Steady First Half Performance by Arla Foods
Arla Foods has increased revenue by 12% to DKr29.9 billion (Eur4.0 billion) in the first half, resulting from a combination of organic growth within core and growth markets and the realisation of merger and acquisition benefits, including those in Sweden and Germany. Major agreements have paved the way for significant opportunities for Arla in Germany, the UK and China, and previous mergers and acquisitions have delivered efficiencies across the organisation. However, these achievements are against a background of a large increase in global milk production putting significant pressure on earnings and consequently on the milk price.
Arla’s key financial measurement is the milk price it pays to its owners and this is under pressure. While revenue is in line with expectations, Arla earnings for the first half of 2012 are below last year’s at DKr2.64 per kg of milk compared to DKr2.74 per kg in 2011.
“We anticipate that we will be able to deliver the three per cent increase in revenue in our annual results as planned, which equates to DKr1.8 billion. However, the milk price currently paid to our owners is not as high as we would like. The world commodity market has proved more unfavourable than foreseen, primarily due to an unexpected increase in world milk production. This is putting pressure on prices and therefore on our earnings from commodity trading and global E-auction sales and affects 25% of our milk,” explains Frederik Lotz, chief financial officer of Arla Foods.
Although there is a general trend, especially among European consumers in Arla’s core markets, to trade down to less expensive products, Arla’s three global brands – Arla, Castello and Lurpak – are all in growth. For example,. globally sales of Lurpak products continue to grow and the brand grew by 13% in the first half of 2012.
Overall, despite tough conditions within Arla’s biggest markets, the company has achieved 2.8% organic revenue growth. In particular, Arla’s strategic growth markets have seen significant sales increases . In the Middle East and North African region, revenue has increased by 20%, while inRussia, growth is 40%. There is also a double-figure growth rate for Arla’s subsidiary, Arla Foods Ingredients (AFI), which produces whey-based ingredients for the food industry. AFI increased its revenue by 14%.
“We are seeing clear, positive developments in profitability on our growth markets. We will maintain a strong focus on our core markets in Europe and in the future will become more active outsideEurope, moving into markets where there is growth and a rapidly growing demand for dairy products. Within our core markets we are looking forward to the new opportunities and sales channels which our impending mergers in Germany and the UK are expected to create,” says Peder Tuborgh, chief executive of Arla Foods. “We have created important top-line growth in the first half year, which in coming years will create new opportunities for us to grow Arla’s bottom-line.”
For the full 12 months, Arla expects to deliver a revenue of DKr60 billion, a figure which excludes the effects of the potential mergers. If the mergers are approved and the effect of them is included, Arla’s revenue is expected to reach DKr62 billion in 2012 (total revenue in 2011 was DKr55 billion).
Arla expects that prices on the global commodity market will improve significantly in the second half of the year and therefore, so will Arla earnings. Furthermore, a series of efficiency improvements implemented during the first half of the year will result in a decrease in the group’s costs from the end of 2012 and into 2013. The company therefore expects to deliver its forecasted three per cent annual increase in revenue, which in 2012 will equate to DKr1.8 billion.
