Arla profit grows in volatile market

1 Mar 2017

Arla has reported that it delivered a solid business performance throughout 2016 and made a strong start to the delivery of its strategy, Good Growth 2020, despite highly volatile milk markets.

Arla profit grows in volatile market

Arla has reported that it delivered a solid business performance throughout 2016 and made a strong start to the delivery of its strategy, Good Growth 2020, despite highly volatile milk markets. While revenue declined due to the global price environment, Arla says it continued to improve the quality of its sales by moving more milk from bulk to brands, and Arla’s net profit grew 20.7% to €356 million.

In the second half of the year Arla introduced increases in its prepaid milk price to farmers by nearly 30% and expects annual revenue and performance price to improve in 2017.

In a year with extreme volatility in raw milk production and farm gate prices, Arla said it delivered financial results above its targets on most measures, with net profit at 3.6% of sales, a strategic branded volume driven revenue growth of 5.2% and a growth in brand share to 44.5%.

During the first eight months of 2016, the company says the dairy industry was characterised by low global milk prices due to a period with an over-supply of milk, particularly in Europe. European milk supply then declined significantly in the second half of the year, supporting a significant milk price rally.

In the last four months of 2016 Arla delivered four consecutive increases in the on-account milk price – representing close to a 30% increase. This is the most rapid increase in the prepaid milk price that Arla has ever recorded, and this very positive development has continued for the first months of 2017, delivering a total increase of over 40% in the milk price to Arla’s farmer owners.

“Our 2020 strategy has guided our business in 2016 as we sought to mitigate the impact of the extremely volatile market in Europe,” said Arla CEO Peder Tuborgh. “We are more focused than ever on brand and category development as well as our geographic markets, and we succeeded in building our market shares in many of our strategic growth regions outside the EU.”

“The year was very tough for our farmer-owners, as they were not immune to the sustained period of low milk prices in the global dairy industry for the last two and a half years. Consequently, the multiple increases we were able to deliver in Arla’s prepaid milk price during the last four months of the year were much-needed.”

Group revenue decreased by 6.8% to €9.57 billion (compared to €10.26 billion in 2015). This is a direct result of lower sales prices in the global market due to high milk volumes in Europe in the first half of 2016 as well as unfavourable exchange rates.

Net profit grew 20.7% to €356 million, of which the profit share of Arla Foods amba is €347 million, corresponding to 3.6% of group revenue.

“We generated an average of five per cent more value per kg of owner milk than the average of our peers in 2016, which reflects our ability to pay a competitive milk price in the market as well as our efforts to mitigate the effects of a tough global market for our owners,” said Arla CFO Natalie Knight. “While this does not change the fact that 2016 was an extremely challenging year for our farmers, it shows that we are delivering above the majority of peers in the market.”

Despite lower overall milk supply in 2016, Arla says it managed to move more than 340 million kg of milk from trading into the more profitable retail and foodservice sales channel.

Arla’s strategic brands all gained growth momentum in 2016 and delivered increased strategic branded volume driven revenue growth, which is defined as revenue growth associated with growth in volumes from strategic branded products while keeping prices constant:

Arla grew 4.5% (up from 2.5% in 2015)

Lurpak grew 7.7% (6.1% in 2015)

Castello grew 3.0% (0.1% in 2015)

Puck grew 10.6% (9.9% in 2015)

“Our brands performed well, exceeding our overall target range of four to five per cent by achieving a strategic branded volume driven revenue growth of 5.2 per cent,” said Tuborgh. “Puck is the leading performer, driven by exceptional performance in the Middle East and North Africa, where the brand now holds the number one position in jar cheese across the region. The Arla brand showed strong growth due to increased investment in innovative and specialized product ranges such as Arla Natural®, Arla Lactofree, skyr and other high protein products, as well as infant nutritional formula such as Arla Baby & Me,” says Peder Tuborgh.

Europe is Arla’s core commercial zone, contributing to 66% of Group revenue in 2016 with a volume driven revenue growth of 1.3%.

Arla’s strategic growth markets outside the EU achieved the largest volume driven revenue growth rate to date of 9.5% in 2016 – primarily due to strong performance in China and Southeast Asia (up 31.2%) and Sub-Saharan Africa (up 15.8%).

“Our highest growth rates right now are in China and Southeast Asia, where our aim is to quadruple revenue from retail and foodservice by 2020 compared to 2015,” said Knight. “We are on track to deliver this strategic target with strong positions in child nutrition, foodservice and even the growing cheese category. Our efforts to engage consumers via digital and e-commerce sales channels have contributed to this growth.”

Arla Foods Ingredients, a 100% owned Arla Foods subsidiary, reported a 5% increase in revenue to €545 million in 2016 due an improved product mix and growing sales volumes.

In 2017, Arla expects Group revenue to grow significantly due to a continued growth in the company’s branded business as well as higher prices in the market globally. Arla targets a net profit share for 2017 in the range of 2.8 to 3.2 as the company continues to focus on paying out the largest possible share of profit via the prepaid milk price to farmer-owners.

Arla expects 2017 to be another year of improvement in financial leverage within the stated long-term target range of 2.8 to 3.4.

“We are confident that the improved quality of our business as well as our Good Growth 2020 strategy put us in a favourable position and will ensure that we are ready to capture the full potential of the market as it continues to evolve and globalise in 2017,” said Tuborgh. “You will see Arla take an even stronger position in the market as an innovative dairy company that provides natural and healthy food to consumers and customers worldwide.”