Arla to invest as sales volume grows in 2019

By Jim Cornall

- Last updated on GMT

Arla's recently-acquired Bahrain facility will be one of the beneficiaries of some of the €619m Arla plans to invest in 2020.
Arla's recently-acquired Bahrain facility will be one of the beneficiaries of some of the €619m Arla plans to invest in 2020.

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In 2019 farmer-owned Arla Foods exceeded expectations for global branded sales as it worked on transforming its business securing cost-savings through its Calcium program.

Arla said it was able to deliver a stable milk price to its farmers owners and a strong cash flow further strengthened the company’s investment power in future growth.

Group revenue increased to €10.5bn/$11.3bn (compared to €10.4bn/$11.2bn in 2018), driven mainly by the global brand portfolio that achieved a year-on-year branded sales volume increase of 5.1%.

“Throughout 2019 we continued to build on the positive momentum that we have created in the business and Arla is a stronger company than we were a year ago. We have strengthened our competitiveness and beat our financial targets while continuing our transformation through Calcium,”​ Arla Foods CEO Peder Tuborgh said.

Arla’s branded sales volume grew 5.1% in 2019, compared to 3.1% in 2018, mainly driven by the Arla brand. Global revenues of the Arla brand grew to €3.033bn ($3.27bn) compared to €2.875bn ($3.1bn) in 2018, driven by a series of launches across its Lactofree and organic ranges, the introduction of new flexitarian options as well as the growth of Skyr in core European markets.

Innovations such as the Lurpak softest launch in the UK and the new butter box packaging for block butter brought in sales of more than 100,000 tonnes. Lurpak revenue increased to €588m ($634.8m), compared to €561m ($605.6m) last year. Puck, the company’s leading brand in the Middle East and North Africa (MENA) grew revenue to €363m ($392m), compared to €352m ($380m) last year, driven by the processed and cream cheese business.

Castello specialty cheese revenue stayed constant at €179m ($193m), despite what Arla said was a challenging and competitive environment across Europe and selected international markets.

Milk based beverage brands increased revenue by €20m ($21.6m) to €207m ($223.5m), mainly driven by Starbucks, which is sold in Europe, the Middle East and Africa.

“Arla’s global brands continue to be at the heart of our business and in 2019 we have clearly strengthened consumer trust in our brands. We delivered a range of popular dairy products that capitalized on increasing consumer demand for healthy and sustainable food choices, which helped us exceed our expectations for branded growth in 2019,”​ CFO of Arla Foods, Natalie Knight, said.

Arla’s Europe segment represents just over 60% of the business, and core brands delivered a 2.9% branded volume growth, compared to 2.5% in 2018 with growth across all markets. The UK delivered 8.8% branded volume growth, however, the overall revenue in the Europe segment decreased by €154m ($166.3m) to €6.353bn ($6.86bn), largely as a result of stepping out of unprofitable private label contracts and exchange rates.

Arla’s International segment represents 17% of the business. The international division delivered overall double-digit branded volume revenue growth of 10.3% with growth across all regions except North America. Revenue increased €226m ($244m), to €1.802bn ($1.946bn), the highest increase in the past three years. On top of this, the acquisition of the production facility in Bahrain from Mondelez International and the long-term Kraft brand license for their cheese business in MENA enables Arla to change its production capability in the region to enable future growth ambitions.

Arla Foods Ingredients (AFI) a 100% owned subsidiary of Arla Foods, increased revenue by €58m ($62.6m) to €710m ($766.6m), driven by higher sales of value-added products within the pediatric, health & performance and food segments, as well as higher prices and the full-year effect from the acquisition of the remaining 50% share of Arla Foods Ingredients S.A. Argentina in 2018.

Trading, which is business-to-business commodity sales, decreased revenue by €28m ($30.2m) to €1.662bn ($1.79bn), mainly due to lower volumes and negative currency effects.

Arla’s transformation and efficiencies program, Calcium, again delivered above expectations, with savings of €110m ($118.8m) exceeding the high-end 2019 target of €75-100m ($81m-$108m). As a result, the accumulated savings of €224m ($242m) since the launch in 2018, means that Arla is more than half way towards the 2021 end goal of more than €400m ($432m) in sustainable savings.

Tuborgh said, “In 2019 we were able to grow and improve our quality of business while continuing to deliver efficiencies beyond our initial expectations. This clearly shows that our employees are transforming the way they work, spend and invest in our business. The changes becoming more and more embedded in our ways of working and I am very proud of our people and our results so far.”

Arla plans to invest a record €619m ($668m) in major projects to expand capacity in growth sectors such as milk powder for the international markets by continuing the completion of a powder tower in Pronsfeld, Germany, expansion of its mozzarella capacity in Branderup, Denmark, and upgrades to the newly acquired Bahrain production site, as well as significant investments into capacity increases for AFI.

In 2020 Arla said it will build on the momentum created in 2019 and further strengthen the cooperative’s competitiveness with focus on branded growth, the transformation and efficiencies program, Calcium, and increase its focus on taking action on the sustainability agenda across the whole value chain.

Brexit continues to be a risk, with the negotiations on the future UK/EU trading relationship taking place in 2020. There is the potential for tariffs and non-tariff barriers to be imposed, which would add friction and cost to UK and EU trade. Arla is advocating for as close a trading relationship as possible to minimize these risks.

The end of 2020 also marks the completion of the Good Growth 2020 strategic period, and Arla expects to reach all its long-term financial targets.

“As we come into the home stretch of our Good Growth 2020 strategy, it’s clear that it has been a very successful guide for us to grow our global and branded positions. Looking forward, we will continue to capitalize on these strengths, increase our innovation capabilities and most importantly, strengthen our commitment to sustainability to secure even more value for our farmer owners going forward,”​ Tuborgh said.

Group revenue outlook for 2020 is expected to be €10.4-10.8bn ($11.2bn-$11.66bn), net profit share will be in the range of 2.8 to 3.2%, and leverage is expected to be within target range of 2.8-3.4.

Arla will publish its annual report and CSR report on February 27.

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