FrieslandCampina profits bolstered by butter and cheese price recovery

31 Aug 2017 --- FrieslandCampina has posted profit uptick and milk price recovery for dairy farmers as the Dutch dairy cooperatives sees its revenue increase by almost 11 percent for the first-half of 2017, as butter and cheese price recovery contributes to solid results. It’s been a very busy period for FrieslandCampina with plans for a big company restructure and selling off its juice division, among other strategic developments, and now financial results show revenue increased by 10.7 percent to €6.1 billion (US$7.2bn) over the first half-year 2017, while profit went up 1.3 percent to €162 million (US$192 million).

Revenue increased due to an increase in sales prices and the acquisition of Engro Foods in Pakistan. Last December, Royal FrieslandCampina N.V. acquired a majority stake of 51 percent in Pakistan’s second largest dairy producer, in partnership with the World Bank Group's International Finance Corporation and the Dutch development bank FMO.

Meanwhile, the pro forma milk price for member dairy farmers increased by 26.9 percent to €38.37 (US$45.62) per 100 kilos of milk. The interim pay-out for member dairy farmers amounts to €1.17 (US$1.39) per 100 kilos of milk.

“The milk price for member dairy farmers recovered this year after a number of disappointing years. The higher sales prices for primarily butter and cheese lie at the root of this recovery,” says Roelof Joosten, CEO of Royal FrieslandCampina N.V.

“In West Europe, we were successful in passing on the higher guaranteed price in the sales prices. This is reflected in the increased revenue. The total compensation paid to member dairy farmers increased by 24 percent in comparison to the first half year of 2016. High growth levels were realized in Indonesia and Vietnam and with cheese and butter. In Germany, the Philippines and Nigeria, result trends are not as positive due to local market conditions and negative currency translation effects, the latter particularly in Nigeria.”

Increased revenue
The increase in revenue to €6.1 billion (US$7.2bn) is due to the increase in higher sales prices of 10.3 percent and the acquisition of Engro Foods in Pakistan at the end of 2016 of 2.4 percent. On balance, currency translation effects had a negative effect of €53 million (US$63million) on revenue. The volume of products with higher added value declined by 1.6 percent (exclusive of the acquisition of Engro Foods) and the volume of basic products rose by 1.2 percent. 

On balance, this had a negative mix effect of -1.0 percent on revenue. Butter products displayed the highest price increases due to the increased global demand for butter and cream products with a declining supply, says the company. 

Higher operating profit
The operating profit increased by 7.8 percent to €275 million (US$327 million) over the first half of 2017. Currency translation effects had a negative effect of €13 million (US$15.5 million) on the operating profit.

The gross margin increased by 8.2 percent to €1 billion (US$1.2) due to the fact that the higher sales prices compensated for the increased costs. The cost of goods sold increased by 11.2 percent to €5.1 billion (US$6bn). This is mainly due to the higher guaranteed price for raw milk and the increased prices for other raw materials.

The total compensation paid to member dairy farmers for their milk increased by 24.1 percent to €2.1 billion (US$2.5 billion), at a 1-percent-lower milk production level (5,435 million kilos).

The one-off items recognized in operating profit include the €9 million book profit on the sale of the 8.2 percent interest in Synlait Milk Ltd. and the impairment of €20 million (US$23.7 million)  of the 1.1 percent interest in China Huishan Dairy Holdings Company Ltd.

Busy summer for FrieslandCampina 
Earlier this month, FrieslandCampina reached agreement on the takeover of its fruit juice division from investment firm Standard Investment for an undisclosed fee. Once part of Riedel, which merged with FrieslandCampina’s predecessor more than 40 years ago, the juice division’s market share had been shrinking and the dairy cooperative offloaded it Standard Investment which plans to introduce its juice portfolio to European retailers. The transaction is expected to be completed before the end of the year.

And more significantly, FrieslandCampina has recently announced plans for a strategic simplification of the organization into four global business groups: Consumer Dairy, Specialised Nutrition, Ingredients and Basic Dairy, as reported in FoodIngredientsFirst. 

The company claims a less complex structure will allow it to respond to the market developments more efficiently and to allow innovation with strategic priorities. The objective of the new structure is to further improve the company both operationally and commercially, generating more value for the member dairy farmers. The new organization will be operational from next January. 

Milk supply
The milk supplied by member dairy farmers decreased by 53 million kilos over the first half-year 2017 (1.0 percent) to 5,435 million kilos of milk. During the initial months of 2017, two temporary milk volume control measures were in effect: the so-called 10 cent measure and the temporary FrieslandCampina standstill measure.

As far as forecasting and outlook are concerned, FrieslandCampina does not make any specific pronouncements concerning the result for the full year 2017.