Challenging first half of 2023 for Friesland­Campina

• Revenue rose by 4.6 per cent in comparison to the first half of 2022 to 6.9 billion euros; adjusted for currency translation effects increase in revenue 6.9 per cent.
• Volume of consumer brands under pressure due to persistent inflation and lower consumer purchasing power.
• Operating profit decreased by 85.7 per cent compared to the first half of 2022 to 47 million euros, primarily due to disappointing operating profits for the Food & Beverage and Trading business groups.
• Net profit decreased by 94.2 per cent in comparison to the first half of 2022 to 8 million euros.
• Adverse effect due to difference between milk price paid to member dairy farmers based on FrieslandCampina's milk price system and lower market value of stocks at the time of sale.
• Operating cash flow 90 million euros in comparison to -89 million euros in the first half of 2022; improvement in working capital driven by lower stocks and accounts receivable levels.
• The pro forma milk price for member dairy farmers increased by 0.7 per cent to 51.70 euros per 100 kilogrammes; the pro forma performance price decreased by 3.9 per cent to 50.58 euros, in comparison to the first half of 2022.
• No interim payment of the pro forma supplementary cash payment over the first half-year of 2023 to member dairy farmers.

The first half of 2023 was challenging for FrieslandCampina. As indicated at the start of the year in the ‘Outlook for 2023’, the economic conditions for the company deteriorated in the first six months of the year. The milk price that FrieslandCampina paid to its member dairy farmers over the past half year was higher than the sharply declined market prices for commodity dairy products, particularly for cheese and butter. Expensive product stocks had to be sold in a declining dairy market. Furthermore, volumes declined as a result of market declines due to a loss of purchasing power and a shift in consumer spending towards private label. The Food & Beverage and Trading business groups were hit the hardest by this. The Ingredients and Specialised Nutrition business groups on the other hand had a good start of the year, but this could not compensate the loss in profitability at the other two business groups. As a result of the above developments, net profit declined sharply in the first half of the year.

Despite the challenging circumstances, FrieslandCampina has continued to invest in the company, future growth and sustainability. In Veghel (the Netherlands), FrieslandCampina Ingredients opened a new, sustainable production facility for lactoferrin, an important, high-quality protein for infant and adult nutrition. Furthermore, a large-scale pilot with a methane-reducing feed additive, in which almost 160 dairy farms with a total of almost 20,000 cows participated, was successfully completed. This is promising news relating to the future reduction of greenhouse gas emissions at dairy farms. The company has also refinanced maturing debts by issuing a 300 million euro Schuldschein linked to environmental, social and governance (ESG) goals. This would not have been possible without clear climate objectives and other sustainability priorities.

Increased revenue, decreased operating profit and net profit

In the first half of 2023, FrieslandCampina’s revenue increased by 4.6 per cent to 6.9 billion euros compared to 6.6 billion euros in the same period last year. The growth in revenue was primarily driven by earlier implemented price increases. In the first half of 2023, commodity dairy prices dropped faster than the milk price paid by FrieslandCampina to its member dairy farmers based on its milk price system. On top of this stocks produced at a higher cost price had to be sold at a lower market value, which had an adverse effect on profitability.

The operating profit and profit declined in the first half of 2023 in comparison to the same period last year. Operating profit amounted to 47 million euros, a decrease of 85.7 per cent compared to 328 million euros in the first half of 2022. Profit amounted to 8 million euros, a decrease of 94.2 per cent compared to 139 million euros in the first half of 2022. Interest rate increases, unfavourable currency translation effects, loss in purchasing power and a shift in consumer spending all contributed to this.

Mixed results among business groups

The Food & Beverage business group’s revenue grew due to price increases by 1.9 per cent to 4,799 million euros in the first half-year of 2023, compared to 4,711 million euros in the same period last year. Volume declined due to loss of purchasing power and a shift in consumer spending towards private label. The Professional business managed to maintain its volumes at the same level compared to the first half of last year, but the significant decrease in commodity dairy prices had a substantial impact on its results. The operating profit of the entire Food & Beverage business group decreased by 85.4 per cent to 23 million euros in the first half of 2023. The operating profit in the same period last year was 158 million euros.

Specialised Nutrition reported excellent revenue and operating profit figures, partially driven by growth in infant nutrition sales under the Friso Prestige brand in the ultra-premium segment in China. The business group’s revenue increased by 17.1 per cent and amounted to 582 million euros, compared to 497 million euros in the first half of 2022. The operating profit increased by 30.9 per cent and amounted to 127 million euros, compared to 97 million euros in the first half of 2022.

A 50.6 per cent increase brought the operating profit of the Ingredients business group to 131 million euros in the first half of 2023, compared to 87 million euros in the same period last year. At 752 million euros, revenue remained the same as in the first half of 2022.

The revenue of the Trading business group increased by 24.8 per cent to 765 million euros in the first half of 2023, compared to 613 million euros in the same period last year. Lower volumes for consumer products in the business group Food & Beverage and the almost stable supply of milk meant that Trading had to trade more commodity dairy products. The result of Trading was negatively impacted by the steep decline in commodity dairy prices. As a result, commodity dairy products produced at a higher cost price had to be sold at a lower market value. Operating profit decreased substantially to -138 million euros in comparison to 71 million euros in the first half of 2022.

Operating cash flow

Cash flow from operating activities was 90 million euros in the first half of 2023, compared to -89 million euros in the same period last year. This increase was primarily due to improvements in working capital.

Milk supply in line with last year

In the first half of 2023, member dairy farmers supplied 4.8 billion kilogrammes of milk to FrieslandCampina’s production facilities. This was 0.5 per cent more than in the same period last year.

Milk price (amounts stated are exclusive of VAT)

In the first half of 2023, FrieslandCampina paid its member dairy farmers a slightly higher average guaranteed price per 100 kilogrammes of supplied raw milk than in the same period last year: 49.96 euros versus 49.39 euros. The guaranteed price significantly increased in the first half of 2022 and stayed more or less stable until December 2022, while the price dropped significantly in the first half of 2023. As a result, the average price ended up at more or less the same level. However, the pro forma milk price (guaranteed price plus premiums) per 100 kilogrammes of supplied raw milk increased from 51.33 euros in the first half of 2022 to 51.70 euros in the first half of 2023. The pro forma performance price (milk price plus interest on member bonds and addition to retained earnings) declined from 52.63 euros to 50.58 euros because of negative retained earnings due to the lower results.

Interim payment of pro forma supplementary cash payment

Due to the lower result and a higher allocation to interest on member bonds and to non-controlling interests, no interim payment of the pro forma supplementary cash payment over the first half-year will be paid to member dairy farmers.

Outlook

For the second half of 2023, the milk price paid to the member dairy farmers and commodity dairy prices are expected to converge. As a result, losses seen in the first half of 2023 due to the difference between milk price paid to member dairy farmers and the lower market value of stocks at the time of sale are expected to have a lower impact in the second half of the year. However, volumes are expected to remain under pressure in all markets due to inflation and the loss in consumer purchasing power. Rising interest rates and unfavourable currency translation effects are also expected to negatively impact the company’s result in the second half of 2023. Finally, the company's cost structure will be reviewed which may result in restructuring costs in the second half of the year.