In spite of the decline, Arla said that it was “…a robust performance against difficult conditions in 2015, which was a tough year for the global dairy industry.”
Arla said that it 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 $11.5bn (€10.3bn) in revenue, a 3.3% decline compared to the year before. The company said this is fully in line with expectations.
'Dairy prices under pressure'
The performance price, which measures the value Arla has generated from each kilo of milk supplied by the farmer-owners, was 33.7 eurocent per kilo ($0.376) with a total volume of owner milk of 12.5bn kilos in 2015 (compared to 41.7 eurocent per kilo ($0.417) with a total volume of owner milk of 11.7bn kilos in 2014).
“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,” said 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 profits were expected
The net profit of the Arla Group in 2015 accounts for $328.8m (€295m), of which the profit share of Arla Foods amba is $317.7m (€285m), corresponding to 2.8% of Group revenue.
“Normally our profit target is 3% of our revenue, but in August last year the Board of Directors agreed to reduce the profit target from 3% to the range 2.7% to 3% of the company’s revenue. This reduction was made in favor 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,” said 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.
Arla’s overall volume of milk grew by approx. 622m kilos in 2015 to 14.19bn kilos. Despite the lack of general growth in most of the markets where Arla operates, the company said it set the target to grow its sales in the more profitable retail and foodservice sector equal to a volume increase of approximately 500m kg extra milk, which it says was successfully achieved.
Arla recently announced its new Good Growth Strategy 2020, which included a restructure and the loss of up to 500 jobs. This new strategy sets out to grow business in eight global dairy categories and six market regions as the company moves towards 2020 as one unified company.
“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,” said Tuborgh.
“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.”
More cost cutting measures
In 2015, Arla said, it also delivered on its long-term efficiency programs. Through reduced spending, efficiency improvements and continuous adjustment of the organisation, Arla achieved its annual savings goal of $367.9m (€330m) in 2015 compared to 2012 cost levels.
“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 $445.9 (€400m) by 2020, starting with the first $111.5m (€100m) in 2016,” says Tuborgh.
Growth outside Europe
Arla noted that 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 approximately $222.9m (€200m) (3%) in spite of the fact that the company gained market shares and increased sales volumes.
Outside the EU, Arla said it continues to expand its branded sales. In 2015 Arla grew its sales of consumer products by 20% in the Middle East & North Africa, by 50% in China, and by 14% in the US.
“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 Tuborgh.
Expectations for 2016
CFO Natalie Knight said, “When you look at 2016, we're expecting sales to be on par with the 2015 level. This is going to show continued price pressure, but we believe it's going to be driven by higher volumes, greater brand component and continued focus on the international market.
“We're looking at our profitability again being in that range of 2.8% to 3.2%, which is in line with our earnings consolidation policy. That's something that's important for us, and we are right on track so early in the year, to deliver on that number.”
Arla Foods will publish its annual report on February 24 after the company’s Board of Representatives have decided how to appropriate the profits.
Strong figures in the UK
Arla Foods UK grew volumes sold by approximately 200 million kg and delivered its highest ever rate of branded sales. This included record sales in butter and spreads with Lurpak and Anchor (up 4.6%); Cravendale liquid milk (up 2.1%); Castello cheese (up 6.7%); and the Arla Lactofree product range (up 23%).
The company said Arla branded products outperformed expectations by achieving volume driven growth of 5.2%. This included Arla Big Milk, Arla Skyr and Arla Protein – the latter two marking the business’s entry into the UK yogurt category.
Peter Giørtz-Carlsen, Executive Vice President, Arla Foods UK, said, “Our performance success means that we will continue to invest in branded growth, and increase our marketing spend as well as our presence in the yogurt category in 2016.
“To further underpin our position as industry leader, and take advantage of the increasing supply of milk available, we will soon be making an announcement in the UK as part of the business’s Good Growth 2020 strategy, with the aim of supporting the growth of dairy categories in the UK as well as the development of Arla into a top 10 consumer grocery brand.”
Overall revenue in the UK increased from $3.1bn (€2.8 bn) in 2014 to$3.2bn (€2.9bn) in 2015.
Market overview 2015
In Arla’s new Strategy 2020 the company says it will focus on markets in six strategic regions: Europe (with the four lead markets United Kingdom, Sweden, Denmark and Germany), Middle East & North Africa (MENA), China & Southeast Asia, Sub-Saharan Africa, USA and Russia.
Europe – UK
As the largest market in the group by revenue, Arla said there was an improved performance through strong cost savings as well as growing the business.
Arla’s overall UK revenue increased from $3.1bn (€2.8bn) in 2014 to $3.2bn (€2.9bn) in 2015.
Europe – Sweden
Arla’s overall revenue in Sweden decreased 4% from $1.69bn (€1.52bn) in 2014 to $1.62bn (€1.45bn) in 2015.
The purchase of the cheese company Falbygdens Ost was approved by the Swedish Competition Authority in April 2015.
Arla’s dairy in Falkenberg, recently remodelled into Europe’s largest cottage cheese dairy, is now fully operational following the opening in 2014.
In 2015, Arla Sweden launched Arla Chef’s Range (Kockserien), a premium product line for butter and spreads.
Europe – Denmark
Arla’s revenue from consumer products in Denmark decreased 4% from $1.07bn (€957m) in 2014 to $1.02bn (€917m) in 2015, mainly due to an increased focus on discount and private label products.
In 2015, Arla Denmark launched new yogurt products, along with cheese and milk while also entering new categories such as ice cream.
Arla Denmark has also entered new sales channels, including the opening of an Arla Unika speciality cheese store in Aarhus.
The company said its health strategy was implemented in Denmark in 2015, which included the launch of products rich in protein for both the health industry and sports purposes.
Europe – Germany
Arla said that its revenue from consumer products in Germany decreased by 14% from $1.51bn (€1.35bn) in 2014 to $1.3bn (€1.17bn) in 2015, mainly due to continued pressure on prices in the German market.
The new milk powder and butter facility in Pronsfeld officially opened in January 2015, making Arla’s Pronsfeld dairy the largest production site in the Arla Group.
In late 2014, Arla Germany launched its first branded organic range of dairy products under the Arla Bio brand, and in 2015 that organic range continued to grow to include categories like liquid milk, yogurt and cream.
Arla’s revenue from consumer products in the region Middle East & North Africa increased by 19% from $495m (€444m) in 2014 to $591m (€530m) in 2015.
The growth was driven by Arla’s established brands in that region such as Puck cheese, Lurpak butter and spreads and Arla Dano milk powder.
Arla established a new joint venture company in Egypt, which is now fully operational and the company says it expects to increase Arla’s sales in the Egyptian market.
In Arla’s new Strategy 2020 the company aims to double its consumer sales in the Middle East & North Africa by 2020.
China & Southeast Asia
Arla’s revenue in the region increased by 41% from $94.7m (€85m) in 2014 to $134m (€120m) in 2015. Of this, the highest growth rates were recorded in China, where Arla’s consumer sales doubled from $29m (€26m) in 2014 to $58m (€52m) in 2015.
Arla stated that, including third-party manufacturing and commodity trading, Arla’s overall revenue in the region China & Southeast Asia reached $334m (€300m) in 2015 – of which $160m (€144m) were recorded in China.
The company says it aims to triple its revenue from consumer sales in the region China & Southeast Asia.
Arla’s revenue from consumer products in the Sub-Saharan Africa region dropped from $98m (€88m) in 2014 to $83.6m (€75m) in 2015.
Arla says that it expects the Nigeria and West Africa market to create a tripling of revenue in the region by 2020.
Arla’s revenue in the US increased by 14% from $120m (€108m) in 2014 to $137m (€123m) in 2015.
The US is the world’s largest cheese market, and Arla’s intention is to double revenues by 2020. It says it aims to place Castello as one of the leading speciality cheese brands, and that it will also look to build in the cream cheese category.
Arla’s revenue sharply declined in Russia by 64% from $119m (€107m) in 2014 to $43m (€39m) in 2015, which the company says was expected as a result of the Russian embargo against dairy products from the EU.
However, Arla said that Russia will continue to be a key market in the future once the embargo is lifted.
During 2015, Arla increased its local production of branded yellow cheese in a partnership with the Russian dairy company Molvest. In 2015, a new production line for local processed cream cheese was added.