FrieslandCampina to Increase Export Production Capacity, Reports Strong First Half

29 Aug 2013 --- The Member Council of FrieslandCampina has approved the construction of a new plant for infant and toddler nutrition and ingredients in Borculo, as well as the replacement and expansion of the processing capacity for evaporated milk products in Leeuwarden. The plans, which were previously announced, require an investment of 135 million euros in Borculo and 110 million euros in Leeuwarden.

These amounts are in addition to the total of 200 million euros in investments FrieslandCampina committed to in the first half of 2013. With these expansion plans, FrieslandCampina is not only contributing to regional employment, but also to a further strengthening of the Netherlands’ export position in dairy products.

The aim is to build a new plant in Borculo next to the existing site, complete with a spray-drying tower for the production of infant and toddler nutrition and ingredients.

By replacing and expanding its processing capacity in Leeuwarden, FrieslandCampina is responding to the growing demand for evaporated milk products in Africa, the Middle East and Asia. The construction process will make use of technical and sustainable innovations, such as evaporators capable of reusing heat multiple times. This will ensure considerable energy cost savings.

The above-described investments are in addition to the total of 200 million euros in investments FrieslandCampina committed to in the first half of 2013. The most important projects covered by those funds include the expansion of the production capacity for infant and toddler nutrition at FrieslandCampina Domo in Borculo (40 million euros), the improvement of the production location in Samrong, Thailand (13 million euros) and the expansion of the production capacity of FrieslandCampina Butter in Den Bosch (7 million euros). The remaining investments involve renovations and expansions of several production locations. All these plans are to be realised over the coming years.

A number of expansion projects were completed in the first half of this year. These included doubling the cheese production capacity at FrieslandCampina Cheese in Workum to 120,000 tonnes per year. In addition, the production location adjacent to FrieslandCampina Domo was expanded to enable processing of whey, a by-product of cheese production. A new sustainable installation was added, which concentrates whey into powder, an important ingredient for infant and toddler nutrition, among other applications. And July 2013 saw completion of the FrieslandCampina Innovation Centre in Wageningen, which includes research facilities, laboratories, a pilot plant and offices. The Innovation Centre will be officially opened in October 2013.

The expansions are part of FrieslandCampina’s route2020 growth strategy. The aim of the investments is to enable FrieslandCampina to profit from the increasing demand for products with added-value and to have the capacity to process the expected increased quantity of milk supplied by member dairy farmers due to the termination of the EU milk quota in 2015. Last year, FrieslandCampina invested a total of 423 million euros to expand its processing capacity.

The news came as the company reported that in the first half of 2013 the revenue of Royal FrieslandCampina N.V. rose by 8.5 percent to 5,524 million euro while profit rose by 17.1 percent to 164 million euro. Higher sales prices and the sale of more products with added-value contributed towards the revenue increase and improved result. The Consumer Products International and Ingredients business groups once again improved their revenue and result with the most robust growth being achieved by infant & toddler nutrition in both the consumer and business to business markets. The Cheese, Butter & Milkpowder business group achieved a positive result thanks to higher sales prices. The Consumer Products Europe business group’s revenue and result lagged behind due to reduced consumer spending in Europe. The Company’s performance in respect of its member dairy farmers rose by 28.7 percent to 3.05 euro.

Cees ’t Hart, CEO Royal FrieslandCampina N.V.: ‘FrieslandCampina achieved a good result in the first six months of 2013. We are strategically on course. Nevertheless FrieslandCampina must also find an appropriate way to deal with the consequences of lagging consumer spending in Europe.’

The higher net revenue was achieved due to higher sales prices as a result of the higher guaranteed price for milk, increased sales of products with added-value and acquisitions. The higher sales prices for cheese, butter and ingredients in particular made a major contribution towards the revenue growth. Other products followed this price development after some delay. In Europe volume and revenue were under pressure due to reduced consumer spending. The shift in the portfolio from commodities to products in the growth categories of infant & toddler nutrition, dairy-based beverages and branded cheeses continued. The acquired companies Alaska Milk Corporation in the Philippines (March 2012), Yoko Cheese (October 2012) and Zijerveld and Den Hollander Food (both May 2013) contributed 195 million euro (or 3.8 percent) towards the revenue growth. Organic revenue growth amounted to 5.1 percent. The net currency translation effect on revenue was 0.5 percent negative (-22 million euro).

In the first half of 2013 operating profit rose by 25.0 percent to 275 million euro primarily due to higher sales prices for cheese, butter and milk powder, increased sales of added-value products and the improved margins of the Consumer Products International and Ingredients business groups.

Operating expenses in the first half of 2013 rose by 7.7 percent to 5,253 million euro due to acquisitions and higher packaging materials and raw materials costs (first half of 2012: 4,878 million euro). The higher milk price meant that in the first half of 2013 the pro forma payment to member dairy farmers for milk rose by 11.6 percent to 1,892 million euro (first half of 2012: 1,696 million euro).

The Chinese National Development and Reform Commission (NDRC) concluded that FrieslandCampina Trading (Shanghai) had signed contracts with customers that did not comply with local legislation and, as a consequence, fined FrieslandCampina 5.9 million euro. FrieslandCampina has paid the fine and the costs have been included in the figures for the first half-year.

Profit over the first half of 2013 rose by 17.1 percent to 164 million euro (first half of 2012: 140 million euro). The higher profit was achieved due to the higher operating profit and despite the higher financing and operating expenses. The profit attributable to the Company’s shareholder (the Cooperative) amounted to 105 million euro (first half of 2012: 84 million euro).

The Company’s performance in respect of the Zuivelcoöperatie FrieslandCampina U.A member dairy farmers comprises the performance premium and the distribution of member bonds. The pro forma performance premium over the first half of 2013 was 1.81 euro per 100 kilos of milk excluding VAT (first half of 2012: 1.42 euro). The pro forma distribution of member bonds over the first half of 2013 amounted to 1.24 euro per 100 kilos of milk (first half of 2012: 0.95 euro). In total the Company’s performance amounted to 3.05 euro per 100 kilos of milk (first half of 2012: 2.37 euro), an increase of 28.7 percent.

The guaranteed price over the first half of 2013 was 37.03 euro excluding VAT per 100 kilos of milk. This 8.5 percent increase compared with the first half of 2012 (34.14 euro) was due to the higher milk prices of the reference companies.

The pro-forma milk price for the first half of 2013 was 40.08 euro excluding VAT per 100 kilos of milk. This is 9.8 percent higher than for the first half of 2012 (36.51 euro).

The pro forma milk price rose due to the higher guaranteed price, the passing on of this increase to the market and the Company’s improved results.

Compared with the first half of 2012 the interest on member bonds fell from 22 million euro to 16 million euro as a result of the lower Euribor. The average interest payout amounted to 0.35 euro per 100 kilos of member milk.

The cash flow from operating activities fell to 168 million euro (first half of 2012: 247 million euro) as a result of the increase in working capital due to the higher guaranteed price, which increased the value of inventories and claims. Net outgoing cash flows from investment and financing activities rose. In the first half of 2013 outgoing cash flows for investments related to the expansion of production facilities amounted to 220 million euro (first half of 2012: 177 million euro). In addition, 80 million euro in cash was invested in the acquisition of Zijerveld and Den Hollander Food. Most of the investments could be financed from the company’s own funds. The perpetual notes amounting to 125 million euro were also repaid. The cash flow from financing activities amounted to -98 million euro.

On 30 June 2013 group equity was 2,437 million euro (end of 2012: 2,258 million euro). Group equity was strengthened by the pro forma reservation from profit and a one-time increase resulting from the expiry of the DFE put-option, which was offset by the repayment of the perpetual bonds.

Since 1 January 2013 FrieslandCampina has applied the amended IFRS regulations regarding pensions. As a result the comparable figures for 2012 have been adjusted for the impact of the new regulations. The total impact on equity as at 1 January 2013 amounted to 256 million euro negative. This reduced solvency (group equity as a percentage of the balance sheet total) from 36.8 percent to 33.1 percent at the end of 2012.

During the first half of 2013 solvency rose to 34.3 percent (end of 2012: 33.1 percent) due to the strengthening of group equity. As at 30 June 2013 FrieslandCampina complied amply with the bank covenants.

In the first half of 2013 the Consumer Products Europe business group was confronted with a further worsening of market conditions in Europe. Consumer spending dropped further due to the sombre economic outlook, rising debt levels and increasing unemployment. Consumer Products Europe’s net revenue from third parties was 1,484 million euro. Volume fell as sales of both branded and supermarkets’ private label dairy products declined. Volumes were most under pressure in Hungary, Romania, Germany and the Netherlands. The higher guaranteed price for raw milk could be passed-on, albeit with some delay due to existing contracts. The market share of most brands was under pressure. Operating profit fell to 48 million euro despite fixed costs being lower due to earlier reorganisations, cost management and reduced spending on advertising & promotion campaigns. Ways to adjust the organisation to difficult market conditions are being studied.

The Consumer Products International business group’s revenue from third parties in the first half of 2013 rose by 17.1 percent to 1,606 million euro. The revenue increase was achieved due to volume growth and price increases and despite a negative currency translation effect of 13 million euro. Sales of both infant & toddler nutrition and dairy-based beverages (especially condensed milk) showed good growth. In a number of countries the higher raw milk and raw materials costs could not be passed on in the sales price due to local government restrictions. In most countries the market share was better than in 2012, in part thanks to increased investments in advertising and promotion campaigns. The integration of Alaska Milk Corporation, which was acquired in 2012, proceeded smoothly. Operating profit of the business group rose by 21.0 percent to 271 million euro (first half of 2012: 224 million euro). In most countries competition increased, particularly from local dairy companies.

During the first half of 2013 the Cheese, Butter & Milkpowder business group’s revenue from third parties rose by 12.2 percent to 1,380 million euro. Although the sales volume was comparable to the first half of 2012, revenue rose as a result of price increases throughout the business group. Operating profit rose by 51 million euro to 19 million euro due to improved market conditions. Operating profit as a percentage of revenue amounted to 1.4 percent (first half of 2012: -2.6 percent). During the first half of 2013 the European Commission approved FrieslandCampina’s acquisition of cheese specialist Zijerveld and its packaging unit Den Hollander Food.
The Ingredients business group once again performed well with net revenue from third parties amounting to 905 million euro – a 6.8 percent increase compared with the first half of 2012. The increase in revenue was due to higher demand for high-quality ingredients for infant & toddler nutrition and the passing on of price increases. The volume of added-value products rose and, as a result, less commodities were produced. Operating profit rose by 17.6 percent to 140 million euro.

It is anticipated that in 2013 the global offering of milk will increase only slightly and will not exceed to the 2012 volume until the end of the year. The global consumption of dairy products is stable to slightly higher in the emerging markets. In Europe the consumption of dairy products is under pressure. Small fluctuations in supply and demand on the world market have major consequences for the price development of dairy products. FrieslandCampina cannot make any concrete statement regarding the expected result for the whole of 2013.