Difficult market conditions and one-off restructuring costs negatively affect Friesland­Campina’s 2023 results

Jan Derck van Karnebeek, CEO Royal FrieslandCampina N.V.:

“2023 was a difficult year for FrieslandCampina. Business results, particularly with respect to our global consumer dairy and Trading activities, were severely under pressure. By contrast, the Specialised Nutrition and Ingredients business groups had a good year, although this was insufficient to compensate for the disappointing results of the other two business groups. The disappointing operating profit, combined with one-off costs and higher financing charges, resulted in a negative net result for 2023. As a result, we are not providing a supplementary cash payment to our member dairy farmers. This is disappointing, all the more so given the increased costs for our members and costs for efforts to further increase sustainability at farms.

With a view to these disappointing results, we initiated a transformation, Expedition 2030, in the second half of 2023, fully focused on remaking FrieslandCampina into the leading dairy company it has always been.

The core of Expedition 2030 consists of seven, powerful business groups, each with its specific markets, product categories, strategy and the required people, competencies and investment levels. FrieslandCampina’s strength lies in the diversity of our business. We have linked the new business structure to an integral cost reduction programme to ensure that the business groups, our production environment and support services, have a fitting cost structure. Unfortunately, this means that over the next two years 1,800 jobs will be eliminated worldwide. This was a difficult, but necessary decision and we will do everything in our power to effectively support the affected employees in this process.

We will also continue to focus on making our dairy chain more sustainable. We are doing this for our owners – our member dairy farmers – for our employees worldwide and of course, also for our customers and consumers, and all other stakeholders in a successful and future-proof FrieslandCampina.”

Developments

In 2023, FrieslandCampina was confronted with challenging market conditions. The 75-million-euro operating profit was negatively affected by the difference between the guaranteed price of member milk and market prices for commodity dairy products, the sale of expensive stocks in a market of low prices, and unfavourable currency translation effects. In addition, loss of consumer purchasing power due to high inflation resulted in decreased volumes and lower profit margins for branded products. As a result of these developments, volumes and result of the consumer business were under pressure, and the results of the Trading business group and the Professional business were negatively affected.

In 2023, Professional managed to strengthen its market position as a supplier of quality products to professional buyers. The Specialised Nutrition business group was successful with the Friso brand on the Chinese infant nutrition market and currently ranks fourth in this market, compared to seventh a few years ago. In 2023, the Ingredients business group was successful in the sale of high-quality proteins for adult nutrition, as well as the sale of ingredients and semi-finished products for use in pharmaceuticals and functional nutrition by DFE Pharma. In 2023, it was decided to significantly expand the whey protein isolate and Milk Fat Globule Membrane (MFGM) production capacity at the Borculo production facility in the Netherlands.

Higher interest rates and unfavourable currency translation effects negatively affected the net result. In part due to one-off restructuring costs of 136 million euros for the implementation of the Expedition 2030 strategy, a one-off charge of 58 million euros for terminating a long-term contract and an additional cost item of 30 million euros with respect to higher foreign currency exchange costs in Nigeria, the year closed with a net result of -149 million euros.

Revenue

FrieslandCampina’s revenue in 2023 dropped by 7.1 percent to 13.1 billion euros compared to 14.1 billion euros in 2022. This decrease primarily was due to unfavourable currency translation effects, sale of part German consumer activities and declining volumes in consumer markets, in particular due to high inflation. Before currency translation effects, revenue decreased by 3.2 percent.

Operating profit and net result

The operating profit in 2023 amounted to 75 million euros, a decrease of 84.1 percent compared to 471 million euros in 2022. Unfavourable currency translation effects negatively affected the operating profit. Furthermore, increased interest rates and high foreign currency exchange costs in Nigeria resulted in additional financing costs. As a result of the abovementioned one-off restructuring costs and higher financing costs, the net result over 2023 was -149 million euros, compared to a net result of 292 million euros in 2022.

FrieslandCampina invested 568 million euros in advertising and promotions in 2023, compared to 601 million euros in 2022. Selling and general administrative costs increased by 1.4 percent from 922 million euros in 2022 to 935 million euros in 2023.

Operating cash flow

In 2023, the cash flow from operating activities was significantly higher at 831 million euros, compared to 293 million euros in 2022. This increase was primarily due to substantial improvements in working capital.

Profit appropriation

For 2023, 58 million euros is reserved as the interest payment for the holders of member bonds (2022: 29 million euros), 19 million euros will be paid to the provider of the cooperative loan (2022: 9 million euros); 9 million euros will be paid to the holders of perpetual bonds (2022: 9 million euros); and 67 million euros is allocated to non-controlling interests (2022: 62 million euros). Combined with the consolidated net result of -149 million euros, this means that 302 million euros will be withdrawn from the retained earnings, including the non-controlling interest that is directly attributable to the shareholder, Zuivelcoöperatie FrieslandCampina U.A. (2022: 183 million euros).

Financial ratios

Equity as a percentage of the balance sheet total has decreased in 2023, but remains within the internal target for this ratio. The covenant guidelines for all credit facilities are met. Due to the higher interest charges in combination with the lower operating result, the interest coverage ratio has deteriorated, but it remains within the guidelines. The net debt ratio remains well within the guidelines due to the good cash flow development.

Supply of member milk

In 2023, the total volume of supplied member milk decreased by 1.4 percent in comparison to 2022; from 9,502 million kilogrammes to 9,369 million kilogrammes. This drop is attributable to a decrease in the number of member dairy farms, from 9,927 to 9,417.

Value creation for members

In 2023, the milk price received by FrieslandCampina’s member dairy farmers was 48.08 euros per 100 kilogrammes of milk. This is 16.2 percent less than the year before, when 57.35 euros per 100 kilogrammes of milk was paid. The milk price consists of the guaranteed price and extra premiums for special supplements and the meadow milk premium, the Foqus planet premium and the supplementary cash payment. Due to the disappointing result, there will be no supplementary cash payment for 2023.

Good progress on sustainability agenda

In 2023, greenhouse gas emissions from production and milk transport (Scope 1 and 2) decreased by 9.4 percent in comparison to 2022 to 588 kt CO2 equivalent (2022: 649 kt). In 2023, greenhouse gas emissions on member dairy farms decreased by 4.3 percent to 10,359 kt CO2- equivalent (2022: 10,823 kt). In 2023, the new Foqus planet Sustainable development methodology went into effect, whereby member dairy farmers receive a higher financial premium for reducing greenhouse gas emissions on the farm. The sustainability efforts of member dairy farmers on their own dairy farms are increasingly resulting in partnerships with key international business-to-business customers who are prepared to contribute to these efforts financially and this way also reduce their own footprint.

The total energy consumption in 2023 amounted to 13,499 GJ (2022: 14,823 TJ). The sale of some production facilities in Germany in 2023, and the (partial) shutdown of production facilities in the Netherlands in 2022, contributed to a structural reduction in energy consumption. 91 percent of the electricity purchased by our production facilities in the Netherlands was covered by electricity generated by our member dairy farmers; on a global basis this represents 58 percent. In 2023, another step forward was taken in valorising green energy from our own chain. For example, the company purchased 500,352 MWh (2022: 486,000 MWh) in green electricity certificates from 1,285 member dairy farms (2022: 1,194).

Of the total volume sold, 75 percent of consumer products complied with the FrieslandCampina Global Nutritional Standards (GNS) Next Level. This increase in comparison to 2022 (72 percent) is primarily due to changes in the mix of volume sold.

2024 Outlook

Market trends

In 2024, milk production is expected to continue to be under pressure in key dairy exporting regions. The projected worldwide demand for dairy is expected to grow slightly. Owing to persisting conflicts and geopolitical instability in various parts of the world, the costs for raw materials, packaging materials and transportation are expected to increase.

Expedition 2030

FrieslandCampina’s focus is on optimally valorising member milk to enable it to pay a leading milk price. To achieve this objective, the emphasis in 2024 is on implementing the Expedition 2030 strategy and a new organisational structure with seven specialised business groups. These are supported by an effective production organisation and efficient support departments.

The success of the Expedition 2030 strategy is measured in terms of three dimensions: ‘winning in the market’, ‘increasing the margin’ and ‘improving our cash position’. Success in terms of these dimensions is expected to result in the optimal valorisation of member milk. Expedition 2030 and the announced annual savings are expected to offset inflation, as well are expected to have a positive effect on the result. Owing to the uncertain market conditions, we are not providing any specific revenue and result forecasts for 2024.

Investments

With a view to future sustainable growth, FrieslandCampina in 2024 will continue to invest in strengthening and improving its production equipment and, at the same time, invest in development and innovation. In January 2024, FrieslandCampina opened a new production and distribution centre in Cikarang, Indonesia, for the production of sweetened condensed milk for Indonesia and other Southeast Asian countries. A new production facility is also under construction in Bandar Enstek in Malaysia. This site is expected to be operational by 2024 and will not only have a larger capacity but also produce a wider range of products for export to neighbouring countries. Both investments contribute to FrieslandCampina's growth in the region.

Sustainability

With the Climate Plan’s implementation, further steps will also be realised in the area of sustainability in 2024. In addition, full efforts will be devoted to cooperating with business-to-business partners, among others, to realise sustainability targets in our value chain.