Global Outlook and the African Market

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11th AFRICAN DAIRY CONFERENCE Global Outlook and the African Market

September 23, 2015

Steen Hadsbjerg, Vice President Arla Foods

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1. Current milk prices

2. Market update

3. Outlook end 2015 and 2016

Agenda

4. Impact on Africa

Prices are unsustainably low

Russia and China dropped demand, while milk supply is growing

Prices under pressure - but recovery in late 2015/ early 2016 likely

Increased focus on the African Market

23. September 2015 Global Outlook and the African Market – 11th Dairy Conference

3


2. Market update


Agenda

4. Impact on Africa






4

Prices: Milk prices are unsustainably low – around the globe!

Farmers receiving poor milk prices, €ct.*

The complete global dairy sector is affected

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28

30

32

34

36

38

40

42

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Jul.- 15 Jan.-15 Apr.-15 Apr.-14 Jul.- 14 Oct.- 14 Jan.-14 Oct.- 15

………… DMK Arla

• 59% reduction in profits • Divesting its milk business

• Severe milk price issues in UK • New CEO on a turnaround mission

• Cost stabilising program and reduced investments announced

• Further milk price decline expected

• Costs saving program +500 jobs reduced • Announced offer of liquidity loans to

their farmers • Negative credit watch from S&P

* Yearly delivery: 1,000,000 kg, 4.20% fat, 3.40% protein, non-organic, best quality


http://www.arlafoods.dk/upload/global/logos/arla_logo_rgb_300dpi.jpg

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Prices: Historically low GDT results put pressure on milk prices, however latest auction increased with 16.5% overall

GDT downturn to a historical low puts pressure on milk prices

• Global Dairy Trade auctions on a not seen historical low and for SMP below EU-intervention

• Latest auction result up again because of reduced volumes as some dairies (like Arla) did not offer volumes below intervention price levels

Comments

3,500

3,000

2,500

2,000

1,500

1,000

5,500

5,000

4,500

4,000

1,400

Ø 3,395

5,300

Aug./15 Jul/0

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Intervention SMP WMP SMP in US-$

2008 - 2010

2011 2012 2013 2014

Sources: GDT, GCO Trade & Planning, Performance Management & Strategic Finance


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2. Market update


Agenda

4. Impact on Africa






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Markets: Global supply and demand is driving declining milk prices

Increased milk supply while Russia and China have left the market

• Supply: Rise of global milk production

• Demand: Russia and China “left the market”

• Stocks: Still high stocks remaining

Fundamentals weighed heavily on international pricing in Q2 and Q3

Comments

Sources: Performance Management & Strategic Finance


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Markets: Global milk production is growing and picking up in 2H 2015

Global milk production is growing YoY % growth of top dairy export regions

After a moderate start, growth is accelerating around the globe in 2H of 2015

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan

..

14

Jan

..

13

Ma

y

15

Jan

..

15

Latest NZ forecast indicates

-2% in 2016

Sources: Rabobank, USDA, CLAL.it,


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Markets: Stocks have increased globally on supplier side

Filled stocks in EU and USA

200

175

150

125

100

75

50

25

0

20

Jun 14

84

84

0

+178%

Jun

15

189

116

73

Dec

14

68

48

USA EU28

ktons

Butter

140

120

100

80

60

40

20

0

18

Dec

14

124

108

16

Jun 14

103

103

0

+9%

Jun1

5

136

118

USA EU28

SMP

300

200

100

0

600

500

400

518

Dec 14

462

Jun 14

479

+12%

Jun 15

USA

Cheese

ktons ktons

Sources: CLAL.it, Blimling,


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Markets: China’s and Russia’s stake in global imports quadrupled and then dramatically reduced….

Other countries

6%

China & Russia

94%

China & Russia

Other countries

72%

28%

China & Russia

Other countries

90%

10%

2014: 2008: 2015:

2008-2014:China & Russia stake +467% 2014-2015: -36%


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2. Market update


Agenda

4. Impact on Africa






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Outlook 2015: Short term there is still pressure on dairy prices

2015 What is happening with the prices right now?

• Short term there is still pressure

on international commodity prices, retailer negotiations and thus, milk prices

• Given the expected milk supply and the high stock levels, the current global demand supports only a slight price recovery in 2015 and first triggers are set to support turnaround within 2016

Comments


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Outlook 2016: Fundamentals are strengthening on supply and demand side!

There is light at the end of the tunnel

• Supply: Global milk production could tighten

to some extent in 2016

• Demand: Low prices and China to drive global demand growth in 2016

• Stocks: Will be worked through in 2016

Fundamentals support a change of the market end 2015 with even more support into mid 2016

Comments

Supply

Demand


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2. Market update


Agenda

4. Impact on Africa






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Sub-Sahara Africa is a 5-10 bnEUR dairy region with ~3% growth and a 3 bnKg milk deficit – RSA and Nigeria equal ~50% of value, while the remaining 50% is split across 30+ markets

Note: 1) LME: Liquid Milk Equivalent Source: FAO Statistics (2011); USDA, Proteus, Mansci; World bank; Euromonitor 2014;

S. Africa

Ghana 0.3

Angola 0.4

Kenya 0.6

Nigeria 1.8

0.1

Uganda

0.1

Other 1.3

N. Sudan

Benin

Mozamb. 0.1

Malawi

Camero.

0.2

Ivory Coa.

0.1

0.1

Senegal

0.2

0.3

2.8

26

399

17

23

39

21

15

26

39

11

22

53

46

179

SSA overview

Milk balance EXP.- IMP., bnKg LME1

-1.1

0.0

-0.1

0.0

-0.1

-0.2

0.0

-0.9

0.0

-0.1

-0.1

0.0

-0.1

#1

#2

#3

#4

#5

#6

#7

#8

#9

#10

#11

#12

#13

Bold = AF presence > 5mEUR

Dairy value & vol. growth 2014, bnEUR, 2011-14 Vol. CAGR%

Value equals formal market (MT, TT, FS)

-3%

5%

2%

8%

9%

2%

2%

-3%

5%

5%

4%

3%

6%

1%

Dairy value & vol. growth 2014, bnEUR, 2011-14 Vol. CAGR%

Population bn, 2014

Milk balance EXP. - IMP., bnKg LME1

World overview

0.9

0.8

0.2

0.3

0.3

1.4

1.2

0.4

0.6

0.6

-1%

3%

3%

0%

3%

7%

4%

1%

5%

Africa 5-10

SE Asia 10-15

Russia/CIS 15-20

Middle East 15-20

Oceania 25-35

China 35-50

India 40-55

US & CAN 45-60

LATAM 60-70

Europe 90-120

5%

-3

-7

-2

-7

-8

1

5

-4

13

11

3%

2%

2%

3%

3%

2%

3%

2%

3%

2%

3%

3%

3%

1%

Population mn, 2014, CAGR ’14-20

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The “sub regions” of Sub-Sahara Africa vary dramatically in terms of dairy consumption, competitive landscape and economics

3%

7% 4%

44%

0% 1%

1%

20%

10% 1%

8% Western

Africa

35%

0% 4%

5%

16%

5% 7%

3% 9%

1%

15% Central

Africa

Eastern

Africa

Southern

Africa

10%

3%

3%

17%

2%

1%

4% 25%

10% 3%

23%

4%

16%

0% 3% 3%

3%

15%

4% 13%

22%

17%

Butter/Spreads

Margarine

MP (Child)

MP (Family)

Other Cheese

CC/PC

YC

Other LDP

Yoghurt, Laban, Labneh

Milk (Fresh)

Milk (UHT)

3.2

0.8

1.6

2.8

Lactalis Unilever 0.1 (5%)

0.1 (4%)

Nestle 0.6 (20%)

0.2 (8%)

RFC

Promasidor 0.4 (12%)

Dairy value (bnEUR, 2014)

Top 5 players (mEUR, 2013)

• Population: 340mn

• CAGR (’14-20): +3% • Urbanization: 44% • CAGR (’14-20): +4% • GDP/capita: 1,550EUR




• CAGR (’14-20): +3% • Urbanization: 26% • CAGR (’14-20): +4% • GDP/capita: 590EUR



Category split (value%, 2014)

RFC Lactogal 0.0 (5%)

0.0 (5%)

Mafricom 0.2 (26%)

0.1 (7%)

Nestle

Lactalis 0.1 (9%)

Bidco Lactalis 0.1 (5%)

0.1 (4%)

Danone 0.1 (9%)

0.1 (5%)

Unilever

KCC 0.1 (8%)

Cape Oil & Marg. Danone 0.2 (6%)

0.2 (6%)

Lactalis 0.7 (26%)

0.2 (7%)

Clover

Unilever 0.5 (18%)


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Major market trends in Africa Major opportunitites in a fast developing market

• Double up on urbanisation and population by 2030 and 2050, respectively • Nigeria as the locomotive – Lagos will hold 24m people in 2015 (#3 largest city globally)

• Moms looking for nutritious and safe products for their kids • Dairy considered as a major source for a healthy upbringing

• Snacking used as enjoyment for kids – with liquid considered as nutritious/energy • Long-distance travel driving “quick fixes” (e.g. small dairy, on-the-go snacking)

• Food safety is becoming increasingly important (there are ~2,000 food safety-related deaths each year) • Strong brand translates to high food safety

• Big parts of SSA population still BoP • Low buying power calls for affordable products “nutrition for money”!

Trend outline


http://www.google.dk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.dairyreporter.com/Manufacturers/Arla-Foods-eyeing-African-dairy-opportunities&ei=JPoCVdOcJMKrUfLBgvgF&bvm=bv.88198703,d.d24&psig=AFQjCNGIjPikK3A72dyVBzIBueXjVCdf3w&ust=1426344718576839

http://www.google.dk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://voicesofafrica.co.za/shopping-malls-signs-angolas-rising-middle-class/&ei=SvcCVYW1NonnygP8-YL4Ag&bvm=bv.88198703,d.d24&psig=AFQjCNExf6Htbs7aAUVe9wQc07l4dby9tA&ust=1426344102038637

http://www.google.dk/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.heifer.org/about-heifer/press/press-releases/2014/heifer-international-receives-255m-grant-to-expand-its-east-africa-dairy-development-program--milk-for-health-and-wealth.html&ei=bfYCVaKEFcf1UNSIgLgN&bvm=bv.88198703,d.d24&psig=AFQjCNGJYGcTrEWwwo3RlFZsmulb6ryFgg&ust=1426343514779963

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Global dairy trends

Trends in dairy points towards trust, holistic health, reduced sugar/salt and increased protein – hybrid products and non-soy alternatives are on the rise

You can trust us

Health is more holistic

Rise of the hybrid2

The protein horizon

New stealth

strategies

Alternative alternatives

• Consumers becoming more health conscious

and prefer simple and natural foods

• Health claims such as fat free, lactose free,

high fiber and heart health gaining currency

• Increase in innovative fusion products such

as frozen pot desserts focusing on health and

indulgence

• On-the-go drinkable breakfast dairy

products on the rise; preferred especially by

the fast-paced, working youth and adults

• Soy remains prominent among dairy

alternative drinks but decline in usage over

the last 5 years

• Plant-based alternatives including

cereals (such as rice and oats) and nuts

(like almond) gaining popularity

• Continued reformulations and NPD activity

aimed at sugar and salt reduction in dairy

products

• Use of stevia in dairy products is new,

diverse, and on the rise

• Promoting product transparency through

origin and clean labeling1 (with claims such

as natural and additive free)

• Enhancing product traceability through

technological innovations ”No artificial flavors. No artificial sweeteners. No preservatives”

• Increasing NPD around protein rich

products to attract all ages, especially

Greek yogurt and whey drinks

• Emergence of male-specific marketing

with extra protein and large serving sizes


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Thank you for your attention

22. September 2015 Leaders Luncheon – 11th Dairy Conference

Data & Analytics

Global Outlook and the African Market