FrieslandCampina half-year results lifted by higher dairy costs, retail hit by inflated raw material prices

20 Jul 2022 --- In its newly released half-year results for 2022, dairy giant FrieslandCampina’s Food & Beverage business group performance benefitted from the recovery of the European out-of-home markets and high butter market prices.

However, margins in the retail channel were under pressure from the significant rise in the cost of raw materials that necessitated price increases.

The company’s operating profit in the first half of 2022 grew substantially to €328 million / US$336 million (first half of 2021: €130 million / US$133 million). Meanwhile, net profit prominently rose to €139 million (first half of 2021: €62 million / US$63 million) due to higher commodity dairy prices and the recovery in infant nutrition activities.

At €89 million (US$91 million), the operating cash flow was at a lower level. The decrease was due to higher working capital, partly compensated by higher results.

The end of uncertainties is not yet in sight for the dairy market, CEO Schumacher concedes.Socio-economic climate impacts
CEO Hein Schumacher highlights a “dynamic” first half of 2022 for the Netherlands-based multinational dairy cooperative. Adjusted for currency translation effects, revenue rose from €5.5 to €6.5 billion (US$5.6 to 6.7 billion), primarily due to price increases, higher commodity dairy prices and the recovery of European out-of-home markets.

“My first thoughts here are the [Dutch] Cabinet’s nitrogen proposals and the farmers’ responses, the war in Ukraine and its effects on the global economy, as well as the extreme inflation we are confronted with,” says Schumacher.

“Our Professional and Trading businesses benefited from high fat, protein and commodity dairy prices. Profit margins, particularly in the retail channel, were under pressure, because it was not possible to fully pass on cost increases.”

“The historically high milk price in the first half of the year of course is favorable for our member dairy farmers since they too are confronted with significantly increased costs in their farming operations.”

But the end of all uncertainties is not yet in sight, as Schumacher puts it. “We are still faced with inflation-related challenges and the associated price increases, mounting raw material shortages, declining consumer confidence and the corona pandemic, which has yet to completely pass.”

“We are also still confronted with major uncertainty concerning the impact of the Dutch Cabinet’s announced nitrogen proposals on our members and our company. For this reason, we are exercising extra caution in terms of our outlook for the rest of the year, and we have decided to forego the interim pro forma supplementary cash payment to our member dairy farmers.”

Prices driven up
Driven by price increases, higher commodity dairy prices and the recovery of out-of-home markets in Europe, FrieslandCampina’s reported revenue in the first half of 2022 increased by 19.4% to €6.6 billion / US$6.8 billion (first half of 2021: €5.5 billion / US$5.6 billion).

Currency translation effects had a positive effect of 2.4% on revenue.

Revenue of FrieslandCampina’s Food & Beverage business group in the first half of 2022 increased by 19.7% to €4.5 billion (first half of 2021: €3.8 billion / US$3.9 billion). Before currency translation effects, revenue of this group grew by 17.6%, the company notes.

The volume of retail brands in the Food & Beverage group decreased slightly in comparison to the first half of 2021. Meanwhile, the “Professional” category of this group benefited from higher commodity dairy prices, particularly for butter, and the growth of out-of-home activities in Europe.

In the Specialized Nutrition business group, revenue  increased by 18.6% to €612 million (US$626 million) compared to the same period of the previous year (first half of 2021: €516 million / US$528 million). Although infant nutrition brand Friso’s market share remained stable, revenue and profit in China rose significantly, in part due to the strong growth of Friso Prestige. 

FrieslandCampina is still confronted with major uncertainty concerning the impact of the Dutch Cabinet’s announced nitrogen proposals on its members.Meanwhile, revenue of the Ingredients business group increased by 31.8% to €775 million (US$793 million), primarily due to price increases, particularly in the infant nutrition, elderly nutrition and pharmaceutical market segments (first half of 2021: €588 million / US$601 million).

For the Trading business group, the strong increase in commodity dairy prices in the first half of 2022 resulted in noticeably higher price levels and an increase in revenue of 21.7% to €663 million / US$678 million (first half of 2021: €545 million / US$558 million).

Slight drop in milk supply
FrieslandCampina reports its milk supplied by member dairy farmers in the first half of 2022 decreased by 4.6% to 4.8 billion kg in comparison to the first half of 2021 (5 billion kg) due to a decline in the number of members, lower quality of grass silage and higher feed costs.

Meanwhile, the milk price for member dairy farmers over the first half of 2022 increased by 37.8%to €51.33 (US$52.53) per 100 kg of milk exclusive of VAT in comparison to the first half of 2021 (€37.25 / US$38.12). This increase was in part due to an increase in commodity dairy prices resulting from increased market demand.

The organic milk price was €57.31 (US$58.65) per 100 kg of milk exclusive of VAT (first half of 2021: €49.16 / US$50.31).

Scale up activities
In recent business developments resulting in one-off operating expenses, FrieslandCampina invested in new production facilities in Indonesia and Malaysia, new recyclable PET packaging lines in Aalter (Belgium), and expanded our lactoferrin production in Veghel (the Netherlands). 

The cooperative also made moves to offload part of its German business to Theo Müller and to continue to focus on a number of its better performing international consumer brands in Germany, including Chocomel, Valess and Frico. 

In the Netherlands, the company also decided to close a production location in Rotterdam and two powder towers in Leeuwarden. In Thailand, it is focusing on production and sales of long shelf life dairy products and has closed its local production site for pasteurized products. 

Among other highlights, the company recently signed an agreement for the sale of its production location for local infant nutrition in Xiushui, China.

Outlook fractured by global instability
As a result of the war in Ukraine, the COVID-19 pandemic and rising costs, including the cost of energy, fuel, transport and raw materials, and general disruptions in international supply chain and trade, FrieslandCampina’s outlook for the second half of the year is uncertain.

A turnaround of commodity dairy prices could have a significant impact on results, the company notes. 

“FrieslandCampina will continue to study how it can further optimize its production network,” it states. “Because of the many uncertainties, FrieslandCampina is not issuing an outlook for the expected profit for 2022 and is also not making any forecasts concerning the future development of the milk prices.”

By Benjamin Ferrer