Resilient strategic focus leads to strong results in 2014
2014 was a complex year for Arla. The farmer-owned company achieved one of its best results ever in a market impacted by volatility and international politics. A strong first half of the year produced record-high earnings, but the global market shifted in the second half, reducing the farmer milk price significantly.
Seldom has a business year been split in two so opposing halves. 2014 was a year that first saw strong economic tail winds in the global market that carried Arla into the summer with record-high milk prices for its cooperative farmers in Sweden, Denmark, Germany, the UK, Belgium, Luxembourg and the Netherlands.
Then things changed. The tail winds became head winds as global supplies rapidly outstripped demand, Chinese consumption ebbed off, and inventories were full. Finally, when Russia imposed a ban on dairy products from the EU, the headwinds grew in strength.
Performance price higher than ever
Summing up both halves, Arla came out of 2014 with an overall performance stronger than ever. The performance price, which indicates the value Arla has generated from each kilo of milk supplied by the owners, was 41.7 eurocent pr. kilo with a total volume of owner milk of 11.7 billion kilos in 2014 (compared to 41.0 eurocent pr. kilo with a total volume of owner milk of 9.5 billion kilos in 2013).
Arla’s profit in 2014 reached 0.3 billion euro, which corresponds to the set target of three per cent of the total revenue. The company’s Board of Representatives will decide how to appropriate profits in a meeting on February 25-26.
“In a rollercoaster year for the global dairy industry, Arla’s strong brands and focus on efficiency and cost control enabled us to make the most of the upturn and to be competitive through the downturn. The record-high performance price of 41.7 eurocent in 2014 confirms this, however it does not fully reflect the fact that the year ended with much lower milk prices than it began. Market conditions and the Russian embargo are making the financial situation difficult for our owners, but we have worked hard to minimise the effects by sticking to our strategy of creating growth outside Europe and strengthening our business across our European core markets,” says CEO of Arla Foods, Peder Tuborgh.
More milk into brands
Arla posted its highest-ever revenue of 10.6 billion euro, with much of it attributable to organic growth of 6.7 per cent. Given the market situation, the strategic global brands – Arla®, Lurpak® and Castello® – produced satisfactory results in 2014 with a total volume growth of 2.1 per cent.
“We are seeing growth for Arla’s strategic brands and our overall market shares in an otherwise stagnating or declining European dairy market. Throughout 2014 we have worked hard to move more milk into value-added brands, by enhancing our portfolio to our customers through further investment in innovation. Our grip on costs has never been more firm. Our owners gave us more milk in 2014, and we are ready to shift up to 500 million kilo of additional owners’ milk into value-added products in 2015,” says CFO Frederik Lotz.
Entering new markets
While Arla continues to move more milk into branded products, the company is also working hard to move those branded products into new markets. Arla’s international operations and ingredients business had yet another strong year with growing opportunities.
“We saw 14 per cent growth in our international business despite the Russian embargo. There has been steady growth in China, and we have created growth of 20 per cent in the Middle East and Africa. In 2014 we have begun to enter new markets in Asia and Africa, and in 2015 we will continue to move into new markets where safe and high-quality dairy products are in growing demand,” says Frederik Lotz.
Although Denmark continues to be the country that supplies the most milk to Arla, the UK remains Arla’s biggest market by revenue followed by Sweden and Germany.
Expectations for 2015
2014 showed that the global milk price is extremely volatile, and therefore Arla cannot announce any expectations for its revenue nor the performance price for 2015.
“The global dairy industry has never been as unpredictable as it is now, but we believe that our strategy is the right one to take us forward. We continue to rigidly streamline and control costs, while investing significant sums in marketing and new products. Arla’s ability to profitably handle larger milk volumes will define the success of the business in 2015. We will enhance the quality of our product range and our positions and stand strong when the market turns,” says Peder Tuborgh.
The annual results were presented to Arla’s Board of Directors on Tuesday. They will now be submitted for approval to Arla’s Board of Representatives at a meeting in Nyborg, Denmark on February 25-26 2015, after which the Annual Report will be published.
Year of growth for the UK
2014 was a year of growth for Arla Foods UK, the UK’s number one dairy company, despite challenging global conditions. At 2.8 billion euros (£2.3bn) the UK continued to be the largest market for Arla Foods amba representing 27 per cent of the group’s revenue.
In line with group performance a strong first half of the year was impacted in the second half by downward pressure on worldwide prices for commodity products, driven by increased global supply and weakening demand, predominantly as a result of the Russian trade embargo on dairy products and weakening growth in China. In response, Arla implemented a number of key measures to maximise revenue and minimise costs in order to continue delivering a leading milk price despite challenging times for its 13,500 owners, including its 3,000 British farmer owners.
Significant UK developments during the year included the official opening of the world’s largest fresh milk facility¹ at Aylesbury, Buckinghamshire, the roll out of the biggest cheddar cheese contract in the company's history and further measures to pave the way for the increased presence of the Arla brand in the UK market. Arla launched a number of new products during the year including Anchor Cheddar, Lurpak Cook’s Range, and Cocio Chocolate Milk. Against a backdrop of declining category sales, key Arla brands Lurpak, Anchor and Lactofree delivered growth and Cravendale was able to hold its share in an extremely competitive fresh milk category.
To support business growth and strengthen its position as the number one dairy company, last year Arla continued to invest significantly in the UK, not only at its state-of-the art dairy at Aylesbury but also in new technology across several sites, such as its packing operation at Oswestry, Shropshire, where it has created new packing facilities for Anchor Cheddar and own label cheese. These investments will enable the business to create new and exciting product ranges in 2015 particularly for the Arla brand where the business will focus on the inherent naturalness of dairy. This investment will continue in 2015 with almost £40 million being spent by Arla across its UK sites
Last year saw Arla launch 'Support our Farmers', a major campaign to unify British farmers at a time of lowering milk prices. Launched in October, it called on shoppers to support dairy farming and Arla farmer-owners directly by buying Arla’s well-known branded products such as Anchor, Cravendale and Lurpak. The initiative also helped Arla farmers engage directly with their local communities and raise awareness that they are owners of a dairy cooperative, the profits of which go directly back to them.
Peter Giørtz-Carlsen, executive vice-president, Arla Foods UK, said: “The UK business has delivered in a very challenging market and we have embedded some of the measures needed for sustainable growth in the long-term. We are acutely aware of the continuing challenge, but it is vital we remain firm in our approach to build an organisation that is competitive today and into the future.
“Our focus remains on adding value to our owners' milk by improving our efficiencies, and having a strong position across all our dairy categories and global brands as well as maximising our revenue by moving our milk into the categories that offer us the best returns. At the same time, we have implemented a number of measures to increase efficiencies and control costs.
“Together, focusing on increasing brand strength and operational efficiency should help us build upon the firm foundations already in place and ensure we stay competitive in 2015. Our approach is already having a positive effect, for example helping us secure a new three-year contract to supply fresh milk to Morrisons, which directly benefits our farmer owners."