Arla Foods raises full-year earnings guidance despite higher resource costs

26 Aug 2021 --- The inflationary environment created by COVID-19 is expected to challenge dairy giant Arla Foods and its farmer owners, with increasing production costs due to higher prices on fuel, energy, packaging and feed.

Despite these headwinds, the global dairy cooperative adjusted its expectations for full year revenue for 2021 to the range of €10.6 billion (US$12.5 billion) to €11 billion (US$12.9 billion). These promising results were predominantly driven by retail sales, which allowed the company to pay out a competitive prepaid milk price to farmer owners.

Total Arla group revenue increased slightly by 1.2 percent to  €5.441 billion (US$6.4 billion).

Many of Arla’s farmer owners are challenged by increased production costs as global prices of fuel, energy and feed going up.Arla increased the guidance of its branded sales volumes growth to around 3 to 4 percent, and its year-end leverage to no more than 2.8. Its net profit forecast is maintained at 2.8 to 3.2 percent of revenue.

“We continue to be in a strong financial position despite the prolonged uncertainty and global operational challenges from COVID-19,” remarks Arla’s CFO, Torben Dahl Nyholm.

“In the first half of 2021 we have continued to manage our business effectively across our commercial segments. However, the high inflationary pressure will be a challenge in the second half of the year.”

Revenue increase driven by sustained sales
High demand for dairy across all categories and a “strong operational execution” resulted in Arla’s global brands delivering total sales volume growth of 5.6 percent in the first half of this year.

Total Arla Group revenue increased slightly by 1.2 percent to €5.441 billion (US$6.4 billion), compared to €5.377 billion (US$6.3 billion) in the first half of 2020. This was driven mainly by continued high branded sales volume growth of 5.6 percent across all dairy categories, particularly in the retail sector.

“Global consumer demand for dairy has remained strong over the first half of 2021 as people continue to value the taste, nutritional quality and variety that dairy brings to their diets,” comments Arla CEO, Peder Tuborgh.

“Our strong positions across the retail sector and commitment to innovation, together with the resilience of our operations and farmer owners, has meant that we have delivered a solid result for the first half of 2021 and delivered good returns to our owners through an improved milk price.”

Many Arla farmer owners are challenged by increased production costs, as global prices on fuel, energy and feed are going up.

Fuel and feed prices rise
The cooperative’s performance price – which measures the value Arla creates per kilogram of owner milk – was €38.6 cents compared to €37 cents in the first half of 2020. Arla paid a competitive prepaid milk price with increases over four consecutive months leading to a first half average of €36.0 cents/kg, which is €1.6 cents higher than the same time last year.

Arla’s international segment delivered branded growth of 12.2 percent across all regions and main brands.However, many of Arla’s farmer owners are challenged by increased production costs as global prices on fuel, energy and feed are going up. On average, feed prices have increased by 13 percent per cow in the first half of 2021.

Arla’s international segment delivered branded growth of 12.2 percent across all regions and main brands. But due to impacts of a declining US dollar and higher production and service costs, total revenue grew modestly by 1.3 percent to €1,037 million (US$1,219 million) compared to €1,024 million (US$1,204 million) of the previous year.

These negative impacts were offset by price increases to some degree, the company notes. Arla Foods Ingredients (AFI), a fully owned subsidiary of Arla, saw its revenue grow to €387 million (US$455 million) compared to €360 million (US$423 million) in the first half of 2020.

Commercial zones deliver positive results 
The Arla brand grew 6.9 percent delivering revenue of €1,626 million (US$1.9 million) driven by sub-brands such as LactoFREE and in the “fill ‘n fuel” category. Arla’s stable of licensed brands also performed well, led by its ready drink Starbucks portfolio, which grew 43 percent in volume across Europe, the Middle East and Africa.

Arla’s European segment delivered a revenue of €3,199 million (US$3.8 million) compared to  €3,178 million (US$3.7 million) in the same period last year with contributions from all markets.

Growth was seen in all markets but among others the UK and Denmark witnessed fast growth, driven in part by significant distribution gains in retail channels and the introduction of new products, such as Starbucks Triple Shot and Starbucks Chilled Classics Grande.

Arla’s Food Service business saw a boost in sales in the Spring as the hospitality sector re-opened. While sales have not yet fully recovered due to prolonged global COVID-19 disruptions, a re-balancing of demand between retail and the hospitality sector continues to play out.

Due to the increased sales through Arla’s retail channels, the overall share of milk solids fell from 23.6 percent last year to 23.1 percent in 2021. Despite this, revenue in Arla’s Global Industry Sales increased slightly to €818 million (US$962 million) compared to the €815 million (US$958.5 million) of the same period last year, as a result of global market price increases.

Brand performance is currently being supported by the company’s digital strategy, which is focused primarily on building its e-commerce and in-house digital marketing capabilities and innovation in its production facilities.

Notably, Arla’s e-commerce business grew 33 percent by revenue compared to the same period last year.

By Benjamin Ferrer

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