Arla Foods to give all profits to farmers after rebound from ‘tough’ Q1

By Jim Cornall contact

- Last updated on GMT

In the first half of 2018, Arla's new Calcium savings program delivered a positive contribution of €9.5m.
In the first half of 2018, Arla's new Calcium savings program delivered a positive contribution of €9.5m.

Related tags: Arla, Arla food ingredients, European union, Food

Because farmers are facing a tough financial situation, partly because of the Europe-wide drought, Arla Foods is proposing to give all 2018 net profits to farmers due to the positive development of Arla Foods’ balance sheet.

Arla's board of directors has discussed and agreed on a proposal for the company's supreme governing body, the board of representatives, to pay out the entire net profit from 2018 when the annual results are approved early next year, thus making a one year only deviation from the company's usual profit appropriation policy.

Chairman of Arla Foods, Jan Toft Nørgaard, said, "As a farmer-owned dairy company, we care deeply about the livelihood of our farmers and we recognize that this summer’s drought in Europe has been extraordinary.

We are proposing that extraordinary measures be taken in this situation, and the Board is satisfied with the positive development of the company's balance sheet, which makes this proposal possible."

Potential pay-out in March 2019

The proposal will be discussed at the next board of representatives meeting in October. The board expects to make a final decision at the meeting in February 2019 when the annual results are approved.

The amount of this payout remains subject to there being no material changes to the profit level or financial outlook at the end of the year. If approved, the payment will follow the regular timing of the supplementary payment in Arla, with money being paid out in March 2019.

The board said the expected payout will be in the range of 2.3-2.5 cents (US 2.6-2.9 cents) per kilogram of milk.

Also included in the BoD's proposal is the pre-requisite of a commitment to return to the company's existing retainment policy for the remainder of the current strategic period, affecting the financial years of 2019 and 2020.

CEO of Arla Foods, Peder Tuborgh, said, "Our balance sheet has improved significantly over the last few years, and the strength of our balance sheet makes room for this extraordinary initiative while still maintaining our investment plans for the continued future growth of the company.

“If the board's proposal is approved, our financial ratios are expected to remain within the target range, provided there is a firm commitment by the board of representatives to return to the agreed retainment policy after 2018."

For 2018, Arla expects net profit to be within the target range of 2.8 - 3.2% of Group revenue.

Rebound from tough quarter

Arla Foods said it has improved its profitability and delivered revenue growth of 2.2% to €5.1bn ($6bn), driven in part by the company’s strategic brands in the first half of 2018 and rebounding milk prices after a weak first quarter.

The first half of 2018 was characterized by challenging market conditions with a continued weak British pound and unfavorable development in both fat and protein prices. However, price levels began to improve in the second quarter of 2018, and despite higher retail prices consumers remained attracted to Arla’s strategic brands across categories.

The company said operational costs increased in the first half year as a result of inventory revaluation from changes in milk price, higher sales volumes, as well as increased inflation-driven costs for energy and transportation.

Tuborgh said, “It was a tough start to 2018 as we took urgent action to repair our bottom line, which was impacted by the double-whammy of a weak British pound and unfavorable prices. This urgency delivered a positive result as we were able to improve our profitability and the performance of our milk price over the period. However, there is more work to be done as we continue to relentlessly execute our transformation programme, Calcium, which will further improve our performance.”

Calcium program

Early in 2018, the three year transformation and efficiency program Calcium was announced by Arla’s management to reduce costs by more than €400m ($467m).

In the first half of 2018, Calcium delivered a positive contribution of €9.5m ($11.am). For the full-year of 2018, Arla expects Calcium to deliver a positive contribution of at least €50m ($58.4m).

Of the €400m ($467m) Calcium is expected to deliver by 2021, Arla aims to direct €300m ($350m) to its farmers via the prepaid milk price while reinvesting €100m ($117m) into areas that fuel growth.

Business improvement

The Arla brand saw sales growth of 5% in the first half-year, adjusted for exchange rates. It was largely driven by price increases and increasing sales volumes within the organic milk, milk based beverages and mozzarella cheese categories.

In the Middle East and North Africa, the Puck brand revenue grew 9.1%, adjusted for exchange rates, mainly driven by higher volumes in its core cream and processed cheese category.

Lurpak saw 11.3% growth in revenue in the first half-year, while cheese brand Castello grew 5.6%, adjusted for exchange rates.

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