Half-year accounts: Arla remains strong despite pressure on prices

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 profit of three per cent of the annual 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 pr. kg of milk in 2011,” says Frederik Lotz.

Arla’s half-year report contain more information about Arla’s business development generally, and about Arla’s performance in its core markets in the UK, Sweden, Denmark, Germany, the Netherlands and Finland, as well as in its international growth markets. Find it on www.arla.com/investors

Key figures:

• Revenue: DKK 29.9 billion
• Arla earnings per kg of milk from members: DKK 2.64 (DKK 2.74 in the first half of 2011, DKK 2.37 in the first half of 2010)
• Result: DKK 513 million
• Organic growth: 2.8%