2016 was a challenging year for the Tetra Laval Group. Net sales amounted to €13.8 Bn, a nominal decrease of 3.4 per cent compared to 2015. At comparable rates sales contracted by 1.4 per cent. The weakening of the Brazilian real, Mexican peso and Chinese yuan renminbi relative to the euro contributed to the lower sales. The main reason for the declining sales was that some of our larger markets didn’t develop as well as anticipated. Particularly sales of capital equipment were affected by lower demand, while technical service sales improved significantly or were stable in all industry groups. Operating profit improved both in absolute and relative terms despite the declining sales. This was the result of our cost-efficiency programs, which have been ongoing for some years in our industry groups. Lower material costs also contributed to the improved result. When summarising 2016 I would like to thank all our dedicated personnel for their outstanding achievements during the year.
From a geographical point of view, sales declined in our largest market, China. Sales of capital equipment in China declined due to underutilisation of the installed base, while technical sales and service showed a slight growth. While sales in South East Asia and Oceania developed favourably, the Group was negatively impacted by the difficult market conditions in Brazil and Russia. Despite the volatile geopolitical environment in the Middle East, sales improved, mainly related to a strong demand for our technical service offerings.
In June 2016, I was appointed Chairman of the Board for the Group, after having served on the Board since 2013. During my intense six months’ introduction in my new role, I met many competent and dedicated employees. There are three reflections from this introduction. Firstly, I am impressed by the strength of our relationships with our customers. We are all keen to understand their business so that we can deliver outstanding customer value. Secondly, all industry groups have the challenge of innovation in a broad sense and keeping up with changing customer demands and technology trends. Thirdly, a prerequisite for success is the need for a cost and productivity focus. This is a perpetual journey and here the industry groups are at different stages.
Tetra Pak had a year of mixed developments. Net sales decreased by 3.6 per cent compared to 2015, particularly affected by lower demand for its capital equipment business. Across its five geographic clusters, Tetra Pak achieved year-on-year net sales growth in two, Greater Middle East & Africa, and South Asia, East Asia & Oceania. Despite contracting sales, Tetra Pak managed to deliver improved operating results and cash flow due to significant cost savings.
The packaging material business was impacted by slower growth in large markets, such as China, Brazil and Russia, and also saw a decline in traditional categories, such as milk and juice. Conversely, packaging material showed double-digit growth in South Asia, East Asia & Oceania. For the full year, the number of packages grew by 3.4 billion to in total 188 billion or 1.8 per cent, reflecting the shift from large family packages in markets like China to portion packages in other Asian markets.
During the year Tetra Pak continued to drive the deployment of its newer packaging solutions, offering customers a range of shapes, closures and materials. In 2016 the advanced portfolio accounted for 43 per cent of total packaging material sales – an increase of 3 percentage points compared with 2015. Regarding the capital equipment business, there was a continued delay in investments, reflecting uncertain market conditions, both for processing and packaging applications. Technical services, however, continued to deliver a strong sales increase. As an example, Technical services had a double-digit growth in the sale of Consumables, Expert Services and Equipment Upgrades, with several new offerings gaining strong traction among customers.
Sidel saw signs of recovery during 2016. Net sales increased by 1.7 per cent at prevailing rates compared to previous year, and by 3.6 per cent at comparable rates. Sales of capital equipment for PET decreased, but order intake improved for the full year after a strong development during the second half of the year. Revenues from Gebo Cermex grew significantly in the glass and can business, mainly driven by a strong demand from the brewery industry. Gebo Cermex’s integrated solutions, as part of Sidel’s offering of complete line solutions, also developed favourably. I am very pleased with the Sidel group’s improved operating results.
Sidel’s transformation programme is ahead of schedule and internal efficiency measures are paying off. The programme entails both cost reductions for improved productivity as well as improved quality in most aspects of customer delivery and installation. Sidel and Gebo Cermex business units are now working closely together, combining their respective strengths and expertise, and delivering the benefits of the group’s entire portfolio to their customers. In recent years, Sidel has made considerable investments in R&D, and during 2017 there will be a number of new product launches.
DeLaval had a year with tough market conditions. The uncertainty of EU subsidies and price drops in dairy commodities continued during the year which lead to that the order intake in capital equipment decreased, while the aftermarket managed to remain stable. Net sales decreased by 8.6 per cent at prevailing rates and 7.2 per cent at comparable rates compared to 2015. Due to the sales decrease, the operating result also decreased for DeLaval. However, global demand for milk is increasing, which suggests that the price recovery that we saw during the second half of 2016 could be sustainable in the longer term. In addition, global feed price development remained favourable, keeping costs down for farmers. Another positive trend is the increased demand for voluntary milking systems. The robotic business is expected to continue to grow as large farms are striving for productivity improvements.
To manage these difficult market conditions DeLaval has launched a substantial two-year transformation programme, including reduction of personnel, transfer of administrative and engineering functions from the centre, and not least, a substantial increase in R&D investments. These investments are not restricted to capital equipment but also to new aftermarket products as well as new ways of working with preventive maintenance in order to improve milk quality and animal health. This will certainly emphasise DeLaval’s position as technology leader within the dairy industry. The result of this massive effort within R&D will be several innovative products to be launched in 2018. In relation to the transformation programme the company went through organisational changes including a restructure of the market organisation into clusters in order to be even closer to the customers. The measures taken by DeLaval have already paid off – despite decreasing sales the company managed to increase its market share in 2016.
Taking into account the widespread political instability as well as macroeconomic developments, the world seems to have entered into a low-growth mode compared to some years ago. The ability to manage changing conditions and lower market growth is key to our future success. Our focus areas for 2017 are Growth, Efficiency and Innovation. Growth will be achieved by helping our customers to introduce more attractive products at competitive prices. There is also a demand from our customers for our expertise in improving their operational efficiency. Continued improvement of internal efficiency in all parts of the Group is necessary in a world with limited growth. The ongoing transformation programmes will make the industry groups leaner and faster. Finally, innovation is in our genes and we will launch several products this year. We are addressing these focus areas with speed and determination and I am confident that the Group will deliver good results under challenging market conditions in 2017.