Branded sales grew 6.1% in the period, although revenue decreased by 5.3% to €4.9bn ($5.47bn) compared to the first half of 2015.
Also in the first half of 2016, Arla restructured the organization with the loss of 500 jobs.
To capitalize on branded sales and value-added products, the company has subsequently announced the creation of a Milk-Based Beverages unit, to create new products to triple the revenue of milk-based beverages as part of its Good Growth 2020 program.
Brand revenues rise
Arla’s total milk volume in the first half of 2016 increased 1.9% to 7.2bn kg. Despite taking in more milk, Arla says it managed to move the extra milk into the most profitable sales channels, retail and foodservice.
CEO of Arla Foods, Peder Tuborgh said that its dairies processed 119m kg of extra milk from its farmers.
The company said that the branded volume-driven revenue growth of 6.1% was at twice the pace of growth of its private-label products.
Arla brand was up 5.0%, Lurpak rose 7.6% and supported brands like Puck increased by 10.2%, while Castello dropped 0.7%.
CFO Natalie Knight said that close to 45% of sales are coming from brands.
“It now contributes the significant majority of our profitability to the Group,” she said.
Knight pointed to international revenue as being important to Arla.
“International revenue is over €700m ($782m) in the first half,” she said.
“This is a place that is critical for our success. In 2020 we want this to be 25% of our sales. This half year we've made a big jump, we're almost at the 20% number, and this is a place where we drive higher margin, and we see great opportunity for our business going forward.”
Knight said that there was also growth in the Middle East and northern Africa.
“This is for us, outside of Europe, the most important region, in terms of delivering on profitability for the Group, and sales are up 8%,” she said.
Positive outlook for second half of 2016
Arla’s profit for the first half year was €124m ($139m) corresponding to a profit share of 2.5% of revenue (excluding gain from sale of entities), compared to 2.3% in the same period last year.
Arla said it expects revenue for the full year to be within the range €9.5-9.8bn ($10.6-10.9bn) and the profit share to be within the target range of 2.8-3.2% of revenue by year-end.
Milk volumes are flattening in Europe and as a result market prices are levelling out. A more stable market situation is expected in the second half of 2016.
Last week, Arla Foods raised its farmgate milk price, and Knight said, “we believe that there's more to come.”
Divestment of Rynkeby Foods
In May 2016, Arla concluded an agreement to divest the juice subsidiary Rynkeby Foods A/S, which has annual revenue of €130m ($145m) and 200 employees. Rynkeby was the last non-core business unit within Arla, which means that the company will now focus solely on the dairy sector.
New Milk Based Beverage unit
Arla says that it wants to challenge soft drinks with healthier milk-based alternatives.
A sparkling milk & fruit drink, a milk & tea drink and an energy drink rich in protein are all part of Arla’s ambition to triple its business outside standard white milk in the global beverage market.
The company says that part of its ‘Good Growth 2020’ strategy is to capture the opportunities within beverages with a portfolio that includes healthier alternatives based on milk and natural ingredients.
The goal is to triple the revenue of milk-based beverages from €230m ($257m) in 2015.
Hanne Søndergaard, executive vice president for global Marketing & Innovation at Arla said that the company will create new sales opportunities in convenience stores, gas and train stations, gyms, workplaces and cafes where the company is not currently present.
Arla said it has had success through its Cocio subsidiary and its cooperation with Starbucks coffee drinks. Recently, beverages such as Arla Protein and Arla Move with natural ingredients have been introduced.