Lower profit FrieslandCampina due to losses on milk powder and cheese in spite of growth in infant nutrition and dairy-based beverages

First half-year 2016: further decrease in milk price for member dairy farmers

1 September 2016
  • Milk supply member dairy farmers increased by 583 million kilos (11.9 percent)
  • Increase volume basic dairy products (milk powder, foil cheese and butter) sold at a loss
  • Further increase in volume and improvement in result in South-East Asia, China and the FrieslandCampina Ingredients business group
  • Volumes and result in Africa under pressure due to low oil prices and political instability
  • Revenue decreases by 2.2 percent to 5,522 million euros; positive volume-mix effect on revenue of 5.1 percent, 5.6 percent lower sales prices and 1.5 percent unfavourable currency translation effects
  • Profit decreases by 16.7 percent to 160 million euros; currency translation effects have a negative impact of 27 million euros (14.1 percent)
  • Pro forma milk price decreased by 17.1 percent to 30.24 euros (first half-year 2015: 36.48 euros)

The profit of Royal FrieslandCampina N.V. decreased by 16.7 percent over the first half-year 2016 to 160 million euros compared to the same period in the previous financial year. Due to the significant increase in the member dairy farmers’ milk production (+11.9 percent), basic dairy products such as milk powder, foil cheese and butter were produced that had to be sold below cost. Growth in volume was realised in infant nutrition in China and South-East Asia, dairy-based beverages in South-East Asia and Eastern Europe and ingredients, with improved results.

Revenue decreased by 2.2 percent, down to 5,522 million euros. The decrease in revenue due to lower sales prices was largely compensated by a higher volume. The milk price for member dairy farmers decreased to 30.24 euros per 100 kilos of milk (first half-year 2015: 36.48 euros) due to the lower guaranteed price for raw milk and the lower value creation (performance premium and reservation in member bonds). The interim pay-out amounts to 1.170 euros per 100 kilos of milk (2015: 2.018 euros).

Roelof Joosten, CEO of Royal FrieslandCampina N.V.: “We can look back on a special first half year. FrieslandCampina is doing well in Asia and with ingredients, realising a fine 2.3 percent growth in volume with added value products. Due to the increased milk production, we had to process significantly higher volumes of milk into basic dairy products that we could not sell at a profit in the market. This is visible in the 17 percent decrease in both profits and milk price for the member dairy farmers.”

Milk supply increased by 11.9 percent

Over the first half-year 2016 5,488 million kilos of milk were supplied by the member dairy farmers of Zuivelcoöperatie FrieslandCampina U.A. This is a 583 million kilo milk increase (11.9 percent) compared to the same period last year. A high proportion of the increased milk volumes was processed into basic products.

Revenue decreases as volume increases

The revenue decreased by 2.2 percent to 5,522 million euros (first half-year 2015: 5,645 million euros). On balance, currency translation effects had a negative effect of 87 million euros (1.5 percent) on revenue. The sales (volumes) of added value products, including infant nutrition, ingredients for infant nutrition and condensed milk, increased by 2.3 percent. The volume of basic products increased even more significantly: by 16.8 percent. The sales prices decreased by 5.6 percent and the prices of added value products decreased by 4.3 percent. Over the first half year of 2016, more raw milk was sold directly to third parties due to high milk supply and fully utilised production capacity.

Lower operating profit

The operating profit decreased by 18.8 percent to 255 million euros over the first half-year 2016 (first half-year 2015: 314 million euros). Currency translation effects had a negative effect of 30 million euros on the operating profit.

The gross profit decreased by 5.6 percent to 938 million euros (first half-year 2015: 994 million euros) because the sales prices incurred a quicker decrease than the cost. The sales increased in volume; however, margins were at a lower level than in the first half year of 2015. Due to the high milk supply and the lagging demand, basic products were mostly sold under cost. Direct sales of raw milk in the spot market also showed a loss.

Decrease in profit

Profit over the first half-year 2016 decreased by 16.7 percent to 160 million euros (first half-year 2015: 192 million euros). Of this amount, 117 million euros is at the disposal of the shareholder and the provider of the cooperative loan (Zuivelcoöperatie FrieslandCampina U.A.) and the holders of member bonds (first half-year 2015: 152 million euros).

Decrease in operational cash flow

The cash flow from operating activities decreased to 165 million euros (first half-year 2015: 319 million euros). This is mainly due to the higher working capital, among others due to the increased quantity of milk and the decrease in profits. Over the first half-year 2016, the outbound cash flow used in investment activities amounted to 262 million euros (first half-year 2015: 384 million euros).

Outlook

The milk prices have bottomed out. In the second half year of 2016, worldwide supply of milk is expected to decrease compared to the first half year. Demand for dairy products is expected to only show a modest increase over the second half year of 2016. This is due to the limited purchasing power in many oil-exporting countries, political instability in many countries, the limited demand for dairy materials in China and Russia continuing to block the European Union’s dairy products.

The effect of the European Commission’s measures to reduce milk production in the European Union based on support measures is as yet unclear. The impact of possible voluntary restriction of production of cooperatives or producer associations are also unclear. The Netherlands is expected to impose measures to reduce phosphate production in cattle farms to fall under the level of 2 July 2015. It is as yet unclear whether or not this may lead to a reduction of the milk production in 2016.

FrieslandCampina does not express any concrete outlooks relating to the results of the entire year 2016.