Arla said it expects to achieve its full-year targets for profits, strategic branded growth and financial leverage – along with further improvements in the performance price and a full-year group revenue increase of nearly €1bn ($1.2bn).
The first half of the year showed a recovery in global milk prices after nearly three years of low prices in the industry.
This was a direct result of lower to unchanged milk production versus the prior year in most dairy-producing markets combined with improved demand for milk and dairy products in Europe, the US, and emerging markets.
Despite reduced total milk volumes from farms and adverse currency developments, Arla’s revenue grew 3.4% to €5bn/6bn (from €4.85bn/$5.85bn the first half of 2016).
Arla’s performance price, which measures the value Arla has generated from each kilo of milk supplied by the farmer-owners, increased by 19% over the period.
Arla Foods CEO Peder Tuborgh said as the global dairy market improved, the company has responded to the rally in global dairy prices while improving product mix across key markets.
As a result, Arla has increased the prepaid milk price to the farmers who own the company by 42% over the last 12 months, he said.
Tuborgh told DairyReporter, “We've been able to deliver significant price increase to our farmers. There's reason to be optimistic.”
Full-year expectations
For the full year, Arla said it expects further improvement in the performance price compared to the half-year level. Revenue is expected to be in the upper end of the range of €10-10.5bn ($11.9-12.5bn), up from €9.6bn ($11.5bn) in 2016.
“The improving market conditions, driven by increasing milk fat and protein prices, particularly in Europe over the recent months, is indeed good news for Arla and our farmers,” Tuborgh added.
“We think that the rest of the year will be at the robust high level, there is a clear and sound demand and growth worldwide.”
Potential shortages
Tuborgh said there is a significant and increasing imbalance especially on the fat component of milk, so for creams, butters and spreads, the demand is still exceeding the supply capabilities, not only of Arla, but the industry.
“There is this year not a chance that the industry will be able to fulfil the supply,” Tuborgh said of the shortage in those categories.
“It's unavoidable. In 2016, we had as an industry very low milk prices, unsustainably low, which led to farmers putting the brakes on their production. That is leading to a lack of raw materials, predominantly within the fat and cream area, so it's quite natural that we are in this situation.”
Strong sales growth in Arla Foods Ingredients
Arla Foods Ingredients, a fully-owned Arla Foods subsidiary, reported a 24% revenue growth in the first half of 2017 to €313m ($374m), compared to €252m ($301m) in the first half of 2016.
“Our natural whey ingredients business remains the most profitable part of the Arla Group,” Tuborgh said.
Europe the core zone
Europe is Arla’s core commercial zone with revenue of €3.2bn ($3.8bn) in the first half of 2017 (excluding European revenue from Arla Foods Ingredients and trading), equal to 63% of revenue.
Higher sales prices and improved share of branded sales had a positive impact on Arla’s revenue in Europe, however these were offset by lower milk volumes and adverse currency developments, as well as the divestment of the juice subsidiary Rynkeby in May 2016, which accounted for a €23m ($27.5m) reduction in revenue compared to the first half of last year.
Currency issues were primarily related to the British currency, which impacted revenue negatively by €135m ($161m).
Brexit concerns, strong UK market
Tuborgh said with respect to Brexit, the waiting period doesn't allow companies such as Arla to currently plan for the period after Brexit.
“What we do see already is that the pound has deteriorated against the euro.”
Tuborgh said Arla, due to its presence across Europe, including the UK, was in a good position of trying to express its views on the Brexit process from all angles.
“We are a firm believer that the free flow of products without tariffs across markets is the best thing for our farmers no matter where they come from,” he said.
In the UK, there was a 10% increase in net revenue from brands including Lurpak and Castello, with the Arla brand seeing revenue growth of 15%. This was driven by high performance in the yogurt category, with Arla Protein and Arla skyr seeing revenue rises of 59% and 82% respectively.
Arla is investing £37.5m ($48.5m) in its UK sites in 2017, and has launched new products. The company also agreed a new three-year exclusive contract with Morrisons, set to begin in March 2018.
Good international growth
A part of Arla’s strategic ambition is to expand sales outside Europe, specifically in the regions Middle East and North Africa, China and Southeast Asia, Sub-Saharan Africa, USA and Russia.
Arla has also announced a new sales and packaging center will be constructed in Accra, Ghana, which will be operational by September 2017.
Overall, Arla’s international business grew 10% to €792m ($946m) for the first half of the year – primarily driven by strong performance in Sub-Saharan Africa (up 32%) and China and Southeast Asia (up 36%).