Arla delivered a robust performance against difficult conditions in 2015, which was a tough year for the global dairy industry. Increased milk supply in Europe combined with China’s slowdown in demand and the Russian embargo have sent world market prices down. Arla navigated through the global crisis by moving even more of its milk into branded dairy products and foodservice, improving market positions and driving down costs.
Arla came out of 2015 with 10.3 billion euro in revenue, a 3.3 per cent decline compared to the year before. This is fully in line with the company’s expectations.
The performance price, which measures the value Arla has generated from each kilo of milk supplied by the farmer-owners, was 33.7 eurocent pr. kilo with a total volume of owner milk of 12.5 billion kilos in 2015 (compared to 41.7 eurocent pr. kilo with a total volume of owner milk of 11.7 billion kilos in 2014). Leverage at the end of 2015 was 3.3.
“We knew 2015 would be tough on all markets, and it was. Dairy prices have been under pressure worldwide all year, and every dairy farmer has felt the consequences. It affected Arla’s milk price to our owners and our revenue in 2015. Having said that, Arla has achieved what we set out to do within our business in a year when the entire dairy industry has struggled,” says CEO of Arla Foods, Peder Tuborgh.
“We have worked intensely to minimise the damage from the negative global trends by reducing costs and by maintaining and improving our market positions in Europe while creating new market positions for our branded products outside the EU.”
Lower profit as expected
The net profit of the Arla Group in 2015 accounts for 295 million euro, of which the profit share of Arla Foods amba is 285 million euro, corresponding to 2.8 per cent of Group revenue.
“Normally our profit target is 3 per cent of our revenue, but in August last year the Board of Directors agreed to reduce the profit target from 3 per cent to the range 2.7 to 3.0 per cent of the company’s revenue. This reduction was made in favour of the prepaid milk price to support our farmer-owners in their very difficult financial situation, which is caused by the global decline in milk prices,” says chairman of Arla Foods, Åke Hantoft.
Arla’s Board of Representatives will decide how to appropriate profits at their next meeting on February 23-24.
Mitigating the impact of global price decline
Arla’s overall volume of milk grew by approx. 622 million kilos in 2015 to 14.19 billion kilos. Despite the lack of general growth in most of the markets where Arla operates, the company set the target to grow its sales in the more profitable retail and foodservice sector equal to a volume increase of approx. 500 million kg extra milk. This was successfully achieved.
Arla recently announced its new Strategy 2020 setting out to grow its business in eight global dairy categories and six market regions as the company moves towards 2020 as one effective and unified company in a dramatically changing global dairy market.
“We are working fiercely to expand our branded business in growth regions outside the EU but also within our European lead markets. We are launching new innovations and have increased the marketing spend to support this. We have gained market shares in most of our markets although the competition is fierce, with everyone competing for their share of the market while global prices are under pressure. We are confident that Arla has the right strategy to take the company and its owners forward as we focus on organic growth within our existing branded business,” says Peder Tuborgh.
Driving down costs to benefit farmer-owners
In 2015, Arla also delivered on its long-term efficiency programmes. Through reduced spending, efficiency improvements and continuous adjustment of the organisation, Arla achieved its annual savings goal of 330 million euro in 2015 compared to 2012 cost-levels.
“Delivering consistently on both agendas – expanding our branded business while reducing costs – has significantly improved the strength of our business. Constantly becoming more cost-efficient is a crucial part of our efforts to create the best value for our farmer-owners in the extremely tough conditions. We have therefore set a new target of delivering additional annual savings of 400 million euro by 2020, starting with the first 100 million euro in 2016,” says Peder Tuborgh.
Continued growth outside Europe
Two of the world’s biggest importers of dairy products – China and Russia – took in significantly less of Europe’s growing milk pool in 2015, leading to declining prices worldwide and in Europe in particular. Consequently, Arla’s overall revenue in European core markets declined by approx. 200 million euro (3 per cent) in spite of the fact that the company gained market shares and increased sales volumes.
Outside the EU, Arla continues to expand its branded sales. In 2015 Arla grew its sales of consumer products by 20 per cent in the Middle East & North Africa, by 50 per cent in China, and by 14 per cent in the United States.
“Arla has performed in line with expectations in a highly competitive European market, and in our prioritised markets outside the EU we are harvesting double-digit sales growth as planned. We have continued to pave the way for international growth by setting up strong regional sales teams close to the customers and consumers and by entering partnerships with strong local players in Nigeria, Senegal, Egypt and Australia,” says Peder Tuborgh.
Expectations for 2016
The global market is expected to remain unpredictable and tough in 2016, but a turn for the better is anticipated towards the end of 2016.Arla expects its revenue to be on par with 2015 level, and the company expects its leverage to be approx. 3.2 and its profit to be within the range 2.8 to 3.2 per cent of the company’s revenue.
“The global dairy industry has rarely been as tough and unpredictable, and 2015 has unfortunately been as challenging as we anticipated. We have an extremely difficult task ahead of us in 2016 as global milk supply still exceeds demand. We do expect that the global market will begin to turn for the better towards the end of 2016,” says Peder Tuborgh.
Arla Foods will publish its annual report on February 24th after the company’s Board of Representatives have decided how to appropriate the profits.
Arla Foods is an international dairy company owned by 12.700 farmers from Denmark, Sweden, the UK, Germany, Belgium, Luxemburg and the Netherlands. Arla Foods is one of the strongest players in the international dairy arena, with a wide range of dairy products of highest quality. Well-known brands like Lurpak® and Castello® belongs to the Arla family. Arla Foods is also the world's largest manufacturer of organic dairy products.