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FrieslandCampina profits plummet

5 Sep 2016

FrieslandCampina saw profits plummet by 16.7% over the first half-year 2016 to €160 million compared to the same period in the previous financial year as basic dairy products were produced that had to be sold below cost.

FrieslandCampina saw profits plummet by 16.7% over the first half-year 2016 to €160 million compared to the same period in the previous financial year. Due to the significant increase in member dairy farmers’ milk production (+11.9%), basic dairy products such as milk powder, foil cheese and butter were produced that had to be sold below cost, the company said. Growth in volume was realised in infant nutrition in China and South-East Asia, dairy-based beverages in South-East Asia and Eastern Europe and ingredients, with improved results.

Revenue decreased by 2.2%, down to €5,522 million. The decrease in revenue due to lower sales prices was largely compensated by higher volume. The milk price for member dairy farmers decreased to €30.24 per 100 kilos of milk (first half-year 2015: €36.48) due to the lower guaranteed price for raw milk and the lower value creation (performance premium and reservation in member bonds). The interim pay-out amounts to €1.170 per 100 kilos of milk (2015: €2.018).

Operating profit decreased by 18.8% to €255 million over the first half-year 2016 (first half-year 2015: €314 million). Currency translation effects had a negative effect of €30 million on operating profit.

Gross profit decreased by 5.6% to €938 million (first half-year 2015: €994 million) because sales prices incurred a quicker decrease than the cost. Sales increased in volume; however, margins were at a lower level than in the first half year of 2015. Due to the high milk supply and the lagging demand, basic products were mostly sold under cost. Direct sales of raw milk in the spot market also showed a loss.

Profit over the first half-year 2016 decreased by 16.7% to €160 million (first half-year 2015: €192 million). “We can look back on a special first half year,” said Roelof Joosten, CEO of FrieslandCampina. “FrieslandCampina is doing well in Asia and with ingredients, realising a fine 2.3% growth in volume with added value products. Due to the increased milk production, we had to process significantly higher volumes of milk into basic dairy products that we could not sell at a profit in the market. This is visible in the 17% decrease in both profits and milk price for the member dairy farmers.”

Milk prices have bottomed out, the company believes. In the second half year of 2016, worldwide supply of milk is expected to decrease compared to the first half year. Demand for dairy products is expected to only show a modest increase over the second half year of 2016. This is due to the limited purchasing power in many oil-exporting countries, political instability in many countries, the limited demand for dairy materials in China and Russia continuing to block the European Union’s dairy products, FrieslandCampina said.

The effect of the European Commission’s measures to reduce milk production in the European Union based on support measures is as yet unclear, the company continued. The impact of possible voluntary restriction of production of cooperatives or producer associations is also unclear. The Netherlands is expected to impose measures to reduce phosphate production in cattle farms to fall under the level of 2 July 2015. It is as yet unclear whether or not this may lead to a reduction of the milk production in 2016.