After 2016’s disappointing top line decline, Tetra Pak returned to growth last year, with net sales rising modestly to €11.5 billion, up 0.5 per cent compared with the previous 12 months.
2017 was a year in which the pace of GDP growth quickened in eight of our top ten markets, including Russia and Brazil, where muted recoveries reversed two years of economic downturn. Three of our five geographic clusters reported year-on-year improvements in net sales, with Europe’s 1 per cent growth ending the negative trend of the past four years. By contrast, for the first time in more than a decade, Greater Middle East & Africa reported a year-on-year fall in net sales (at comparable exchange rates), as tough market conditions in Egypt, Pakistan and the Arabia area took a heavy toll on sales of laminated packaging material.
Overall, the business climate remained harsh, with consumption in core categories continuing to decline and the competitive environment increasingly aggressive. Yet despite this, both cash flow and operating profit remained strong, ending 2017 in line with our long-term ambitions. It is an achievement that again bears testimony to the quality of our employees, the vision of our customers and the effectiveness of the strategy put in place eight years ago, focused on significantly expanding our involvement in areas beyond our category and business traditions.
Sales of capital equipment, for both Processing and Packaging applications, bounced back strongly from last year’s declines, with revenues up 2.9 per cent and 14 per cent respectively to €1.17 billion and €0.88 billion. Our Packaging business reported a healthy rise in filling machine installations, up 24 units from 2016, with 30 per cent-plus gains in two of our five geographic clusters – South Asia, East Asia & Oceania and Greater Middle East & Africa – more than offsetting a 20 per cent drop in Greater China, following very strong sales in 2016. In our Processing business, we saw particularly strong net sales growth in capital equipment for Cheese and Prepared Food applications, up 42 per cent and 25 per cent respectively, at comparable rates, year on year. The business also secured several significant new projects in 2017, including its largest-ever contract in North America for Select Milk, worth more than €65 million. In total, orders received by Processing during 2017 rose more than 13 per cent from the previous year, passing €1.3 billion to reach a historic high.
Once again in 2017, sales of our Service solutions were strong, rising 6 per cent from 2016, to €1.4 billion, with particularly robust gains in machine upgrades, consumables and expert services, all of which reported double-digit growth compared with the preceding year.
As we extend our Services business, an increasing number of customers are requesting common solutions, capable of covering all of the processing and packaging equipment within their facilities. For example, in 2017, our expert services team worked with one of our major South American customers to introduce the Tetra Pak® Total Productive Maintenance system in 11 of the company’s dairy manufacturing plants, encompassing all components of the production process. The results in terms of productivity gains and cost savings were significant, leading the company to request similar installations at other sites. We expect sales in this area to gain further momentum through the years ahead.
Since the turn of the decade, the evolution of Tetra Pak Services has been stellar, with revenues now virtually double those of 2010 and the business today accounting for more than 10 per cent of annual sales. We are confident this trend will continue.
Once again in 2017, packaging materials net sales dropped, down 2 per cent year on year to €8.0 billion. In part, this was caused by the continued weakness of core categories, but a shift in product mix, from family packs to portion packs, also had an impact, as did net pricing reductions in response to aggressive competition worldwide.
Net sales for laminated packaging material fell 2.5 per cent, while additional materials, like caps, closures and straws, grew 2.7 per cent, reflecting the continued shift towards products in our advanced portfolio, which offer improved functionality, convenience and shelf appeal. Advanced formats now account for 47 per cent of packaging sales, up four percentage points year-on-year and 34 percentage points higher than at the start of the decade.
From a volume perspective, we sold more than 188 billion packs, slightly higher than in 2016 thanks to the continued shift to portion packs, while in litres equivalent our numbers dipped 0.5 per cent, to 77.4 billion litres.
But hidden beneath this headline is a far more positive story: the continued influx of new customers and new business in important growth categories. During the past three years these have added almost 6 billion litres equivalent of packaging material sales. In that same period, however, sales of our commodity basics formats have fallen by an even greater amount, due to category decline and low-cost competition; masking a trend that is unquestionably strengthening our position for long-term profitable growth.
Alongside the continued shift to advanced formats, and our success in important growth categories, another packaging highlight for 2017 was the continued rise of Tetra Recart, our retortable carton packaging system for food. At the start of the year, 33 Tetra Recart lines were installed worldwide; by the end, we had secured 12 further contracts for line installations, as the product gained further traction with consumers, retailers and brand owners.
In 2017, we took several steps to raise the bar of our performance in the eyes of our customers.We strengthened our Issues Resolution Programme, a cross-functional, organization-wide initiative, designed to reduce the time it takes to solve product issues, adding dedicated teams that successfully closed more than 50 of the most challenging in 2017.
We also made good headway in correcting the fragmentation that customers sometimes perceive between different parts of our organisation. Among other things, we introduced new integrated service agreements and a single Key Account Team approach for multi-business customers.
More activities are rapidly moving ahead to help ensure that all customers see we truly are one company, providing end-to-end solutions that support their individual needs, and putting their success at the heart of everything we do.
Through 2017, we continued to drive growth by strengthening our competitiveness and by extending our business in some important new directions.
For example, we made further progress in the development and deployment of digitally-enabled products, services and applications that will fuel growth and productivity for our customers, as well as for ourselves, from codified packages to predictive maintenance. We have several streams of activity now under way in this fast-moving and increasingly significant area of our business.
Of course, the year also saw the introduction of many other more conventional, but equally exciting, product and service offerings. From ground-breaking technologies on a small scale, like the WingCap™ 30 one-step package opening, to those on a much larger scale, like the new High Shear Mixer for food processing, that raises the bar for ingredient mixing.
Beyond the sphere of products and services, a number of events stood out in 2017.
We completed the acquisition of Johnson Industries International, a market leader in the design, development and manufacture of equipment and lines for mozzarella cheese, reinforcing Tetra Pak’s position as the leading provider of cheese manufacturing solutions.
Our acquisition of Big Drum Engineering, a German company that specialises in technologies for filled ice cream products, significantly strengthened our offering in a segment that now accounts for half the global market for packaged ice cream.
We announced the go-ahead for a major expansion of our factory in Thailand, to produce around 3 billion closures for carton packaging a year in a variety of formats. We kicked off the €30 million upgrade of our packaging facility in Denton, USA, to support the growth of our business across North America. And work on our new converting factory in Vietnam made good progress, staying on track to start commercial production before the end of 2018.
At the same time, we also reached the tough decision to close our factory in Foshan, China, where local constraints on its operations meant that production at the site was no longer sustainable.
During 2017, we took further steps to ensure sustainability remains high on our agenda, including the creation of a Sustainability Forum, reporting to the Strategy Council, to govern and lead the company’s strategic and cross-functional approach to sustainability. We also achieved OHSAS 18001 certification for Occupational Health and Safety performance across all of our facilities. Our climate impact reduction targets were ratified by the Science Based Targets initiative. We increased our use of renewable electricity, which now accounts for more than a third of total consumption worldwide. We were awarded the highest possible score by the CDP Forests Programme for our work in tackling deforestation. And we celebrated 10 years of supplying Forest Stewardship Council™ (FSC) certified packages, during which time more than 300 billion FSC-labelled Tetra Pak® packages have been delivered to store shelves.
As we move through 2018, we continue to see signs of a strengthening global economy, but its fragility cannot be understated. The challenges of increasing competition and weakness in core categories will persist, as will our resolve to drive a strategic agenda that ensures sustainable, profitable growth long into the future.
We will continue to strengthen our competitiveness, and to find new ways to enhance our relevance to customers. We will expand further into fast-growing categories, where we still have a relatively low presence. And we will take major steps to ensure our different businesses are fully aligned and properly coordinated at every customer touch point, working seamlessly to deliver end to end solutions that fully address their individual needs.