Arla Remains Strong Despite Pressure on Prices

For the first six months of 2012, Arla posted a revenue of just under DKK 30 billion (compared to DKK 27 billion in the first half of 2011). The 12 per cent increase is the result of a combination of organic growth within core and growth markets and the realisation of merger and acquisition benefits, including those in Sweden and Germany.

3 Sep 2012 --- Growth and efficiencies characterised the first half of 2012. 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. 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.

For the first six months of 2012, Arla posted a revenue of just under DKK 30 billion (compared to DKK 27 billion in the first half of 2011). The  12 per cent increase is the result of a combination of organic growth within core and growth markets and the realisation of merger and acquisition benefits, including those in Sweden and Germany.

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 DKK 2.64 per kg of milk compared to DKK 2.74 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 DKK 1.8 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 per cent of our milk," explains Arla’s Chief Financial Officer, Frederik Lotz.

Growth outside Europe
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. In Germany, for example, Arla Kærgården has delivered double-figure growth rate and is now sold in all the country’s major grocery chains. Globally, sales of Lurpak products continue to grow and the brand grew by 13 per cent in the first half of 2012.

Overall,  despite tough conditions within Arla's biggest markets, the company has achieved  2.8 per cent 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 per cent, while in Russia, growth  is 40 per cent. 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 per cent.

"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 outside Europe, 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. In  more terms, 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,” says CEO Peder Tuborgh.

Significant developments  in the UK, Germany and China
During the first half of the year, Arla entered into a strategically important agreement with China's largest food company, COFCO, in relation to co-ownership of the country's largest dairy company, Mengniu Dairy Group. Arla also entered into two important merger agreements in Europe, with Milk Link in the UK and MUH in Germany, both of which are subject to approval by the regulatory authorities.

"The two mergers represent a fundamental strengthening of Arla. We will become a strong European dairy company that operates globally. Subject to the mergers being approved by the competition authorities, our annual revenue will increase by approximately DKK 11 billion. In this financial year, if the mergers go ahead, we  expect them to contribute approximately DKK 2 billion to revenue," says Frederik Lotz.

Expectations for the full year
For the full 12 months, Arla expects to deliver a revenue of  DKK 60 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 DKK 62 billion in 2012 (total revenue in 2011 was DKK 55 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 DKK 1.8 billion.

"Even though we expect to achieve the annual  result we have planned for 2012, we are prepared that it will be difficult to achieve the same level of Arla earnings as in 2011. Market conditions in the second half of the year as still expected to be tough and while we expect to achieve higher Arla earnings than in the first six months of the year they will be slightly below the level of Arla earnings in 2011," says Frederik Lotz.

UK overview

The first six months of the year have seen the delivery of several significant milestones for the UK business.

In January, Arla Foods Milk Partnership commenced its next stage of investment in Arla Foods UK, with all members increasing their investment from one pence per litre to five pence per litre, to be paid over a period of 8-10 years. The investment forms part of the strategy for AFMP members to increase their investment in the UK business.

Also in January, Arla launched Lurpak Lightest Spreadable, the biggest butter, spreads and margarine launch for Arla in the UK in last 10 years. Other new product launches in the first half of the year include crème fraiche with less than three per cent fat and several new cottage cheese flavours including tomato and basil. The company’s successful Lactofree portfolio has also been extended with the introduction of Lactofree spreadable and Lactofree ice cream.

In February, construction of Arla’s one billion litre fresh milk dairy at Aylesbury commenced and the £150 million project is on track for completion in summer 2013.
The months of May and June were equally eventful. Arla UK’s proposed merger with Milk Link was announced on May 22 and both Arla Foods amba and Milk Link members voted overwhelmingly in favour on June 26. The merger is now subject to regulatory approval.

In line with its stretching sustainability agenda, Arla UK has delivered its zero waste to landfill target and received awards for its environmental achievements including best environmental sustainability initiative at the Dairy Innovation Awards and Commercial Recycler of the Year at the Awards for Excellence in Recycling and Waste Management. Arla is currently a finalist in the environmental categories of the IGD, EDIE Sustainability Leaders and UK National Business awards.

Commenting on the first six months of the year, Arla UK CEO, Peter Lauritzen, said: “In addition to achieving a financial result in line with our expectations, we delivered several strategic milestones, principally the commencement of the construction of our new dairy at Aylesbury and the announcement of our proposed merger with Milk Link.”

Looking ahead to the second half of  2012, Peter added: “Our focus for the remainder of the year, in addition to implementing the proposed merger with Milk Link, is ensuring a successful start of Anchor butter production at our dedicated butter-making facility in Westbury and maintaining focus on costs in order to deliver our demanding 2012 targets.”