FrieslandCampina’s profit up by 85%

First half of 2015: interim pay-out to member dairy farmers up by 145%

27 August 2015

In the first half of 2015 the profit of Royal FrieslandCampina N.V. rose by 85 percent to 192 million euro (first half of 2014: 104 million euro). Margins rose due to the sale of more products with a higher added-value, positive currency translation effects, lower purchasing costs and the lower guaranteed price for raw milk. At 5,645 million euro revenue was at the same level as in the same period in 2014 (5,635 million euro). The milk price for member dairy farmers fell to 36.48 euro per 100 kilos of milk (first half of 2014: 44.19 euro) due to the lower guaranteed price for raw milk. Value creation (performance premium plus issuance of member bonds) rose by 2.49 euro to 4.22 euro (first half of 2014: 1.73 euro). The interim pay-out amounted to 2.018 euro per 100 kilos of milk (2014: 0.825 euro).

Roelof Joosten, CEO of Royal FrieslandCampina N.V.: “In the current uncertain markets we were able to achieve a good result. This proves the success of the route2020 strategy, aimed at achieving sustainable growth and value creation, which we have followed since 2010. Thanks to our strong market positions and cost reductions we have managed to compensate the drop in the guaranteed price for the member dairy farmers to an extent in the milk price. As a result we will be able to pay the member dairy farmers an interim pay-out of just over 2.00 euro.”

Considerably higher profit, stable revenue in uncertain market

  • Revenue stable at 5,645 million euro due to 1.6 percent positive volume-mix effect, 6.4 percent lower sales prices and favourable currency translation effects of 4.4 percent
  • Growth in China, Hong Kong, Indonesia, Africa, South-east Europe and in the FrieslandCampina Ingredients business group
  • Lower volumes in Western Europe due to difficult market conditions
  • In the second quarter of the year lagging demand coupled with an increased supply of milk puts pressure on prices, especially of commodities
  • Operating result up by 81.5 percent to 314 million euro in part due to the lower guaranteed price for raw milk and lower purchasing costs: positive currency translation effects on the operating result amount to 23 million euro
  • Profit up by 84.6 percent to 192 million euro; positive currency translation effects amounting to 17 million euro
  • Cash flow from operating activities up to 319 million euro (first half of 2014: -192 million euro) in part due to the higher profit

Milk price significantly lower, interim pay-out considerably higher

  • Guaranteed price for the Cooperative’s member dairy farmers down by 24.3 percent to 31.84 euro
  • Value creation (performance premium of 2.69 euro and member bonds reservation of 1.53 euro) up by 144 percent to 4.22 euro (first half of 2014: 1.73 euro)
  • Milk price down by 17.4 percent to 36.48 euro
  • Interim pay-out (75% of the pro forma performance premium) to member dairy farmers in September 2015 up by 145 percent to 2.018 euro per 100 kilos of milk
  • Milk produced by member dairy farmers up by 1.8 percent to 4,905 million kg of milk compared to first half of 2014

Per 100 kilos of milk excluding VAT at 3.47% protein, 4.41% fat and 4.51% lactose. The milk price, performance premium and reservation of member bonds are all pro forma.

route2020 strategy

  • Achievement of the strategy forms the basis of the good results
  • Volume mix improvement of 1.6 percent
  • 8 percent volume growth with Friso and B2B infant nutrition
  • Dairy-based beverages volume down by 0.5 percent due to difficult market conditions
  • Volume of cheese for the retail segment up by 14.0 percent and margins improved. Volume of branded cheese down by 6.0 percent. Excluding the effect of the Russian boycott the volume of branded cheese rose by 0.5 percent
  • Investment level down
  • A further reduction in the number of accidents at FrieslandCampina facilities

Investments in efficiency and the organisation

  • Friesland Huishan Dairy joint venture established on 1 April 2015. The company will exploit a fully-integrated chain of infant nutrition suppliers in China
  • 182 million euro invested in increasing interest in FrieslandCampina WAMCO Nigeria Plc. from 54.58 to 67.81 percent
  • 25 million euro provision for reorganisation costs related to the closure of Den Hollander Food in Lochem and efficiency measures in the Beilen, Leeuwarden and Gütersloh production facilities
  • First phase of the new FrieslandCampina Ingredients production facility for special milk powders and ingredients in Borculo completed and the sustainable energy provision (pyrolysis installation) goes into service

Revenue remains stable

At 5,645 million euro revenue was virtually the same as for the first half of 2014 (5,635 million euro). Currency translation effects had a net positive influence of 250 million euro (4.4 percent) on revenue (first half of 2014: -177 million euro). The volume-mix effect was 1.6 percent positive, but sales prices fell by 6.4 percent. Acquisitions contributed 0.6 percent towards revenue. Sales of infant nutrition, ingredients for infant nutrition and condensed milk rose, which increased the share of added-value products in the revenue. Revenue from dairy-based beverages rose despite a slight decrease in sales volumes due to the difficult market conditions. The volume of commodities rose, but lower sales prices put pressure on revenue.

Substantially improved operating profit

In the first half of 2015 operating profit rose by 81.5 percent to 314 million euro (first half of 2014: 173 million euro). Currency translation effects had a positive influence of 23 million euro on operating profit. Three of the four business groups improved their operating profit. The operating margin improved by 2.5 percent points due to the more favourable sales mix (increased share of products with a higher added-value in the revenue), the lower guaranteed price for raw milk, cost-reducing measures in all business units, improved purchasing conditions for non-milk-related raw materials and packaging materials, and favourable currency developments. The operating profit was negatively influenced by a provision of 25 million euro for the closure of Den Hollander Food in Lochem and efficiency measures at the Beilen, Leeuwarden and Gütersloh (Germany) production facilities.

Operating costs in the first half of 2015 fell by 2.5 percent to 5,332 million euro as a result of the lower costs for milk, raw materials and energy (first half of 2014: 5,466 million euro). Despite the milk supply increasing by 1.8 percent to 4,905 million kilos of milk, the higher performance premium and the higher issuance of member bonds, in the first half of 2015 the pro forma payment to member dairy farmers for milk fell by 15.6 percent to 1,800 million euro (first half of 2014: 2,134 million euro). This was due to the lower guaranteed price.

A sharp rise in profit

Profit over the first half of 2015 rose by 84.6 percent to 192 million euro (first half of 2014: 104 million euro). This rise in profit was due to increased sales of products with a higher added-value, favourable currency translation effects of 17 million euro, the lower guaranteed price for raw milk and lower operating costs. The profit attributable to the Company’s shareholder (the Cooperative) amounted to 152 million euro (first half of 2014: 72 million euro). A large portion of FrieslandCampina’s revenue is generated through the export of its products from the Netherlands to other countries. FrieslandCampina’s result is even more dependent on export.

Interim pay-out of 2.018 euro per 100 kilos of milk

In September 2015 the Cooperative’s member dairy farmers will receive an interim pay-out of 2.018 euro per 100 kilos of milk. This is 75 percent of the pro forma performance premium over the first half of the year. The final settlement will be paid-out in April 2016 on the basis of FrieslandCampina’s results for 2015 and the total quantity of milk supplied by the member during 2015.

Outlook

The worldwide offering of milk is expected to increase slightly in the second half of 2015. Demand for dairy products in local markets and on the world market is likely to increase very little due to the lagging demand for dairy raw materials in China and Russia’s on-going boycott of dairy products from the European Union. This is likely to continue putting considerable pressure on the sales prices of dairy products in the second half of the year. FrieslandCampina is not making any concrete statement regarding the expected result for the whole of 2015.