FrieslandCampina Results Boosted by Ingredients, Warns of Uncertain Outlook

Ingredients’ net revenue from third parties rose by 12.8% to 836 million euro. The business group was able to increase its revenue due to increased raw materials prices being offset by a higher volume and higher market prices.

31 Aug 2012 --- In the first half of 2012 the net revenue of Royal FrieslandCampina N.V. rose by 7.6% to 5,089 million euro. Profit rose by 8.7% to 138 million euro. Volume growth and higher sales prices, to offset the increased costs, contributed towards the revenue growth and improved result. In the first half of 2012 the overall volume rose by 2.4 % but the strategic value drivers achieved a volume growth of 4.5 %. Most of the volume growth was achieved in the consumer and business to business markets for infant & toddler nutrition. The dairy-based beverage category also achieved growth, most of it in Asia.

The results from operating activities were 9.4% higher than for the first half of 2011. After the reservation of 15 million euro (2011: 2 million euro) for the payment of the meadow milk premium (amounts to 0.32 euro per 100 kilos of milk calculated over all member milk) operating profit rose by 3.3% to 217 million euro.

The Consumer Products International and Ingredients business groups once again increased both their revenue and their result. Consumer Products Europe improved its result despite the difficult market conditions in Europe. Its revenue dropped due to pressure on volume. The Cheese, Butter & Milkpowder business group’s revenue and result both fell primarily due to low sales prices for butter and milk powder.

Cees ’t Hart CEO Royal FrieslandCampina: “FrieslandCampina can look back on a good first half of 2012. Both revenue and result rose despite the difficult market conditions in Europe and the steep drop in the market prices for butter and milk powder. In part due to this the guaranteed price of milk from the member dairy farmers was less than in the first half of 2011. Asia, where FrieslandCampina achieved a quarter of its total revenue, made a major contribution towards the revenue growth and improved result. The volume of infant & toddler nutrition has increased in both the Ingredients and Consumer Products International business groups.”

Revenue for the first half of 2012 rose by 7.6% to 5,089 million euro. Volume growth, higher sales prices and currency translation effects contributed towards the increase in revenue. The acquisition of Alaska Milk Corporation contributed 63 million euro (or 1.3%) towards the revenue growth. Organic revenue growth amounted to 6.3%. The currency translation effect on revenue amounted to 63 million euro positive.

The results from operating activities were 9.4% higher than for the first half of 2011. After reserving 15 million euro (2011: 2 million euro) to pay the meadow milk premium (spread across all member milk amounts to 0.32 euro per 100 kilos) operating profit rose by 3.3% to 217 million euro.

Operating expenses in the first half of 2012 rose by 7.7% to 4,879 million euro due to higher packaging materials, raw materials and energy costs (first half of 2011: 4,532 million euro). Payments to member dairy farmers, a component of business expenses, fell by 3.8% to 1,696 million euro in the first half of 2012 as a result of the lower guaranteed price (first half of 2011: 1,763 million euro).

The profit over the first half of 2012 rose by 8.7% to 138 million euro (first half of 2011: 127 million euro). The higher profit was achieved due to the increased operating profit and reduced financing expenses, despite higher tax expenses compared to the first half of 2011.

Cash flow from operating activities rose to 247 million euro (first half of 2011: 63 million euro) mainly due to better working capital management. The net cash flows from investing and financing activities rose as a result of the acquisition of Alaska Milk Corporation.

On 20 March 2012 FrieslandCampina gained control of the Philippians dairy company Alaska Milk Corporation (AMC). On this date FrieslandCampina increased its shareholding from 8% to 68.5%. On 14 June 2012 FrieslandCampina’s interest was further increased to 97.7%. AMC produces, distributes and sells dairy-based beverages and milk powders under the brand names Alaska, Carnation, Liberty, Alpine and Milkmaid in the Philippines. The acquisition has strengthened FrieslandCampina’s position in Asia – a strategic growth area in the context of route2020. Since 20 March 2012 AMC has been consolidated as a component of the Consumer Products International business group. In the three months to 30 June 2012 AMC contributed 63 million euro net revenue and 7 million euro profit towards FrieslandCampina’s results. FrieslandCampina acquired AMC with a cash payment of 341 million euro.

As at 30 June 2012 net debt amounted to 1,059 million euro. This 139 million euro increase compared with the end of 2011 was due to the greater need for financing to pay for acquisitions.

On 30 June 2012 group equity was 2,397 million euro (end of 2011: 2,264 million euro). Equity was strengthened by the attribution of profit. Solvency (equity as a percentage of the balance sheet total) fell to 37.6% (end of 2011: 39.4%) due to the increase of the balance sheet total primarily as a result of the acquisition of Alaska Milk Corporation.

The balance of financing income and expenses fell by 22 million euro, which resulted in an expense of 18 million euro. The reduction was due primarily to the positive currency translation effect on an interim short-term loan. The net interest expense was 20 million euro (first half of 2011: 26 million euro).

The result from joint ventures and associates rose from 5 million euro in the first half of 2011 to 7 million euro in the first half of 2012.

Taxation amounted to 68 million euro (first half of 2011: 48 million euro). The increase was primarily due to the higher profit. In the first half of 2011 taxation was offset by an exeptional tax rebate in the Netherlands.

The Cheese, Butter & Milkpowder business group’s revenue from third parties was 1,188 million euro – a drop of 0.9% compared to the first half of 2011. The drop, which was due to lower sales prices especially for butter and milk powder, was partially offset by a higher volume.

The Cheese, Butter & Milk powder business group’s operating profit fell by 80 million euro to 109 million euro negative. The drop was due to increased pressure on margins across most of the commodities range. Sales prices for butter and milk powder fell particularly sharply. The operating profit of Cheese, Butter & Milkpowder was negatively influenced by the attribution of the performance premium and the registered reserve to the different business groups in proportion to the quantity of member milk received.FrieslandCampina Cheese achieved a satisfactory performance in view of the market conditions while FrieslandCampina Cheese Specialties achieved a slightly improved result with branded cheese.

Ingredients’ net revenue from third parties rose by 12.8% to 836 million euro. The business group was able to increase its revenue due to increased raw materials prices being offset by a higher volume and higher market prices.

Ingredients’ operating profit rose by 19.1% to 106 million euro. This business group also improved its result because the higher raw materials prices could be passed-on, which was not the case in the first half of 2011.

FrieslandCampina cannot make any concrete statement regarding the expected result for the whole of 2012.

The economic outlook remains uncertain. The forecast is that consumers in Europe will continue to be reticent in their spending due to the economic situation and that, as a result, dairy product consumption will remain under pressure. At a global level dairy product consumption is expected to increase slightly this year due to the demand in the emerging markets. As a result of the drought in the United States, rising animal feed prices and the lagging behind of milk production in the EU, the worldwide supply of milk could come under some pressure. Small fluctuations in supply and demand on the world market can have major consequences for the price development of dairy products.

The disappearance of the milk quota in 2015 and the difficult economic situation in Europe are creating a new dynamic in the global dairy market. FrieslandCampina is seeing an acceleration of the international consolidation of dairy companies. This is partly a reaction to the merger of Friesland Foods and Campina and partly due to parties determining their position ahead of the ending of the milk quota within the European Union in 2015. In the coming years the markets will become even more volatile. The route2020 strategy is proving its robustness in these difficult and volatile conditions and forms a good basis for further growth and result improvement.