Inter­view with the Manage­ment Team

Integrated Annual Report 2019

Integrated Annual Report 2019
Message from the Elected Officers

“We’ve already achieved a lot.”

The coronavirus presents the whole economy with an unprecedented challenge. In these difficult times, the DMK Group is benefiting from the transformation it undertook in the last few years. CEO Ingo Müller and CFO Dr Frank Claassen look back on 2019 and talk about their plans for the company’s future.

No one could have foreseen the economic impact that the coronavirus will have. How hard will it hit DMK?

Müller: As a player in the food industry, we reacted promptly to the spread of the coronavirus and took necessary precautions. We set up a task force that continuously monitors and assesses the current situation and initiates action accordingly. That way, we are ensuring that we will do the right thing at DMK in this volatile situation. The developments are extremely dynamic and it reliable forecasting is difficult. We have set up a coronavirus task force at DMK whose members discuss developments every day and which keeps in contact with public authorities and industry associations. Our goal is to be as well prepared as possible for all eventualities. The task force is also in close contact with suppliers and service providers to maintain supply chain security as effectively as possible.

My thanks go in particular to our employees, who do all that lies in their power on a daily basis to ensure business as usual despite the difficult circumstances. Likewise, I have an enormous respect for our farmers and all the other farmers in the country who are protecting the food supply in this situation. The importance of promoting and protecting domestic agriculture has become clear to see. The exceptional situation caused by the coronavirus demands a particularly high level of solidarity among the people at large. This essential “we feeling” is in our DNA as a cooperative. I’m proud that we at DMK can do our bit to make sure people get through these times safe and sound.

Claassen:As things stand today, we should weather the crisis in good shape. Of course, no one knows what will happen tomorrow. However, we have prepared for a broad range of scenarios. In the best case, the situation will ease and normality will gradually be restored. In the worst, the crisis will continue or deteriorate. That could result in tough measures. We must all be aware of that. But we are very well prepared for the conceivable scenarios and will be very flexible in our response.

In the past, you frequently mentioned that you would make major changes in 2020. Have you started yet?

Claassen:I would say that we made major changes in 2019 as well. However, in past years we were kept extremely busy just making DMK fit for the future. We had to initiate a large number of projects to ensure greater transparency and thereby introduce improved steerability into the company. We also made a lot of investments. That was naturally a major drain on our resources.

Müller: Our goal is still clear: to get away from being a pure standard product-based player and move into higher-margin products. For this reason, we continuously put new products on the market. Two new varieties stand as examples: Kalder Kaffee “amazingly strong” and “with oats”. We will place our protein-rich MILRAM brand products under a common conceptual umbrella aimed at the topic of health. More varieties of ice cream will come out under the MILRAM and Baileys brands. We’re also keeping up our activities abroad: we’re expanding the Russian site and have increased our share in the flourishing whey derivatives business at DTV Nutrition to 100%. We’re pleased to have got the factory in Strückhausen certified for China.

“Our goal remains clear: to get away from being a pure standard products-based player and move into higher-margin products.”

Ingo Müller, CEO of the DMK Group

How is the milk price doing?

Müller:2019 made huge demands on us all, the farmers, the DMK Group’s employees and the entire industry. Our milk price was not where we wanted it to be in 2019. However, by the end of the past year we had finally got closure on a number of topics that weighed heavily on us. We’ve completed DMK’s fundamental restructuring.

Claassen: We paid above the average milk price in 2017 and almost up to the average in 2018. In 2019, we then dropped below it for reasons we are all familiar with. We want to close this gap again in the current year and return to the average milk price.

The farmers will be glad to hear it. How does the balance sheet for 2019 look overall?

Claassen: We generated a turnover of 5.8 billion euros in the DMK Group. To compare, in 2018 the figure was 5.6 billion euros. Our equity ratio is stable at around 30%. The net profit for the year at Group level is around 24.5 million euros. That’s a solid result for a year of restructuring.

Müller:The agricultural industry is under enormous pressure. And not just from one side, but from several at once. Consumers’ and food retailers’ demands are constantly rising: GMO-free, organic, low fat, high protein, everything in environmentally friendly packaging but still secure and convenient. Young consumers have other wants on top of that: vegan products, environmental protection and resource-conserving production. We can’t ignore our consumers’ wishes and have no desire to do so. Quite the reverse, they present us with enormous opportunities. We’re therefore happy to do all these things, as a company and on the farms. However, it can't be done without an effort, and we want to be rewarded accordingly. We at DMK play our part: As a provider of food for consumers and a supplier to food retailers – but above all as a cooperative of farmers who not only provide food, but also want to make a living from it themselves.

Why were the investments so high? Wouldn’t the money have been needed elsewhere?

Claassen: The investments were absolutely essential. Last year we invested around 145 million euros in a new factory in Strückhausen which produces baby milk powder for the Humana brand. The spray tower in Beesten also went into operation successfully at the beginning of the year.

Müller: It's true, the factory in Strückhausen and the spray tower in Beesten cost us a great deal of cash in 2019 and earlier years. But we will earn money with both sites in the current year and still have a capacity buffer so that we don't have to make investments again immediately if Strückhausen is working to full capacity. In addition, we have now consolidated the ice cream division. Above all, however, we had to cope with an enormous drop in the milk volume in 2019. We mastered this as well by decisive action and I can say in all honesty that we have made DMK future-proof.

"We will still be the farmers’ company.”

Ingo Müller, CEO of the DMK Group

What role did the loss of milk volume play, and what other problems arose? How did you handle them?

Claassen: We lost around 1 billion kilos of milk at the start of the year 2019. That presented us with a huge challenge and affected virtually every area of the company. However, we managed to absorb the loss by closing factories and introducing toll production models. Both measures cost money, but they safeguard our competitiveness.

We also drove forward consolidation in the ice cream division. The key issue here was to concentrate it at two sites: Everswinkel and Prenzlau. We’re going to sell the factory in Waldfeucht-Haaren. At the same time, we’re increasing production capacity in Everswinkel from the present 65 million litres of ice cream to 100 million litres in the future. We’ll be producing the same volume of ice cream at just two sites. This investment will pay off quickly.

What are the next steps? Where will the road to 2030 take us?

Müller: We’ll still be the farmers’ company. And we will stand up for our farmers – including in price negotiations with retailers. We’re better positioned for that than we used to be, because we know that we’re no longer a simple raw milk processor, but a modern food industry player. We therefore won’t accept prices unless they ensure that we can pay our farmers an adequate price for their milk.

With the sector strategy, we are concentrating our forces within the dairy industry. We’ll pursue our objectives rigorously. We’ll set our standards as an industry ourselves and won’t allow ourselves to be driven by politics, we’ll decide for ourselves how we design our supply relationships and won’t have them dictated by the politicians. We’ll engage actively ourselves and with a powerful voice in the dialogue with consumers, the political sphere and media, and place the debate on a sound footing with transparent information.

Claassen: We still have a lot of work ahead of us. We have to fine tune the smooth steering of our processes. We have make sure that our most profitable products are produced in sufficiently high volume. Our sweeping restructuring programme comes on top of that. Unfortunately, the market hasn't helped us particularly in 2019. But after all, our strategy is aimed at making us less dependent on short-term market fluctuations. For example, by offering more high-margin products and less standard merchandise.

You set yourself the task of spending as little money as possible during the transformation. Are you sticking to that in 2020?

Müller: The high-investment phase is over for the time being. We've done our homework for 2020. We’ll continue to economise, and the investments of past years are starting to pay off. That said, particularly in view of the general conditions we need to remain cautious. Forecasts are problematic these days against the background of the coronavirus pandemic.

Claassen:I would say that our brief is to spend money only where it is really used wisely. Essentially, we still have our foot on the brake, especially in the area of human resources. We’re still not hiring where we can avoid it, we want to continue to use natural fluctuation. We’ve managed over the past months to fill 70% of vacant positions with in-house staff members, or to do without them entirely.

What else happened at DMK in 2019?

Müller: For example, we developed the successful Milkmaster Programme further. We made it even more clear-cut at the beginning of the year. We’re ensuring more transparency in milk price accounting and have updated the bonuses for GMO-free milk production, Milkmaster, logistics and cooling costs. We’ve also got our digital interface myMilk to the starting gate. Forms, news and individual information for each farmer can be downloaded there in just a few steps. We’re also working on a fixed price model which can be used for hedging certain volumes of milk on the milk futures exchange via DMK. This allows us to create significantly more planning security on request.

“We have to manufacture standard products cost-effectively in large volumes and at the same time produce and sell specialities with high margins.”

Dr Frank Claassen, CFO of the DMK Group

Claassen: Another issue is procurement. This is where we can reduce costs fastest, to gain time for long-term optimisation programmes. We’re scrutinising the whole procurement function with our Pacesetter programme. We’re redesigning many supply relationships and service contracts and bundling purchasing volumes. That way, we can secure better terms in price negotiations.

We are of course doing all this to support our 2030 Vision. We won’t succeed by economising alone, because we have a challenging business model. We have to manufacture standard products cost-effectively in large volumes and at the same time produce and sell specialities with high margins. That’s why the manageability of  the company plays the leading role for me. The task is to improve the in-house organisation of processes, skills and competences. We have now launched financial transformation under the title of One Finance which will help us here..

What are your goals for 2020?

Claassen: We want to help DMK to get through the coronavirus crisis unscathed. Because even once the real consequences have abated, the economic ones will not be over. We’re all working at full steam on that – nevertheless, we still have to accept that we won’t escape without consequences. But we’ll hit the ground running after the crisis and push on with our change projects.

Müller: The majority of our manufacturing still relates to standard products, which are subject to greater price fluctuations than branded ones. We hoped that prices would go up because of the drought, but this was not the case. For this year, we expect stable milk production in Germany, because herds are smaller and requirements are more stringent due to the German Fertiliser Ordinance. There are also shortages in the feed supply.

Production will probably be increased, particularly of cheese. Butter and skim milk powder manufacturing is likely to be scaled back. Milk volumes are expected to rise by one percent across the EU. Global milk production will continue to grow, albeit at a slower rate than in previous years. Other factors remain uncertain, such as the negotiations between the EU and the UK after Brexit and the further increase in protectionism on the global level.

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Integrated Annual Report 2019