The Denmark-based dairy cooperative said strong performance by Arla Foods’ global brands, international markets and Ingredients business ensured a year of high growth, as it delivered a 27.4% increase in pre-paid milk price to its farmer owners, and a net profit of 2.8% of revenue within its target range.
Gross profit fell 5% to €2.28bn ($2.8bn) compared to 2016, and profit before tax fell to €321m ($395m) in 2017, compared to €398m ($490m) in 2016, a drop of 19%.
However, Arla Foods CFO Natalie Knight told DairyReporter that a factor in this was being able to increase the amount paid to farmers.
“Essentially, as a cooperative, our most important target is always how do you get our pre-paid price as high as possible to at least pay out to our farmers,” Knight said.
“So, if you look at our 2017 numbers, what you see is we paid out almost 25% more to our farmers. The EBIT number down (from €505m in 2016 to €385m in 2017, a drop of 24%) isn't indicative of poor performance, it's just indicative of we've chosen to pay out a higher milk price to our farmers.”
Growth in brand revenue
Arla said 2017 was another volatile year in the global dairy market characterized by significant shifts in market prices, which supported an increase in sales prices of €1bn ($1.23bn).
Group revenue increased by 8.1% to €10.3bn ($12.7bn) driven by higher sales prices, increased branded share of sales, and a better geographical and product mix. However, production costs were higher, which accounted for the 5% drop in gross profit.
There was a 10.1% growth in Arla brand revenue, a 13.2% increase in revenue from international markets and 19.6% revenue growth in its ingredients division, Arla Foods Ingredients.
The Arla brand registered gains in many markets, which the cooperative attributed to organic launches in the Middle East, cream cheese launches in the US, and high demand for Arla’s skyr and protein products throughout Europe.
Arla Foods’ CEO Peder Tuborgh said the company delivered a strong performance built on a good balance of brands, categories, and geographies.
“Most importantly, this enabled us to pay out significantly higher milk prices to our farmer owners and utilize our balance sheet to enable the substantial capital investments we are making in 2018,” Tuborgh said.
Last month, Arla announced a €527m ($649m) investment in new and expanded production capacity as well as innovative technology.
Revenue growth mainly driven by higher sales prices
Knight noted this was the single biggest organic revenue increase inside one year in company history, not considering mergers.
“It was driven by our continued drive into international markets as well as our focus on growing and developing our strategic brands on all markets,” Knight said.
The International commercial segment, which comprises 16% of Arla Foods total revenue, showed a strong performance throughout 2017.
International sales to retail and foodservice customers delivered a 13.2% increase in revenue to reach an all-time record of €1.616bn ($1.99bn).
The company pointed to growing demand for dairy in Sub-Saharan Africa, particularly Nigeria, where disposable incomes are increasing and more nutritious foods are sought.
During its earnings presentation, Knight noted sales doubled in Nigeria in 2017, and there has been expansion into Ghana.
“We see lots of potential in 2018 and beyond,” she said.
It also noted a new appetite for organic products in the Middle East, and the growth of the foodservice sector in China.
As Arla Foods’ largest commercial market, Europe saw a total revenue increase of 3.9% to €6.568bn ($8.09bn). This reflects the longer-term rebound in demand for natural, whole fat dairy products such as butter and cheeses as well as the trend towards convenient high-protein products.
Knight said that, while fat prices have gone down a little, they have rebounded and prices are still high heading into 2018.
“I can't say what's the long-term – but I think definitely in the short and medium term, there isn't an expectation that that trend will change significantly.”
In 2017, Arla Foods grew its share of branded business to 44.6% – near the long-term ambition in Good Growth Strategy 2020 of 45%.
There were strong gains in many markets, with Arla skyr as an example of this trend, performing well in the German market, showing a revenue growth of 94%. Arla protein drinks launched into six new markets in 2017 and are now available in 14 markets worldwide.
While the German market has previously been a challenge for Arla, Knight said there have been improvements.
She said Germany continues to be a very competitive and challenging market in Europe.
“2017 was a year where, especially on the branded side, we had some big wins, and I think when you look forward, it's one where we are very committed to doing what it takes to be successful in that marketplace in the branded side and the private label side.”
In spite of being overshadowed by Brexit, the UK is still a key market for Arla Foods.
Tomas Pietrangeli, managing director, Arla Foods UK, said Arla was both the fastest growing FMCG brand in the UK and the only leading dairy company delivering branded growth.
Pietrangeli said there were “significant wins in both foodservice and own label offering in 2017, such as the Morrisons’ fresh milk tender win. I believe we are in a strong position to deliver on our 2020 Good Growth strategy.”
Arla’s brands delivering the greatest revenue growth in 2017 included Lurpak (9%), Anchor (16%) and the Arla brand (18%).
The co-branding of Arla Organic into McDonald’s has contributed to a high growth rate on branded volumes and includes the relaunch of the 250mls Happy Meal milk.
Arla Foods Ingredients
For Arla Foods Ingredients, a 100% owned subsidiary of Arla Group, 2017 was another strong year, showing significant top and bottom line growth driven by innovation in its specialty protein range.
Revenue grew 19.6% to €651m ($801m) driven by the sale of higher volumes in Arla Infant Milk Formula Business to Business as well as strong price and volume growth in the value-added protein segment.
Knight said, “I think AFI is one of the crown jewels at Arla, it's our most profitable commercial segment. It grew 20% and we're really going from strength to strength.
“We have a very strong infant nutrition business where we're really going to be able to capitalize on some of the changes in the Chinese legislation as we go forward and grow that even more,” while additionally, “ we are one of the world leaders in terms of the high value protein ingredients products that we're bringing to market.”
Expectations for 2018
Arla Foods’ Good Growth 2020 Strategy remains key for strengthening brands and business in 2018, according to the company.
The €527m investment plan recently announced will drive branded and international growth with increasing investments in innovative technology and new, expanded and improved production capacity to enable this.
And while a brand share of 44.6% means some targets have already been neared – or met in the case of international share – Knight said it’s premature to talk about changing targets as that’s a decision for the board.
“We certainly will focus on exceeding those targets, and I think in the near future it's a very relevant question for us,” she said.
“It is going to be about how do we expand brand share and international share further, because those have really big benefits for us in terms of higher profitability especially on the brands side - lower volatility and higher real direct connection with our consumers.”
Strategic growth markets such as Middle East and North Africa, China, South-East Asia, Sub-Saharan Africa and the US remain a priority for 2018.
Revenue in 2018 is expected to be at a similar level of between €10bn and 10.5bn ($12.3bn-18.5bn) as a result of higher milk volumes and an improving product mix, which are likely to be largely offset by expected negative currency developments.
Arla Foods said it will continue to target a net profit share for 2018 in the range of 2.8 to 3.2% of revenue, but expects seasonality to have a high impact on the 2018 half-year results, which are expected to be below the annual target range.