Arla: Strong growth in the second half of the year and accelerated CO2e reductions

After a challenging first half of the year, the Arla Group recovered quickly and achieved strong growth rates for all markets and brands in the second half of 2023. Results from Arla's efficiency program exceeded full year targets and the company's leverage improved. The Arla Group's total revenue amounted to EUR 13.7 billion in 2023, which is roughly in line with the previous year's revenue level (2022: EUR 13.8 billion). Revenue was impacted by negative currency developments, mainly in relation to the Swedish krona, the British pound and the US dollar. Net profit amounted to EUR 380 million or 2.8% of sales, which is at the lower end of the target range of 2.8% to 3.2%.

The cost of goods and general inflation led to a decline in the so-called milk performance price from 8.1 euro cents per kilogram of milk to 47.0 euro cents per kilogram of milk; compared to the highest milk performance price to date in 2022. Despite this decline, the result for 2023 is 15 percent above the average of the past five years. The milk performance price measures the value added per kilogram of milk by cooperative members, including the annual additional payment and the retained, consolidated profits (capital contribution). In Germany, the average Arla milk price paid to farmers for conventional milk (4.2% fat, 3.4% protein) in 2023 was 44.51 euro cents (vs. 50.90 euro cents in 2022); this price does not include the planned annual supplementary payment, interest and the annual capital contribution.

"Thanks to the strong commitment of our farmers, Arla employees and management, Arla once again demonstrated its ability to adapt to challenging market conditions in 2023. I am proud of our solid results, which are reflected in both a competitive milk price and the sustainability milestones achieved. The issue of sustainability is a challenge we have to face and we are on track to achieve our 2030_{CO2e reduction target}. We farmers are demonstrating that we are proactive and are actively tackling the challenge and taking innovative approaches," says Jan Toft Nørgaard, Danish farmer and Chairman of Arla's Board of Directors.

The solid financial performance enabled Arla's Board of Directors to propose an additional payment to dairy farmers of 2.07 euro cents (including interest on capital contributions) per kilogram of milk delivered in 2023, which corresponds to a total amount of 270 million euros. The proposed additional payment is therefore well above the level set out in Arla's consolidation policy.

"The proposed supplementary payment and a competitive milk price in 2023 reflect Arla's financial performance and resilience. We have successfully navigated a deflationary and volatile global dairy market in the face of negative currency developments. Against this backdrop, I am very pleased that in 2023 we were able to pay the second highest average milk price in our history and still offer our farmers a high supplementary payment at the end of the year," says Arla's CEO Peder Tuborgh.

Arla's farmers continue to drive the acceleration of_{CO2e reduction}

Arla's farmers once again demonstrated their commitment to reducing_{CO2e emissions}on the farms last year. On average,_{CO2e emissions}were reduced by 3.6 percent compared to 2022, resulting in a decrease in emissions on farms from 1.12 to 1.08 kg_CO2eper kilogram of milk produced.

Arla's total Scope 3 emissions, which account for 96 percent of the company's total_{carbon footprint}, were reduced by 3 percentage points per kilogram of milk and whey. Compared to the reference year 2015, this represents a total reduction of 12 percent.

In 2023, Arla was able to reduce its scope 1 and 2 emissions (in the areas of production, own logistics fleet and energy use) by 4 percentage points, which corresponds to an overall reduction of 33 percent compared to the reference year 2015. This is mainly due to energy optimization at the sites and the impact of long-term power purchase agreements.

In the two years between 2021 and 2023, Arla, together with its farmers, has saved almost 1 million tons_{of CO2e}. This puts Arla on track to meet the 2030 reduction targets of -63 percent emissions per kilogram of milk and whey for Scope 1 and 2 and -30 percent for Scope 3.

In addition, Arla took key steps in 2023 to further accelerate the reduction of scope 3 emissions on the farms: Firstly, with the introduction of the sustainability incentive model, which links parts of the milk price received by Arla cooperative members to sustainability measures on the farms. Secondly, with the introduction of the new Customer Sustainability Program (CSP) for a closer connection between farmers and Arla's customers in projects to achieve common climate goals.

"Together with our farmers, we have launched very important initiatives that have an impact on our_{CO2e reductions}. We are on track to achieve our 2030 reduction target and have saved almost 1 million tons_{of CO2e}in the past two years. At the same time, this approach also creates added value for our customers. This is a good example of how we are shaping the future of the dairy industry," says Peder Tuborgh.

Arla's sustainability surcharge was paid out for the first time in the summer of 2023. This linked the milk price for Arla farmers directly to the environmental and climate measures implemented on the farm. Farmers can earn a supplement of a maximum of 3 euro cents per kilogram of milk in relation to a total of 19 different sustainability topics. This creates an incentive for the implementation of further measures that contribute to achieving Arla's 2030 reduction target of 30% less Scope 3 _CO2eemissions per kilogram of milk and whey compared to the reference year 2015. Other sustainability measures, such as those aimed at preserving biodiversity, are also to be promoted in this way. In 2023, a total amount of €226 million was redistributed via this system, based on the points achieved by farmers under the incentive model and the submission of their climate check data.

Strong brand growth in the second half of 2023

The strong inflation and high cost of living in 2022 continued into early 2023. The sharp decline in purchasing power not only led consumers in Europe and Africa in particular to increasingly turn to cheaper products, but also to buy fewer dairy products overall. However, Arla's brand portfolio proved to be very robust despite these fluctuating market conditions.

"2023 was a year of two very different halves. In the first half of the year, consumers increasingly switched to cheaper products due to inflation and volume-based sales growth from our strategic brands decreased by 6.0 per cent. In the second half of 2023, we then saw a very strong recovery and an increase of 4.1%," reports Peder Tuborgh.

The decline in retail consumption of dairy products slowed over the course of the year as inflation eased and wages rose. As a result, the consumption of dairy products increased again at the end of the year, which means that the overall consumption trend for dairy products in the retail sector in the EU region will remain stable in 2023. In 2023, Arla recorded a 1.2 percent increase in sales of branded products to a record high of EUR 6.38 billion (2022: EUR 6.30 billion) due to higher prices. In parallel, volume-based revenue growth from strategic brands decreased by -0.7 percent - a result that was above expectations and showed positive momentum at the beginning of 2024.

Negative currency developments affect Arla's business areas

Arla divides its business into four business areas:

Arla Europe business area: due to high inflation and increased milk prices, branded dairy volumes in Europe were under pressure in 2023, but consumers started to return to branded products in the second half of the year. Sales increased by 2.7% to EUR 7.98 billion (2022: EUR 7.77 billion). Volume-based sales growth (volume) with brands fell by 1.3%, as many consumers switched to cheaper products and increasingly took advantage of special offers. The biggest setback was recorded in Sweden, where Arla experienced a 5.1 percent decline in branded volume due to the impact of high inflation, interest rates and a weakened Swedish krona. Despite all the challenges, Arla achieved volume-based revenue growth of 6.9 percent for branded products in the Netherlands/France/Belgium business area and 2.2 percent volume-based revenue growth for branded products in the UK. The licensed brand Starbucks™ achieved growth of 21.8 percent and Arla® Protein continued its growth of 60.5 percent.

The German business: As expected, the trend of the first half of 2023 with persistently high inflation and the high cost of living continued in Germany in the second half of the year. As a result, consumer spending was also under pressure in Germany throughout 2023, with consumers opting for private labels more frequently. This was at the expense of the brand business for dairy products.

Individual brands with growth despite market challenges

"All in all, we managed to overcome the difficult market environment in Germany in 2023 and close the year with a strong overall performance. Even though the economic challenges put our brand business under pressure overall, we were able to further expand our leading positions with individual brands," says Arla Germany CEO Lillie Li Valeur. As in the previous year, the licensed brand Starbucks proved to be very strong with double-digit percentage sales growth. This means that Arla remains the market leader in the branded iced coffee business in the German retail sector. In addition, Arla Finello also recorded double-digit percentage sales growth and remains the number one branded product for grated cheese. The Arla Buko cream cheese brand also saw sales increase in the upper single-digit percentage range. The expansion of business with selected branded products in the discount segment also contributed to growth in individual areas. Arla also achieved significant growth in the food service business, particularly with the Arla Pro brand, which increased its sales volume by more than half. The main drivers here were a significantly better market situation after the coronavirus period and new customers.

Strong focus on sustainability

Arla has also made significant progress with its sustainability agenda in Germany, particularly with the introduction of the new sustainability incentive model for Arla's German farmers, which continues to drive emission reductions in milk production on farms. In addition, Arla has also announced the launch of its new customer sustainability program CSP for the German market at the end of 2023.

Looking ahead to the current year, Lillie Li Valeur explains: "The biggest challenge will be the persistently high cost level combined with volatile markets. We expect consumers to eat out less often this year and cook at home instead. This should continue to positively support sales in some categories. We will therefore also place a strong focus on cooking and introduce product innovations in this category in the first half of the year. And we see further opportunities in the dairy drinks category, where we want to expand our very strong position." In addition, sustainability remains a key focus for the German business this year, especially with the new sustainability program for customers, which will also be introduced in Germany in 2024.

Arla International business division: In this business division, revenue increased by 1.4 percent to EUR 2.47 billion (2022: EUR 2.44 billion). Despite a high price level, the volume-based revenue growth of the brands remained positive at 1.9 percent. In the MENA region (Middle East and North Africa) and Southeast Asia, Arla recorded volume-based branded revenue growth of 4.2 and 3.9 percent respectively. Business in West Africa was negatively impacted by the currency devaluation and subsequent inflation in Nigeria.

Arla Foods Ingredients (AFI) division: Arla's wholly owned subsidiary increased its sales volume in the value-added protein segment by 10.4 percent, but revenue decreased by 6.3 percent to 963 million euros (2022: 1.03 billion euros). In 2023, AFI faced a very dynamic market environment characterized by exceptionally volatile market prices for whey and lactose-based ingredients and currency fluctuations, including the currency devaluation in Argentina, where AFI has a production site.

Global industrial sales division (B-B raw material sales): The total share of milk solids sold increased to a historically high volume of 27.4 percent compared to 23.6 percent in the previous year. The division's revenue fell by 8.7% from EUR 2.53 billion in 2022 to EUR 2.21 billion, which is attributable to a rapid decline in raw material prices in the first half of the year. Raw material prices began to recover in the second half of 2023, mainly due to a decline in milk production.

Outlook 2024

Arla expects that the volatile market conditions driven by external factors such as reduced consumer purchasing power, currency developments and geopolitical tensions and uncertainties will continue to impact the business in 2024. Arla expects the growth momentum seen in the second half of 2023 to continue in the first half of 2024. This is expected to result in total volume-based brand growth of 1.0 to 3.0 percent for 2024, although the outlook for market and growth developments for the second half of the year is uncertain.

Through its sustainability and climate strategy, including the Sustainability Incentive Model and the new Customer Sustainability Program (CSP), Arla will continue to drive efforts to reduce its environmental impact. This should enable Arla to achieve its 2030_{CO2e reduction}targets (63 percent reduction in scope 1 and 2 emissions and 30 percent reduction in scope 3 emissions per kilogram of milk and whey).

Peder Tuborgh explains: "While we expect continued volatility on several levels, our strong performance in the second half of 2023 gives us confidence going into 2024. Uncertainty remains, as increasing unrest around the world and the associated economic slowdown could potentially have a negative impact on our business. However, Arla is in a solid financial position and global demand for dairy products remains strong. With our sustainability and climate strategy, including the incentive model and the new CSP, we will further accelerate our efforts to reduce our environmental impact and deliver on our 2030 emission targets in Scope 1, 2 and 3. We remain fully committed to achieving the goals of our Future26 strategy and strive to be at the forefront of sustainable dairy farming."

The Arla Group's revenue forecast for 2024 is expected to be between EUR 13.2 and 13.7 billion. This decline is primarily due to lower sales prices compared to the record highs at the beginning of 2023 and negative currency developments. The profit share of sales is expected to be in the range of 2.8% to 3.2% and efficiency gains will amount to between EUR 85 million and EUR 105 million. The leverage ratio is expected to be in the target range of 2.4 and 2.8.

Arla will publish its full financial and sustainability report for 2023 on February 29, 2024.

Key figures of the Arla Group's 2023 annual results at a glance:

• Revenue of the Ar la Group: 13.7 billion euros (2022: 13.8 billion euros)
• Profit share of revenue: 2.8 percent (2022: 2.8 percent)
• Volume-based revenue growth through strategic brands (volume): -0.7 percent (2022: -3.2 percent)
• Gearing ratio: 2.6 (2022: 3.0)
• Milk volume: 13.9 billion kg (2022: 13.5 billion kg)
• Net efficiency gains: 114 million euros (2022: 101 million euros)
• Investments: Investments in intangible assets, property and equipment, including rights of use, amounted to a record EUR 601 million (2022: EUR 521 million).
• Proposal of the Supervisory Board on the appropriation of profits: Additional payment including interest of 2.07 euro cents per kilogram of member milk, corresponding to a total payout of 270 million euros.
• Milk performance price: 47.0 euro cents/kg milk (2022: 55.1 euro cents/kg milk)
• (The milk performance price for Arla Foods is defined as the prepaid milk price plus the annual net profit divided by the total milk supply of the cooperative members. It measures the value added per kilogram of milk of the cooperative members, including the annual back payment and retained earnings in the form of individual and collective capital contribution and is a key financial indicator for the dairy cooperative).
• Sustainability: Accelerated reduction of Scope 3 emissions, on track for the 2030 reduction target with_{CO2e savings}of almost 1 million tons in the past two years. Successful introduction of the sustainability incentive model in 2023 and the new sustainability program for customers, the Customer Sustainability Program (CSP), to further drive both sustainability activities on the farms and value creation.