FrieslandCampina reports stable revenue but expects COVID-19 profit pressures to bite in Q2

23 Jul 2020 ---- FrieslandCampina has reported a strong start of the year with first-quarter results above last year, but in the second quarter it expects major impact from the COVID-19 pandemic on operations and results. Pressures were most notable due to a strong decline in out-of-home sales, lower basic dairy prices and a fall in infant nutrition sales in Hong Kong due to closed borders with China. This was partially offset by higher profit for Consumer Dairy and Ingredients.

Revenue is stable (+0.3 percent) at €5.6 billion. However, on a comparable basis, operating profit is down 17.2 percent and profit down 37.2 percent versus the first half of 2019.

Milk price for member dairy farmers decreased by 3.5 percent to €36.59 per 100 kilos of milk due to a decline in basic dairy prices. Meanwhile, milk supply increased by 1.1 percent to 5,144 million kilos due to favorable weather conditions.

Global recession with an anticipated slow recovery necessitates further intervention in cost structure and structural improvement of productivity, notes FrieslandCampina. 

“The coronavirus pandemic has created extraordinary market conditions in the first half of 2020. In many countries, lockdown measures forced people to stay at home and hotels, restaurants, bars and other out-of-home outlets shut down. Basic dairy prices fell sharply but certain costs rose, for example for transportation and shipping containers,” says Hein Schumacher, the dairy giant’s CEO.

“In this unprecedented situation, our member dairy farmers continued to supply their milk, which was collected on time and processed in full at our production locations. We have also always delivered our products to our customers in these challenging months.”

“FrieslandCampina felt the financial impact of the coronavirus pandemic in the first half of 2020. Our total revenue stayed virtually the same, but we saw a shift from the profitable out-of-home segment, where revenue mostly fell away, to sales growth for basic dairy products where prices and profit margins dropped significantly due to the corona crisis. Revenue for the profitable infant nutrition business in Hong Kong also declined as a result of the closed borders with China,” he adds. 

Despite taking numerous, far-reaching measures to absorb the impact of the pandemic on results, FrieslandCampina’s operating result and profit still came under pressure, notes Schumacher. However, he also stresses how the company has rapidly adapted to a new situation of “business as unusual” with a focus on the production and distribution of FrieslandCampina products and “making huge strides with further digitization and e-commerce.”

FrieslandCampina also recently strengthened its market positions in ingredients worldwide and in key consumer markets such as China, Indonesia, Nigeria, Pakistan as well as its home markets of the Netherlands and Germany.

“Looking ahead, we must now assume that we will enter a global recession in 2020 and that recovery will take time. This necessitates us to further intervene in our cost structure and take measures to structurally improve our productivity,” adds Schumacher. “However, we will also continue to invest in our brands, innovations, sales channels, such as e-commerce, and growth markets. This combination should ensure that we emerge stronger from this challenging period.”

Stable revenue 
The business groups Dairy Essentials and Ingredients saw revenue increase by 5.8 percent and 3.6 percent, respectively. Revenue for the business group Specialised Nutrition was lower (0.8 percent).

Despite a strong start of the year, revenue of the business group Consumer Dairy declined in the first half of 2020 (-1.9 percent), mainly due to a significant decline in out-of-home volumes caused by the temporary shutdown of foodservice outlets.

Revenue of consumer and, in particular, branded products increased in the first half of 2020. Market shares of important consumer brands including Rainbow (Middle East), Peak (Nigeria), Frisian Flag (Indonesia), Olper's (Pakistan), Campina, Optimel, Parrano (the Netherlands) and Landliebe (Germany) rose. After China recovered from the coronavirus epidemic in the second quarter of the year, infant nutrition sales in this important market returned to pre-crisis levels. The Friso brand in particular achieved sales growth in China with Friso Prestige. 

Profit and operating profit under pressure
On a comparable basis, operating profit decreased by 17.2 percent and profit decreased by 37.2 percent in the first half of 2020. The business groups Consumer Dairy and Ingredients saw a substantial increase in their operating profit by 18.1 percent and 21.9 percent, respectively, while the business groups Specialised Nutrition and Dairy Essentials reported lower operating profit (-16.5 percent and -50.5 percent respectively). 

Consumer Dairy showed an increase in operating profit despite the fact that profitable market segments such as ‘food service’ largely disappeared as a result of the coronavirus pandemic.

As a result of the application of the statutory fiscal cooperative regime, the allocation of the performance premium and member bonds is no longer included in operating profit as of 2020 but is allocated directly from equity to the members. As a result of this change, the company’s reported operating profit rose by 5.2 percent to €221 million in the first half of 2020 (first half 2019: €210 million) and reported profit in the first half of 2020 decreased by 10.7 percent to €108 million (first half 2019: €121 million).

The milk price for member dairy farmers decreased by 3.5 percent in the first half of 2020 to €36.59 excluding VAT per 100 kg of milk (first half of 2019: €37.90). This decrease was among others caused by a decline in basic dairy prices as a result of the pandemic. The organic milk price was €48.73 excluding VAT per 100 kg of milk (first half of 2019: €49.78).

Outlook
The global economy is expected to experience a major negative impact from the coronavirus pandemic in 2020 and recover only slowly thereafter. With this in mind, FrieslandCampina will intervene further in the cost structure of the company and take measures to structurally increase productivity. The associated restructuring costs will have a negative impact on FrieslandCampina's profitability in 2020. 

Edited by Gaynor Selby