FrieslandCampina 2017 results reveal higher revenues but reduced profit

It attributed the increase to higher sales prices and the inclusion of Engro Foods in Pakistan, which it acquired, in the consolidated statements.

Profit decreased by 37.3% to €227m ($279.5m).  In addition to negative currency translation effects, lower profits were attributed to write-offs of assets in China and Germany, and restructuring costs.

The higher milk price was largely offset by increased revenues, however insufficient to fully compensate increases in other raw material and packaging costs. This put the margins, particularly in consumer activities, under pressure.

Positive trends

Sales volumes of consumer products in Southeast Asia and in Friso infant nutrition in China showed positive trends. The same applies to Africa in general. Also, the sale of caseinates and ingredients for the pharmaceutical industry is growing, the cooperative said.

The milk price for member dairy farmers increased by 24% to €40.01 ($49.27) per 100 kilos of milk (excluding VAT, at 3.47% protein, 4.41% fat and 4.51% lactose) as a result of a higher guaranteed price for raw milk.

Hein Schumacher, CEO of Royal FrieslandCampina, said 2017 was a challenging year.

“On the one hand, we have seen a positive increase in revenue and a significant increase in the milk price for our member dairy farmers,”​ Schumacher said.

“On the other hand, write-offs of assets in China and Germany, pressure on volume in Europe and restructuring charges reduced profit. We implemented changes to our organization structure last year that enable us to respond faster and with a greater focus to the demands of consumers and customers. This has created a new basis for growth.”​

FrieslandCampina said 2017 was a year of recovery of dairy prices, and will especially be remembered as the year of butter.

Market prices for cream and butter reached a record high in the third quarter, while the price for milk protein, in the form of skimmed milk powder (SMP), declined. This caused a significant increase in SMP stocks, demonstrating the high volatility of the dairy market.

Operating profit and profit decline

Operating profit in 2017 decreased by €119m (21.1%) to €444m ($546.8m).

This decline was caused by negative currency translation effects, one-off costs and failure to fully pass on the increased cost to higher sales prices. Currency effects (particularly the Nigerian naira and the Chinese renminbi) had a negative effect on the operating profit of €36m ($44.3m).

The cost of goods sold increased by 12.3% to €10.2bn ($12.6bn). This was mainly due to the higher price for raw milk and the increased prices for other raw materials. As a result, operating profit is under pressure because price increases can only be transferred in some part to the sales prices, or with a delay.

The total compensation paid to member dairy farmers for their supplied milk increased by 22.6% in 2017, the highest total compensation paid to member dairy farmers since FrieslandCampina’s inception.

Outlook

FrieslandCampina said it expects global milk production to further increase in 2018.

In the Netherlands, milk production is expected to remain virtually stable due to phosphate legislation. The demand for dairy products in the EU is expected to increase somewhat, as a result of lower market prices.

It is expected that the demand for dairy products in Asia, particularly in China, will further increase due to positive economic growth and low global market prices.

Demand in other regions is also expected to increase, although to a lesser degree. The dairy market is expected to regain its balance by mid-2018 and milk prices are expected to stabilize.

FrieslandCampina said its revenue is expected to be under pressure in the first half of 2018 due to lower sales prices for basic dairy products. Another key factor is the development of the euro in relation to the US dollar and in relation to Asian currencies.

The cooperative said it is key to achieve a balance between the volume of supplied milk, FrieslandCampina’s processing capacity and market demand.

FrieslandCampina’s Members’ Council approved a temporary conditional measure on November 21, 2017 to regulate milk supply. This measure can be activated during the period of January 1 up to and including June 30, 2018, should the expected supply of milk by member dairy farmers exceed FrieslandCampina’s processing capacity.