Mergers, acquisitions and strong brands were behind the significant rise in Arla's turnover in 2012. Despite significant price pressure on the global market in the first half of the year, Arla delivered results in line with expectations.
2012 saw strategic developments in Arla's growth markets and historic expansion in Europe. This was despite a first half-year during which prices in the global dairy industry were under severe pressure due to an unexpected increase in global milk production, which affected earnings across the industry.
Turnover rose 15 per cent to DKK 63.1 billion (against DKK 54.9 billion in 2011). As expected, consolidated net profit amounted to three per cent of turnover and totalled DKK 1.9 billion in 2012 (DKK 1.4 billion in 2011).
For each kilogramme of milk supplied to the company by the owners – the 12,300 cooperative members in Sweden, Denmark, Germany, UK, Belgium and Luxembourg – Arla generated earnings of DKK 2.71 in 2012, the performance price. It was four per cent lower than in 2011 at DKK 2.81 due to tougher market conditions in the first half of the year.
“2012 was a landmark year for Arla. In a tough market, Arla has continued to develop a strong cooperative with promising new positions in several core markets and strong brands. The Arla performance price is below the 2011 level, but it should be noted that it is at the high end of the European spectrum for dairy companies, which have all had to operate under the same market pressure,” says Arla Foods’ CEO, Peder Tuborgh.
The net result of 1.9 billion DKK is the highest in Arla’s history, and the performance price the third highest ever. However, Arla’s management team is committed to improving the bottom line further still to the benefit of the company’s cooperative members, some of whom are under serious financial pressure due to rising costs on farm.
“We fully appreciate that the ratio between our members’ earnings from milk production and on-farm costs is, currently, extremely strained. Arla is generating as much profit in its operating markets as possible right now, but in 2012 the high cost of energy and feed for the cows meant that, for some, the milk price did not sufficiently cover the cost of operations on the farm. This has the full attention of Arla’s management,” says Peder Tuborgh.
A world in two parts
While growth in European markets for food products is low, markets outside the EU are experiencing double-digit growth rates. Arla delivered growth in both turnover and earnings in almost all markets outside the EU in 2012. In Russia, Arla's turnover increased by almost 28 per cent to over DKK 600 million, and in the Middle East and Africa, sales of dairy products to consumers grew by 22 per cent to approximately DKK 3 billion.
“It became clear in 2012 that future opportunities lie in new growth markets. Our ingredients business and markets outside Europe in 2012 contributed significantly to the company's profit – in fact, we have never experienced such a positive development in our profits outside the EU. It is evidence that our international strategy is now delivering for us in financial terms and it demonstrates that the international markets will be crucial for our future earnings,” says Peder Tuborgh.
Global brands and ingredients deliver
Despite the generally low growth rates in the EU dairy market, Arla's global brands, led by the Arla® brand and Lurpak®, achieved overall growth. Globally, the Arla® brand grew by 3.4 per cent and Lurpak® by 5.1 per cent. Arla's third and smallest global brand – Castello® – suffered as a result of European consumers' general reluctance to buy slightly more expensive branded products. As a result, global turnover from Castello® products decreased by 1.1 per cent in 2012 compared to 2011.
Arla Foods Ingredients (AFI), which is responsible for Arla's global production, sales and development of whey proteins and ingredients to the food industry, achieved 10 per cent growth in 2012, delivering DKK 2.2 billion in turnover.
“Overall, the group delivered organic growth of 2.1 per cent, which was primarily driven by the growth markets of Russia, the Middle East and Africa as well as our whey and ingredients business. These three areas have not only shown impressive sales figures, they are also where earnings growth has been greatest,” says CFO at Arla Foods, Frederik Lotz.
Lower costs
In an effort to increase earnings for Arla's owners Arla's management team, in 2012, set about creating a more flexible business that can operate more efficiently and at a lower cost. The main effect of this will be felt in 2013 and beyond.
“In 2012, we introduced a number of new efficiency measures, which together are expected to save at least DKK 2.5 billion in costs by 2017. The effect of this will be more visible in 2013 but, in 2012, we experienced a significant decrease in fixed costs,” says Frederik Lotz.
Outlook for 2013
In 2013, Arla forecasts that it will achieve a turnover of around DKK 72 billion and a profit that is three per cent of turnover, equivalent to DKK 2.2 billion. Based on current expectations for the markets, Arla's ambition is to deliver earnings to its members that exceed those in 2012.
“The milk price is influenced by factors we cannot always predict or control. We saw this clearly in 2012. The forecasts for 2013 are based on there continuing to be low or no growth in the EU, where we derive most of our turnover and earnings, while the impressive growth rates outside the EU will continue. Regardless of market developments, we are confident in our ability to deliver for our owners. Having taken the decision to deliver several major mergers and acquisitions, Arla's owners have enabled us to create a platform from which we can deliver increased earnings. We must now deliver this uplift to them,” says Peder Tuborgh.
The accounts for 2012 were presented to the Board of Directors yesterday. They must now be considered by Arla's Board of Representatives at a meeting in Halmstad on 27-28 February 2013, after which the final annual report will be published and the profits appropriated.
Arla UK overview
Arla’s UK business group – Consumer UK – finished 2012 ahead of its financial forecast, delivering a turnover of approximately £1.7 billion (£1.5b in 2011) despite challenging market conditions which have been characterised by greater focus on price among consumers and discount stores continuing to increase market share. This has resulted in significant retail price competition on products such as fresh milk and heavy promotions within the butter, spreads and margarine category, which Arla UK has successfully managed.
2012 was a year of many major milestones; most significantly it saw Arla become the UK’s largest dairy company, in terms of both turnover and size of milk pool, following the completion of the merger with Milk Link, another UK dairy cooperative. The merger was truly complementary bringing together two successful and growth orientated farmer-owned dairy processing businesses, resulting in the enlarged business boasting an enviable product portfolio with established market positions in fresh and long life liquid milk, cream, Cheddar and speciality cheese, butter, spreads and dairy ingredients.
It was also the year that construction of the company’s one billion litre dairy at Aylesbury commenced, which will be one of the world’s largest and most technologically advanced, setting new standards for fresh milk processing. It is also planned for the facility to be zero carbon, making it the most environmentally progressive of its kind.
There was good growth for Arla’s branded products, and despite very challenging market conditions, Cravendale maintained its strong foothold. In addition, there were significant gains within the own label milk, cottage cheese, Cheddar and speciality cheese categories. The launch of Lurpak Lightest in January 2012 has been a resounding success, delivering £13.5m in first-year sales. Production at the dedicated butter making facility at Westbury Dairies has continued to increase with the transfer of Anchor block butter in the autumn.
In September, Arla announced its new milk pricing and sourcing model, which includes the sharing all liquid milk premiums for the benefit of all Arla Foods Milk Partnership members not on a formulaic model and a range of contracts to suit the needs of dairy farmers. The latter is being implemented in 2013.
Arla continued to deliver against its environmental agenda and was awarded the title Recycling Business of the Year by Awards for Excellence in addition to taking the award for Best Environmental Sustainability initiative at the Food Bev Innovation awards. The company was also a finalist in the Environmental Sustainability category at the IGD awards as well as in the Corporate Responsibility and Sustainability category at the UK National Business awards.
Peter Lauritzen, executive vice president for Consumer UK, said: “I am delighted that we have achieved our vision of becoming the UK’s number one dairy company and that, despite the tough conditions in which we are operating, have made good all round progress in terms of our strategic objectives.
“We anticipate that the 2012 market challenges will continue throughout 2013 and, as such, have clearly defined objectives for the coming 12 months to improve the bottom line in order to enhance returns for our cooperative owners. These focus on realising the benefits of the merger and exploiting the growth opportunities this presents, generating supply chain efficiencies through the continued embedding of our LEAN programme, increasing the market share of our brands and delivering our new dairy at Aylesbury on time and to budget.”