Significantly lower profit due to impact of corona pandemic and restructuring costs

• Revenue declined by 1.4% to EUR 11.1 billion. Adjusted for currency translation effects, revenue remained virtually stable.
• Higher sales of Ingredients, retail and e-commerce offset lower sales in Hong Kong and out-of-home channel, adjusted for currency translation effects.
• E-commerce revenue increased by more than 50% worldwide.
• Operating profit decreased by 38.0% to EUR 268 million due to lower results in Hong Kong and out-of-home, currency translation effects and a EUR 106 million restructuring charge.
• Excluding restructuring charge and currency translation effects, operating profit decreased by 10.9%.
• Profit declined by 71.6% to EUR 79 million, primarily due to the significantly lower operating profit and a higher effective tax burden.
• Operating cash flow increased by EUR 170 million to EUR 737 million.
• The milk price for member dairy farmers decreased by 5.9% to EUR 35.72 per 100 kilos of milk. No supplementary cash payment will be made to member dairy farmers for 2020 and no member bonds will be issued. The interest on member bonds will be paid, however.
• Long-term climate-neutral growth objective achieved: greenhouse gas emissions in the period 2010-2020 decreased from 13,108* kt to 13,039 kt, while production volume increased by 13.6%.

Hein Schumacher, CEO Royal FrieslandCampina N.V.:

“The direct and indirect impacts of the corona pandemic that really became evident within the company starting in March, overshadowed the excellent results in the first quarter. FrieslandCampina’s operating profit was hard hit by this. In addition, the accelerated implementation of the Our Purpose, Our Plan strategy – a far-reaching but necessary decision required to successfully operate as a company in the future – resulted in a restructuring charge of EUR 106 million in 2020. Both factors led to a significantly lower profit as a result of which no supplementary cash payment over 2020 can be made to members and no member bonds can be issued. A huge disappointment for our members.

The 2020 results are also disappointing for our employees. A great deal of hard work was done under very difficult circumstances to keep the production and sale of our dairy products on track during the corona crisis. The resilience of the entire organisation, from the member dairy farmers up to our salesforce, was tremendous in 2020. Our production facilities continued to operate and during the lockdowns our salesforce quickly switched from out-of-home to retail and e-commerce channels. E-commerce revenue grew considerably worldwide. We resolved the lactoferrin shortage for our infant nutrition business, which had been an issue for us in 2019. We also introduced a number of relevant innovations to the market last year. To mention a few examples: Vivinal Milk Fat Globule Membrane, a functional ingredient for infant nutrition in support of immunity and brain development. In Hong Kong Friso Prestige Organic, infant nutrition made using ingredients from milk produced by our organic member dairy farms. A number of functional nutrients for seniors under the brand name Biotis. And finally in Nigeria Milky Pap, a nutritious and affordable dairy product that helps counter malnutrition.

While there is light at the end of the tunnel now that vaccination programmes are getting underway throughout the world, for the next couple of months we are still totally immersed in the corona crisis. In the first half of 2021, the results will therefore still be under pressure. However, I am convinced that the acceleration of our strategy, combined with structural cost savings, will enable us to better absorb shocks and increase positive impact in the post-corona period.”

Revenue

In 2020, FrieslandCampina’s operating companies in 28 of the 41 markets realised strategic revenue growth in comparison to 2019. E-commerce revenue grew by more than 50% worldwide. Despite the corona pandemic, net revenue before currency translation effects remained virtually stable, but currency translation effects had a negative impact of -1.3% on revenue, mainly due to the devaluation of the Nigerian naira and dollar-related currencies in Asia. Reported net revenue in 2020 decreased by 1.4% to EUR 11.1 billion (2019: EUR 11.3 billion).

After a strong start in the first quarter, the business group Consumer Dairy’s revenue dropped by 3.3% to EUR 5,735 million (2019: EUR 5,931 million) as a result of the corona pandemic. There was strong growth in the sale of consumer brands through the retail channel, while the lack of out-of-home activities and negative currency translation effects put revenue under pressure. The continued closure of the border between China and Hong Kong caused Specialised Nutrition’s revenue to decline by 7.1% to EUR 1,119 million (2019: EUR 1,205 million). In spite of the fact that Ingredients was also affected by a decrease in foodservice and out-of-home demand, its revenue grew by 5.3% to EUR 1,816 million (2019: EUR 1,724 million), in particular driven by the sale of caseinates and whey proteins for sports nutrition for example. The revenue of Dairy Essentials grew by 3.4% to EUR 2,467 million (2019: EUR 2,385 million) primarily due to the sale of cheese to industrial buyers and the retail sector.

Operating profit and profit

As a result of the direct and indirect impacts of the corona pandemic and the EUR 106 million restructuring charge, operating profit dropped by 38.0% to EUR 268 million in 2020 (2019: EUR 432 million). Excluding the restructuring charge and currency translation effects, operating profit fell by 10.9%.

Consumer Dairy’s operating profit decreased by 12.1% to EUR 255 million (2019: EUR 290 million) as a result of the corona pandemic, mainly due to the loss of profitable out-of-home sales, negative currency effects in Nigeria and restructuring charges in Germany. Underlying profitability (before restructuring costs and exceptional items) increased due to growth in retail and e-commerce, positive sales price developments and mitigating measures.

Specialised Nutrition’s operating profit declined by 36.2% to 166 million euros (2019: 260 million euros), primarily due to the difficult market conditions in Hong Kong. In addition, higher production costs put pressure on margins. Because the lactoferrin shortage, which held back the business in 2019, was resolved, Friso Prestige grew its revenue in China and significantly improved its market position.

The business group Ingredients experienced a slight increase in operating profit, by 0.7% to EUR 140 million (2019: EUR 139 million). Ingredients' underlying result was better because a restructuring charge for the closure of the milk powder plant in Dronrijp was booked in 2020. The improved result was due to profit growth in the commercial segments, including resolving the shortage of lactoferrin, as well as cost savings in the supply chain.

Operating profit of Dairy Essentials decreased to EUR -202 million, including restructuring charges taken in 2020 for plant closures in the Netherlands and Belgium (2019 EUR -39 million, including the proceeds from the sale of the stake in CSK). In addition, the corona pandemic caused bulk dairy prices to drop by more than 30% in the second quarter, only to recover slowly during the year, and sales in food service and exports declined. This impact was partially mitigated by cost controls and a better product mix, which is evident from, among other things, strong growth in cheese sales.

As a result of the application of the statutory fiscal cooperative regime, the allocation of the supplementary cash payment and issue of member bonds is no longer included in operating profit as of 2020, but is allocated directly from equity to the members. In 2019, 138 million euros was included in cost of goods sold for this.

Due to the lower operating profit, including the restructuring charge, and a higher effective tax burden, FrieslandCampina's profit in 2020 decreased by 71.6% to EUR 79 million (2019: EUR 278 million).

Operating cash flow

Cash flow from operating activities increased by EUR 170 million to EUR 737 million (2019: EUR 567 million). This considerable increase is due to the enhanced focus on cash flow, particularly working capital, during the corona crisis, as a result of which stocks and outstanding receivables decreased. In 2020, the cash flow used for investments and acquisitions amounted to EUR -443 million (2019: EUR -185 million, including proceeds from disposals amounting to EUR 168 million).

Value creation for members

As a result of the lower profit, member dairy farmers will not receive a supplementary cash payment for 2020 (2019: EUR 107 million) and no member bonds will be issued (2019: EUR 31 million). The interest on member bonds will be paid, however, and amounts to EUR 46 million (2019: EUR 48 million). The interim payment made in September 2020, 75% of the pro forma supplementary cash payment for the first half of the year (EUR 0.11, excluding VAT, per 100 kilos of milk over the entire year) will be settled with members in 2021 in line with the milk regulations. In order to limit the negative cash impact for the members, this settlement will take place over the May 2021 milk payment (in June 2021) together with other cooperative settlements.

The FrieslandCampina milk price for member dairy farmers over 2020 declined by 5.9% to EUR 35.72 per 100 kilos of milk (2019: EUR 37.95). The FrieslandCampina guaranteed price over 2020 was EUR 34.46 per 100 kilos of milk, a decrease of 3.4% compared to 2019 (EUR 35.66). The decrease was the result of lower milk prices at reference companies, in part caused by the corona crisis. The premium for special milk streams was EUR 0.36 (2019: EUR 0.26). Distributed across all milk, the meadow milk premium and the Foqus planet contribution amounted to EUR 0.90 per 100 kilos of milk (2019: EUR 0.65).

Climate-neutral growth 2010-2020

One of the sustainability targets formulated by FrieslandCampina in 2010 was ‘Climate-neutral growth 2010-2020’. This relates to the total greenhouse emissions of the company and member dairy farms combined. FrieslandCampina achieved this objective over the past decade: while the total production volume grew by 13.6% over this period, total greenhouse gas emissions slightly declined from 13,108^* kt in 2010 to 13,039^* kt in 2020. This was primarily achieved through energy savings in production and the use of renewable energy generated by member dairy farmers. Combined with other measures, the greenhouse gas emissions per kilo milk dropped by 8% to 1.22 CO₂ equivalents per kilo of milk in the same period.

Renewed sustainability strategy

At the end of 2020 FrieslandCampina presented a renewed sustainability strategy: Nourishing a better planet. The motivation for this was the Our Purpose, Our Plan business strategy in which sustainability plays a prominent role, and various global developments, such as climate change, the scarcity of food and raw materials, and the environmental burden. With Nourishing a better planet, FrieslandCampina aims to make a positive contribution for farmers, society and the planet. The aim is to provide the growing world population with nutritious and affordable food, produced in balance with nature and in this way support dairy farmers in generating a good living for a sustainable future.

2020 Sustainability performance

The corona pandemic also resulted in fluctuations in production volumes, which adversely affected the energy efficiency of production facilities. As a result, energy consumption increased by 1.4% to 2.83 GJ/tonne product in 2020 (2019: 2.79 GJ/tonne product). Furthermore, shifts in market demand between different sales channels affected the use of recyclable and non-recyclable packaging. As a result, the percentage recyclable plastic packaging decreased by 4.8 percentage points to 28.2% in 2020 (2019: 33.0%). FrieslandCampina recently announced that it is using 100% recycled PET (rPET) for all its bottled products in the Netherlands, Belgium, the United Kingdom and Hungary as of February 2021.

In 2020, the percentage green electricity of the total electricity consumed at production facilities rose by 6 percentage points to 100% (2019: 94%). Of the green electricity consumption, 44% is produced by member dairy farmers (2019: 25%). Approximately 3,000 member dairy farmers generate green electricity by means of solar panels, mono-manure digesters or small windmills. The emission of greenhouse gases on member dairy farms decreased slightly by 0.2% to 12,319 kt CO₂ equivalent (2019: 12,344 kt CO₂ equivalent). The greenhouse gas emissions from production and transport decreased by 4.4% to 720 kt CO₂ equivalent (2019: 753 kt CO₂ equivalent) due to an increase in the use of green electricity. In 2020, further progress was made in the balance and composition of the product range. For example, the percentage consumer products that complies with the FrieslandCampina Global Nutritional Standards** rose to 75% (2019: 70%).

* The emission factors for milk, milk powder and whey for the Netherlands, Germany and Belgium have been adjusted retroactively on the basis of the latest commonly accepted scientific insights.

** The FrieslandCampina Global Nutritional Standards are scientific nutritional criteria that our own consumer products are expected to comply with. The criteria for trans-fat, saturated fat, added sugar and salt are derived from Choices International, and were developed by independent scientists.