FrieslandCampina: satisfactory result in a dynamic year

Royal FrieslandCampina N.V. 2014 results

12 March 2015
  • Revenue stable at 11.3 billion euro excluding currency translation effects an increase of 2.2 percent.
  • Operating profit up by 56.2 percent to 489 million euro. Corrected for one-time items and currency translation effects, operating profit down by 10.7 percent.
  • Profit up by 93 percent to 303 million euro. Excluding the one-time items and currency translation effects profit down by 13.1 percent.
  • Cash flow from operating activities down to 545 million euro (2013: 588 million euro).
  • Milk price for member dairy farmers amounts 42.70 euro, falls marginally by 0.5 percent (2013: 42.90 euro).

FrieslandCampina can look back on a dynamic year. Geopolitical tensions and adverse currency effects had more influence on business operations, revenue and result than in other years. Net revenue remained stable at 11.3 billion euro. Profit rose to 303 million euro. The results for 2014 were influenced by a one-time income and negative currency translation effects. In the second half of 2014 cost savings contributed towards the development of the operating profit. Compared to the same period in 2013, operating profit (corrected for one-time items and currency translation effects) in the second half of 2014 rose by 5.5 percent. FrieslandCampina’s pay-out to member dairy farmers remained stable. At 42.70 euro per 100 kilos of milk the pay-out was only fractionally lower than in the record year of 2013 (42.90 euro).

Cees ’t Hart, CEO Royal FrieslandCampina:
“In 2014 Royal FrieslandCampina’s results were more influenced by external conditions than in other years. The year 2014 could accurately be described as ‘dynamic’. Although the disappearance of the EU milk quota will quite possibly lead to even more volatility on the dairy market, the prospects for FrieslandCampina and the member dairy farmers remain positive. The company is well positioned.”

Value creation for member dairy farmers

Per 100 kilos of milk excl. VAT, at 3.47 percent protein, 4.41 percent fat and 4.51 percent lactose

  • Guaranteed price down by 0.07 euro (-0.2 percent) to 39.38 euro (2013: 39.45 euro).
  • Total performance premium (1.86 euro) and distribution of member bonds (1.07 euro) amounts to 2.93 euro, 0.11 euro (-3.6 percent) lower than in 2013 (3.04 euro).
  • On top of the guaranteed price a total of 277 million euro (2013: 282 million euro) was distributed to member dairy farmers.

Achievement of route2020 strategy

  • 5.7 percent volume growth in infant nutrition, especially in China and Hong Kong.
  • 5.4 percent volume reduction in dairy-based beverages due to lower consumption and pressure on market shares.
  • 14.5 percent volume reduction in branded cheese due to Russian boycott and competition on the European market.
  • The negative effect of the Russian boycott of dairy products on operating profit estimated at 80 million euro.
  • Investments of 656 million euro primarily in capacity expansion and in quality and efficiency improvement.
  • Updated Foqus planet quality and sustainability programme for member dairy farmers.
  • Substantial improvement in safety and safety awareness; the number of accidents resulting in sick leave down from 140 to 94.

Organisation strengthened

  • In 2014 FrieslandCampina and China Huishan Dairy Holdings Company Limited signed a letter of intent for a 50–50 joint venture. The company being set-up, FrieslandHuishan Dairy, will produce, market and distribute infant nutrition.
  • FrieslandCampina strengthens its position in West Africa through the acquisition of the dairy activities of Olam in the Ivory Coast.
  • FrieslandCampina strengthens its position in Italy through the acquisition of the cheese and butter distribution activities of DEK Srl and 80 percent of the shares in Orange Srl.

Revenue stabilises

In 2014 revenue rose by 0.6 percent to 11.3 billion euro as a result of higher sales prices and increased sales of Friso infant nutrition. Currency translation effects had a net negative effect of 176 million euro on total revenue. The volume in the growth categories dairy-based beverages, branded cheese and ingredients dropped as a result of lower consumption, in part due to higher sales prices in Asia, increased competition in several countries, and the Russian boycott of dairy products.

Operating profit development

Operating profit rose by 56.2 percent to 489 million euro. In 2014 a one-time income of 131 million euro was recognised due to an adjustment to the pension plans for employees in the Netherlands. Corrected for this one-time income the operating profit fell by 19.7 percent compared with the operating profit before goodwill impairment in 2013. Corrected for negative currency translation effects operating profit fell by 10.7 percent. Operating profit was also adversely affected by the Russian boycott of dairy products. The estimated direct effect (loss of revenue and profit) and indirect effect (negative market effects) amounted to at least 80 million euro. Other one-time items were a book profit of 20 million euro as a result of the fire at FrieslandCampina Cheese in Gerkesklooster in the Netherlands and an expense of 20 million euro as a result of the announced closing of the production facility of FrieslandCampina Branded Belgium in Sleidinge. The Consumer Products Europe, Middle East & Africa and Consumer Products Asia business groups improved their operating profit. The main reasons were margin improvement due to higher net prices and cost reductions, especially in Western Europe. In the second half of 2014 cost savings contributed towards the operating profit and market conditions improved slightly.

Profit influenced by one-time income and currency effects

Compared with 2013 (157 million euro) profit rose to 303 million euro. Without the goodwill impairment in 2013 and the one-time pension income in 2014 profit would have dropped by 21.1 percent. Corrected for the one-time items and the negative currency translation effects profit would have decreased by 13.1 percent.

Lower operational cash flow

Cash flow from operating activities fell to 545 million euro (2013: 588 million euro). In 2014 the outgoing cash flow for investments amounted to 618 million euro (2013: 576 million euro). In 2014 656 million euro was invested in production capacity and in efficiency and quality improvements. In addition, 28 million euro was invested in the acquisition of the cheese companies Orange and DEK, both in Italy, and Olam in the Ivory Coast.

Value creation for member dairy farmers

In 2014, on top of the guaranteed price a total of 277 million euro (2013: 282 million euro) was distributed to member dairy farmers of which the performance premium accounted for 176 million euro (1.86 euro per 100 kilos of milk excluding VAT). The distribution of member bonds for 2014 amounted to 101 million euro (1.07 euro per 100 kilos of milk excluding VAT). In total the company’s value creation per 100 kilos of milk amounted to 2.93 euro (2013: 3.04 euro), a decrease of 3.6 percent.

Outlook

At a global level the supply of raw milk and the demand for dairy products form a precarious balance. After more than 30 years the milk quota for dairy farmers in the European Union will expire on 1 April 2015. Worldwide the volume of milk supplied over the whole of 2015 is expected to be 2 to 4 percent more than in 2014.

It is anticipated that in 2015 the demand for dairy products will increase slightly. The expectation is that in Asia and Africa it will be mainly the growing middle class that profits from economic recovery. As a result of the lower price level of dairy products it is possible that consumers in emerging markets will also once again be able to afford more dairy products. The relatively cheap euro will mean that dairy products from the euro zone will be better able to compete against other suppliers from countries with different currencies, so more dairy products can be exported. China’s need for dairy products and raw materials is difficult to estimate. Whether, or when, the Russian boycott of western agricultural products will be lifted is equally unpredictable. But even if the boycott is lifted, demand in Russia is not expected to recover quickly. Consumers in Europe will remain price-conscious and, in part as a result of this, the competition from other suppliers and private labels will continue increasing.

In 2015 FrieslandCampina anticipates volume growth from infant nutrition in Asia and Africa and also expects it will once again be able to achieve volume growth with ingredients and dairy-based beverages. The recovery of the growth of dairy-based beverages will take place primarily outside of Europe. Expenditure on advertising and promotion will increase to support this growth and strengthen the brand positions and market shares. Expenditure for research & development will increase slightly. Investments in infrastructure and production capacity are expected to total around 600 million euro.

In view of the uncertainties mentioned FrieslandCampina is not making any concrete predictions regarding the expected results for 2015. Taking a longer-term view the outlook remains positive. As the world’s population grows and welfare increases in many regions the demand for food, and in particular food rich in nutrients including dairy products, will continue rising.

Developments per business group

Consumer Products Europe, Middle East & Africa

  • Volumes under pressure due to relatively high sales prices, declining dairy consumption in the Netherlands and the termination of contracts.
  • Revenue from third parties down because price increases could not fully offset the decreasing volumes.
  • Operating profit up due to price increases and cost reductions resulting from restructuring in the Netherlands, Germany, Belgium and Hungary.
  • Market shares under pressure in the Netherlands, Germany, Belgium and Nigeria.

Consumer Products Asia

  • Further growth of Friso infant nutrition in nearly every country.
  • Revenue and operating profit growth in China and Hong Kong.
  • Operating profit up by 13.8 percent.
  • Negative currency translation effect on revenue and result.

Cheese, Butter & Milkpowder

  • Steep decline in commodity prices due to increased milk supply and lagging sales as a result of lower demand for milk powder from China and Southeast Asia plus the Russian boycott.
  • Negative results due to commodity prices being lower than the guaranteed price.
  • Costs reduced to compensate for pressure on margins.
  • Insurance company compensates for the fire damage at FrieslandCampina Cheese in Gerkesklooster.

Ingredients

  • Weak demand for dairy ingredients coupled with a greater supply puts pressure on sales prices and margins.
  • Delayed start-up of new processing capacity.
  • Cost reductions and efficiency contribute towards the result.
  • Further investments in capacity expansion.