Arla Foods UK interim profits for first half 2006 has collapsed, with the company posting a GBP0.9m (US$1.7m) loss following pre-tax profits of GBP17.3m in last year's comparable period.

The 51%-controlled subsidiary of Danish company Arla Foods amba, has attributed the losses to a challenging trading environment that is causing pressure on the UK business.

The six-month deficit was despite record sales from continuing operations increasing by 2.9% to GBP683.2m from GBP664.2m in the first half of last year, due to good growth in leading brands.

Exceptional costs of GBP10.0m, arising from the streamlining of Arla's head office and dairy rationalisation, reversed underlying profit of GBP10m in the six month period. The dairy producer was also materially affected by increased oil-based fuel, packaging and utility costs.

In its outlook, the company noted the substantial reductions in the retail price of its own brands of milk during March, adding: "The widening price differential between these and premium brands has made it impossible for us to sustain the good growth in Cravendale milk volumes achieved in the first half."

The dairy firm expects these factors to have an approximate GBP5m impact on second half profitability. 

Arla Foods UK chairman Sir David Naish said: "Our Lurpak and Anchor brands continue to perform strongly, and own label fresh milk volumes to supermarkets are ahead of the comparable period last year, although the trading environment remains challenging.

"I am pleased to report that the business is operating at its highest ever levels of efficiency, with fixed costs under excellent control. Despite the pressures upon us, I am confident that our performance in the second half will represent a significant improvement on the first half and meet our expectations for the full year."