Higher profit FrieslandCampina limits drop in milk price for member dairy farmers

Royal FrieslandCampina N.V. annual results 2015

3 March 2016

In 2015 operating profit of Royal FrieslandCampina N.V. rose by 17.8 percent to 576 million euro. Margins increased due to the sale of more added-value products in Asia and the increased sales of dairy ingredients and infant nutrition by FrieslandCampina Ingredients. Additionally lower purchasing costs and currency translation effects contributed positively. Net profit increased by 13.2 percent to 343 million euro. The volume of milk supplied by member dairy farmers increased by 6.4 percent to 10.1 billion kilo. Revenue fell by 0.7 percent to 11,265 million euro. Cash flow from operating activities rose to 1,019 million euro as a result of lower working capital coupled with higher profit. The milk price for member dairy farmers fell by 18.9 percent to 34.64 euro per 100 kilos of milk due to the lower guaranteed price for raw milk. As a result of the higher profit, value creation (performance premium plus distribution in member bonds) rose by 20.5 percent to 3.53 euro. This limited the drop in the milk price for the member dairy farmers to some extent.

Roelof Joosten, CEO Royal FrieslandCampina N.V.:
“2015 was an exceptional year for the dairy sector and for FrieslandCampina. On 1 April 2015 the milk quota system for dairy farmers was abolished after 31 years. In an uncertain dairy market FrieslandCampina performed well. This good result could, to some extent offset the reduction of the milk price for member dairy farmers.”

Update route2020 strategy

While updating its route2020 strategy, FrieslandCampina formulated its purpose statement: nourishing by nature – better nutrition for the world, a good living for our farmers, now and for generations to come. Roelof Joosten: “FrieslandCampina’s unique dairy chain underpins its activities. In recent years FrieslandCampina has performed well in a number of attractive market positions. The focus remains on sustainable growth of the most valuable product market combinations and product market combinations that absorb mainly member milk. At the same time we will continue to manage in a very cost-conscious way so that the means to achieve growth are available.”

Revenue down slightly

Revenue fell by 0.7 percent to 11.3 billion euro as a result of lower sales prices. Currency translation had a positive effect of 382 million euro on total revenue. The volume in the infant nutrition category increased by 9.0 percent (business-to-business products up by 13.5 percent and consumer products up by 1.7 percent). The increased demand for infant nutrition could be met due to new production capacity. Sales of Friso infant nutrition increased in all markets especially in China and Hong Kong.

Substantially improved operating profit

Gross Profit rose by 36.2 percent to 2,000 million euro due to the more favourable sales mix (higher portion of the revenue generated by products with higher added-value) and lower input costs. The cost of goods sold fell by 6.2 percent to 9,265 million euro. This was mainly due to the lower guaranteed price for raw milk, cost-reduction across all business groups and improved purchasing conditions for raw materials and packaging materials. Due to the lower guaranteed price, the payment to member dairy farmers for the raw milk supplied in 2015 fell by 13.4 percent to 3,514 million euro (2014: 4,056 million euro) despite the volume increase of 6.4 percent to 10,060 million kilos of milk, the higher performance premium and the higher distribution of member bonds. FrieslandCampina invested 536 million euro in advertising and promotions (+185 million euro compared with 2014) to improve its market positions. In total operating profit rose by 17.8 percent to 576 million euro in 2015 (2014: 489 euro). Currency translation on operating profit amounted to 45 million euro.

Higher profit

In 2015 profit rose to 343 million euro (2014: 303 million euro), including 34 million euro currency translation effects.

Value creation for member dairy farmers increases

The total paid out to the member dairy farmer for 2015 on top of the guaranteed price was 355 million euro (2014: 277 million euro) of which 226 million euro was the performance premium. The distribution of member bonds for 2015 amounted to 129 million euro. Together the performance premium and distribution of member bonds per 100 kilos of milk added up to 3.53 euro (2014: 2.93 euro), an increase of 20.5 percent.

At 34.64 euro excluding VAT the milk price for the member dairy farmers for 2015 was 18.9 percent lower than for 2014 (42.70 euro).

The guaranteed price for 2015 was 30.68 euro per 100 kilos of milk, a decrease of 22.1 percent compared with 2014 (39.38 euro). The lower guaranteed price was due to the lower milk prices of the reference companies.

The performance premium was 2.25 euro per 100 kilos of milk (2014: 1.86 euro). The increase was the result of the higher profit, of which 35 percent was attributed to the performance premium. The distribution of member bonds for 2015 amounted to 1.28 euro per 100 kilos of milk (2014: 1.07 euro).

The performance price reflects the company’s overall performance. The FrieslandCampina performance price for 2015 amounted to 37.23 euro per 100 kilos of milk excluding VAT (2014: 45.05 euro), a decrease of 17.4 percent compared to 2014. The decrease in the performance price compared to 2014 was due to the lower guaranteed price. Retained earnings amounted to 2.17 euro in 2015 compared to 1.93 euro in 2014.

The organic milk price for 2015 was 51.80 euro excluding VAT per 100 kilos of milk (2014: 52.95 euro). The organic milk guaranteed price was 47.77 euro per 100 kilos of milk.

Milk supply up by 6.4 percent

In 2015, 10.1 billion kilos of milk was supplied by the Cooperative’s member dairy farmers. The 6.4 percent increase over 2014 (9.5 billion kilo) was the result of an increase in the number of dairy cows held by the member dairy farmers, good quality feed and mild weather.

Higher operational cash flow

Cash flow from operating activities rose to 1,019 million euro (2014: 545 million euro) as a result of lower working capital and higher profit. In 2015 the outgoing cash flow for investments and acquisitions amounted to 705 million euro (2014: 627 million euro). In 2015 564 million euro was invested in production capacity and efficiency and quality improvements. A further 130 million euro was invested in the acquisition of the Friesland Huishan Dairy joint venture in China, mozzarella producer Fabrelac in Belgium and the activities of Anika Group, distributor of infant nutrition in Russia, Belarus and the Ukraine. The cash flow from finance activities includes 182 million euro that was invested to increase the share in FrieslandCampina WAMCO Nigeria PLC from 54.58 to 67.81 percent.

Outlook

Global milk production is expected to continue to increase in 2016. The situation with regard to the supply of raw milk in the Netherlands is uncertain, in part because of uncertainty related to the details of the intended phosphate regulation. Whether the demand for dairy products on the world market will increase at the same rate as worldwide milk production is uncertain. This will depend primarily on the development of the demand in China and on whether or not Russia lifts the embargo on the import of dairy products from the European Union. As a result of these developments, prices for basic dairy products are expected to remain under pressure for some time.

The result for 2016 is expected to be under pressure due to the low oil price and the resulting stagnating economies in oil exporting countries such as Nigeria and the Middle East, the geopolitical tensions in several regions and the expected increase in the quantity of raw milk. Continuous cost reductions, both at the production facilities and in the offices, are therefore also foreseen in 2016 in order to offset the pressure on results and to enable investments.

For the longer term the outlook remains positive. As the world’s population grows and prosperity increases in many regions, the demand for food, and in particular food rich in nutrients, which includes dairy products, will continue to rise.

Announcement of investigation into acquiring an interest in Engro Foods

In the updated route2020 strategy resources are deployed to achieve sustainable growth for the long term. Existing and any new product-market combinations are analysed and assessed for their contribution to the achievement of this long-term objective. In view of this, this morning was announced that FrieslandCampina will start investigating a possible acquisition of an interest up to 51 percent in Engro Foods in Pakistan. Engro Foods is listed on the Pakistan Stock Exchange (psx).

Major developments in 2015

Substantially improved result with volume increase of 7.8 percent

  • Revenue down by 0.7 percent to 11.3 billion euro due to 2.4 percent positive volume-mix effect, 7.2 percent lower sales prices, 0.7 percent acquisitions and 3.4 percent favourable currency translation effects
  • Growth, especially in China, Hong Kong, Indonesia, Thailand, Southeast Europe, the Middle East and Africa, and in the FrieslandCampina Ingredients business group
  • Lower sales prices for basic dairy products, such as foil cheese, butter and in particular milk powder due to increased milk supply especially in Western Europe
  • Operating profit up by 17.8 percent to 576 million euro in part due to increased sales of products with added-value in Asia, increased sales of dairy ingredients and infant nutrition by FrieslandCampina Ingredients, lower purchasing costs and positive currency translation effects (45 million euro)
  • 536 million euro invested in advertising and promotions (+185 million euro compared with 2014) to improve market positions
  • Profit up by 13.2 percent to 343 million euro; currency translation effects have a 34 million euro positive effect on profit
  • Cash flow from operating activities up to 1,019 million euro (2014: 554 million euro) as a result of working capital reduction and higher profit

Value creation for member dairy farmers up by 20.5 percent, milk price down by 18.9 percent

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

  • Higher profit helps offset the drop in the milk price
  • Guaranteed price for member dairy farmers down by 22.1 percent to 30.68 euro (2014: 39.38 euro)
  • Value creation (performance premium 2.25 euro and distribution of member bonds 1.28 euro) up by 20.5 percent to 3.53 euro (2014: 2.93 euro)
  • Milk price for member dairy farmers down by 18.9 percent to 34.64 euro (2014: 42.70 euro)
  • Quantity of milk supplied by member dairy farmers up to 10.1 billion kilos of milk, 6.4 percent more than in 2014

Achievement of route2020 strategy

  • 2.4 percent positive volume-mix effect on revenue
  • 9.0 percent volume growth of Friso infant nutrition and B2B infant nutrition
  • Volume of dairy-based beverages stable in a highly competitive field
  • Volume of cheese for the retail segment up by 12.1 percent
  • Number of accidents at FrieslandCampina facilities down from 94 in 2014 to 71 in 2015

Investments in growth and efficiency

  • 564 million euro invested in quality improvements and capacity expansion
  • Establishment of Friesland Huishan Dairy joint venture in China as of 1 April 2015
  • Investment of 182 million euro in increasing share in FrieslandCampina WAMCO Nigeria PLC from 54.58 to 67.81 percent
  • Acquisition of mozzarella producer Fabrelac in Belgium
  • Acquisition of the activities of Anika Group, infant nutrition distributor in Russia, Belarus and the Ukraine
  • Restructuring costs of 50 million euro for announced facility closures and reorganisations; loss of around 800 jobs in the coming two years