Basic dairy products and price competition in infant nutrition putting pressure on profit

• Revenue declined by 0.8 percent excluding currency effects and disposals
• Operating profit under pressure due to low prices for basic dairy products in comparison to the guaranteed price paid for members’ milk
• Price competition in infant nutrition in Asia putting pressure on volume and margins
• Negative trend in added value volumes underlines the importance of the transformation process currently underway
• Transformation and restructuring costs in the first half-year amount to approximately 30 million euros
• Operating cash flow increased from 29 million euros to 186 million euros, primarily due to working capital improvements
• Milk price dropped to 36.74 euros per 100 kilos of milk (-4.2 percent)
• Milk supply dropped to 5,356 million kilos of milk (-1.5 percent)

Hein Schumacher, CEO Royal FrieslandCampina N.V.: “In the first quarter of 2018, similar to the last quarter of 2017, FrieslandCampina faced low prices for basic dairy products, which insufficiently compensated the guaranteed price of milk paid by the Company to member dairy farmers. This puts pressure on the Company’s results. There was a recovery in the second quarter. Strong price competition for infant nutrition in Asia is challenging us to fight for our market position. This requires additional investments and a nimble organisation. In part for this reason, the organisation structure was adjusted effective on 1 January 2018 and an intensive transformation programme is underway. This enables us to operate faster in the market and to structurally lower costs.”

As part of the transformation programme non-profitable activities are being reviewed. For example, the supply chain network was reviewed and an announcement was made to close down two production facilities in France. The costs involved in these closures were recognised in the first half-year. Together with other restructuring initiatives, 30 million euros in transformation and restructuring costs were recognised.

Operating profit in the first half of 2018 amounts to 177 million euros, 35.6 percent lower compared to the first six months of 2017. Currency effects had a negative effect of 21 million euros on the operating profit. Without currency effects, the operating profit is 28.0 percent lower than in 2017.

In the first quarter of 2018, similar to the last quarter of 2017, the loss on basic dairy was substantial to the amount of approximately 135 million euros. In addition, severe price competition in Asia for the infant nutrition market had an adverse effect on operating profit. The trend in the second quarter results is positive, but insufficient to offset the backlog created compared to the first half of 2017. The results of the Consumer Dairy and Ingredients business groups, adjusted for currency effects, are showing a stable trend. Furthermore, the abovementioned transformation and restructuring costs are impacting the result.

In comparison to the first six months of the previous year, the milk supplied by member dairy farmers decreased in the first half-year 2018 by 79.5 million kilos (1.5 percent) to 5,356 million kilos of milk. To ensure that phosphate production in the Netherlands remains below the phosphate ceiling, the system of phosphate rights for dairy livestock went into effect on 1 January 2018. As a result of this measure, the number of dairy cattle held by member dairy farmers in the Netherlands has decreased and as a consequence also the milk supply.

The pro forma milk price for the member dairy farmers over the first half-year of 2018 decreased by 4.2 percent to 36.74 euros per 100 kilos of milk exclusive of VAT (first half-year 2017: 38.37 euros). The milk price that FrieslandCampina pays member dairy farmers on an annual basis consists of the guaranteed price, the annual performance premium, the meadow milk premium, the special supplements premium and the issue of member bonds.

On 1 September 2018 at the latest, FrieslandCampina will distribute an interim payment in the amount of 0.41 euro per 100 kilos of milk (exclusive of VAT) to the member dairy farmers of Zuivelcoöperatie FrieslandCampina U.A. This payment is 0.76 euro lower than in the first half-year of 2017. The interim payment represents 75 percent of the pro forma performance premium over the first half year.

The expectation is that in the second half of 2018, global milk production will once again increase due to the relatively high milk prices. The long-term drought in Northern Europe has a negative effect on feed production. This may put the growth of milk supply somewhat under pressure in the fourth quarter. The demand for dairy on the global market will probably remain high, thanks to strong economic growth in countries that import dairy products, such as China, and countries in Southeast Asia and the Middle East. The high oil prices throughout the world show that there is economic growth. On this basis, it is safe to assume that the demand for dairy products will continue to increase.

Negative weather conditions, political developments in the European Union and potential problems in international world trade, such as creating trade barriers or higher import duties in key importing countries, could put milk prices under pressure.

FrieslandCampina does not make any specific pronouncements concerning the company’s result for the full year 2018.