Improved results, strategy execution as planned

Royal FrieslandCampina N.V. 2019 Half-Year Results

25 July 2019
  • Revenue of 5.7 billion euros unchanged (first half of 2018: 5.7 billion euros)
  • Operating profit increased by 18.6 percent to 210 million euros (first half of 2018: 177 million euros)
  • Transformation on track: value-added volumes increased and margins improved in line with plan
  • Significant progress on sustainability across all indicators
  • Milk price for member dairy farmers increased by 3.2 percent to 37.90 euros per 100 kilos of milk (first half of 2018: 36.74 euros)
  • Milk supply decreased by 5.0 percent to 5,088 million kilos (first half of 2018: 5,356 million kilos)

Hein Schumacher, CEO Royal FrieslandCampina N.V.:
“These results show a positive impact from the changes initiated last year and are reason for cautious optimism. Following the launch of our market-driven strategy, we are seeing a positive momentum. After a strong finish in 2018, our consumer business experienced continued growth in a challenging market, and our market shares and margins improved. However, increasing protein prices put pressure on the development of the result in essentially all business groups. Throughout the entire chain, from grass to glass, our ambition to lead with sustainability is taking further shape and significant progress has been made.”

Revenue stabilised, operating profit increased
FrieslandCampina’s revenue stabilised in the first half of 2019 in comparison to the same period last year. Operating profit increased by 18.6 percent to 210 million euros (first half of 2018: 177 million euros). Results improved due to an increase in the sale of value-added products, mainly consisting of cheese. Our activities in Africa in particular showed strong growth and also exhibited positive momentum in Asia; overall the Consumer Dairy business group’s branded volumes grew by 4.8 percent. The reduced milk supply in the Netherlands contributed to improved profit due to a decrease in the production of (still loss making) basic dairy products, such as butter and milk powder. Increased protein prices put pressure on overall margins as sales prices continued to lag market input costs developments. In China volumes stabilised due to challenging market conditions and the constrained supply of a number of key ingredients.
Profit for the entire company rose to 121 million euros, an increase of 11.0 percent (first half of 2018: 109 million euros).

Increased cash flow
Net cash flow from operating activities increased to 195 million euros over the first half of the year (first half of 2018: 186 million euros). The increase in operating profit before depreciation largely offset the increase in working capital. The net cash flow from investment activities was -161 million euros over the first half of the year (first half of 2018: -216 million). Cash flow from financing activities was 43 million euros (first half of 2018: 70 million euros). This includes interest payments for member bonds and the dividends paid to minority shareholders.

Net debt increased
As at 30 June 2019, the net debt* was 1,409 million euros, an increase of 122 million euros compared to 31 December 2018. The buffer capital increased slightly and amounted to 1,319 million euros. As a percentage of the balance sheet total*, the buffer capital remained unchanged at 14.8 percent. Equity attributable to the shareholder and other equity providers remained stable at 3,209 million euros (year-end 2018: 3,209 million euros). This was due to the fact that the addition of retained earnings and the issue of member bonds were partly offset by the foreign currency translation differences of participating interests and the remeasurement of pension liabilities.

Milk supply 5.0 percent lower
The milk supplied by member dairy farmers in the first half of this year decreased by 268 million kilos (-5.0 percent) to 5,088 million kilos of milk in comparison to the same period in 2018. This decrease is partly due to members who left the cooperative. Fewer cows as a result of the phosphate-related restrictions (phosphate legislation) in the Netherlands, limited feed stocks (silage and other feeds) due to last year’s drought, and higher feed costs also played a role.

 Processing capacity reassessed
Due to the development of the milk supply, it was decided to reassess the planned strategic expansions of processing capacity. We will continue to focus on realising flexible capacity for processing the milk from member dairy farms and on speeding up market introductions of innovative new protein and dairy solutions.

Pro forma milk price increased by 3.2 percent
The pro forma milk price for member dairy farmers over the first half of the year increased by 3.2 percent to 37.90 euros per 100 kilos of milk exclusive of VAT (first half of 2018: 36.74 euros). The milk price that FrieslandCampina pays member dairy farmers consists of the guaranteed price, the pro forma performance premium, the meadow milk premium, special milk stream premiums and the pro forma issue of member bonds.

Higher interim payment
No later than on 1 September 2019, FrieslandCampina will deposit an interim payment of 0.65 euro per 100 kilos of milk (exclusive of VAT) into the member accounts of the member dairy farmers of Zuivelcoöperatie FrieslandCampina U.A. This is 0.24 euro higher than in the first half of last year (first half of 2018: 0.41 euro). The interim payment represents 75 percent of the pro forma performance premium over the first half-year.

Lead with sustainability
FrieslandCampina is continuously working on reducing its environmental impact and on achieving a more sustainable, circular, dairy chain. For example, all packaging must be 100 percent recyclable by 2025. Currently 30 percent of our plastic packaging is suitable for recycling. To demonstrably take bigger steps in sustainability, FrieslandCampina has developed the Respackt software tool. This tool enables Research & Development to quickly analyse the environmental burden and the recyclability of packaging and thus select the most sustainable options. Respackt can also measure the environmental impact of food waste. In this context, FrieslandCampina has committed itself to the objectives of Plastic Pact NL and The New Plastics Economy Global Commitment of the Ellen MacArthur Foundation, among others.

In Europe, FrieslandCampina uses 100 percent green electricity for the production of dairy products. Worldwide the use of green electricity rose to 94 percent (year-end 2018: 90 percent). 62 percent of the electricity consumed by Dutch plants and offices was generated by member dairy farms.

The production of green electricity on these dairy farms can be viewed live at www.frieslandcampinaopwek.nl. A partnership agreement has been signed with E.A.Z. for the installation of small windmills on farmyards.

The energy efficiency of the production of dairy products improved to 2.81 GJ/tonne of finished product in comparison to the same period last year (first half of 2018: 2.95 GJ/tonne of finished product). An energy efficiency programme focused on a 2-percent reduction in 2019 has been implemented.

FrieslandCampina collaborates on sustainability with its member dairy farmers. In cooperation with the dairy cooperative’s District Boards, we engaged 3,300 members in focused training courses and discussions to further enhance sustainability efforts at the farm level. Furthermore, together with member dairy farmers and the BoerenNatuur Foundation, a Dutch national farmers’ organisation, a national database for nature and landscape management at the farm level is being set up.

Together with BoerenNatuur and the Netherlands Society for the Protection of Birds, FrieslandCampina established an independent Foundation for Strengthening Meadow Bird Habitats. The foundation’s funds can be used for implementing the specific plans developed for meadow bird management by area managers and farmers. This involves support for investments in measures and/or management.

We continue to reward meadow grazing efforts. This year 248 member dairy farmers choose to switch over to outdoor grazing (2018: 314). With this increase, the number of FrieslandCampina member dairy farms in the Netherlands where cows graze in the pasture increased to 83.3 percent, well above the sector average of 81.2 percent. The final percentage will be determined in December, at the end of the outdoor grazing season.

During the first half of this year almost 42,000 dairy farmers in Nigeria, Vietnam, Malaysia, Thailand, Pakistan, Romania and Indonesia were trained and provided with advice as part of the FrieslandCampina Dairy Development Programme.

Safety
In the first half of 2019, the total number of accidents decreased by 20 percent to 59 accidents (first half of 2018: 73). By ‘accidents’ FrieslandCampina means all accidents that lead to absence, adapted work or medical treatment. The number of accidents resulting in absence, i.e. the most serious incidents, has increased by 55 percent to 26 incidents (first half of 2018: 17). This has our concern and attention. In the first half of the year, the total number of accidents per 200,000 hours worked slightly increased to 0.36 (first half of 2018: 0.34). While we aim for zero accidents, our objective for the full year is to achieve a target of ≤0.37.

Outlook
In the coming months we expect continued volatility, especially in the prices of dairy components. As such we are cautious in providing a precise financial outlook for the year. In general we are aiming for continued growth in value-added products and to strengthen our market shares in branded dairy. The current momentum provides us with cautious optimism but with clear caveats around cost prices and restraints in production which make it hard to fully meet market demand, particularly in China. These are the main factors that could impact the results for 2019.

The appendix inter alia contains an overview of the key figures, the consolidated summary income statement, the consolidated summary balance sheet, the consolidated summary cash flow statement and the most important results by business group.