Global growth creates a strong performance for 2013

Today Arla Foods reports its 2013 results announcing its highest Performance Price ever in its history and an improved balance sheet. This is as a result of a strong European business and rapid growth in its growth markets outside the EU – at a time when Arla’s most important ingredient, milk, has increased in value worldwide.

Following the mergers in 2012, Arla’s global business benefited from a strong base in its core markets in Europe in 2013 as well as a continued significant increase in sales within its growth markets outside the EU. Globally, the demand for dairy products exceeded the supply of milk, which increased the value of milk and the overall price level of dairy products.

The most defining key figure in any Arla financial report is the Performance Price, which indicates how much value Arla has been able to generate from each kilo of milk supplied to the company by the cooperative owners in Sweden, Denmark, Germany, UK, Belgium and Luxembourg throughout the year. The 2013 Performance Price amounts to 33.91 pence per kilo (3.05 DKK per kilo) with a total volume of owner milk of 9.5 billion kilos (compared to 30.21 pence per kilo (2.71 DKK per kilo) with a total volume of owner milk of 7.5 billion kilos in 2012).

Arla’s total revenue rose by over £1.1 billion (10 billion DKK) to £8.4 billion (73.6 billion DKK) up by 16.6 per cent. The company’s net profit was the planned three per cent of the revenue, equal to £250 million (2.2 billion DKK), compared to £207 million (1.9 billion DKK) in 2012.

“Milk has become a more valuable commodity globally, and that naturally has a positive effect on our results. With this tailwind we have driven our business forward in 2013 – with a strong efficient base in Europe, promising growth rates in Russia, China, the Middle East and Africa as well as a very profitable ingredients business in Arla Foods Ingredients. Our main focus is to create the best possible milk price for our owners, and the 2013 results confirm that we have the right strategy to achieve this,” says Arla Foods’ CEO, Peder Tuborgh.

“The Performance Price is up by 12.5 per cent in 2013, and that has been much needed among our farmers. The higher milk price strengthens the economy on the farms. The milk production is rising, and the relationship between a farmer’s profits and costs has been improved. This development was necessary and must be carried on in 2014,” says Arla Foods’ board of directors chairman, Åke Hantoft.

Europe still leaning towards discount

Measured by revenue the UK remains Arla’s biggest market followed by Sweden and Germany. Although Denmark is the country that supplies the most milk to Arla, Denmark is now Arla’s fourth biggest market.

“In Europe our focus has been on integrating the companies that we merged with in 2012, and that has already made us more efficient and given us a more complete product portfolio. European consumers are still among the most price-focused in the world, and that means tough competition between discount products and quality brands. Our organic growth on our European core markets in 2013 reached 3.5 per cent, which is reasonable given the pressure from discount,” says Arla Foods’ Chief Financial Officer, Frederik Lotz.

“Our three global brands – Arla®, Castello® and Lurpak® - have been pressed by discount trends and private labels in 2013. All three brands are performing well on the growth markets outside the EU, but the volumes in Europe has not grown the way we wanted them to. In 2014 we will continue to focus on creating global growth with all three brands,” continues Frederik Lotz.

Growth machine gearing up

Three strategic growth markets have been prioritised outside the EU, where Arla has an increased focus on investments and higher growth ambitions than on other export markets: Russia, China, and the Middle East & Africa. In 2013 Arla’s revenue grew 35 per cent in Russia, 60 per cent in China, and 10 per cent in the Middle East & Africa.

“Our growth machine lies outside the EU, where we expect to increase our sales rapidly between now and 2017. This is driven by Arla’s strong brands, which are in higher and higher demand by consumers in the growing middle class who are willing to pay for higher quality and better product safety. We are building a long-term presence in Russia, China, the Middle East and Africa, which will give an even better return to the milk price for our cooperative owners,” says Frederik Lotz.

The subsidiary Arla Foods Ingredients increased its revenue by eight per cent to £273 million (2.4 billion DKK) in 2013, and its sales of milk-based ingredients for the global food industry remains one of Arla’s most profitable areas of business. The target is to double the revenue by 2017.

Improved balance sheet

Following two mergers and a series of acquisitions and the financial costs that came with it in 2012, another focus throughout 2013 was to reduce Arla’s leverage and thus improve the creditworthiness of the company.

“We have succeeded in bringing down our leverage significantly, and that in a year in which we also managed to deliver high earnings for our owners and integrate new companies into Arla after mergers of the previous year in Germany and the UK. The reduced leverage improves our balance sheet and financial flexibility and gives us more leeway to make new potential investments to support our growth strategy and contribute to a higher milk price for our farmers,” says Frederik Lotz.

Expectations for 2014

In 2014, Arla expects to reach a revenue of £8.7 billion (79 billion DKK) and a net profit of the targeted three per cent of the revenue, equal to £265 million (2.4 billion DKK). Given the current market expectations it is Arla’s ambition to deliver a Performance Price in the area of 36.1 pence per kilo - 37.3 pence per kilo (3.25 – 3.35 DKK per kilo).

“Arla operates in a complex industry where production and thereby the supply of milk dictates the milk prices in a global and interconnected world. For example a drought in New Zealand can impact prices in Europe. We are off to a good start in 2014, but we are well aware that a lot of milk is being produced in the world at the moment which may put pressure on prices late in the year. We expect a higher performance price for the year 2014 than the year 2013 as our business continues to grow both in and outside Europe,” says Peder Tuborgh.

The annual results were presented to Arla’s Board of Directors on Tuesday. It will now be submitted for approval to Arla’s Board of Representatives at a meeting in Halmstad, Sweden on February 26-27 2014, after which the Annual Report is published.

Another landmark year for the UK

2013 marked another year of unprecedented activity for the UK business. Now the largest dairy company in the country with leading positions in milk, cheese, butter and spreads, the focus has been on maximising and extending these leads.

Revenue rose 22 per cent to £2.2 billion (19.2 billion DKK) primarily due to the Milk Link merger in 2012. The business completed this and its integration during the year is already seeing significant benefits. A key objective is now to grow its core cheddar and speciality cheese business and in 2013 Arla UK negotiated the biggest cheese contract in its history. From April 2014, the business will supply 30,000 tonnes of cheddar to its retail customer Asda, increasing cheese production by 50 per cent. 

It also signed an exclusive partnership with Starbucks to supply 30 million litres of Cravendale to all its 700 stores in the UK and Northern Ireland on an annual basis. Arla’s cooperative status was cited as one of the key reasons for gaining the contract.

"The UK business is performing well. Arla UK has a compelling dairy offer and we are very much focused on growing our business and building on our No 1 position in fresh milk, butter and spreads as well as cheese.  We focused on integrating the Milk Link business into Arla during 2013 and we are already seeing good commercial progress as a result of this," says CEO, Arla Foods UK, Peter Lauritzen.

A landmark decision was made last year when Arla Foods’ Board of Representatives voted for Arla Foods Milk Partnership (AFMP) farmers to become co-owners of of Arla Foods amba. This decision has meant that Arla has increased its British farmer owners to circa 2,800. 

The UK commenced production at its new fresh milk dairy in Aylesbury, near London.  Built to schedule and budget, it will be the world’s largest and most environmentally advanced dairy of its kind and a significant operational ramp-up is expected this year.

The business will support the delivery of its cooperative status, integrating AFMP farmers and recruiting more owner milk where it can throughout 2014.