H1 2019: Arla Foods sees growth after period of ‘rare stability’ in Dairy market

Arla Dano World Milk Day 2019 milk consumption brandspur nigeria5

The first half of 2019 saw rare stability in the otherwise volatile global dairy market resulting in stable prepaid milk prices to farmer-owners across Europe. Arla delivered the cooperative’s highest performance price in 3 years, improved profitability and continued to deliver growth for strategic brands in both the European and International zones. Across the business, the focused execution of the transformation and cost savings programme Calcium delivered above expectations.

Total Arla Group revenue grew 2.0 per cent to EUR 5.2 billion compared to EUR 5.1 billion in first half-year of 2018, driven by higher strategic branded sales volumes of 4.6 per cent and an increase in sales prices. Especially Arla’s International zone delivered an impressive branded volume growth of 10.2 per cent. In the first half-year of 2019, Arla delivered a net profit share of 2.3 per cent, up from the last half year’s profit share of 2.2 per cent. The company expects its full-year net profit share to be within the 2.8 to 3.2 per cent target range.

Arla’s performance price – which measures the value Arla creates per kilogram of owner milk – is the highest in 3 years at 36.1 EUR-cent compared to 34.7 EUR-cent in the first half of 2018, mainly due to our transformation and cost savings programme Calcium delivering ahead of expectations.

“The rare stability in the global dairy market has allowed Arla to build on the momentum we created in 2018. We have strengthened our competitiveness relative to our peers and improved our profitability while launching our ambitious climate goal to become carbon net-zero by 2050. We are focused on delivering on our ambitious targets for 2019 while remaining alert and prepared for the continued uncertainties around Brexit,” says Arla Foods CEO Peder Tuborgh.

Positive sales development across all commercial segments

Arla divides its business into two commercial zones, Europe and International. Retail and foodservice sales in Europe declined by 1.5 per cent to EUR 3,149 million in the first half of 2019, compared to EUR 3,197 million in the first half of 2018. This was mainly due to the strategic decision to step out of selected loss-making private label contracts and the negative currency development of the Swedish krone.

However, the European zone successfully continued to focus on fast scaling successes across Europe and delivered a branded volume growth of 2.3 per cent, driven by product categories such as Lactofree, Skyr, cheese and milk-based beverages under the Arla® brand and Starbucks®.

Arla’s international zone realized double-digit in sales and branded growth. Sales increased by 11.9 per cent to EUR 839 million in the first half of 2019 compared to EUR 750 million in the same period last year, with strong development across regions while strategic branded sales volumes grew 10.6 per cent.

In Arla’s biggest international market, the Middle East and North Africa (MENA) Arla increased market share in all key product categories. The formal takeover of the Kraft® branded cheese business from Mondeléz International with a 12-year license agreement in May will have great strategic importance for the international zone going forward.

Another key international market China, delivered more than 50 per cent growth in both volume and revenue in the organic early life nutrition (ELN) business and liquid milk, due to the recent approval of Arla’s ELN products.

In the first half of 2019, Arla Foods Ingredients (AFI) grew revenue 13.1 per cent to EUR 352 million from EUR 311 million in the same period last year by successfully moving more volumes into value-added protein segments.

Trading, which is business to business commodities sales, increased by 8.3 per cent to EUR 892 million in the first half of 2019 from 796 million in the same period of 2018, as the value of protein continued to rise, supporting the value of both skim milk powder and caseinate products for manufacturing.

Innovative brands meet consumer demands

Across the business, Arla continued to increase its branded volume share and delivered growth for the company’s strategic brands of 4.6 per cent in the first half of 2019 compared to 3.0 percent in the same period last year.

The Arla® brand is at the heart of the company’s growth and had a 5.3 per cent branded volume growth in the first half of 2019 supported by the Lactofree brand which grew 13.5 per cent.

Milk-based beverages category grew 11.9 per cent with Starbucks® leading the way with new innovations.

In the Middle East, Arla launched Puck® Squares at the beginning of the year, and the successful brand saw a 4.2 per cent growth in the first half of 2019.

Branded volume growth for the butter brand Lurpak® was up 1.6 per cent, driven mostly high sales of the innovative spreadable Lurpak® softest, despite its high prices. The speciality cheese brand Castello® decreased branded volume growth with 4.1 per cent. This is primarily a result of a challenging competitive environment across Europe and some international markets.

“We have continued to build engagement and relevance of our brands through innovative products, brand activation and digital content. Consumers are pushing for more nourishing and sustainable food choices, which is why our intensified climate agenda will help increase both the credibility of Arla farmers and our competitive advantage,” says CFO in Arla Foods Natalie Knight.

Calcium delivers ahead of expectations

Arla’s transformation and cost savings programme Calcium performed strongly in the first half of 2019. The programme has already delivered EUR 97 million of the EUR 75-100 million full-year target for 2019. Due to the strong performance of Calcium year to date, Arla expects the programme to deliver at least EUR 100 million in 2019 although the expected savings will be significantly lower in the second half of the year compared to the first half. Calcium aims to reduce cost by EUR 400+ million, where EUR 300 million will go to improving the milk price to farmer-owners and EUR 100+ million being reinvested in the company’s growth.

“We are now well into the second year of our transformation, and throughout the organization we have made sustainable changes to the way we work, spend and invest in our business. The hard work across all areas of the Arla is paying off and we have regained our competitiveness and improved our performance as a business,” says CEO Peder Tuborg.

Full-year expectations Arla delivered strong results in the first half of 2019 and the second half of the year will focus on delivering on full-year targets while continuing to outperform our peers. There are, however, external factors that could negatively impact Arla’s full-year expectations. The potential adverse consequences of a hard Brexit continues to be our biggest risk, along with the inherent volatility of the global milk markets.

With this in mind, Arla’s revenue outlook for full-year 2019 is expected to be EUR 10.2-10.6 billion. Net profit share for 2019 is expected to be in the target range of 2.8-3.2 per cent of revenue. A potential no-deal Brexit could however negatively impact the outlook.

The outlook for branded volume growth is increased to 3.5 per cent or above, up from the previously communicated target of 1.5-3.5 per cent. Focus on sustainability and product innovation drive higher expectations.