Strong Growth of Friesland Foods' Profit

07/03/08 Friesland Foods delivered a good performance in 2007. Profit for the year rose by 35 percent, landing at 172 million euros (2006: 128 million). Revenue was up 400 million euros on 2006, rising to 5.1 billion euros (8.5 percent). Revenue growth was posted in all business groups and regions thanks mainly to higher selling prices. In Asia and Africa, volumes increased as well (by 9 percent), although margins did come under pressure here in the last quarter of the year because increases in the cost of raw materials were not fully covered by higher selling prices. The increase in profit was attributable to the Classic Dairy and Industrial business groups.

Profit for the year was raised by a non-recurring income item as a result of the sale of Friso baby and infant foods in the Netherlands. Moreover, restructuring expenses were lower than last year.
 
The year 2007 was characterised by strong increases in the world market prices of milk powder, whey powder and butter due to the globally increasing demand for dairy products and somewhat lagging supplies of milk. Selling prices in other product categories such as cheese, and fresh and long-life dairy in Western Europe also started to rise over the course of the second half year. World market prices for powders and butter have dropped since September.

In Central Europe, Asia and Africa, and in the professional cream-based products segment, the cost of raw materials could not, for the time being, be fully recharged to the customer, which led to pressure on margins. In addition, currency developments and the abolition of export subsidies had an adverse effect on revenue. This was offset by higher sales volumes. Sales of key drive brands were up 12 percent on 2006.

Operating profit was up 42 million euros (16 percent) rising to 299 million euros. Operating profit as a percentage of revenue (ROS) increased from 5.5 to 5.9 percent.
 
The cost of raw materials and consumables, and goods for resale rose to 3.2 billion euros. The increase by 335 million euros (12 percent) was attributable to the higher cost of raw materials on the world market and higher milk prices in the Netherlands. In 2007 Friesland Foods processed 6.9 billion kilograms of milk, 5.3 billion kilograms of which were supplied by Dutch member dairy farmers. These are the same figures as in 2006. Based on the forecast developments in milk prices paid by the index companies in 2007, the milk price used in the financial statements is 37.07 euros per 100 kilograms of milk (inclusive of 5.374 percent VAT). Adjusted for differences in the fat and protein content of the milk, this represents an increase by 6.16 euros (inclusive of VAT) per 100 kilograms of milk (20 percent) relative to the market price of milk in 2006.

The employee benefits expense was up 2 percent, rising to 448 million euros. The number of employees dropped by 730, landing at 14,582. In the Consumer Products Europe business group, 743 jobs were lost due to restructurings, whereas the staff base in the Industrial business group increased by 71 people.

Restructuring expenses amounted to 11 million euros (2006: 24 million), which was due mainly to the cost of the shut-down of the Groningen-based production site and the restructuring of the corporate staff departments.
The income tax expense increased by 2 million to 65 million euros. The tax burden dropped by 3 percent to 25 percent of pre-tax profit due, in particular, to one-off tax benefits in 2007.

As a result of these developments, profit for the year increased to 172 million euros. Profit for the year as a percentage of revenue was 3.4 percent (2006: 2.7 percent). This marks the first time that Friesland Foods reached the target of achieving a net profit for the year margin of more than 3 percent.

Net cash flows from operating activities amounted to 225 million euros in 2007 (2006: 244 million). This drop was caused chiefly by higher working capital. The increase in working capital was seen in inventories in particular, the main reason being sharp increases in the cost of raw materials during the year. These resulted in higher values of inventories, especially in the fourth quarter of the year. In addition, inventory volumes saw modest increases at year end. Investments in land, buildings, plants, equipment and intangible assets increased by 21 million euros relative to 2006. Key investment projects in 2007 included the cheese-storage facility in Workum (the Netherlands), the second spray-dryer in Salatiga (Indonesia) and the construction of a second production site in Vietnam (Hanam). In 2007 Friesland Foods spent 39 million euros less on acquisitions than in 2006 (42 million euros).

Equity was up 10 percent in 2007. The solvency ratio (equity as a percentage of total assets) dropped, however, to 38.7 percent (2006: 39.6 percent). This was the result of higher total assets due to an increase in working capital. Net debt rose by 8 million to 582 million euros.
 
Friesland Foods comfortably meets the requirements imposed by lenders, as expressed in the headline figures. The ratio of net debt to operating profit before depreciation and amortisation plus dividends from associates and exclusive of exceptional items is not allowed to exceed 3.5 : 1. At year-end 2007 this ratio was 1.4 : 1, the same as in 2006. In addition, the ratio of operating profit before depreciation and amortisation plus dividends from associates and exclusive of exceptional items to interest (interest coverage ratio) should be at least 3.5 : 1. This ratio was 13.0 : 1 at year-end 2007 (2006: 12.8 : 1).
 
Total dividend distributions on Classes A and B shares increased by 35 percent compared with 2006. The dividend per Class A share is 2.62 euros (2006: 2.39 euros), and 10.24 euros per Class B share or depositary receipt for Class B share (2006: 6.81 euros). As in 2006, the dividend distribution on Class A shares reached the maximum amount as provided in the Articles of Association. Based on the dividend distributed on Class A shares, Zuivelcoöperatie Friesland Foods will distribute 0.36 euros exclusive of VAT per 100 kilograms of milk to the member dairy farmers  (2006: 0.33 euros exclusive of VAT).
 
On 2 March 2007 share premium reserve A of 62 million euros was converted into Class A share capital at a nominal value of 46.00 euros each. As a consequence, the Class A share capital has increased to 330 million euros. The number of Class A shares rose from 5,840,363 to 7,179,950. The Class B share capital amounts to 186 million euros. The ratio of Class A to Class B shares is now 64 : 36.

Revenue from European activities increased by 8 percent to 3.9 billion euros in the year under review. The increase was achieved mainly by the Dutch activities as a result of higher selling prices of dairy products. Revenue from activities undertaken in Hungary fell due to restructurings in 2006 and early in 2007. Despite the reduction in EU subsidies on butter and in export subsidies on cheese, condensed milk and low-fat and whole-milk powder of 38 million euros, total operating profit in Europe rose by 42 percent to 230 million euros. Operating profit as a percentage of revenue increased to 5.9 percent (2006: 4.5 percent). In Asia, revenue rose by 12 percent to 977 million euros (2006: 873 million). Operating profit was down 14 percent to 85 million euros (2006: 99 million) due to the fact that the higher cost of raw materials was not fully covered by higher selling prices, and an increase in advertising and promotional expenses. In Asia, operating profit as a percentage of revenue fell from 11.3 percent to 8.7 percent.

In the other regions, revenue was up 8 percent, rising to 338 million euros (2006: 314 million). Key countries are Nigeria and Saudi-Arabia. Operating profit showed a 15% drop in this region, from 36 million euros in 2006 to 30 million euros in the year under review. Again, the cause lay in the fact that the high cost of raw materials could not be fully incorporated in the selling price. In the other regions, operating profit as a percentage of revenue was down from 11.5 to 8.9 percent.