

5,299

Equity

2,264

2,071

Equity attributable to shareholder of the Company and other providers of capital

2,148

1,961

Net debt

699

776

Equity as a percentage of the balance sheet total

39.4%

39.1%

Cash flow

Net cash flow from operating activities

508

444

Net cash used in investing activities

340

239

Depreciation on buildings and equipment and amortisation of intangible assets

176

210

Value creation for member dairy farmers
In euros per 100 kilos (excl. VAT, at 4.41% fat and 3.47% protein)

Guaranteed price 1, 2

36.94

32.39

Performance premium 1

1.10

1.23

Registered reserve member bonds 1

0.73

0.73

Milk price 1

38.77

34.35

Additional information

Employees (average number of FTEs)

19,036

19,484

Number of member dairy farms at year end

14,391

14,829

Number of member dairy farmers at year end

19,848

20,375

Total milk processed (in millions of kilos)

10,140

10,266

Milk supplied by member dairy farmers (in millions of kilos)

8,838

8,821

1. In 2011 the reservation policy and the guaranteed price calculation were amended compared to previous years. The figures for 2010 have not been adjusted.
2. For 2011 this means the balance of the guaranteed price of 36.88 euro and an adjustment of 0.06 euro.

Profit
Operating profit for 2011 was 403 million euro, 7% less than for 2010 (434 million euro). Operating profit as a percentage of net revenue amounted to 4.2% (2010: 4.8%). The increased milk price and the higher prices of other raw materials could be almost fully passed on in the selling prices. Investments in the achievement of the route2020 strategy, difficult economic conditions in Europe and negative currency translation effects put pressure on the result. Thanks to lower depreciation and improved efficiency, FrieslandCampina was able to offset some of the pressure on the margins.

Consumer Products Europe’s operating profit fell to 55 million euro (2010: 126 million euro) as a result of difficult economic conditions in Europe and pressure on volume due to higher prices. Margins were under pressure during the first half of 2011 because, due to contractual agreements, in many cases there was a delay before the higher guaranteed price of raw milk and other raw materials could be passed on. The margins recovered in the second half of the year. In Germany price competition resulted in profit development lagging behind throughout the year. In Hungary profit was negatively influenced by the economic conditions and incidental higher tax liabilities. The sale of a participation in Spain resulted in a one-time income of 9 million euro.

Consumer Products International’s operating profit remained stable at 353 million euro (2010: 356 million euro). Infant & toddler nutrition did particularly well. Not all the higher dairy product prices could be passed on in full. Measures to offset the pressure on margins included implementing cost savings. At the same time, revenue and volume development were stimulated by specific investments in advertising and promotion.

The Cheese, Butter & Milkpowder business group achieved a negative operating profit of 97 million euro (2010: -92 million euro). This business group in particular suffered from the costs of the performance premium and the distribution of member bonds being charged to the business groups in proportion to the amount of member milk received. The Cheese, Butter & Milkpowder business group processed 56% of the member milk. Although the results from commodities such as basic cheese and milk powder improved slightly, the price development and sale of branded cheese were under pressure due to declining consumer confidence and the economic developments in a number of countries.

The Ingredients business group improved its operating profit by 48% to 189 million euro (2010: 128 million euro). The maximum production capacity utilisation resulting from the growth, the good results with ingredients and the higher revenue prices contributed towards the higher profit.

At 13 million euro the profit from joint ventures and associates remained the same as in 2010.

Net financing income and expenses rose by 3 million euro, which resulted in an expense of 72 million euro. Net interest expense amounted to 42 million euro (2010: 44 million euro).

Taxes amounted to 128 million euro (2010: 93 million euro). The effective tax rate rose from 24.4% to 37.2%. The increase was primarily due to incidental higher tax expenses in Hungary as a result of amended legislation. And also due to the writing-down of deferred tax assets in Germany and Hungary as a result of the expected drop in future results in both countries.

Profit for 2011 amounted to 216 million euro (2010: 285 million euro). The most important reasons behind the reduced profit were higher investments in the organisation in the context of the route2020 strategy, higher taxes and negative currency effects. The amendment of the milk price system and reservation policy led to a lower profit and a higher pay-out to the member dairy farmers.

In 2011 operating costs rose by 8% to 9,243 million euro (2010: 8,558 million euro). Payment to the member dairy farmers, which is a component of operating costs, rose by 13% to 3,456 million euro (2010: 3,054 million euro).

From the profit 122 million euro was attributed to the shareholder of Royal FrieslandCampina N.V., Zuivelcoöperatie FrieslandCampina U.A. (2010: 192 million euro). This is 70 million euro less than in 2010, in part as a result of the revised milk price system and reservation policy. The profit attributable to the providers of member certificates rose by 10 million euro to 39 million euro as a result of higher interest. From the profit 9 million euro was paid-out to the providers of the perpetual notes (2010: 9 million euro) and 46 million euro was attributed to non-controlling interests (2010: 55 million euro).

Milk price, performance premium and member bonds
As of the 2011 financial year FrieslandCampina’s milk price comprises the guaranteed price, the performance premium and the distribution of the fixed (registered) member bonds per 100 kilos of milk. In 2011 the reservation policy and the calculation of the guaranteed price for the milk of the member dairy farmers was amended compared with the years 2008 – 2010. This had a negative effect of 32 million euro on the profit and a positive effect of 0.48 euro per 100 kilos of milk on the milk price.

FrieslandCampina paid the member dairy farmers of Zuivelcoöperatie FrieslandCampina U.A. a milk price of 38.77 euro (excluding VAT) per 100 kilos of milk at 4.41% fat and 3.47% protein. This is 13% higher than in 2010 (34.35 euro per 100 kilos of milk).

The guaranteed price for 2011 was 36.94 euro excluding VAT per 100 kilos of milk – 14% higher than the 2010 guaranteed price (32.39 euro per 100 kilos of milk). The guaranteed price is calculated using the weighted average of the annual milk price for raw milk paid by a number of reference companies in the Netherlands and abroad.

The performance premium for 2011 was 1.10 euro per 100 kilos of milk excluding VAT. This is 11% lower than the performance premium for 2010 (1.23 euro per 100 kilos of milk).
The amount of the performance premium and the distribution of member bonds depends on the Company’s financial performance. Thirty percent of FrieslandCampina’s profit based on the guaranteed price and after deduction of the distribution of member bonds, the recompense for perpetual notes and the profit attributable to non-controlling interests, is paid out to members as a performance premium and 20% is reserved in the form of member bonds.
The distribution of member bonds for 2011 was 65 million euro. This amounts to 0.73 euro per 100 kilos of milk (2010: 0.73 euro per 100 kilos of milk). Compared with 2010 the interest on member bonds rose from 29 million euro to 39 million euro due to the rise of the Euribor and the interest rate and an increase in the number of member bonds.

Stimulus for sustainable dairy farming
In 2011 a revamped sustainability programme was introduced for the Company and the Cooperative as a component of route2020. In addition, the member dairy farmers approved a programme for sustainable dairy farming. In this context a meadow milk premium to stimulate cows being grazed outdoors has been agreed. FrieslandCampina is making 45 million euros a year available to stimulate dairy cows being put out in the meadow. FrieslandCampina will expand its range of dairy products guaranteed to be made from Dutch meadow milk. Research has shown that many consumers appreciate these products.

Outlook
In 2012 a slight increase in the demand for dairy at a global level is anticipated as a result of increasing consumption at a global level. In Europe dairy consumption will probably remain under pressure due to consumers’ reticence when it comes to spending. The availability of milk will increase slightly at a global level and, at certain times during the year, the supply of milk could exceed the demand, which will put pressure on prices. 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 cost of raw milk and other raw materials goes up margins could come under pressure if these price increases cannot be passed on in the selling prices in full or in time. The moment at which the price and duration of a contract are fixed can have a substantial effect on the achieved selling price and margin development.

For FrieslandCampina 2012 will be a year of further progress in the route2020 strategy. FrieslandCampina will strive to achieve growth in dairy-based beverages, infant & toddler nutrition, branded cheese and specialised ingredients. Investments are planned in the field of production capacity expansion, machinery replacement, efficiency improvement and innovation. The innovation programmes are linked to the strategic growth categories. Research & Development expenses are expected to increase slightly. FrieslandCampina’s solid financial base means the Company is well prepared to achieve its plans in the context of the route2020 strategy. FrieslandCampina has an amount of 715 million euro available from its current credit facility.

In the field of human resources demographic developments in the different regions will be the guideline for achieving the right staffing level as will staff training and education.
Increased efficiency the expansion of activities and possible acquisitions could all lead to changes in the number of employees. A greater focus on Corporate Social Responsibility throughout the dairy production chain must contribute towards sustainable value creation for all stakeholders.

No statement is being made regarding the expected result for 2012.

Major developments in 2011

  • 2011 a good year
  • A record year for member dairy farmers with a milk price of 38.77 euro per 100 kilos of milk
  • Good results from the Ingredients and Consumer Products International business groups
  • Robust growth in infant & toddler nutrition especially in Asia, Africa and the Middle East
  • Economic conditions in Europe led to increasing pressure on volumes and disappointing results
  • Safety and safety awareness are key operational focal points

Achievement of route2020 strategy on schedule

  • Growth in infant & toddler nutrition in both business-to-business and business-to-consumer
  • 130 million euro invested in capacity expansion for infant & toddler nutrition in 2010-2012
  • Long-term investment plans envisage heavy investment in the expansion of milk processing capacity in preparation for the ending of the milk quota in 2015
  • Global category teams for dairy-based beverages, infant & toddler nutrition and branded cheese focus on accelerating growth and innovation
  • ‘One face to the customer’ introduced for key business-to-business accounts
  • Revamped sustainability programme formulated for the Company and the Cooperative as an important cornerstone of route2020
  • FrieslandCampina encourages cows being put out in the meadow with a financial impuls for dairy farmers of up to 45 million euro a year
  • Letter of intent signed for the acquisition of two dairy companies to reinforce FrieslandCampina’s position in South-East Europe
  • A strengthened position in Asia due to a majority interest in Alaska Milk Corporation (AMC) – one of the largest dairy companies in the Philippines.

The successful merger is the basis for future growth 

  • Integration completed successfully
  • Synergy achieved faster and to a greater extent than anticipated
  • Efficiency improvements in production achieved
  • A stronger position in the area of purchasing has led to more savings
  • A new innovation centre for 450 R&D employees under construction on the Wageningen University campus
  • A clearer profile as an employer makes attracting new talent easier

Major financial developments in 2011

Increased net revenue

  • Net revenue up by 7% to 9.6 billion euro due to higher sales prices and volume growth in ingredients and infant & toddler nutrition in Asia and Africa
  • Operating profit down by 7% to 403 million euro due to investments in route2020, difficult economic conditions in Europe and negative currency translation effects
  • Profit down by 24% to 216 million euro due to lower operating profit and incidental higher tax charges; corrected for the amended reservation policy profit down by 13%
  • Currency developments have an overall negative effect of 11 million euro on profit and 105 million euro on revenue

Milk price rises 

  • Guaranteed price up by 14% to 36.94 euro per 100 kilos of milk (excl. VAT, at 4.41% fat and 3.47% protein)
  • Performance premium (1.10 euro) and distribution of member bonds (0.73 euro) down by a total of 7% to 1.83 euro per 100 kilos
  • Milk price for Cooperative members up by 13% to 38.77 euro per 100 kilos (excl. VAT, at 4.41% fat and 3.47% protein)

Improved cash flow

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

 

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • Cash flow from operating activities up by 64 million euro (14%) to 508 million euro primarily due to better management of working capital

Reserve strengthens balance sheet

  • 122 million euro added to equity
  • 65 million euro (0.73 euro per 100 kilos of milk) added to the reserve registered in the names of member dairy farmers

Financing acquisitions
On 13 March 2012 the Members’ Council of Zuivelcoöperatie FrieslandCampina U.A. agreed the arrangement of a long-term financing facility of 700 million euro to finance the acquisitions of Alaska Milk Corporation in the Philippines and Imlek and Mlekara Subotica in Serbia announced earlier.