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Arla posts H1 profits drop as milk crisis cancels out revenue growth

By Mark Astley , 03-Sep-2012

Dairy giant Arla Foods has reported a net profits decrease for the first six months of the year, as the continuing impact of the European dairy price war cancelled out revenue growth in the firm’s core and growth markets.

The Denmark-based dairy co-operative posted net profits of DKK 513m ($86.5m, €68.8m) for the first half of 2012 – down on the DKK 612m ($103.2m, €82.1m) reported in H1 2011.

Despite the fall in profits, Arla reported a 12% increase in revenue growth for the period of DKK 29.9bn ($5bn, €4bn) – an increase on the DKK 26.7bn ($4.5bn, €3.58bn) achieve in H1 2011.

This has been attributed to organic growth in core and growth markets and the realisation of mergers and acquisition benefits relating to its dealings in 2011.

For the full year, Arla expects to deliver total revenue of DKK 60bn ($10.1bn, €8bn) – an increase of the DKK 55bn ($9.28bn, €7.38bn) recorded in 2011.

If its proposed mergers in the UK and Germany are approved, this figure is expected to increase to DKK 62bn ($10.5bn, €8.32bn).

Revenue growth

Despite the net profits drop, Arla has heralded the results as a milestone in its 2015 strategy, putting it well on track to deliver revenue of DKK 75bn ($12.65bn, €10bn) by 2015.

“The half year result is at the expected level. We have begun work to reduce costs early and we have reached important milestones in our 2015 strategy,” said Arla chief financial officer (CFO) Frederik Lotz.

“We are seeing position volume growth across all business areas, which is contributing to the positive sales increases Arla has delivered.”

Sales in growth markets increased by 24% during the first six months of the year, Arla revealed. The Middle East and North African regions reported a revenue increase of 20%, while Russian sales jumped by 40%.

“We are seeing strong underlying volume growth in Arla’s sales to retailers which is helping to drive the business forward both in our core markets in Europe and globally. Emerging markets, particularly Russia and the Middle East, are major contributors of the positive growth,” said Lotz.

Elsewhere, the firm’s Arla Food Ingredients subsidiary reported double-digit growth for the period of 14% and its three global brands – Arla, Castello and Lurpak - achieved growth of around 8%.

M&A driven growth

Looking ahead, Arla expects to deliver revenue of DKK 60bn for the full year.

If proposed mergers with UK-based Milk Link and German dairy firm Milch-Union Hocheifel (NUH) are approved, that figure could hit DKK 62bn in 2012, the firm added.

The proposed mergers follow on from Arla’s agreement with China’s largest food and beverage manufacturer, COFCO, in relation to co-ownership of China’s largest dairy processor, Mengniu.

Arla has pinpointed mergers and acquisitions as a driving factor in its growth agenda.

“Although we continue to maintain focus on our core European markets, in the future Arla will increase its activities outside Europe and look to expand into countries where there is growth. By that we do not mean just China, the Middle East and Russia, where we have already established a strong presence,” Lotz added.

“We expect a significant increase in demand from the world’s emerging markets which will absorb the increasing quantities of milk.”

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