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 3.05 DKK pr. kilo with a total volume of owner milk of 9.5 billion kilos (compared to 2.71 DKK pr. kilo with a total volume of owner milk of 7.5 billion DKK in 2012).
Arla’s total revenue rose by over 10 billion DKK to 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 2.2 billion DKK (compared to 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,” said 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,” said 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,” said 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, 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,” said Frederik Lotz.
The subsidiary Arla Foods Ingredients increased its revenue by eight per cent to 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,” said Frederik Lotz.
Expectations for 2014
In 2014, Arla expects to reach a revenue of 79 billion DKK and a net profit of the targeted three per cent of the revenue, equal to 2.4 billion DKK. Given the current market expectations it is Arla’s ambition to deliver a Performance Price in the area of 3.25 to 3.35 DKK pr. 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,” said Peder Tuborgh.