FrieslandCampina Announces 16.7 Percent Drop in Profits for H1

01 Sep 2016 --- Dutch dairy giant FrieslandCampina has reported a profit decrease of 16.7 percent for the first half of 2016 as the global milk crisis bites into revenues. The company says its due to losses on milk powder and cheese and comes despite a growth in infant nutrition and dairy-based beverages.

The 16.7 percent decrease amounts to €160 million (US$178 million), compared to the same period in previous financial year.

Due to the significant increase in the member dairy farmers’ milk production (+11.9 percent), basic dairy products such as milk powder, foil cheese and butter were produced that had to be sold below cost. 

Revenue went down by 2.2 percent to €5,522 million (US$6,152 million). Although the decrease in revenue to lower sales prices was largely compensated by a higher volume. The milk price for member dairy farmers decreased to €30.24 euros per 100 kilos of milk (first half-year 2015: €36.48 euros) due to the lower guaranteed price for raw milk and the lower value creation (performance premium and reservation in member bonds). The interim pay-out amounts to €1.170 euros per 100 kilos of milk (2015: €2.018).

Meanwhile there was growth in volume in the infant nutrition in China and South-East Asia, dairy-based beverages in South-East Asia and Eastern Europe and ingredients.

“We can look back on a special first half year. FrieslandCampina is doing well in Asia with ingredients, realizing a fine 2.3 percent growth in volume with added value products. Due to the increased milk production, we had to process significantly higher volumes of milk into basic dairy products that we could not sell at a profit in the market. This is visible in the 17 percent decrease in both profits and milk price for the member dairy farmers,” says Roelof Joosten, CEO of Royal FrieslandCampina N.V.

In terms of the milk supply increase of 11.9 percent, the first half of 2016 has seen 5,488 million kilos of milk supplied by member dairy farmers which is a 583 million kilo increase compared to the first half of 2015, although a large proportion of the 11.9 percent increase was processed into basic products. 

With the profit decrease of €160 million, of this amount €117 million (US$130 million) is at the disposal of the shareholder and the provider of the cooperative loan (Zuivelcoöperatie FrieslandCampina U.A.). The cash flow from operating activities decreased to €165 million (US$183 million), against €319 million (US$355 million) for the first half of 2015. 

The company says this is mainly due to the higher working capital, among others due to the increased quantity of milk and the decrease in profits. Over the first half-year 2016, the outbound cash flow used in investment activities amounted to €262 million (US$291 million), compared to €384 million (US$427 million) in the first half of 2015.

The outlook for the remainder of 2016 is still unclear as the international milk sector in general continues to go through turbulent times. Milk prices have bottomed out and worldwide supply of milk is expected to decrease during the second half of 2016. Expectations are that demand for dairy products will modestly increase, mainly due to the limited purchasing power in many oil-exporting countries, political instability in other locations and the limited demand for dairy products in huge markets like China as well as Russia’s continuing block of EU dairy products.  

The effect of the European Commission’s measures to reduce milk production in the European Union based on support measures is as yet unclear as is the impact of possible voluntary restriction of production of cooperatives or producer associations, says FrieslandCampina.

The Netherlands is expected to impose measures to reduce phosphate production in cattle farms to fall under the level of July 2015, and this too could lead to a reduction of milk production, although it’s not yet clear.