Arla delivers strong results despite pandemic
Total Arla Group revenue grew 2.8% to €5.4bn ($6.4bn) compared to €5.2bn ($6.2bn) in the first half of 2019, driven mainly by higher branded sales volumes in retail across markets. Arla grew profitability and achieved a net profit share of 3% of revenue up from 2.3% in the first half of 2019.
Despite the challenging global market, throughout the first half of 2020 the milk price to farmer owners remained stable at a competitive level. The cooperative’s performance price – which measures the value Arla creates per kilogram of owner milk – was at 37.0 EUR-cent ($0.44) compared to 36.1 EUR-cent ($0.43) first half year of 2019.
“It has truly been abnormal times this year and I am very proud of our people and our results. The Covid-19 pandemic is one of the most severe crisis situations I have experienced as CEO of Arla, and we – as many other food companies - saw a very quick change in consumers eating habits as countries shut down around the world. We quickly channeled milk from our Foodservice business into retail and successfully maintained a steady flow of products in demand while our Foodservice business found creative solutions to support their customers. This shows just how robust and agile our cooperative really is for our dairy farmers,” CEO of Arla Peder Tuborgh said.
Arla’s transformation and efficiencies program, Calcium, delivered savings above expectations at €69m ($m) despite the pandemic. Cost savings were mainly from efficiencies in indirect spends and optimization of supply chain operations.
“We have had to navigate very high levels of volatility in the global dairy industry, seeing commodity prices drop significantly and currencies being severely impacted globally. Due to our position both geographically and across categories, we have delivered very strong financial results, increased our profitability and secured continued savings through Calcium. But the situation remains very volatile and we need to continue to be vigilant in securing our business continuity,” Arla CFO Torben Dahl Nyholm said.
As restaurants, coffee shops and canteens had to close due to the pandemic, Arla’s food service business declined rapidly. Consumers turned to trusted household dairy products as in-home cooking and consumption increased and this more than offset lost foodservice sales and lower commodity prices. Overall strategic branded sales volume increased 10.4%.
Global brands Lurpak and Puck grew 17.7% and 16.7% respectively. Arla was affected by the decline in foodservice, but still delivered 3.3% volume growth. Arla’s milk based beverages (MBB) delivered 13.1% volume growth, mainly driven by Starbucks.
“As consumers around the world were forced to stay home, we expected our household brands to do well and they certainly have. During the lockdown people have loved to cook with our Lurpak butter and dairy has seen a boost in relevance in households across markets as consumers have valued our products. As countries are opening again, we are looking at how we best continue to deliver our trusted brands to customers and consumers,” Tuborgh said.
Arla divides its business into two commercial zones, Europe and International. Although both zones were highly affected by the pandemic, as first China and then most of Europe and the US restricted movement and travel creating logistics and supply chain challenges, both delivered strong financial results and branded volume growth.
Arla’s European foodservice business saw a steep reduction, but this was more than compensated by the strong performance of retail and a significant increase in e-commerce. The Europe zone delivered branded sales volume growth reaching 6.3% driven mostly by Lurpak, Arla and Starbucks. Arla’s Europe zone grew revenue 0.9% to €3.178bn ($3.76bn) compared to €3.149bn ($3.72bn) in the same period last year.
Arla’s International zone delivered the highest revenue growth in the past five years of 22.1%, an increase to €1.024bn ($1.21bn) compared to €839m ($992m) in first half of 2019. Middle East and North Africa (MENA) was the main driver for the growth as home cooking and overall dairy consumption rose steeply due to lockdowns and curfews. All other international markets also contributed positively to the revenue growth. Overall branded sales volume growth reached 19.5%.
In the first half of 2020, Arla Foods Ingredients (AFI) delivered a strong performance supported by stable operations and increased demand for AFI’s value-added products within pediatric, health and performance and food segments. AFI grew revenue 2.4% to €360m ($425.9m), up from €352m ($416m) in the same period last year.
Trading continued its strong position from 2019, but as Covid-19 impacted the global market, commodity prices fell significantly and volumes were reduced as they were channeled into retail. Trading revenue decreased by 8.3% in the first half of 2020, from €861m ($1bn) to €790m ($935m).
Throughout the pandemic Arla’s farmer owners have continued to deliver milk while safeguarding the health and safety of their employees. At the same time, they have also continued their sustainability journey and in June, 90% of farmer owners across Europe voluntarily submitted their climate data, creating one of the world’s biggest dairy production climate datasets. External advisors and Arla expect to have the first results from the data ready by early 2021.
The uncertainty around the duration and intensity of the economic and market impacts caused by the Covid-19 pandemic is expected to continue throughout the second half of 2020. Arla said it will focus on continuing to steer successfully through the coming deadline for Brexit negotiations and the looming global recession.
“On the short term, we are looking at two very severe and unpredictable risks for the second half of 2020. One being the covid-19 pandemic that continues to require us to be in crisis mode along with the potential adverse consequences surrounding Brexit negotiations. On the longer term we need the business to be ready to navigate successfully through the expected global recession. So, we must continue to be resilient and agile to ensure that Arla continues to be as robust and competitive as it is today,” Tuborgh said.
Despite the uncertain external factors, Arla said it still expects to meet its expectations for full year with revenue outlook 2020 at €10.4bn-€10.8bn ($12.3bn-$12.8bn), a net profit of 2.8 to 3.2% of revenue and a year-end leverage at the bottom or below target range of 2.8-3.4.