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Combined Annual Report and Sustainability Report 2018

Extract from the Group Management Report of Deutsches Milchkontor eG 2018

Dairy market influenced by drought

In addition to seasonal volatility, the dairy market was overshadowed in 2018 by the effect of the hot weather and extremely dry conditions on the volume and quality of feed. In total, dairy farmers in Germany nevertheless supplied 1.7% more milk and in the EU 0.8% more: a higher yield from the cows led to an increase in the milk collection. The dairy herd and number of farms continued to decline. Milk prices tracked the trend in skim milk powder, cheese and whey powder revenues, which were weaker than in the previous year. Conventional milk (4.0% fat and 3.4% protein) fell to an average value of 33.82 cents per kilo.

Product markets showed an uneven development in 2018: while the butter market shrank slightly under price volatility, the cheese market grew, particularly in the areas of processed cheese, mozzarella and soft cheese. Cheese prices softened again somewhat by the end of the year after a positive phase. Dried milk products saw growth in the production of whole milk and buttermilk powders, while skim milk production went down. In the light of increasing price rises, the EU Commission succeeded in selling the majority of its intervention stocks of skim milk powder. Divergent trends were to be observed in the production of the “white line” dairy range. The market for drinking milk dropped again in the year under review, with a decrease of 3.1%. Retail grocery sales in the ice cream segments rose year on year by €236.5 million. The German baby food market shrank after the previous years’ growth by 9.2%, to a sales volume of €954.5 million. The market for milk formulae fell by 17.3%, while the solid baby foods market remained more or less stable year on year. Exports of German dairy products also remained stable overall year on year, with slight increases in cheese and skim milk powder exports.

Significant fall in milk volume

One of the most significant factors in the 2018 fiscal year for DMK was the resignation of dairy farmers from Deutsches Milchkontor eG, with its accompanying reduction in the milk volume. These changes affected planning, production and marketing. The company has responded with actions including factory closures, cooperation and production agreements and external purchases of raw milk. This was also the context for portfolio adjustments towards higher-value areas such as the business with the MILRAM brand, which grew in 2018.

In the year under review, DMK completed the MOVE restructuring programme, which had been launched in previous years for the purpose of Group reorganisation. MOVE had taken major steps in the areas of controlling, organisation and communication. In May 2018, DMK increased its stake in the Russian cheese manufacturer IKAM Richart Holding GmbH to 100%. DOC Kaas B.V. was integrated into the in-house SAP systems landscape as a pure toll manufacturing company.

Preferred partner to retail and industry

Within the framework of the 2020 strategy, DMK aims to position itself as a preferred partner to retailers and industrial companies with an attractive product portfolio and tailor-made services, thereby enabling it to pay competitive milk prices. For this purpose, the company is focusing on such activities as increasing value added by optimising its product range, developing customised solutions and improving its internal efficiency. In the medium term, it plans to achieve market leadership in Germany with a strong product portfolio. Its goal here goal equates to a strong and profitable position in the home market, local roots with a regional image, excellent infrastructure and quality of supply, and a relevant product range. The home market serves as the linchpin. The business is supported by focused international activities and a significant share of exports.

The company started initial activities to develop the long-term DMK Group 2030 strategy during the year under review. This should secure DMK’s ability to address predictable developments early and consider future requirements accordingly. For the year 2019, the focus remains on increasing value added by portfolio optimisation measures, product development, and internal efficiency improvements in the domestic and international business with consumers and industry customers.

 

Slight upturn in consolidated net income

The 2018 fiscal year turned out better than the previous one, as demonstrated in the consolidated net income and other areas: Overall, despite the impairment of €6.2 million on financial investments, the consolidated net income for the year has improved slightly from €29.6 million in 2017 to €30.6 million in the year under review. DMK has thus achieved the target bandwidth for net income of €30 to €35 million.

DMK benchmarks its average price of conventional milk against that of a defined peer group of eleven dairies. For 2018, the company earned a benchmark price of 33.57 cents per kilo, just short of the peer group’s price of 33.71 cents per kilo. This price does not meet the internal goals we set. Against this background, the Group management is not satisfied with the way the reporting period went, but considers itself to be on the right track for further business development.

The sales forecast for 2018 published in the previous year’s annual report was €5.7 billion. With prices slipping in general, the company fell slightly short of the forecast for fiscal year 2018 and generated sales of €5.6 billion. Apart from lower milk volumes, this was due to the altered price situation. Overall, sales declined across all product groups with the exception of baby food, fresh dairy products and UHT products. Export sales likewise dipped slightly year on year, essentially due to falling prices. Sales revenues in a number of business areas also fell in the year under review because of the unfavourable trend in prices. The consolidated equity ratio for 2018 was 30.9 % on the balance sheet date (31/12/2017: 31.1 %).

 

Focus on value added continues

In the near future, the Group management expects an upturn in demand in the home market and in relevant international markets. While competition on commodities remains as fierce as ever, the trend towards high-end foods will ensure further growth in the higher-value segments, the demand for dairy products is likely to rise further, particularly in the growth regions of Asia, Africa and the Middle East. Its broad product portfolio gives DMK the chance to compensate for market fluctuations in individual products.

In view of the falling milk volume, DMK will channel the milk into the profitable product areas. The Business Unit Private Label is aiming for competitive differentiation in the volume and value added segments. The Business Unit Industry is positioning itself as a supplier that can offer reliable quality and volume for international B2B customers and will continue its policy of increasingly substituting special powders for standard powders in ingredients. The Business Unit Brand is focusing on expanding the relevance of the MILRAM brand as a full-liner for consumers and food service users. The Business Unit International is expanding its position in key countries for its growing, future-proof international business, and is working in parallel on shifting from pure exports to a business aligned with specific markets. In the baby food business, DMK will continue to go for growth and expansion and particularly aims to tap into the potential of foreign markets to increase its sales revenues. The ice cream division will continue on the course it adopted during the optimisation efforts, and expects a significantly improved trend in income as a result.

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