28 Annual report 2016 Seven essential business priorities for 2016 The seven essential priorities are the outcome of our annual business planning process, outlining the core priorities for the coming year, key activities, as well as associated key performance indicators and targets that define success. The seven essential priorities are utilised throughout all business functions and commercial zones to ensure delivery of our most important strategic priorities as ONE united group. Volume is king Target: Add an additional 400 million kg owner milk into retail and foodservice. Status: Result: In 2016, we delivered retail and foodservice volume driven revenue growth of 2.7 per cent, slightly below our target of three to five per cent. We successfully increased retail and foodservice volumes by 341 million kg. This was a great delivery close to target, despite total milk volumes being more than 800 million kg less than initially expected. Certain tradeoffs between volume and price were made during the second half of 2016 based on the increasing raw material shortage and rapidly increasing milk prices. The reduction in milk intake expectations during 2016 exemplifies this change in strategic perspective. Deliver significant growth on brands Target: Deliver significant growth on strategic brands, covered by Arla®, Lurpak®, Castello® and Puck®. Status: Result: Delivering strategic branded volume driven revenue growth at 5.2 per cent is an all-time high for Arla. In 2016, almost the entire growth in our core retail and foodservice business has been driven by our brands. Intensified sales efforts and increased investment in marketing have resulted in our branded growth being driven by the Arla® brand (4.5 per cent), Lurpak® (7.7 per cent), Castello® (3.0 per cent) and Puck® (10.6 per cent). With a brand share of 44.5 per cent, the proportion of high profit products is the strongest in years. Improve Central Europe peer performance* Target: Improve Central Europe peer performance by addressing cost and brand performance and competitively export milk into retail and foodservice outside the EU. Status: Result: The business delivered significant cost improvements according to plan in supply chain, across administrative and commercial functions, as well as significantly improving the results in the German cheese business. In addition, branded positions grew by 3.4 per cent, a solid achievement in a difficult market. Milk supply and price volatility have unfolded more rigorously in Germany than any other region, and the market has become even more fragmented, tough and competitive. This proved to be even more challenging than expected, although some improvements have become visible towards year-end. Strengthen market positions in International** Structurally reduce the cost level Improve cash flow Strengthen the Arla cooperative Target: Strengthen leading positions in China, the Americas, Nigeria, Middle East and North Africa measured by volume and market share. Status: Result: In 2016, we have succeeded in growing volumes in these International regions by 9.5 per cent and our branded business by 10.7 per cent. China and South East Asia grew by 31.2 per cent, Sub-Saharan Africa grew by 15.8 per cent, the Middle East and North Africa grew by 3.8 per cent, and the Americas grew by 3.4 per cent. In a volatile year impacted significantly by low oil prices and the spill over economies in the Middle East and Nigeria, we are satisfied with the results, although they are below our 15 per cent growth target. Target: Volume driven revenue growth should be >2.0 times higher than the growth in capacity costs. Deliver a conversion cost in production at an index level of 98.5. Status: Result: Our strong cost performance is, in part, due to huge efforts to run an efficient supply chain, however, our conversion cost has fallen short of the target at 99.2, impacted by the lower milk volume. Scalability ensures that capacity costs are increasing at a lower rate than revenue. Our scalability met the target of >2.0 due to firm control of capacity costs. EUR 100 million of our new ambitious cost improvement target of EUR 400 million in supply chain has been delivered in 2016. Target: Improve cash flow to achieve leverage of 2.8 to 3.2 and release EUR 130 million*** in cash within net working capital. Status: Result: In 2016, we achieved leverage of 2.8, which is at the low range of our long-term target range of 2.8 to 3.4, underpinning the Group’s strong financial position. Including the gain on divestment of Rynkeby, leverage is 2.4. Our primary net working capital position, excluding owner milk, was significantly improved and a cash release of EUR 165 million was achieved. Target: Establish a process with the Board of Directors, National Councils and Board of Representatives to create strong owner relations. Status: Result: The new owner strategy will prepare Arla for the future and ensure a competent and aligned fundamental owner structure that unites owners across countries. In October, the Board of Representatives decided on an aligned structure, annual calendar and to explore if the UK and Central European owners can be offered direct membership in Arla Foods amba. The first elements of the strategy will come into effect in 2017. * After the restructure, Consumer Central Europe is referred to as Central Europe. The priorities remain unchanged. ** After the restructure Consumer International is referred to as International. The priorities remain unchanged. *** Changed at mid-year from EUR 150 million due to a higher share of sales in International. Target not achieved. Achievement on major components. Target fully achieved.
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