FrieslandCampina results: 10 percent revenue growth, but profits down in challenging 2017

Sales volumes of consumer products in Southeast Asia and in Friso infant nutrition in China showed positive developments. The same applies to Africa in general. In addition, the sale of caseinates and ingredients for the pharmaceutical industry is growing.

The milk price for member dairy farmers increased significantly by 24.0 percent to €40.01 (US$49) per 100 kilos of milk (excluding VAT, at 3.47 percent protein, 4.41 percent fat and 4.51 percent lactose) as a result of a higher guaranteed price for raw milk. The value creation part of the milk price (expressed performance premium and issue of member bonds) decreased by €228 million (US$280m) to €142 million (US$174.4m). Per 100 kilos of milk, the value creation decreased by 61.3 percent to €1.33 (US$1.63). The decrease in value creation is due to the adjustment of the profit appropriation to member farmers and the lower profit.

Hein Schumacher, CEO of Royal FrieslandCampina N.V. commented on the results: “2017 was a challenging year for FrieslandCampina. On the one hand, we have seen a positive increase in revenue and a significant increase in the milk price for our member dairy farmers. On the other hand, write-offs of assets in China and Germany, pressure on volume in Europe and restructuring charges reduced profit. We implemented changes to our organization structure last year that enables us to respond faster and with a greater focus on the demands of consumers and customers. This has created a new basis for growth.”

2017: The year of butter
2017 was a year of recovery of dairy prices and will especially be remembered as the year of butter. The market prices for cream and butter reached a record high in the third quarter, while the price for milk protein, in the form of skimmed milk powder, declined significantly. This caused a significant increase in the stocks of skimmed milk powder demonstrating the high volatility of the dairy market. Minor changes in conditions and sentiment can have a major impact on the supply and demand of dairy products, and consequently on prices.

Increased revenue
Revenue increased by 10.1 percent to €12.1 billion (US$14.8bn). This is primarily resulting from higher sales prices (+11.0 percent in comparison to 2016) and the inclusion of Engro Foods in Pakistan in the consolidated figures (+2.1 percent). The increase in revenue is largely due to the increased cheese prices and higher prices for butter and fat-related products in the second half of the year. The volume mix effect is -1.2 percent due to lower volumes, particularly in Europe. Currency effects had a negative impact of -1.8 percent on revenue.

Operating profit and profit decline
Operating profit in 2017 decreased by €119 million (US$146m) (-21.1 percent) to €444 million (US$545m). This decline was caused by negative currency translation effects, one-off costs and failure to fully pass on the increased cost to higher sales prices. Currency effects (particularly the Nigerian naira and the Chinese renminbi) had a negative effect on the operating profit of €36 million (US$44m) (-6.4 percent). Furthermore, incidental costs reduced the operating profit on balance by €90 million (US$110m). These costs include the cost of restructuring, write-offs of assets in Germany and China, and are only partly compensated by the gain on the sale of the activities of Riedel.

Outlook
FrieslandCampina expects global milk production to further increase in 2018. In the Netherlands, milk production is expected to remain virtually stable due to the phosphate legislation. The demand for dairy products in the European Union is expected to increase somewhat, as a result of lower market prices. It is expected that the demand for dairy products in Asia, particularly in China, will further increase due to positive economic growth and low global market prices. Demand in other regions is also expected to increase, although to a lesser degree. The dairy market is expected to regain its balance by mid-2018 and milk prices are expected to stabilize.