FrieslandCampina blames pandemic and restructuring for 2020 profit drop of more than 70%

By Jim Cornall

- Last updated on GMT

As a result of the lower profit, member dairy farmers will not receive a supplementary cash payment for 2020.  Pic: FrieslandCampina
As a result of the lower profit, member dairy farmers will not receive a supplementary cash payment for 2020. Pic: FrieslandCampina

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In 2020, Dutch dairy cooperative FrieslandCampina said its operating companies in 28 of the 41 markets realized strategic revenue growth in comparison to 2019. E-commerce revenue grew by more than 50% worldwide.

Reported net revenue in 2020 decreased by 1.4% to €11.1bn ($13.36bn).

After a strong start in the first quarter, the business group Consumer Dairy’s revenue dropped by 3.3% to €5.735bn ($6.91bn) as a result of the coronavirus pandemic. There was strong growth in the sale of consumer brands through the retail channel, while the lack of out-of-home activities and negative currency translation effects put revenue under pressure.

The continued closure of the border between China and Hong Kong caused Specialised Nutrition’s revenue to decline by 7.1% to €1.119bn ($1.35bn). In spite of the fact that Ingredients was also affected by a decrease in foodservice and out-of-home demand, its revenue grew by 5.3% to €1.816bn ($2.19bn), in particular driven by the sale of caseinates and whey proteins for sports nutrition for example. The revenue of Dairy Essentials grew by 3.4% to €2.467bn ($2.97bn), primarily due to the sale of cheese to industrial buyers and the retail sector.

As a result of the direct and indirect impacts of the corona pandemic and the €106m ($127.6m) restructuring charge, operating profit dropped by 38% to €268m ($322.7m) in 2020. Excluding the restructuring charge and currency translation effects, operating profit fell by 10.9%.

Consumer Dairy’s operating profit decreased by 12.1% to €255m ($307m) as a result of the pandemic, mainly due to the loss of profitable out-of-home sales, negative currency effects in Nigeria and restructuring charges in Germany. Underlying profitability (before restructuring costs and exceptional items) increased due to growth in retail and e-commerce, positive sales price developments and mitigating measures.

Specialised Nutrition’s operating profit declined by 36.2% to €166m ($199.9m), primarily due to the difficult market conditions in Hong Kong. In addition, higher production costs put pressure on margins. Because the lactoferrin shortage, which held back the business in 2019, was resolved, Friso Prestige grew its revenue in China and significantly improved its market position.

The business group Ingredients experienced a slight increase in operating profit, by 0.7% to €140m ($168.6m). Ingredients' underlying result was better because a restructuring charge for the closure of the milk powder plant in Dronrijp was booked in 2020. The improved result was due to profit growth in the commercial segments, including resolving the shortage of lactoferrin, as well as cost savings in the supply chain.

Operating profit of Dairy Essentials decreased to -€202m (-$243m), including restructuring charges taken in 2020 for plant closures in the Netherlands and Belgium. In addition, the pandemic caused bulk dairy prices to drop by more than 30% in the second quarter, only to recover slowly during the year, and sales in food service and exports declined. This impact was partially mitigated by cost controls and a better product mix, which is evident from, among other things, strong growth in cheese sales.

Due to the lower operating profit, including the restructuring charge, and a higher effective tax burden, FrieslandCampina's profit in 2020 decreased by 71.6% to €79m ($95m).

Cash flow from operating activities increased by €170m ($204.6m) to €737m ($887m). The increase is due to the enhanced focus on cash flow, particularly working capital, during the crisis, as a result of which stocks and outstanding receivables decreased. In 2020, the cash flow used for investments and acquisitions amounted to -€443m (-$533m), including proceeds from disposals amounting to €168m ($202m).

As a result of the lower profit, member dairy farmers will not receive a supplementary cash payment for 2020, and no member bonds will be issued. The interest on member bonds will be paid, however, and amounts to €46m ($55m).

Hein Schumacher, CEO Royal FrieslandCampina N.V., said, “The direct and indirect impacts of the corona pandemic that really became evident within the company starting in March, overshadowed the excellent results in the first quarter. FrieslandCampina’s operating profit was hard hit by this. In addition, the accelerated implementation of the Our Purpose, Our Plan strategy – a far-reaching but necessary decision required to successfully operate as a company in the future – resulted in a restructuring charge of €106m in 2020. Both factors led to a significantly lower profit as a result of which no supplementary cash payment over 2020 can be made to members and no member bonds can be issued. A huge disappointment for our members.”

Schumacher said the 2020 results are also disappointing for employees.

“A great deal of hard work was done under very difficult circumstances to keep the production and sale of our dairy products on track during the corona crisis,”​ he said.

“The resilience of the entire organization, from the member dairy farmers up to our salesforce, was tremendous in 2020. Our production facilities continued to operate and during the lockdowns our salesforce quickly switched from out-of-home to retail and e-commerce channels. E-commerce revenue grew considerably worldwide. We resolved the lactoferrin shortage for our infant nutrition business, which had been an issue for us in 2019. We also introduced a number of relevant innovations to the market last year. To mention a few examples: Vivinal Milk Fat Globule Membrane, a functional ingredient for infant nutrition in support of immunity and brain development. In Hong Kong Friso Prestige Organic, infant nutrition made using ingredients from milk produced by our organic member dairy farms. A number of functional nutrients for seniors under the brand name Biotis. And finally, in Nigeria, Milky Pap, a nutritious and affordable dairy product that helps counter malnutrition.

“While there is light at the end of the tunnel now that vaccination programs are getting under way throughout the world, for the next couple of months we are still totally immersed in the corona crisis. In the first half of 2021, the results will therefore still be under pressure. However, I am convinced that the acceleration of our strategy, combined with structural cost savings, will enable us to better absorb shocks and increase positive impact in the post-corona period.”

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