The repair work at FrieslandCampina has almost been completed. In the past anniversary year, there were deep cuts in the workforce and several factories closed. With the aim of boosting profitability. The restructuring plan appears to be bearing fruit, as evidenced by the strongly improved half-year figures. The wild dairy market does lend a hand, however. The top of the company cannot breathe easy and take a long holiday this summer. The uncertainties are great and that gives the necessary headaches. We put six in a row.
The past few years have been turbulent for FrieslandCampina, to say the least. The dairy cooperative saw hordes of members leave and results plummet. A reorganization was necessary to turn the tide. About 1.000 employees were herded to the exit. Tensions ran high within the cooperative ranks. The divestiture of the German consumer activities last month appears to be the final step in the repair work. According to CEO Hein Schumacher, the restructuring plan is now almost ready. This concludes a difficult chapter.
The sun is now shining again at the head office in Amersfoort. Well, a very watery sun then. The spacious doubling net profit In the first half of 2022, the top of the dairy group is doing well. Members also benefit from a high guaranteed price, although a large part of this goes up in smoke due to the equally high feed costs. In the midst of social unrest and great uncertainty in the dairy market, there is no time to celebrate profits. FrieslandCampina also does not yet dare to pay out part of the additional payment. The uncertainties are too great for that, according to the commentary. We list a number of headaches below.
1. Nitrogen policy as the 'sword of Damocles'
Nitrogen policy is by far the biggest challenge. The planned national livestock reduction of 30% is not only a headache for members, but also for CEO Hein Schumacher and associates. A significant part of the Dutch milk lake appears to be evaporating. Overcapacity is a threat, not only at FrieslandCampina. This explains why almost every milk processor is eagerly looking for new suppliers. The nitrogen policy will have to be further refined in the coming months. There is now an impasse between the government and a large part of the agricultural sector. FrieslandCampina clearly sides with the farmers. The discussion will undoubtedly flare up again after the summer recess. Based on the government's inflexible attitude, it currently seems unlikely that even the sharp edges of the policy will be auctioned. FrieslandCampina focuses on innovation and puts its money where its mouth is. In a nitrogen pilot – together with Lely and Rabobank – they hope to be able to present an alternative way of reducing emissions. The government will probably think this is wonderful, but will probably stoically put the knife in the livestock. This threatens an accelerated outflow of member dairy farmers in the coming years.
2. High outflow of members
The high outflow of members is a tricky point in any case. In the past twelve months, no fewer than 284 members have left for another processor. This is considerably more than in recent years and also a record number. The DMF scheme is far from full and will also motivate dairy farmers to leave in the coming years. In the meantime, FrieslandCampina is also trying to recruit new members. "There is interest. We are currently in discussions with prospective members," Schumacher said today (July 20) during the press conference about the half-year results. He does not dare to venture into numbers. However, the search is also taking place in Belgium and Germany. In the second half of this year it should become clear how many new members FrieslandCampina has managed to attract. In the meantime, the outflow is likely to continue. However, the number of departures will probably be lower than in the past twelve months. You would think that a large number of the dissatisfied members have now packed up. It does not seem likely that FrieslandCampina will be able to present a positive membership balance in the coming years. After all, in addition to leavers, there are also stoppers.
3. Cost inflation in the chain
In contrast to the increase in turnover and profit, FrieslandCampina has to deal with cost inflation. Prices for fuel, container transport, energy and packaging materials are sky high. "Not all of these can be passed on to our customers," Schumacher indicates. Profit margins in the retail channel in particular are under pressure. "We have to balance between maintaining volumes and prices," Schumacher said. The game is played hard in the chain. At the beginning of May, FrieslandCampina temporarily stopped milk deliveries to Jumbo. The wholesaler blamed it on supply problems, but according to the dairy cooperative, that was not the case. The bottom line was the price. Although prices across the entire commodity market have fallen somewhat in recent weeks, cost inflation will remain an issue in the second half of this year. On top of that, the disruptions in the supply chain due to corona and the war in Ukraine still play a role.
Henry Schumacher
4. A drop in demand is lurking
Consumers had to pay 14% more for dairy products in June than a year earlier, according to figures from Statistics Netherlands. This means that dairy, together with meat, is one of the drivers of inflation. According to Schumacher, the top has not yet been reached. "I am convinced that food inflation will increase further in the coming months." This threatens to lead to a drop in demand, of which the dairy cooperative is already receiving the first signals. A logical consequence is that A-brands are exchanged for private labels. This would be a loss for FrieslandCampina, which focuses heavily on branded dairy products that are generally more profitable. FrieslandCampina hopes to combat a drop in demand through additional advertising campaigns. The budget for this already increased by €24 million to €267 million in the first half of this year and will be further increased in the coming months. "We will need this to dampen a drop in demand," says Schumacher.
5. No pro-forma additional payment, because the dairy market is showing fractures
Despite the significant increase in profit, FrieslandCampina does not dare to make a pro forma additional payment of €0,69 per 100 kilos. "The uncertainty for the second half of this year is too great. The last thing we want is to come back to this. As has sometimes happened in the past," Schumacher explains the decision. The dividend will therefore remain stored in the safe for the time being. The uncertainty is fueled by the dairy market, which has shown cracks in recent weeks. This while the guaranteed price is still rising and will probably increase further before August. FrieslandCampina emphasizes that the profit is not yet in the bag. There are also windfalls. For example, sales of baby milk powder in China are on the rise again after years of decline. This is thanks to improved access to Chinese provincial cities. Especially now that Friso remains on board, that is a bonus.
6. Energy and personnel crisis also affects FrieslandCampina
Finally, FrieslandCampina also has to deal with the problems that almost the entire business community faces: energy and labor shortages. "We are also struggling with staff shortages," says Schumacher. It is a common problem that production workers are not available for the taking. FrieslandCampina also says it is prepared for scenarios in which gas shortages may arise this winter. This would be a major blow to dairy processors overall. "Circumstances force us to be prepared for this," Schumacher said. If this is unexpectedly necessary, the costs will increase considerably. Just like the emissions, he warns.