Arla Foods, Britain's biggest milk supplier, staged a profits recovery in the second half of the year after introducing higher milk prices and carving out greater cost efficiencies.

While the dairy group's full-year profits of £37.8 million were down from £44.1 million last year, the result was in line with market expectations. Its shares were up just over 1 per cent at 67.25p this morning.

Arla said discussions were continuing with Scandinavian parent Arla Foods amba regarding its owner buying the remaining 49 per cent of the UK dairy business it does not already own. However, the subsidiary said there was still no certainty a deal would be agreed.

Arla's price increases and cost-cutting during the second half turned the company's fortunes around after being hampered by supermarkets' aggressive pricing of own-brand milk and by higher marketing and production costs in the first half.

Sales from continuing operations were up 6 per cent to £1.15 billion during the year, helped by growth in Lurpak and Anchor butter and higher milk sales.

Sir David Nash, chairman said the group's brands "continue to make strong progress".

He said: "Cravendale sales have picked up significantly, leading us to materially increase our ... marketing spend next year to £6 million, in order to support the encouraging sales trend that has strengthened during the second half," Sir David said.

"We continue to be the leading supplier of fresh liquid milk and cream to the retailers, and anticipate increasing our sales to our top three retail customers," he said.

The group recorded a £15.4 million net loss on the £33 million disposal of its Express Dairy home delivery business to Dairy Crest as well as a £7.2 million charge relating to disputed milk supply contracts.

The value of Cravendale milk sales were up 19 per cent after the group increased marketing of the product.

Arla is the leading supplier of milk to major retailers with 44 per cent market share; it also has the largest share of the rapidly growing organic milk market. Total milk sales to its top three customers, Tesco, Asda and Morrisons, were up 7 per cent while sales of UHT milk were up 34 per cent after winning a contract with Tesco.

It is also the leading supplier of cream with sales up 5 per cent. During the year, it took on sole supplier status for McDonalds, providing the dairy base for its milkshake and sundaes as well as fresh semi-skimmed and organic milk, with sales up 89 per cent.

The group declared a final dividend of 0.8p which led to a total dividend of 1.45p, up 3.6 per cent on last year. The operating margin on continuing operations fell from 4.5 per cent to 3.7 per cent due to the weaker first half.

Sir David was cautiously optimistic about Arla's outlook: "Although the market remains challenging and we continue to experience cost pressures, especially on HDPE resin, our branded products and fresh milk business provide us with a solid platform from which to drive good progress in 2007 and beyond."

The group is suing Robert Wiseman Dairies for £15 million after the Office of Fair Trading concluded that Arla and other Scottish suppliers engaged in price-fixing.

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