February 22, 2019
Arla delivers turn-around after tough start to 2018
After a difficult first quarter, Arla came out of 2018 with improved sales and brand share as the company's performance grew stronger throughout the year, the dairy co-op said.
Arla's transformation programme "Calcium" delivered cost-savings far beyond targets for the year and thanks to a historically strong balance sheet its board of directors has proposed to pay out the entire net profit for 2018 to farmer owners.
Group revenue increased to EUR10.4 billion (US$11.8 billion) - compared to EUR10.3 billion (US$11.7 billion) in 2017 and EUR9.6 billion (US$10.9 billion) in 2016 - driven mainly by strong growth in branded sales volumes of 3.1% with a wider range of dairy products to meet consumer needs. Therefore, Arla grew its share of branded business to 45.2%, surpassing the long-term target in its Good Growth Strategy 2020 of 45%.
Arla's performance price - which measures the value Arla creates per kilogramme of owner milk - rebounded after the first quarter and improved throughout the year, ending at a full-year average of 36.4 for 2018.
By the end of 2018, the negative impact of the summer's drought in Europe was registered as expected growth in milk volumes stalled in Europe and Arla's farmer owners faced increasing feed prices. Arla's historically strong balance sheet has allowed its board of directors to propose an extraordinary one-time pay-out of the full net profit for 2018 of EUR290 million (US$329 million) to farmer owners. This will be paid out as 2.3 euro cent per kilogramme of milk each farmer owner has delivered to the cooperative.
Arla Foods chairman Jan Toft Nørgaard said: "As a farmer-owned dairy company, we care deeply about the livelihood of our farmers and we see how many of our colleagues have been affected by the drought last summer. We have this exceptional opportunity to help them without putting our company Arla at risk and I am proud that we have proposed to do so."
In 2018, Arla regained its competitiveness as the transformation and cost-savings programme "Calcium" was accelerated as a response to challenging external developments, such as the decline of the British pound and the Swedish krona as well as the historic shift in value between milk fat and protein.
Calcium aims to transform Arla into a leaner and more competitive dairy company by delivering more than EUR400 million (US$454 million) of sustainable annual savings by 2021 where EUR300 million (US$340.2 million) will be invested in a competitive milk price to the farmer owners and more than EUR100 million (US$113.4 million) will be invested back into the company to fund future growth opportunities. In 2018, Calcium delivered significantly above the initial target of EUR30 million (US$34 million) for the year as cost savings of EUR114 million (US$129.3 million) were achieved.
Commenting on 2018 results, Arla Foods CEO Peder Tuborgh said: "Early in 2018, we took decisive action by ramping up our transformation programme Calcium and I am very happy to be able to say that the whole organization has embraced the journey and therefore, we are already substantially changing the way we work, spend and invest in our business. As a result, we improved our performance as a business throughout the year and go into 2019 in a significantly better position than a year ago."
To build on its position as a leading global dairy company, Arla focuses its activities on two commercial zones, Europe and International. With a total revenue of EUR6,507 million and representing 62% of Arla's total group revenue, core brands in the European Zone performed above expectations and delivered strong branded growth of 2.5%. Milk and yoghurts were especially popular among consumers, with Arla® Skyr recording a 22% sales growth while Arla grew sales of its organic milk line by 2.7%.
While revenue from Arla's international growth markets outside of Europe were negatively impacted by exchange rates, Arla's overall international business delivered a 4.6% branded volume driven revenue growth and a total revenue of EUR1,576 million. The Middle East and North Africa continues to be Arla's biggest market outside Europe, and Arla's revenue there grew to a EUR560 million (US$635 million) in 2018, compared to EUR549 million (US$622.4 million) in 2017. Arla's planned acquisition of the Kraft-branded processed cheese business of multinational confectionery, food and beverage company Mondeléz is set to significantly strengthen Arla's position in the Middle East and North Africa region.
"We operate in a global market with fast-changing consumer food trends, political uncertainty and volatility. Despite this, our markets around the world delivered good results that we can build on in 2019. With our Good Growth strategy we are on the right track to strengthen our business in a sustainable way," said Tuborgh.
Arla works to improve its business by continuously moving more farmer owner milk into the company's own more profitable brands. In 2018, branded sales volumes grew 3.1% and Arla surpassed its long-term 45% brand share goal by reaching 45.2%. The Arla brand is central to the global business and in 2018 Arla brand sales grew 0.2% to EUR 3,034 million.
The butter and spreads brand Lurpak grew revenue 6.3% to EUR 561 million (US$636 million), while Arla's leading cheese brand in the Middle East and North Africa, Puck, grew revenue 3.8% to EUR352 million (US$399 million). Sales of Arla's speciality cheese Castello declined 0.6% to EUR180 million (US$204 million), mainly due to exchange rates. The hot summer in Europe had a positive effect on milk-based beverages sales which grew 10.1% to EUR248 million (US$281 million).
Arla Foods CFO Natalie Knight said: "Our brands are at the heart of our business and therefore it is of utmost importance that we continue to deliver products that meet consumers demands and changing eating habits. We are committed to delivering popular brands and innovation, such as nutritious on-the-go products, so consumers continue to be attracted to the Arla brands."
2019 is expected to be another big investment year as a strong balance sheet allows Arla to invest in new technologies and supply chain to succeed in the future with a focus on energy efficiencies and optimizations. Arla plans to invest EUR458 million (US$519 million) in 2019 and main projects include a new powder tower in Pronsfeld, Germany, the expansion and modernisation of production sites in northern Europe as well as large investments in Arla Foods Ingredients.
Brexit remains a variable factor in setting the company's expectations for 2019 as negotiations between the UK and EU progress. Arla continuously monitors and assesses the situation to prepare the business for the various scenarios. Arla continues to make its position clear as a company in favor of free movement of goods and people.
Arla expects to continue to deliver branded growth in both the European and international zones. Group revenue outlook for 2019 is expected to be EUR10.2-10.6 billion, net profit share is expected in the range 2.8-3.2% of group revenue and leverage in 2019 is expected to be within target range of 2.8-3.4% despite a full 2018 net profit pay-out to farmer owners.