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CONSOLIDATED
ANNUAL REPORT
Creating the future
of dairy
Contents
Management review
Consolidated financial statements
80 Consolidated financial statements
82 Primary statements
90 Notes
136 Independent auditor’s report
138 Statement by the Board of Directors
and the Executive Board
2 2016 in short
4 Arla’s milk wheel
6
Moving forward after a volatile
year by Chairman of the Board
of Directors, Åke Hantoft
8
Branded growth in a volatile
market by CEO, Peder Tuborgh
10 Significant events in 2016
14 Strategy
30 Governance
42 Performance
58 Risk and opportunity
68
Values and considerations
Project management: Corporate Finance and Corporate Communication, Arla
Copy, design and production: We Love People
Translation: TextMinded
Photos: Jens Bangsbo, Hans-Henrik Hoeg and Arla
The consolidated annual report is published in Danish, Swedish, German, French and English.
Only the original Danish text is legally binding. The translation has been prepared for practical reasons.
Financial statement of the parent company
Under section 149 of the Danish Financial Statements Act, this consolidated annual report represents an extract of Arla’s
complete annual report. In order to make this report more manageable and user-friendly, we have decided to publish a
consolidated annual report without the financial statements of the parent company, Arla Foods amba. The annual report of
the parent company is an integrated part of the full annual report and is available on www.arlafoods.com. Profit sharing
and supplementary payment from the parent company are set out in the equity section of the consolidated annual report.
The full annual report contains the statement from the Board of Directors and the Executive Board as well as the
independent auditor’s report.
Glossary
Brand share is the ratio of revenue from strategic branded products of Arla’s total revenue.
Strategic branded products are defined as products sold under one of the three global brands -
Arla®, Lurpak® and Castello® and strategic brands.
Capacity cost includes costs such as staff, maintenance, energy, IT, travelling and consultants.
Conversion cost is the total cost of production per kg raw milk excluding the cost
for milk and materials within the production site which are related to the production
of goods.
EBIT is an abbreviation of earnings before interest and tax.
EBITDA is an abbreviation of earnings before interest, tax, depreciation and amortization.
EBIT margin is EBIT as a percentage of total revenue.
Equity ratio is the ratio between equity excluding minority interests and total assets.
Interest cover is the ratio between EBITDA and net interest costs.
Leverage is the ratio between net interest-bearing debt inclusive of pension liabilities and EBITDA.
Net interest-bearing debt inclusive pensions is defined as current interest-bearing liabilities
less securities, cash and cash equivalents and other interest-bearing assets plus non-current
liabilities.
Organic revenue growth is revenue adjusted for the effect of mergers, acquisitions,
divestments of businesses and currency effects.
Peer group index evaluates the relative performance of Arla compared to competitors without
considering the retainment policy calculated as the performance price for Arla divided by the
weighted average performance price of the peer group.
Performance price for Arla is defined as the prepaid milk price plus net profit per kilo member milk
weighed in within the period.
Prepaid milk price equals the on-account payment owners receive per kg milk delivered during
the settlement period. The price is primarily based on the milk’s constituents, i.e. fat and protein, and
quality.
Net working capital is the capital that Arla has tied up in inventories, receivables and payables
including payables for owner milk.
Net working capital excluding owner milk is defined as capital that Arla has tied up in
inventories, receivables and payables excluding payables for owner milk.
Retail and foodservice volume driven revenue growth is defined as revenue growth
associated with growth in retail and foodservice volumes while keeping prices constant.
Scalability is defined as the ratio between retail and foodservice volume driven revenue growth
and growth in total capacity cost adjusted for special items.
Strategic branded volume driven revenue growth is defined as revenue growth associated
with growth in volumes from strategic branded products while keeping prices constant. Strategic
branded products are defined as products sold under one of the three global brands - Arla®, Lurpak®
and Castello® and strategic brands.
Trading share measures the total milk volume used to produce commodity products compared to
the total milk consumption in Arla. A commodity product is sold with a lower amount of value added
or no value added at all.
Volume driven revenue growth is defined as revenue growth associated with growth in volumes
while keeping prices constant.
2016 in short
We evaluate our performance and the success
of our strategy and business model by utilising
key performance indicators. We have chosen
to measure these key performance indicators
because we believe they best demonstrate how
we are driving the business and creating value
for our owners.
Our strong performance in 2016 reflects the
successful execution of our strategy, Good
Growth 2020. Despite a lower milk price and
volumes, we achieved nearly all of our key
performance indicators.
√ Target achieved.
(√) Target not fully achieved.
X Target not achieved.
All key performance indicators include the gain from sale of Rynkeby.
* Peer group index for 2016 is preliminary before year-end results have been published for Royal FrieslandCampina N. V. and
Deutsches Milchkontor eG.
** Brand and International shares are based on retail and foodservice revenue excluding third party manufacturing (TPM) revenue.
Trading share is based on milk consumption.
*** Based on profit allocated to owners of Arla Foods amba.
Peer group index*
105
2016
2015
2014
105
104.6
103.8
Target range 103-105
Target for 2016: 103-105 √
Brand share**
44.5%
2016
2015
2014
44.5%
42.1%
41.2%
Scalability
>2.0
2014: >2.0
2015: >2.0
2016: >2.0
Target for 2016: >2.0 √
Milk volume
Revenue
Strategic branded volume driven
revenue growth
13.9
billion kg
9.6
billion EUR
5.2%
2016
2015
2014
13.9 bkg
14.2 bkg
13.6 bkg
2016
2015
2014
9.6 EURb
10.3 EURb
10.6 EURb
Target for 2016: 4-5% √
6%
4%
2%
0%
3.4%
5.2%
2015
2016
Strategic branded volume driven revenue
growth rate for 2014 is not available due
to the restructure of the organisation.
Retail and
foodservice volume
driven revenue
growth
International
share**
Trading
share**
Conversion cost
2.7%
2016
2015
2014
Target for 2016: 3-5% (√)
18.0%
20.1%
99.2
2.7%
3.9%
3.5%
2016
2015
2014
18.0%
16.5%
15.5%
2016
2015
2014
20.1%
21.5%
20.9%
2016
2015
2014
Target for 2016: 98.5 X
99.2
98.0
95.0
Leverage
Profit share***
Performance price
2.4
3.6%
of revenue
30.9
EUR-cent/kg
41.7
2016
2015
2014
2.4
3.3
3.7
2016
2015
2014
3.6%
2.8%
3.0%
33.7
30.9
Target range 2.8-3.4
Target range 2.8%-3.2%
2014
2015
2016
Target for 2016: 3.2 √
Target for 2016: 2.8-3.2% √
45
40
35
30
25
6
“In a tough year,
the Board of
Directors found
it very reassuring
to have a solid
strategy in place
to guide the
business.”
Åke Hantoft, Chairman of the Board of Directors
Performance price
(EUR-cent/kg)
50
40
30
20
10
0
.
7
1
4
.
0
1
4
.
9
6
3
.
7
3
3
.
*
9
0
3
2012
2013
2014
2015
2016
* Including gain from sale of Rynkeby.
Annual report 2016 7
Mission
To secure the
highest value for
our farmers’ milk
while creating
opportunities for
their growth.
Moving forward
after a volatile year
How would you
summarise 2016?
In 2016, we experienced
unprecedented market volatility in
raw milk production, as well as farm
gate prices. However, Arla’s strong
brands and broad product portfolio,
combined with the presence in
markets across the world, prevented
our milk price from hitting the
extremely low levels we saw in the
industry. Unfortunately, the market
situation meant the effort was not
sufficient to secure a sustainable
income on our farms.
How would you describe
the situation among owners
during the year?
It was extremely challenging.
Reactions were different from
owner area to owner area, which
mirrors the local market, political
and industry issues. From a milk
price perspective, 2016 was a
terrible year, during which we
experienced unsustainably low
prices for our milk. The relief from
my farmer colleagues was huge
when we were able to start
increasing the Arla milk price in
autumn. This really highlighted the
pressure that every single farmer
had been under as a consequence
of the tough market conditions.
On a positive note, it does look like
we now have a period of recovery
ahead of us.
What role does Arla’s
strategy, Good Growth 2020,
play for the owners?
Good Growth 2020 is the vehicle
to execute our mission. It was
developed to take account of
every kg of raw milk supplied and
to create the highest possible
value for us as owners.
As a result of our high quality milk,
Arla has become one of the world’s
largest dairy companies. Our
business is based on many building
blocks from brands, products,
markets to production sites and
core processes. Put together, they
drive Arla and our milk price. Our
current strategy provides very
clear guidance on Arla’s focus
areas, not only to employees
working to deliver our strategy, but
also to our owners. In a year as
tough as 2016, the Board of
Directors found it very reassuring
to have a solid strategy in place to
guide the business.
The Board of Directors and
Board of Representatives have
been working on the new
owner strategy. What is the
impact of the decisions and
direction set out in 2016?
Following the mergers between
2011 to 2014, we decided to align
our local democratic structures
to strengthen the dialogue
between members, elected
representatives and management.
This also enables us to streamline
administration and ensure a
harmonised approach.
Face to face meetings once again
proved to be the backbone of our
cooperative. We want to further
strengthen this dialogue and
engagement among our owners.
The Board of Directors is also
investigating if it is possible,
from a legal and cooperative
perspective, to offer all owners
direct membership in Arla Foods
amba in the coming years. If we
succeed in doing this, it would
certainly be a true milestone in the
history of our multinational
cooperative.
What are the biggest
challenges and opportunities
that lie ahead?
Through our strategy we have
identified key opportunities.
Demand for natural and healthy
products, e-commerce and other
trends will guide our business and
brands towards 2020. We will
continue to tell our cooperative
story and share with consumers
and customers the effort every
single farmer puts in to their farm
every day of the year. This includes
care for animals and nature and
the pride taken in producing
nutritious, high quality milk. The
challenge is to grow our business
in a year in which we expect the
same level of raw milk from our
owners. This requires strong
prioritisation from the business,
and again, we will be guided by our
strategy.
Our cooperative story
Arla’s cooperative foundation has a long history. More than 100 years ago, the first dairy cooperatives were founded in
Scandinavia with the purpose of buying, processing and selling owners’ milk in the best possible way. Today, our
cooperative owners are still both owners and suppliers of Arla. This is the cooperative’s key strength: long-term,
mutually obliging cooperation. Arla’s owners are obliged to supply milk to Arla thereby securing supply of our most
important raw material and Arla is obliged to buy their milk at the highest possible price.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 8
“2016 proved
our strategy
to be the right
one for Arla.”
Peder Tuborgh, CEO
Annual report 2016 9
Vision
Creating the
future of dairy to
bring health and
inspiration to the
world, naturally.
Branded growth
in a volatile market
2016 was the first year of
working with the new strategy,
Good Growth 2020. How did it
play out?
Good Growth 2020 has truly
guided our business in 2016 and
we have already come far on our
strategy journey. We are more
focused than ever on brand and
category development as well as
geographies. We managed to
mitigate the impact of the
extremely volatile market in
Europe, and in many regions we
succeeded in building our market
shares with our International
business. Furthermore, with a
focused effort, we increased our
brand share from 42.1 per cent in
2015 to 44.5 per cent in 2016.
We also improved our equity and
leverage. I have no doubt that in
2016 we proved our strategy to be
the right one for Arla.
In 2016, the new Executive
Management Team and
the new organisational
structure was introduced.
What was the thinking behind
these changes?
In spring we restructured the
organisation to match our new
strategic scope with a functional
set-up driving synergies and clear
responsibilities across the business.
Through a more unified and
lean approach, we made more
than 500 administrative roles
redundant. At the same time, an
efficiency programme within
supply chain delivered savings of
EUR 100 million.
Can you give some examples
of how Arla contributed to the
market in 2016?
A very successful example is our
Puck® portfolio. A relaunch of the
brand combined with a new
compelling campaign has boosted
sales in the Middle East and North
Africa. In Europe we are also
strengthening our business and
the Arla® brand. Examples are the
Arla® branded skyr and protein
products, which are resonating
extremely well with consumers.
This is just one example of how we
continuously respond to consumer
trends for natural and healthy
products. These characteristics are
also the essence of Arla products
and have been for many years.
It is in Arla’s cooperative
DNA and company mission to
welcome and process all
owner milk, unconditionally,
however, in 2016 volumes
decreased. How does this
affect Arla going forward?
Arla has the processing capacity
and logistics solutions in place to
handle more milk than our owners
are currently supplying. In 2015,
and during the first months of
2016, when our milk volumes
were still increasing, our dairies
operated at full speed, improving
our conversion costs. However,
Arla’s owners responded to the
unsustainably low milk prices in
the same way as other European
dairy farmers did in autumn 2016,
and we experienced significantly
decreasing milk volumes.
Currently, increasing milk prices
are generating renewed trust in
the future, and hopefully, Arla will
see increasing milk volumes
coming from owners in all
countries in the coming years.
We need the milk to keep the milk
wheel turning and pursue the full
growth potential of our brands and
markets.
What is the outlook for 2017?
You will see Arla take an even
stronger position in the market as
an innovative and responsible
farmer-owned dairy company,
which provides natural and healthy
food to consumers and customers.
We aim to significantly increase our
engagement in the foodservice
sector, as Arla has solid experience
and unique solutions to offer.
We will build on the current growth
in e-commerce. Guided by our
vision, identity and strategy, I am
convinced that we will create
growth in the market and generate
a stronger performance price for
our owners. Following a very
challenging and volatile 2016, the
entire organisation has never been
more committed to deliver in 2017.
Brand share
44.5%
2015: 42.1%
International share
18.0%
2015: 16.5%
Scalability
>2.0
2015: >2.0
Brand portfolio
Our strong brand portfolio is
at the core of our business
and an important driver for
our success. Our strategic
brands are Arla®, Lurpak®,
Castello® and Puck®.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 10
Significant business events
in 2016
For Arla, 2016 was characterised by change from both the internal and
external environments. Following the restructure of the organisation
and cross-market alignment of our business, we stepped up value
creation as outlined in our strategy, Good Growth 2020. This is clearly
reflected in the business highlights for the year.
Contributing to local
dairy production
in Nigeria
Arla has officially
committed to contribut-
ing to local dairy
production in Nigeria. In
doing so, Arla contrib-
utes to the sustainable
development and
growth of the dairy
sector in the country.
New strategic partnership in the US
Arla and the world’s largest farmer-owned cooperative,
Dairy Farmers of America, entered into a cooperation that
includes a new dairy plant for cheddar cheese production and
the exploration of premium product opportunities.
ONE cooperative created in the UK
Following the merger between Arla Milk Link and Arla Milk
Cooperative, on 1 January, Arla’s owners in the UK united to
form a new cooperative, the UK Arla Farmers’ Cooperative Ltd.
This has ensured a more aligned approach for the UK members,
thereby maximising efficiency within Member Relations.
Q1
The new organisation goes live
On 1 March, the organisational restructure went live. As part
of the restructure the workforce was reduced by more than
500 white collar colleagues. The new functional organisation is
designed to deliver the strategy, Good Growth 2020, and
optimise Arla’s performance in a highly competitive global dairy
market by strengthening value creation and efficiency.
Responsible
Growth
Natural
Growth
Cooperative
Growth
Good
Growth
Healthy
Growth
Closure of Hatfield
Peverel dairy
Following a review of the
processing requirements
across the UK and
significant investments in
the Aylesbury facility, the
decision was made to
close the milk processing
production facilities at
Hatfield Peverel dairy in
the UK.
Q1
Q1
Q1
Q1
Annual report 2016 11
Q1
Q2
Q3
Q4
First quarter
Second quarter
Third quarter
Fourth quarter
Corporate responsibility plan towards 2020
The Executive Management Team approved the corporate
responsibility plan underlining Arla’s pledge to drive a responsible
business. Part of this plan is to ensure that responsibility in Arla is
embedded throughout the business.
Sale of
Rynkeby Foods A/S
In order to focus on the
core business and
following the sale process
initiated in 2015, Arla sold
Rynkeby Foods A/S to the
largest producer of
fruit-based beverages in
Europe, Eckes-Granini
Group GmbH. Rynkeby
was the last major
non-strategic asset.
Q2
Q2
Full ownership of Westbury Dairies Ltd.
Arla took full ownership of the operations at Westbury Dairies
Ltd. in the UK, and strategically moved a substantial proportion
of butter production from Lockerbie to Westbury to secure
economies of scale.
Arla incentivises non-genetically modified feed
Based on commercial opportunities, the Board of Directors
decided to actively encourage farmers to produce milk using
non-genetically modified feed by paying an extra one EUR-cent
per kg milk. In Sweden, all dairy products are already produced
from non-genetically modified feed.
1 billion SEK bonds
issued
Arla issued 5-year SEK
bonds for a principal
amount of SEK 1 billion
targeted at professional
investors. The issue
refinances elements of
Arla’s existing bank debt as
a supplement to other
financing sources.
New packaging site
opened in Senegal
A new Dano® long-life
milk powder packaging
facility opened in Dakar,
Senegal with the capacity
to handle 5,000 tonnes
of milk powder. Senegal
will be an important
gateway for further
expansion in West Africa.
Q2
Q2
New business in Ghana
In line with the strategy, Good Growth 2020, Arla established
a fully-owned subsidiary in Accra, Ghana. The goal is to create
opportunities for European farmers by promoting the
Dano® brand. Ghana is the second largest economy
in Africa and an effective gateway to other opportunities in
West Africa.
Democratic structure alignment
with new owner strategy
Following the mergers during the period 2011 to 2015, the
Board of Representatives decided to align Arla’s democratic
ownership structure and processes across the seven owner
countries.
Q4
Q2
Q4
Q4
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 12
Significant marketing events
in 2016
Brands successfully delivered the majority of our growth in 2016, helped
by the launch of new innovative branded products and strong marketing
campaigns. To create further awareness of our cooperative roots among
consumers, we continued to strengthen our farmer-owned campaign.
All of these developments are clearly reflected in the marketing highlights
for the year.
Arla cheese spread launches in the Philippines
In April, Arla® Cheesy Spread was launched in the Philippines, and has
been a game changer in the market. The natural product made from real
milk is perceived to be of higher quality compared to competing products.
The successful campaign raised extensive awareness of the Arla® brand,
and helped us grow five per cent in the ambient cheese spreads category.
Launching
Arla® B.O.B
In the UK, Arla
successfully launched
Arla® ‘Best of Both’,
which is a unique and
innovative fat-free milk
product that tastes as
good as semi-skimmed
milk. Arla® B.O.B
exemplifies our focus on
launching healthy
products and inspiring
good food habits.
Arla® B.O.B was also
commended by The
Grocer and won ‘best
dairy launch’ of 2016.
Arla Lactofree® champions dairy revolution
Responding to the increasing consumer demand for lactose
free products, new Arla Lactofree® products were launched,
supported by a marketing campaign in the UK. In Denmark,
the Arla Laktosefri® brand hit retailers’ shelves. This is the
fastest growing fresh milk product launch ever.
Coffee you love, with a twist
In 2016, a new campaign introducing everyone’s favourite hot
beverage in a chilled and accessible on-the-go size was launched.
The Starbucks chilled coffee drink is continuing its strong
momentum and is available in 28 markets worldwide. Finishing
the year on a high note, distinctive Christmas packaging was
released and consumers were invited to share a moment of
connection with Arla’s first-ever Snapchat campaign in the UK,
which helped us reach nearly five million users.
Annual report 2016 13
Growing
speciality cheeses
To inspire more everyday
consumption of speciality
cheeses, a successful
smorging campaign and
impactful TV commercials
were released to drive
growth and value. Our
Castello® brand is a strong
performer in a long list of
markets, particularly in the
UK, Australia and Sweden.
Farmer-owned campaign
is going strong
Our farmer-owned
campaign raises consumer
awareness, differentiates
us from competitors and
instills higher consumer
trust in our products. By the
end of 2016, we have
integrated the marque on
70 per cent of all Arla®
branded packaging, which
means it is visible on more
than 750 different products.
Puck® wins gold
In the Middle East and North Africa the Puck® brand won a Gold
Effie at one of the world’s most acclaimed marketing events.
The relaunch campaign celebrating the everyday chef proved
highly successful and led to brand leadership in the region,
where Puck® holds the number one position in jar cheese
across core markets. Puck® also reached thousands of cooking
enthusiasts through sponsorship of Top Chef, a popular reality
cooking show. The campaign achieved a gross rating point
55 per cent above expectations.
Nothing but great taste
It has been nothing but a great year
for the signature chocolate milk,
Cocio®. The brand celebrated its 65th
anniversary by delivering double digit
growth and rapid global expansion.
Cocio® is now available in 17 markets,
with India and Israel being the latest
additions.
Global Lurpak® campaign kicked-off
By getting consumers back in the kitchen, the global Lurpak®
campaign ‘Game on, Cooks’ aims at strengthening its position
as the world’s biggest butter brand. The campaign has reached
34 million people through digital content in the UK alone.
Since the start of the campaign brand awareness showed an
increase of 13 per cent and there was a 35 per cent increase in
sales of Lurpak® block butter in the UK, driven by value rather
than volume.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements Strategy
Good Growth 2020
Our strategy, Good Growth 2020, sets out how we will grow our
business in eight global dairy categories and six market regions
around the world as ONE effective and unified cooperative.
EXCEL
in eight categories
FOCUS
on six regions
WIN
as ONE Arla
Content
16 Responding to change
18
20
22
24
26
28
29
Creating Good Growth
towards 2020
Excel in eight categories to increase
value creation
Focus on six regions
to strengthen and expand
our footprint
Win as ONE to create a global,
coherent and efficient Arla
Seven essential business priorities is
an enabler for Good Growth 2020
Seven essential business priorities
for 2016
Seven essential business priorities
for 2017
16
Responding to change
Key market dynamics impact the global dairy market as we move towards
2020. The exponentially changing world is presenting new challenges and
opportunities for Arla. We have identified the trends that will impact Arla
significantly in order to respond to them efficiently. The transformational
drivers embedded in our strategy, Good Growth 2020, will determine our
future success.
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Supply and demand of milk
The dairy industry is global but the supply
and demand for milk are increasingly
geographically detached. Some regions like
Europe, USA and Oceania have a milk
surplus, while regions like Asia, the Middle
East and Africa have a milk deficit.
In Europe, the low price level in 2016 drove
volatility in milk production. Milk volumes
decreased in 2016, which was a big change
compared to the expectations a year ago.
As a result, the latest outlook shows a
postponement of the expected increase in
milk intake towards 2020. However, with
the milk price increase towards the end of
2016 renewed trust in the future is being
generated. Meanwhile, the demand for milk
globally is unchanged.
We need to ensure that we create the most
value possible for the existing milk pool. We
will channel our milk to the markets in which
the highest value can be added, irrespective
of origin. To support this ambition, we have
established ONE European milk pool to
ensure a more holistic use of our raw milk
across Arla. Please read more about ONE
milk pool on page 76.
PIN code of the world
Developed markets are stable, however they
have low growth rates, while emerging
markets are growing significantly but also
carry higher risk. Approximately 95 per cent
of dairy growth is generated outside of
Europe and the growth outlook remains
unchanged.
The PIN code of the world identifies the
world population as we know it. In 2016,
the code is 1114; 1 billion people living in
Europe, 1 billion people in the Americas,
1 billion in Africa and 4 billion in living in Asia.
In 30 years this combination will change to the
PIN code 1125, doubling the population of
Africa and indicating massive growth in Asia.
Understanding the way the world is growing
and the shift to urban locations is a global
differentiator. Until now, Arla has been very
Europe-centric with 66.1 per cent of sales in
Europe. Our long-term growth opportunities
in Europe are challenged by low growth rates,
whilst International is delivering solid double
digit growth rates and a positive growth
outlook for the foreseeable future. To sustain
double-digit International growth and
balance risks, we need to broaden our
distribution networks and strengthen our
production footprint. Our growth focus needs
to be balanced between Europe and
International towards 2020 and our strategy
is designed to turn these changes into local
opportunities for Arla.
A branded business drives earnings
Prices are volatile and will continue to be
volatile in the future, which emphasises the
need to improve the underlying business
composition. With strong brands as a key
differentiator the business can be close to
consumers, driving trust, loyalty and better
returns. The price premium of a branded
business generates higher margins than
trading and private label alternatives. In the
long run, the branded business will win over
the commodity market through increased
stability and higher prices.
Our branded business has grown dramatically
in recent years and now represents
44.5 per cent of total revenue and generates
approximately 80 per cent of Group
earnings. As a result, brand growth is key for
stronger profitability and to drive less volatile
earnings. Increasing marketing spend is
critical to ensure continued delivery on
branded sales growth towards 2020.
Annual report 2016
17
On-the-go snacking
and convenience products
Convenience and on-the-go consumption of
healthy and filling snacks is expected to
continue to grow significantly and growth is
exceeding expectations. The dairy category
is strong within snacks with yogurt and
milk-based beverages, and cheese snacks
are expected to be the next big trend.
Furthermore, on-the-go products in
convenient packaging for consumers on the
road, in schools and in offices are expected
to continue to grow at a fast pace in 2017.
To be a leading dairy company we need to
develop strong concepts that support
market trends. As a result, we will explore
our opportunities within new categories, for
example, within milk-based beverages and
high-protein products. We will invest in
innovation and product development
making it easy for consumers to meet their
daily nutritional needs on-the-go.
Digital and e-commerce
are game changers
The digital consumer trend has the potential
to become a disruptive factor for the dairy
industry. Digitalisation of the industry is
progressing at a fast pace and on multiple
levels with, for example, digital platforms
and digital marketplaces expected to rapidly
gain ground in 2017. In China, e-commerce
grew approximately 100 per cent from 2011
to 2014.
Another digital trend potentially affecting the
dairy industry is mobile consumers requiring a
new operating model, where the consumer’s
experience becomes more important than
the product itself. It is important to adapt to
the new commerce landscape in order to
stay relevant to consumers.
Digitalisation is essential to creating the
future of dairy and has the power to
fundamentally change Arla’s business model,
with e-commerce, digital marketing, as well
as product development and packaging. We
need to stay ahead of the game and become
more experimental, bold and collaborative in
our ways of working and digital is the perfect
platform to spearhead this journey.
The traditional way of working with
distribution and in store product placement
are still a vital part of Arla’s business.
However, sales from e-commerce platforms
offer not only an online store, but also a new
distribution setup and this will increasingly
change the way of doing business for Arla.
Health agenda is accelerating
Global dairy trends point towards health and
wellness, and conscious living. A growing
concern regarding health and wellness
among consumers leads to the creation of
new dairy products, as well as dairy-free
alternatives. Consumers are increasingly
looking for transparency and authenticity in
products and packaging. Rapidly changing
macro trends lead to diverse consumer
requirements for products, formats and
packaging.
Retailers increasingly seek differentiation
and focus on non-genetically modified feed
and animal welfare product claims and
they are pushing for continued ways to
differentiate milk in order to gain consumer
loyalty.
Our success will be defined by our ability
to turn consumer trends into assets, rather
than considering them to be external
disruptions, and we are in a good position to
do so. For Arla, naturalness is at the core of
our identity, Good Growth, and being
farmer-owned is in our DNA. With our focus
on healthy products and authenticity, we
build trust and credibility with consumers.
We continuously work with product
innovation to meet consumers’ demands
and we will drive initiatives for the benefit
of the commercial business, production
and owners.
We will create credible market claims to
differentiate and leverage trends and
develop strong product concepts.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 18
Creating Good Growth
towards 2020
In December 2015, Arla presented a new corporate strategy for the next five years called
Good Growth 2020. The strategy is our response to the changing world around us where
supply and demand for milk are increasingly geographically detached, competition is fierce
and there are new demographic realities and consumer trends. We strongly believe that
Arla now faces new opportunities for global growth and creating value for our owners.
With Good Growth 2020, we have a clear focus on growing our brands and volumes through innovation that has
consumers and customers wants and needs at its core. This helps us create the most profitable value for our owners’
milk. With the strategy, Arla sets out to grow our business by focusing on increased value creation, strengthening
and expanding our footprint and creating a global, coherent and efficient business.
Our vision
Create the future of dairy to bring health
and inspiration to the world, naturally.
EXCEL
in eight categories
FOCUS
on six regions
WIN
as ONE Arla
Our identity
Healthy, natural, responsible and cooperative growth.
Our mission
To secure the highest value for our farmers’ milk
while creating opportunities for their growth.
Ambitious targets for Good Growth 2020
We have set ambitious targets for the key performance indicators of Good Growth 2020 and
continuously work to deliver based on these targets.
Read more about how we performed in 2016 in the financial review on page 45.
Good Growth 2020 makes a strong start
A year into our Good Growth 2020 strategy, we
remain convinced that it is absolutely the right
direction for Arla. Following the restructure of
the organisation in 2016, Good Growth 2020
is now even more strongly anchored within
the business and progress against targets is
monitored closely on a regular basis.
We initiated 25 strategic bets to drive Good
Growth 2020, within our categories, regions
and efforts to unite Arla as ONE. By the end of
2016, we experienced strong traction on
each of the strategic bets. Throughout the
organisation, we have numerous ambassadors,
including owners of strategic bets who drive
a strong focus on execution, speed and
cross-functional collaboration.
Peer group index
Retail and foodservice volume driven revenue growth
Brand share
Trading share
International share
Baseline in 2015
Target in 2020
103-104
2%
42%
22%
17%
103-105
4%
>45%
<20%
>23%
Annual report 2016 19
Our strategy will help Arla to create
the future of dairy towards 2020.
2020
2019
2018
2017
2016
Excel in eight
categories to increase
value creation
The global dairy industry is developing at high
speed and is characterised by a constant
evolution of consumer habits and preferences.
We have analysed consumer needs and trends
and matched these to our own strengths.
As a result, we have identified eight product
categories that will be the core focus for our
efforts to shape the dairy market, by offering
new products with natural ingredients, great
taste and good nutrition, thereby making it
easier to live healthy lives.
Within these eight categories, we want to excel
and increase value creation with innovative
products, a world class supply chain, compelling
marketing and strong partnerships with our
customers. We will grow the categories through
our global brands, as well as through foodservice
and business to business sales. Furthermore, to
be a leading dairy company, Arla needs to focus
on expanding leading category positions to
grow across markets, regionally or globally.
The eight prioritised product categories are
focused around our global brands:
1 Milk and powder: we will lead and shape
the market with nutritious value-added
products.
2 Milk-based beverages: we will shape the
market for on-the-go products that are made
from natural ingredients.
3 Spreadable cheese: we will be a leader
in cream cheese that is made from both
natural ingredients and high quality processed
cream cheese.
4 Yogurt: we will build a strong market
position that is based on health benefits and
natural ingredients.
5 Butter and spreads: we will be a global
leader with world class products made from
natural ingredients.
6 Speciality cheeses: we will be a leading
player with creatively crafted products and
concepts.
Foodservice sales
7 Mozzarella: we will create a global
foodservice position with high quality
mozzarella.
Business to business sales
8 Ingredients: we will be the global leader in
value-added whey.
Read more about how we excel within eight
categories on page 20.
Focus on six regions
to strengthen and
expand our footprint
We have identified the markets in which Arla
has the biggest potential to grow a long-term
profitable business. Between now and 2020, we
expect approximately 50 per cent of our growth
to come from Europe, while the remaining
share of growth will come from regions outside
of Europe that we manage in International.
Over the years, Arla has built a strong position in
Northern Europe, where we are the preferred
dairy company for consumers, and the Middle
East where our brands are among the strongest
in the food industry. Arla has also begun to build
a business in new growth markets such as China
and South East Asia and Sub-Saharan Africa.
With Good Growth 2020, we will continue to
expand these market positions, whilst further
stepping up our efforts in the Americas and
North Africa. We are focusing our innovation,
investments and competences in these
markets.
Read more about how we focus on six regions
on page 22.
Win as ONE to create
a global, coherent and
efficient Arla
Arla has grown significantly in Europe with
mergers and acquisitions in Central Europe, the
UK and Sweden. The past few years have been
spent aligning the different companies into one,
thereby harvesting the synergies that the
mergers created. With Good Growth 2020, we
will take this unity to the next level.
We will improve our skills and use the same
processes and tools across the organisation.
We will put clear focus on strengthening our
global category and brand building, our
innovation across borders and our commercial
acumen. Our marketing will become more
global and we will drive innovation. Our entire
supply chain will become more efficient as we
established ONE European milk pool to ensure
a more holistic use of our milk across Arla.
These changes will help us achieve our
new ambitious cost improvement target of
accumulated EUR 400 million over four years.
Read more about how we win as ONE Arla
on page 24.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
20
Excel in eight categories
to increase value creation
The eight product categories, which are prioritised in our strategy, Good
Growth 2020, are focused around the Arla® brand, Lurpak®, Castello® and
Puck®. In 2016, we delivered exceptional brand growth in a challenging
market, attributable to a focused effort within these eight categories.
Milk and
powder
Speciality
cheeses
Spreadable
cheese
Butter and
spreads
Milk-based
beverages
Deep dive on
adjacent page.
Mozzarella
Yogurt
Ingredients
Strategic branded volume driven revenue growth in 2016 of 5.2 per cent driven by:
The dairy champion that
brings health and natural
goodness to the world.
Champion
of good food.
Creatively crafted
cheeses.
Celebrating
the everyday chef.
4.5%
2015: 2.5%
7.7%
2015: 6.1%
3.0%
2015: 0.1%
10.6%
2015: 9.9%
2016 showcased the strength of
our global and strategic brands.
Our brands performed well,
exceeding our overall expectation
range of four to five per cent by
achieving a strategic branded
volume driven revenue growth of
5.2 per cent.
Puck® is the leading performer,
delivering a strategic branded
volume driven revenue growth of
10.6 per cent on top of 9.9 per cent
last year. This was strongly driven
by exceptional performance in the
Middle East and North Africa,
where the brand now holds the
number one position in jar cheese
across all core markets.
Lurpak®, our hero in the butter,
spreads and margarine category,
delivered strategic branded
volume driven growth of 7.7 per
cent, compared to 6.1 per cent in
2015. We kicked off a global
campaign in 2016 ‘Game on,
Cooks’, which significantly
increased the brand’s awareness,
strengthening Lurpak® as the
butter champion.
Arla® showed strong strategic
branded volume driven growth of
4.5 per cent, mainly due to
increased investment in innovative
and specialised product ranges
such as Arla Natural®, Arla
Lactofree®, skyr and other high
protein products, as well as infant
nutritional formulas such as Arla
Baby & Me®.
In 2016 we inspired more everyday
consumption of speciality cheeses
for any occasion. Our Castello®
brand is a strong performer across
many markets, particularly in the
UK, Australia and Sweden.
Castello® achieved a strategic
growth rate of 3.0 per cent in 2016,
showing positive performance
compared to last year.
Annual report 2016 21
Expanding the milk-based beverages category
plans for expansion of the category
combined with innovative
packaging. This will create new
sales opportunities for us in places
outside traditional retail channels.
subsidiary and its cooperation with
Starbucks®, through which coffee
drinks and new innovative
milk-based beverages have been
introduced in 2016.
Within beverages, Arla has had
success through its Cocio®
An important strategic bet is to
capture the opportunities within
the beverage market with a portfolio
including healthier milk-based
alternatives. Supporting the Arla®
brand growth, we successfully set
an ambition to triple our business
outside standard white milk in the
beverage market towards 2020
from EUR 230 million in 2015.
The global market for milk-based
beverages is approximately EUR 100
billion in annual retail sales, equaling
the size of the global standard white
milk market. However, the market for
milk-based beverages is growing
much faster. Going forward, we will
approach the milk-based beverage
market more strategically and
double the size of our playing field
for liquid milk products.
By 2020, we aim to be the leading
provider of milk-based beverages
in Northern Europe, as well as one
of the leading importers in Asia, the
Middle East and North Africa.
Modern urban lifestyles have led
people across the world to
increasingly snack, thereby getting
their nourishment outside of their
homes. Mealtimes are blurring,
more women are working and
more people are living in bigger
cities. As a result, we have an
opportunity to provide people with
nourishment when they need it,
based on the natural goodness of
our high quality milk. Our milk
should not only be enjoyed from
litre-sized packages bought in
supermarkets, it should also be
available as tasty beverages on
the go.
A sparkling milk and fruit drink, a
milk and tea drink and a protein
rich energy drink are part of the
The butter and spreads category is growing fast
The butter and spreads category
is key for Arla in creating Good
Growth towards 2020. It is a highly
branded category and so butter
and spreads are strong profit
contributors for Arla.
Overall, the butter and spreads
category showed strong results in
2016. Volume driven revenue
growth was 10.5 per cent in 2016
compared to negative growth rates
in 2015 and as a result, we have
managed to grow the category
significantly more than expected in
2016. Furthermore, we succeeded
in growing our market share in the
majority of our markets.
Within the category, we delivered
a brand share of 74.8 per cent in
2016. The Arla® and Lurpak®
brands are important for the
category, amounting to 74.5 per
cent of total revenue. These are
also the brands present in our key
markets. For Arla, the European
markets and the Middle East and
North African markets are vital to
the butter and spread category as
these regions amount to 90.8 per
cent of total revenue.
Lurpak® is contributing especially
positively to the category growth,
with increasing sales and a growing
International share moving from
12.7 per cent in 2015 to 13.5 per
cent in 2016.
To deliver our growth ambition
towards 2020 and become the
butter champion, we must
continue to build leading market
positions, drive category growth,
and strengthen our brands. We
have a clear and consistent
strategy with a number of great
initiatives enabling us to succeed.
Especially the Middle East
and North Africa show great
opportunities for Arla if we
maintain our strong performance.
Our focus areas for butter and
spreads are the story behind them,
innovative packaging, the products
themselves and communication.
In 2016 we started this journey by
launching the Lurpak® Spreadable
Infusion range and our new global
campaign ‘Game on, Cooks’.
Lurpak® revenue
(EURm)
482
465
2015 2016
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 22
Focus on six regions
to strengthen and expand
our footprint
The six regions, chosen as strategic focus areas in our strategy Good Growth
2020, are embedded in our two commercial zones: Europe and International.
This allows country management to strengthen its commercial focus on
consumers, customers and categories, supported by strong marketing driven
from a global category perspective.
Europe is our core commercial
zone and contributed to 66.1 per
cent of Group revenue. The
International commercial zone
encompasses the Middle East and
North Africa, Russia and others,
Americas, China and South East
Asia as well as Sub-Saharan Africa
and delivered 14.9 per cent of
Group revenue in 2016. Arla
Foods Ingredients, our growing
innovative whey business,
contributed with 5.7 per cent of
Group revenue, whilst other
revenue, for example revenue
from trading activities, comprised
13.3 per cent of Group revenue.
Our International business
achieved the largest volume driven
revenue growth rate of 9.5 per
cent in 2016, primarily due to
strong performance in
Sub-Saharan Africa and China
and South East Asia.
Europe
Volume driven
revenue growth in
2016: 1.3%
2015: 3.3%
Sub-Saharan
Africa
Volume driven
revenue growth in
2016: 15.8%
2015: 8.6%
Russia
and others
Volume driven
revenue growth in
2016: 15.7%
2015: -3.8%
Middle East
and North Africa
Volume driven
revenue growth in
2016: 3.8%
2015: 8.3%
China and
South East Asia
Volume driven
revenue growth in
2016: 31.2%
2015: 63.7%
Americas
Volume driven
revenue growth in
2016: 3.4%
2015: -1.8%
Deep dive on
adjacent page.
Annual report 2016 23
Revenue in China
and South East Asia
(EURm)
+32.4%
158
120
South East Asia
China
2015 2016
China and South East Asia
is booming
The aim for China and South East
Asia towards 2020 is to maintain
high growth rates, working towards
the target of quadrupling revenue
from retail and foodservice by
2020 compared to 2015 when the
strategy was originally launched.
Currently, we are on track to deliver
this strategic target, with sales
growing 32.4 per cent to EUR 158
million in 2016 from EUR 120
million in 2015.
The population in China and South
East Asia is growing and the middle
class is booming. The majority of
this growth is attributable to China,
where we are focusing on several
product categories to further
pursue the growing demand for
dairy products. For example,
Arla is aiming to be a leader within
the cheese category in China,
particularly focusing on
foodservice. Furthermore, we will
use digital and e-commerce
platforms to engage with and sell
to consumers. In 2016, Arla ASCX
Naifu® was test launched in China
and, for the first time, e-commerce
and digital channels played a
central role in the launch.
Arla Baby & Me® is one of our
flagship product ranges within
organic milk powder products for
children aged up to five years. In
2016, a new campaign was
launched to support this brand.
This was our first initiative with
Chinese dairy company Yashili,
which is part of the Mengniu
Group, that we collaborate with
closely in this important category.
China is a crucial market for Arla’s
success in the region. However,
other markets in South East Asia
remain equally important to
maintaining growth rates. In
2016, Bangladesh significantly
contributed to the growth in the
region, with retail and foodservice
volume driven revenue growth of
24.0 per cent.
Ambitious goals in
the Middle East and North Africa
11.7 per cent in 2016 compared to
9.4 per cent in 2015 in the region.
The Middle East and North Africa
have a population of approximately
380 million people. In the region,
dairy products are incorporated
into most meals, therefore serving
as a great opportunity for Arla. Our
Puck® range fills a gap in the
market, helping local consumers to
be the star at the dinner table. The
Puck® brand also won a Gold Effie at
one of the world’s most acclaimed
marketing events. Using the Puck®
website and social media channels,
the brand celebrated mothers as
the everyday hero chef.
With Good Growth 2020, we aim to
double our revenue from retail
and foodservice in the Middle East
and North Africa by 2020
compared to 2015 when the
strategy was launched. This
ambitious goal should be achieved
by a combination of increasing
sales of branded cheese, butter,
spreads and cream cheese across
both retail and foodservice,
developing our business in Egypt
and entering the liquid category
with the Arla® brand.
In 2016, we managed to deliver
volume driven revenue growth in
the region of 3.8 per cent.
The Puck® product range is
especially popular, showing
volume driven revenue growth of
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 24
Win as ONE to create a global,
coherent and efficient Arla
Winning as ONE is a continuous effort to unite Arla across business functions and commercial
zones. The strategic bets identified are the foundation and building blocks for creating Good
Growth towards 2020. The initiatives are tracked continuously by the organisation and at the
end of 2016 we are progressing according to plan.
Win as ONE building blocks for Good Growth 2020
Supply chain
as a competitive
enabler
Innovation
Performance
management
Read more on page 40.
Organise
to Win
Commercial
excellence
in Europe and
International
Strengthen commercial
excellence to lead the
customer agenda.
Master price management to
restore product margins.
Execute the strategy locally.
ONE European
milk pool
Read more on page 76.
Measure and manage performance
securing the business delivers on
key performance indicators.
Take more informed and effective
decisions.
Improve accountability in the
organisation.
Marketing
and brands
Increase marketing spend and
improve spend effectiveness.
Strengthen global brand
building.
Increase brand share.
Deep dive on
adjacent page.
’Organise to Winʼ is the name we gave to the
restructuring of our organisation, that was
successfully implemented during 2016.
The restructure supports our ambition to
create commercial excellence in our Europe
and International market zones. Read more
about the restructure on page 40.
indicators of our strategy, and engaging
everyone in the organisation. It will bring
data-driven, outside-in insight to how we steer,
course-correct and manage our business. This
will enable us to better drive conversations and
make clearer decisions, helping the organisation
take more informed and effective actions.
Performance management is about measuring
and actively managing performance, securing
the business to deliver the key performance
Another important strategic bet for creating
Good Growth towards 2020 is our focus on
marketing and brands, supported by increased
marketing spend in 2016 and a continuous
focus on increasing our brand share. Read more
on page 44.
The establishment of ONE European milk pool
supports our ambition of channelling our
owners’ milk into the markets where the highest
possible value can be added, irrespectively of
origin. Read more about ONE milk pool on
page 76.
Annual report 2016
25
EUR. As a result, we have tested
skyr in China and the Middle East
with good results. The next step is
to establish local production to get
the great tasting skyr products to
consumers in these markets.
Creating the future of dairy with bold innovation
Innovation is at the core of a
branded business with a broad
product portfolio. Arla needs
innovation to create the future of
dairy, remain attractive to
consumers and customers around
the world and to stay ahead of
future trends. Competition is
getting tougher and consumers
have more choices, which is why
innovation has an important role to
play in adding value to our milk.
Consumers and customers want
healthy, natural food that is
produced responsibly. They want
access to food and information
about it through interesting
channels, including online
shopping, eating out, creating their
own products to fit their needs or
to get exciting inspiration on how
to eat. As a result, innovation is
not just about developing new
products. It is also about
considering packaging from a
fresh perspective and adding new
functionalities to the product
portfolio.
The global innovation team will
boost our innovations and the new
Arla Innovation Centre, which
opens in 2017, will be the
epicenter for this. Their main task is
to find new ways of making the
milk from our owners into products
with the highest possible value.
New science and technology
enable us to keep transforming
milk into new kinds of dairy
products. By constantly rethinking
and challenging what the business
is able to do, we are more likely to
create growth and stand out from
our competitors. Innovation is
about taking risks and sometimes
we make mistakes, but we learn
from our mistakes and use the
experiences to create new ideas.
An example of how Arla transformed
innovative ideas into a European
success is skyr. A few years ago,
skyr was a novelty and a niche
product. Today sales in Europe are
booming, with growth rates of
200 per cent from 2014 to 2016.
Following the introduction of skyr
in the UK, Germany and the
Netherlands, sales
outside Denmark
now make up half
of the skyr business.
According to the
international
consultancy Future
Market Insight, there
is a global market for
skyr worth billions of
Supply chain as a competitive enabler
In 2016, supply chain activities
were simplified and streamlined
into ONE function encompassing
production, procurement, QEHS
and logistics. Supply chain is now
in a position to deliver on cost,
quality and service targets,
supporting our strategy, Good
Growth 2020. We can create
centres of excellence rather than
producing all products in all
countries, generate efficiencies on
a global scale and utilise our milk
pool in the best possible way.
At the beginning of 2016, Arla set
an ambitious cumulative cost
improvement target of accumulated
EUR 400 million over four years.
Over time, all business functions
and commercial zones will
contribute to the cost savings,
but initial focus will be on cost
improvements in supply chain.
In 2016, the supply chain delivered
targeted cost savings of
EUR 100 million, clearly indicating
that working as ONE integrated
team is paying off.
This achievement was the result of
many factors, from individual site
specific projects to large scale
structural projects, such as the
reorganisation of inbound logistics
in Germany with the new central
warehouse in Heidenau and the
closure of Hatfield Peverel dairy in
the UK.
In addition, many ongoing
continuous improvement
Cost savings in supply chain
(EURm)
100 100
100
100
2016 2017 2018 2019
programmes have delivered great
results. Our cost improvement
initiatives build on existing
efficiency programmes, such as
LEAN, OPEX, Total Cost of
Ownership, Design to Value and
our net working capital project,
Programme Zero.
However, the success in 2016 has
not been without significant
challenges, as several factors
outside of supply chain’s control
put pressure on the function. The
strategy means supply chain has to
be more consumer-oriented than
ever before, increasing complexity
at sites with expanding product
ranges. Another challenge was
that supply chain planned to
process more milk in 2016, but
Arla experienced a decline in milk
intake, which impacted
efficiencies.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
26
Every year Arla focuses on seven
essential business priorities to
support our strategic objectives.
In 2016, one essential priority was
to strengthen leading positions in
International, including the Middle
East where our brands are among
the strongest in the food industry.
In 2017, we will continue to focus
on building leading market
positions in International measured
by volumes and market shares.
Annual report 2016 27
Seven essential business
priorities are an enabler
for Good Growth 2020
We define our annual business plan as the seven essential priorities. Our business
plan should not be confused with our strategy. It complements our strategy with
more detail and activities that are implementable and measurable within the course
of 12 months. We consider our seven essential priorities to be an enabler for our
strategy, Good Growth 2020, as they consist of critical priorities that we need to
achieve on our journey to success.
In order to continuously deliver strong results for our owners and ensure the success of our strategy, the
Executive Management Team determines the seven essentials business priorities each year, subject to approval
by the Board of Directors. The seven essentials are a set of clear and aligned business priorities, with a defined
and coherent approach on how to succeed on each of them.
The seven essentials are cascaded throughout the organisation, with all business functions and commercial
zones setting goals and activities to ensure that all teams are aligned and deliver as ONE united Group.
Connecting our essentials with our strategy
External
environment
Good Growth
2020
2019
2018
2017
2016
Internal
realities
= Seven essentials
The seven essentials aim to
support the growth agenda
and direction for the
business set out in our
strategy and are developed
with consideration of the
external environment and
the internal realities of the
business.
Time
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 28
Seven essential business
priorities for 2016
The seven essential priorities
are the outcome of our
annual business planning
process, outlining the core
priorities for the coming year,
key activities, as well as
associated key performance
indicators and targets that
define success. The seven
essential priorities are utilised
throughout all business
functions and commercial
zones to ensure delivery of
our most important strategic
priorities as ONE united group.
Volume is king
Deliver significant growth
on brands
Improve Central Europe
peer performance*
Target: Add an additional
400 million kg owner milk into retail
and foodservice.
Target: Deliver significant growth on
strategic brands, covered by Arla®,
Lurpak®, Castello® and Puck®.
Status:
Status:
Result: In 2016, we delivered retail and
foodservice volume driven revenue
growth of 2.7 per cent, slightly below
our target of three to five per cent. We
successfully increased retail and
foodservice volumes by 341 million kg.
This was a great delivery close to target,
despite total milk volumes being more
than 800 million kg less than initially
expected. Certain tradeoffs between
volume and price were made during the
second half of 2016 based on the
increasing raw material shortage and
rapidly increasing milk prices. The
reduction in milk intake expectations
during 2016 exemplifies this change in
strategic perspective.
Result: Delivering strategic branded
volume driven revenue growth at
5.2 per cent is an all-time high for Arla.
In 2016, almost the entire growth in
our core retail and foodservice business
has been driven by our brands.
Intensified sales efforts and increased
investment in marketing have resulted
in our branded growth being driven by
the Arla® brand (4.5 per cent), Lurpak®
(7.7 per cent), Castello® (3.0 per cent)
and Puck® (10.6 per cent). With a brand
share of 44.5 per cent, the proportion
of high profit products is the strongest
in years.
Target: Improve Central Europe peer
performance by addressing cost and
brand performance and competitively
export milk into retail and foodservice
outside the EU.
Status:
Result: The business delivered
significant cost improvements
according to plan in supply chain,
across administrative and commercial
functions, as well as significantly
improving the results in the German
cheese business. In addition, branded
positions grew by 3.4 per cent, a solid
achievement in a difficult market.
Milk supply and price volatility have
unfolded more rigorously in Germany
than any other region, and the market
has become even more fragmented,
tough and competitive. This proved
to be even more challenging
than expected, although some
improvements have become visible
towards year-end.
Strengthen market positions
in International**
Structurally reduce
the cost level
Improve cash flow
Strengthen the
Arla cooperative
Target: Strengthen leading positions in
China, the Americas, Nigeria, Middle
East and North Africa measured by
volume and market share.
Target: Volume driven revenue growth
should be >2.0 times higher than the
growth in capacity costs. Deliver a
conversion cost in production at an
index level of 98.5.
Target: Improve cash flow to achieve
leverage of 2.8 to 3.2 and release EUR
130 million*** in cash within net
working capital.
Target: Establish a process with the
Board of Directors, National Councils
and Board of Representatives to create
strong owner relations.
Status:
Status:
Status:
Result: In 2016, we have succeeded in
growing volumes in these International
regions by 9.5 per cent and our
branded business by 10.7 per cent.
China and South East Asia grew by
31.2 per cent, Sub-Saharan Africa grew
by 15.8 per cent, the Middle East and
North Africa grew by 3.8 per cent, and
the Americas grew by 3.4 per cent. In a
volatile year impacted significantly by
low oil prices and the spill over
economies in the Middle East and
Nigeria, we are satisfied with the results,
although they are below our 15 per
cent growth target.
Status:
Result: Our strong cost performance is,
in part, due to huge efforts to run an
efficient supply chain, however, our
conversion cost has fallen short of the
target at 99.2, impacted by the lower
milk volume. Scalability ensures that
capacity costs are increasing at a lower
rate than revenue. Our scalability met
the target of >2.0 due to firm control of
capacity costs. EUR 100 million of our
new ambitious cost improvement
target of EUR 400 million in supply
chain has been delivered in 2016.
Result: In 2016, we achieved leverage
of 2.8, which is at the low range of our
long-term target range of 2.8 to
3.4, underpinning the Group’s strong
financial position. Including the gain on
divestment of Rynkeby, leverage is 2.4.
Our primary net working capital
position, excluding owner milk, was
significantly improved and a cash
release of EUR 165 million was
achieved.
Result: The new owner strategy will
prepare Arla for the future and ensure a
competent and aligned fundamental
owner structure that unites owners
across countries. In October, the Board
of Representatives decided on an
aligned structure, annual calendar and
to explore if the UK and Central
European owners can be offered direct
membership in Arla Foods amba. The
first elements of the strategy will come
into effect in 2017.
* After the restructure, Consumer Central Europe is referred to as Central Europe. The priorities remain unchanged.
** After the restructure Consumer International is referred to as International. The priorities remain unchanged.
*** Changed at mid-year from EUR 150 million due to a higher share of sales in International.
Target not achieved.
Achievement on major components.
Target fully achieved.
Annual report 2016
29
2017
Seven essential business
priorities for 2017
Our ability to translate the
price increases into higher
retail prices will be the key
to our success. We must
continue transforming our
business, prioritising
high-margin branded products
and keeping strong discipline
on our cost and cash agendas
to best position us for the
future. To support these
ambitions, we will increase our
focus on price management,
strengthen our innovation
pipeline, grow targeted brand
investments and drive
efficiency in our supply chain
and administrative cost
programmes.
Deliver price increases
and drive margin focus
To deliver appropriate retail price
increases across all European and
International markets and categories,
we will introduce enhanced price
management analytics and processes
that optimise the balance between
highest potential margin for our
products with minimal market share
impact. With commercial and financial
discipline, we are confident that we can
ensure a competitive milk price for our
owners, as well as strong peer group
performance.
Control costs,
drive operational efficiencies
and release cash
We will deliver strong cost control by
continuously improving our cost
positions within supply chain,
administrative and commercial
functions. Our aim is to achieve a
conversion cost index in supply chain of
<100 and attain scalability of >2.0.
We will also continue our strong cash
delivery orientation to ensure
appropriate capital is available to fund
our Good Growth 2020 ambitions. To
do this, we will expand our successful
working capital programmes and
deliver a financial leverage within our
long-term target range of 2.8 to 3.4.
Drive bold brand growth
and bold innovation
We believe increasing our share of
branded sales is the most important
structural change we can make to
ensure higher growth and profitability
going forward. Although the growth
rate will be under pressure in 2017 due
to our focus on price increases, we
remain committed to achieving a goal
of >45 per cent of our sales coming
from Arla®, Lurpak®, Castello® and
Puck® by 2020. With the new global
Innovation Centre opening this year,
we plan to visibly increase our short,
medium and long-term innovation
pipeline. We will again increase our
marketing spend to drive globally
focused big bets in markets and
categories with the biggest impact.
Make leadership matter
in the milk, yogurt and powder
category
Build leading
market positions in
International
Partner for
growth with leading
customers
Strengthen
the important German
market position
We are committed to showcasing clear
market leadership in our biggest
product category. We will demonstrate
best-in-class innovation and brand
building, particularly around speciality
offerings such as organic, lactose free,
as well as skyr and protein. We also plan
to expand cross-regional product
launches, moving winning products
and competencies more quickly into
multiple markets. We will continue to
innovate with non-genetically modified
feed and other dedicated innovations,
as well as improve customer service.
Lastly, leading in the white milk
category also requires winning with
private label products.
In markets outside Europe, we will
accelerate growth of our global
categories and brands. This means
growing both on an absolute level, but
also expanding market share in focus
regions. Whether it be the Middle East
and North Africa, Sub-Saharan Africa,
the Americas, China and South East
Asia or Russia and distributor sales, our
goal is to improve our relevance with
consumers, through increased market
investments and strengthened
partnerships with local distributors.
Across Europe, we will strengthen our
customer-centric business and focus on
winning with leading customers. This
requires special focus on growth,
profitability, customers, category
collaboration and delivery of service,
amongst others. Core initiatives will be
category management, mutual
category and brand plans, collaboration
across functions to lift online sales and
the utilisation of digital opportunities.
Within foodservice, we will launch a
new organisation in Europe.
In 2017, we will strengthen our most
challenging market, Germany, by
creating a winning plan, executing
focused commercial bets and
enhancing operational basics. An
increased focus on brands and
innovation will be crucial to improve
quality and profitability. Within
supply chain, we will focus on cost
competitiveness, as well as continued
development of our production
footprint.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements Governance
ONE is a continuous effort to unite Arla on three levels:
ONE | Shared Focus
At the core are the ideas and beliefs that unite us and drive
everything we do.
ONE | Aligned Leadership
Shared management practices align leaders.
ONE | Aligned Functions
Functions are united by ways of working encompassed
within global ONE programmes.
Content
32 Governance framework
35
Inclusion and Diversity
36
Executive Management Team
38 Board of Directors
40
41
A global organisation fit for the future
A living cooperative true to its
principles
32
Governance
framework
Arla is a cooperative owned by dairy farmers. Being a large cooperative is
an important differentiator for us. Operating it across seven owner countries
is both very rewarding and challenging. In 2016, Arla’s governance structure
was improved with a successful reorganisation of the mangement structure
further streamlining the democratic structure of the cooperative.
Corporate governance stands for responsible and transparent management and corporate
control, oriented towards a sustainable increase in value. We are convinced that good corporate
governance is an essential foundation for sustainable corporate success and enhances the
confidence placed in our Group by our owners and colleagues.
Annual report 2016 33
“Over the years Arla has
grown through a number
of mergers. We have
focused on aligning
basic principles in recent
years. This is a huge
achievement. Now the
time has come for us to
align how we work within
our democratic structure.”
Åke Hantoft, Chairman of the Board of Directors
Arla’s governance model
11,922
Owners
Different democratic structures
in DK, SE, UK, DE,
BE, NL and LUX
District councils
191*
18**
2
5
7
Board of Representatives
Board of Directors
4 national councils
Executive Board
Executive Management Team
Functional areas and
commercial zones
18,765
Colleagues
* Including 12 employee representatives.
** Including three employee representatives.
Cooperative governance
Arla’s democratic structure gives decision-making
authority to the Board of Directors and to the
Board of Representatives. Their primary tasks
are the development of the ownership base,
safeguarding the cooperative democracy,
embedding decisions and developing
competencies.
Owners
11,922 milk producers in Denmark, Sweden,
the UK, Germany, Belgium, Luxembourg and the
Netherlands were joint owners of Arla in 2016.
As a cooperative, all of our farmers have the
opportunity to influence significant decisions.
As we expand into new markets, our diverse
group of owners elect representatives from
their ranks to the company’s governing bodies.
District councils
Each owner country has its own democratic
structure resulting in different local
organisations. Each year, the cooperative
members convene for a local annual assembly
in Denmark, Sweden, the UK and Central
Europe (Germany, Belgium, the Netherlands,
and Luxembourg) to ensure the democratic
influence of the cooperative owners in the
seven owner countries. The members in the
district council elect the members who
represent their district on the Board of
Representatives.
In 2016, the attendance rate at the
Board of Directors meetings was
98%
National councils
Arla has four national councils that are
sub-committees of the Board of Directors
and consist of members of the Board of
Directors, as well as members of the Board of
Representatives. The national councils are
established in the four democratic areas of
Sweden, Denmark, Central Europe and the UK
to take care of the matters that are of special
interest to the owners in each country.
New owner strategy
In 2016, the Board of Representatives took the
first steps in developing the new owner strategy.
Read more about the new owner strategy on
page 41.
Board of Representatives
The Board of Representatives is the supreme
governing body comprising 191 members of
whom 179 are cooperative owners, while
12 are Arla colleagues. Cooperative owners are
elected every other year in odd years. The
Board of Representatives makes decisions
including appropriation of profit for the year
and elects the Board of Directors. The Board of
Representatives meets at least twice a year.
Board of Directors
Together with the Board of Representatives,
the Board of Directors is responsible for
decisions relating to long-term strategies,
major investments, as well as mergers and
acquisitions. The Board of Directors consists of
15 elected Arla farmers and three employee
representatives with the knowledge, skills and
professional expertise required to properly
perform their tasks. The composition of the
Board of Directors reflects Arla’s ownership.
The Board of Directors is responsible for
monitoring the company’s activities and asset
management, satisfactorily maintaining the
accounts and appointing the Executive Board.
The Board of Directors is also responsible for
ensuring that Arla is managed in the best
interest of its owners and making decisions
concerning the ownership structure.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 34
Arla is made up of thousands of people who share an
aspiration to make a difference in the world. While we each
have an important individual role to play in achieving our
mission and vision, our shared success is best assured
if we are united as ONE global company.
Corporate governance
In the first half of 2016, a restructure of the
organisation was efficiently executed in order to
deliver the strategy, Good Growth 2020, faster,
stronger and in a more united way. Read more
about the restructure of the business on page 40.
Executive Board
The Executive Board consists of Arla’s CEO and
vice CEO appointed by the Board of Directors.
They are responsible for independently managing
the company, ensuring the proper long-term
growth of the company from a global perspective,
driving the strategic direction, following up on
targets for the year and defining company
policies, while striving for a sustainable increase
in company value. Furthermore, the Executive
Board ensures appropriate risk management
and risk controlling, as well as compliance with
statutory regulations and internal guidelines.
This is where the Group’s ambitions are defined
for cross-disciplinary efforts.
Executive Management Team
The Executive Management Team is responsible
for Arla’s day-to-day business operations and
for preparing strategies and planning the
future operating structure. The Executive
Management Team is based around specific
functional areas such as Supply Chain,
Marketing and Innovation, Human Resourses
and Corporate Affairs, Milk, Member and Trading,
as well as Finance, IT and Legal. It also includes
two commercial zones, Europe and International.
Irrespective of their overall responsibility, the
members of the Executive Management Team
are individually responsible for managing their
respective business areas. The members of the
Executive Management Team keep one another
informed on all significant developments in
their business area and align on all cross-func-
tional measures.
Functional areas and commercial zones
The Leadership Teams within the functional
areas and commercial zones are Arla’s executive
bodies and focus on ensuring that Arla is
result-oriented across organisational units,
while also defining policies, as well as sharing
and implementing best practices.
Colleagues
Arla has 18,765 colleagues globally, who are
represented in the Board of Directors and the
Board of Representatives.
Arla remuneration philosophy
The remuneration package is designed to ensure attraction and retention of the right senior
leaders, at the same time driving both short and long-term business results. This is achieved
by offering a benchmarked remuneration package with the right balance of fixed and variable
pay. The competitive remuneration package is reviewed annually by external advisors using
market data sources.
Executive Board
The remuneration package for members of the Executive Board is based on external benchmarks
against European and International ‘fast-moving consumer goods’ companies, providing a
competitive and sustainable mix of fixed and variable pay. The fixed pay component consists of
an annual base salary, a pension contribution, as well as an executive benefit package. The
variable pay component consists of both an annual variable incentive plan, as well as a three-year
long-term incentive programme.
The members of the Executive Board are employed on terms according to international standards,
including adequate non-compete restrictions as well as confidentiality and loyalty restrictions.
Whistleblower service
Arla is an organisation with a strong sense of responsibility and integrity. Arla’s Code of Conduct
contains general guidelines for conducting business. In addition to this, Arla has a whistleblower
service to enable its colleagues in all companies that are majority owned or controlled by Arla to
report information about possible irregularities. It is also a channel to voice concerns regarding
potential violation of Arla’s Code of Conduct or legislation.
Since the implementation in 2012, Arla has received 52 reports from its whistleblowing service.
The reports have come from most parts of the organisation and include areas such as auditing,
accounting, theft, anti-bribery, entertainment, as well as health and safety. In 2016, the
whistleblowing service received 25 reports of which 15 led to further investigation. Depending
on the outcome of the investigation, appropriate measures have been taken. Ten reports have
been classified as inappropriate behaviour towards an individual, which means that we cannot
register and process these due to legal reasons. Instead, the reporter is informed of which
person to contact within Human Resources.
Annual report 2016 35
Inclusion and diversity
In Arla, we believe that inclusion and diversity are imperative to our business and that
diverse teams lead to enhanced commercial outcomes. We define diversity broadly as
differences between people with a diverse range of backgrounds, while inclusion is about
valuing differences among individuals to create synergies. As an organisation, we strive
for an inclusive and welcoming culture for all colleagues.
Diversity from an owner perspective
In compliance with legislation, Arla has set
a target for the underrepresented gender in
the Board of Directors. As men are highly
overrepresented in our industry, the target
reflects the gender composition among our
owners. We consider the demographics of the
Board of Representatives to be representative of
the owner group due to elections in a
democratic process every other year.
In 2016, the representation of females in
the Board of Representatives was 13 per cent
compared to seven per cent in the Board
of Directors. Our aim is that female
representation in the Board of Directors
reflects the female representation of the
Board of Representatives following the
election in 2019.
Gender in the Board of Representatives*
2016
2015
13%
87%
Gender in the Board of Directors**
2016
2015
7%
93%
Striving for Good Growth 2020
As part of our strategy, Good Growth 2020,
we aim to drive change in the composition of
our teams by ensuring that a maximum of
70 per cent of members in any given team
represents the same set of criteria. These
criteria include nationality and ethnic
background, gender, generation, educational
and professional background.
Gender representation in 2016
We have focused primarily on reporting gender
composition in 2016. Women comprise 28 per
cent of Arla's entire workforce, representing an
increase in scope coverage versus the prior year.
Gender in Arla
2016
2015
28%
28%
72%
72%
In January 2016, the appointment of two
females to the Executive Management
Team was announced bringing the female
representation to 29 per cent. This is a
significant achievement and has established
a foundation for further progress.
Gender in the Executive
Management Team
2016
2015
29%
0%
71%
100%
Since 2013, we have aimed at having more
than 20 per cent of our employee population at
director level and above as female. In 2016, our
population at director level and above improved
modestly, with female representation following
our recent restructure amounting to 22 per cent.
Gender at director level and above
2016
2015
22%
21%
78%
79%
Examples of inclusion and diversity activities in 2016
In 2016, we have worked with several inclusion and diversity initiatives.
Relaunching ‘Our Leadership’ framework
We have refreshed and relaunched Arla’s ‘Our
Leadership’ framework, making all materials
transparent and available to everyone. The
refresh includes clear statements that
demonstrate great leadership is available to all
colleagues, irrespective of job type or hierarchy,
with clear guidance as to how best to show
these capabilities at any career stage. To
support the relaunch of ‘Our Leadership’, all the
leadership programmes have been redesigned
to support colleagues to realise their full
potential in Arla.
Future 15 Graduate Programme
The Arla ‘F15® Graduate Programme’ allows
promising candidates to experience a versatile
picture of Arla. The programme consists of
three global job rotations in diffferent functions.
Across 2015 and 2016, Arla welcomed 18
different nationalities in the application process,
consisting equally of male and female
candidates. In 2015, there was a female
representation of 50 per cent, compared to
75 per cent in 2016. For the 2017 application
round, we received 1,485 applications from
72 countries, with an equal gender distribution.
Talent Accelerator Programme
Our ‘Talent Accelerator Programme’ draws
together some of the brightest and most
ambitious young leaders, giving them the
opportunity to broaden their leadership skills.
In 2016, managers were asked to nominate
their best female and best male high potentials,
removing any gender bias. This resulted in the
same number of males and females being given
the opportunity to join the programme. Of
the nominees who were successful in their
assessment, 53 per cent were female, constituting
an increase of 18 per cent from last year.
* Excluding employee representation in the Board of Representatives.
** Excluding employee representation in the Board of Directors.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
36
Executive Management Team
Executive Board
Other Executive Management Team
1
Peder Tuborgh
CEO
3
Natalie Knight
CFO
Head of Milk, Members and Trading
Head of Arla Foods Ingredients
Executive Vice President,
Finance, IT and Legal
5
7
Hanne Søndergaard
Tim Ørting Jørgensen
CMO
Executive Vice President,
Marketing and Innovation
Year of birth: 1963
Nationality: Danish
Year of birth: 1970
Nationality: American
Year of birth: 1965
Nationality: Danish
2005: CEO, Arla Foods
2016: CFO, Arla Foods
2016: CMO, Arla Foods
2002: Executive Group Director,
Arla Foods
2000: Divisional Director, Denmark
Division, Arla Foods
1994: Marketing Director, Denmark
Division, MD Foods
1990: Marketing Manager, Danya Foods
Saudi Arabia
1987: Product Manager, Germany,
MD Foods
2
Povl Krogsgaard
Vice CEO
Executive Vice President, Supply Chain
Year of birth: 1950
Nationality: Danish
2004: Vice CEO, Arla Foods
2000: Executive Group Director,
Arla Foods
1998: Executive Group Director,
MD Foods
1994: CEO, Mejeriernes
Produktionsselskab
1991: Director, Home Market Division,
MD Foods
1989: Production Manager,
Yellow Cheese, MD Foods
1988: Head of Home Market Division,
MD Foods
1987: Head of Mejeriselskabet
1979: Danske Mejeriers
Fællesorganisation
2015: Senior Vice President, Group
Functions Finance, adidas
2012: Senior Vice President, Global
Categories and Brands, Arla Foods
2011: Senior Vice President, Brand and
Commercial Finance, adidas
2008: CFO, North America, adidas
2004: Vice President, Mergers and
Acquisitions and Investor Relations, adidas
2010: Senior Vice President, Butter,
Spreads and Margarines and Arla Brand,
Arla Foods
2001: Marketing Director, Arla Foods UK
1999: Vice President, Head of Investor
Relations, adidas
1999: Sainsbury’s BU Controller,
MD Foods UK PLC
1998: Investor Relations Manager, BASF
1995: Investor Relations Specialist,
Bankgesellschaft Berlin
1996: Category Controller,
MD Foods UK PLC
1994: Cheese Product Manager,
MD Foods UK PLC
4
Ola Arvidsson
CHRO
Executive Vice President,
HR and Corporate Affairs
Year of birth: 1968
Nationality: Swedish
2007: CHRO, Arla Foods
2006: HR Director, Arla Foods
2005: HR Vice President, Unilever Nordic
2003: HR Director, Unilever Home and
Personal Care Europe
2001: HR Director, Unilever
2000: HR Director, Lever Faberge Nordic,
Unilever
1998: HR Director, Diverseylever Nordic,
Unilever
1995: HR Manager, Unilever
1988: Officer, Royal Combat Engineering
Corps, Swedish Army
6
Peter Giørtz-Carlsen
Executive Vice President, Europe
Year of birth: 1973
Nationality: Danish
2016: Executive Vice President, Europe,
Arla Foods
2014: Executive Vice President, Consumer
UK, Arla Foods
2011: Executive Vice President, Consumer
Denmark, Arla Foods
2010: Vice CEO, China, Bestseller Fashion
Group
2008: Managing Director, Cocio
Chokolademælk A/S
2003: Vice President, Corporate Strategy,
Arla Foods
2002: Business Development Director,
Semco/Bravida
1999: Management Consultant,
Accenture Strategy Practice
Executive Vice President, International
Year of birth: 1964
Nationality: Danish
2016: Executive Vice President,
International, Arla Foods
2012: Executive Vice President, Consumer
Central Europe, Arla Foods
2007: Executive Vice President, Consumer
International, Arla Foods
2001: Divisional Director, Denmark
Division, Arla Foods
1996: Commercial Manager, MD Foods do
Brasil/Dan Vigor
1993: Product Manager, Danya Foods
1992: Trade Marketing Manager, France,
MD Foods
1991: Trade Marketing Assistant, Cheese
Division, MD Foods
2007: Vice CEO, Arla Foods UK
1999: Group Project Manager, MD Foods
Annual report 2016 37
2
5
1
4
7
6
3
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 38
Board of Directors
Åke Hantoft
Chairman
Year of birth: 1952
Nationality: Swedish
Member of the board since 2000
Jan Toft Nørgaard
Vice Chairman
Year of birth: 1960
Nationality: Danish
Member of the board since 2000
Thomas Johansen
Viggo Ø. Bloch
Year of birth: 1959
Nationality: Danish
Member of the board since 2002
Year of birth: 1955
Nationality: Danish
Member of the board since 2003
Manfred Graff
Year of birth: 1959
Nationality: German
Member of the board since 2012
Jonas Carlgren
Year of birth: 1968
Nationality: Swedish
Member of the board since 2011
Bjørn Jepsen
Year of birth: 1963
Nationality: Danish
Member of the board since 2011
Markus Hübers
Year of birth: 1975
Nationality: German
Member of the board since 2016
Annual report 2016 39
Palle Borgström
Heléne Gunnarson
Year of birth: 1960
Nationality: Swedish
Member of the board since 2008
Year of birth: 1969
Nationality: Swedish
Member of the board since 2008
Johnnie Russell
Year of birth: 1950
Nationality: British
Member of the board since 2012
Manfred Sievers
Jonathan Ovens
Year of birth: 1955
Nationality: German
Member of the board since 2013
Year of birth: 1957
Nationality: British
Member of the board since 2014
Torben Myrup
Year of birth: 1956
Nationality: Danish
Member of the board since 2006
Harry Shaw
Employee representative
Ib Bjerglund Nielsen
Employee representative
Year of birth: 1952
Nationality: British
Member of the board since 2013
Year of birth: 1960
Nationality: Danish
Member of the board since 2013
Steen Nørgaard Madsen
Year of birth: 1956
Nationality: Danish
Member of the board since 2005
Haakan Gillström
Employee representative
Year of birth: 1953
Nationality: Swedish
Member of the board since 2015
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 40
A global organisation
fit for the future
In February 2016, Arla announced significant structural changes to the organisation
that will enable the business to deliver its ambitions. The restructure included the
creation of a new Executive Management Team, as well as a more efficient, global and
functional orientated structure, which enables markets to strengthen their commercial
and consumer focus.
Arla has grown its business
significantly in recent years, both
organically and through mergers.
However, more milk is expected to
be produced globally and Europe is
experiencing pressure on prices
and very little growth, which
means competition is fierce. In
addition, consumers’ needs are
becoming more diverse and
customers expect increased levels
of service. In order to increase our
competitiveness, Arla changed its
ways of working to be more agile
and cost efficient.
The new organisation is designed
to optimise Arla’s performance in
a highly competitive global dairy
market, by strengthening value
creation and functional efficiency
as outlined in the strategy,
Good Growth 2020. The new
organisation drives clear functional
responsibilities and efficient
execution in global functions and
develops more collaborative ways
of working, while reducing
duplication across countries. Arla
made more than 500 white collar
employees redundant across
markets and removed them from
the business by June. We expect to
achieve the cost improvement in
2017 and beyond.
A new Executive
Management Team
The changes commenced at
the top of the organisation. On
1 March, the new organisational
restructure went live, with a new
Executive Management Team built
around specific functional areas
and commercial markets organised
into two geographical areas. There
are seven members of the
Executive Management Team,
compared to nine previously.
The main changes
Arla has streamlined and simplified
the global organisational structure
and prioritised its resources to
support the Good Growth 2020
work streams.
The new operating model, following
the restructure of the organisation,
is based on a functional logic
with deep capabilities and clear
accountability. The model ensures
our global functional ambitions
meet the realities of our markets in
order to create Good Growth on
our journey towards 2020.
With the new organisation,
responsibility for marketing and
innovation has been elevated to
the Executive Management Team,
to deliver global brands and
category leadership. Similarly, two
commercial zones have been
formed: Europe and International.
This allows country management
to strengthen its commercial focus
on consumers, customers and
categories supported by strong
marketing driven from a global
category perspective.
Furthermore, ONE European milk
pool and ONE global supply chain
functions have been formed,
encompassing production,
procurement, QEHS and logistics
to utilise our milk in the best
possible way, generate efficiencies
on a global scale and ensure that
the capacity across our 60 sites
is optimised.
Operating model: From farmers to consumers
Milk,
Members and
Trading
Drives ONE
global milk pool
and ensures a
strong farmer
agenda.
Supply Chain
Become ONE
with global
responsibility
and strong
customer focus.
Marketing
and
Innovation
Drive the
category
agenda across
Arla building
strong global
brands and
increasing
value.
Europe
Drive 50 per cent of Good Growth
2020, enhance synergies and increase
value in our European markets.
International
Be the growth engine of Arla towards
2020 and double in turnover.
Human Resources and Corporate Affairs
Build organisational capability, drive strategy execution and engage stakeholders.
Finance, IT and Legal
Drive performance management and support Arla’s globalisation journey.
Annual report 2016
41
A living cooperative
true to its principles
As a thriving cooperative democracy, we are continuously working to further develop
our democratic processes. In 2016, we reviewed our cooperative owner structure, as
well as the democratic bodies that oversee the interests of cooperative owners through
elections, meetings and decision making. In the coming year our new owner strategy
will drive change in all owner countries.
In 2015, the Board of Directors,
in cooperation with the Board of
Representatives, decided to create
a more streamlined structure for
Arla’s member democracy. A
structural change was needed to
align different structures following
several mergers which occurred
between 2011 to 2015, and it is a
natural step in achieving
harmonisation.
Based on the founding principle
from the 1880s, ‘One man, one
vote – in a cooperative owned and
managed by farmers for farmers’,
the aim of the new owner strategy
is to further develop and prepare
Arla as a cooperative for the future.
The majority of Arla’s elected
farmer representatives were
involved in this discussion during
2016 including discussions at the
Board of Representatives meeting
in October. At the meeting, the
191 elected members decided
on a course of action that will
result in a more streamlined
democratic structure over the
coming years. Going forward, the
aim is also to achieve harmonised
processes for meetings among
Arla’s cooperative owners and
representatives, and for the election
of farmer representatives to the
various bodies.
Creating a uniform and
transparent structure
Cooperative democracy allows the
individual member to influence
decision-making in Arla and stay
informed about the development
of the business. This structural
overhaul will make the owner
structure more uniform and
transparent across all seven owner
countries.
Today, the UK and Central
European farmers, unlike owners
from Denmark and Sweden,
are members through their
cooperatives, which in turn are
members of Arla Foods amba. The
Board of Representatives decided
to further explore whether it would
be possible to offer all Arla farmers
direct membership in Arla Foods
amba. If possible, each cooperative
and its farmers would be able to
decide through a local democratic
process.
Improving communication
across the Group
The strength of an owner-managed
company relies on the cooperative
democracy to be alive and healthy,
and its members engaged. As a
result, harmonisation must ensure
prompt communication and
transparency concerning
decision-making processes.
The new structure is also
expected to improve dialogue
across the Group.
Progress on the owner strategy is
expected to continue in 2017.
Specific priorities include focus on
amendments to the Articles of
Association to support the new
structure, as well as on potential
direct membership for the
cooperative owners in Central
Europe and the UK.
The new owner strategy process
February 2016
Spring 2016
May 2016
Summer 2016
October 2016
2017
The new owner strategy
kicked-off with the
Board of
Representatives.
Discussions among
elected representatives
in the National
Councils.
Principle discussions at
the Board of
Representatives.
Further discussions
amongst members,
National Councils
and within the Board
of Directors ahead
of the Board of
Representatives
meeting in October.
The Board of
Representatives
decided on an aligned
structure, annual
calendar and to explore
if the UK and Central
European owners can
be offered direct
membership in Arla
Foods amba.
Implementation of
elements decided
at the Board of
Representatives
meeting in October
2016:
Governance structure
Eligibility and elections
Annual meeting cycle
Discussions continue on
the cooperative
structure in the UK and
Central Europe,
corporate governance
and further develop-
ment of Arlagården®.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
Performance
2020
2019
2018
2017
2016
Our owners
are counting
on us to add
value to
every kg of
their milk.
Content
44 Market overview
45 Financial review
49 Financial outlook
51 Five year financial overview
52 Segment overview
54 Europe
55
International
56
Arla Foods Ingredients
44
Market overview
Milk prices at year-end were the highest in two and a half years, and have improved
strongly versus the low mid-year levels. However, farmers realised significant losses on
their farms throughout the year and despite increasing optimism driven by higher
prices, they remained cautious given the brutal price environment of recent years.
2016 was a challenging and highly
volatile year for the global dairy
industry. Big swings in European
supply were the primary driver of
volumes and prices, while
American supply grew modestly
and Oceania supply continued to
contract, as a result of low global
milk prices that characterised the
market during the first seven to
eight months of 2016. Demand
grew in line with Gross Domestic
Product (GDP) in most markets,
which translated to low single-digit
growth in most countries. This
development also included most
emerging markets and the major
oil exporting regions of the world
such as the Middle East and
Sub-Saharan Africa, which grew
more slowly than in recent years.
The European milk supply grew
sharply in the first four months
of the year, mirroring the
annualisation effects of the
abolition of the EU quota system
in April 2015. Farmers who were
now able to produce unlimited
quantities of milk for the first time
ever, produced five per cent more
milk in the first quarter of the year.
In countries with particularly
strong dairy industries, such as
Ireland and the Netherlands,
growth rates were the highest at
25 and 12 per cent respectively.
Although these increases
moderated later in the first half of
2016, given no matching increase
in demand, prepaid prices moved
downward quickly and reached
historically low levels in May to
June 2016. With limited impulses
from other regions, Global Dairy
Trade (GDT) prices followed the
trend and finished the first half of
2016 at five year low prices, with
whole milk powder prices of USD
2,000 to 2,100 per metric tonne.
In stark contrast, milk supply in
Europe declined significantly
during the second half of 2016,
which led to the fastest milk price
rally ever recorded. Supply growth,
which had slowed in the second
quarter, stabilised and then
decreased sharply as the year
progressed. This development was
largely driven proactively by
farmers, who quickly reduced milk
output by five per cent in the fourth
quarter, due to unsustainable milk
prices. Following record cullings,
farm closures and rigorous political
lobbying, the EU also introduced
an intervention programme to
help stabilise the market. With
supply decelerating quickly and no
measurable changes in demand,
milk prices finally began to
increase early in the second half of
2016. Improvements started in the
European yellow cheese and
butter categories as a direct result
of the increasing scarcity of raw
material in the European milk
market. Price inflation quickly
spread to European powder
products and then to other dairy
commodities traded on the GDT.
significant declines and, in some
categories, real shortages in the
second half. Although milk prices
at year-end were the highest in
two and a half years, farmers
realised significant losses on their
farms throughout the year, and
despite increasing optimism driven
by higher prices, they remained
cautious given the brutal price
environment of recent years.
Global markets initially trailed but
eventually equaled these trends
by year-end. As a result, milk
commodity prices grew 90 to
100 per cent in Europe and 70 per
cent on the GDT, within six to
seven months and completely
reversed the negative pricing
trends of the last two years.
In total, the 2016 milk supply
declined by approximately
one per cent in Europe versus
2015. However, this development
masks a huge discrepancy in
oversupply in the first half versus
Global Dairy Trade development in 2016, Whole Milk Powder
(USD/tonne)
4,000
3,500
3,000
2,500
2,000
1,500
Jan
Feb
M ar
Apr
M ay
Jun
Jul
Aug
Sep
Oct
N ov
Dec
Annual report 2016
45
Financial review
Arla maintained a solid business performance throughout 2016, despite highly
volatile milk markets. While revenue declined due to the external price environment,
we responded to the change in milk supply by improving the quality of our revenue
through focusing on our brands. We continued to drive innovation in order to ensure
sustainable growth in our branded portfolio. We delivered financial results above
our targets on most measures, with net profit at 3.6 per cent of sales (including the
divestment of Rynkeby), a strategic branded volume driven revenue growth of 5.2 per
cent and a growth in brand share to 44.5 per cent. The performance price for the year
was 30.9 EUR-cent/kg.
Arla’s business performance
reflected the year’s market
volatility to a limited extent. This
was the result of our ability to
utilise low milk prices in the first
half to grow market share and
volumes in core European and
international markets. In the
second half of the year, financial
results were less strong for the
Group as we made the strategic
choice to increasingly focus on
raising prices at the expense of
volumes, driven by lower supply
availability. Similarly, as prices
improved, we focused on paying
out as much to farmers as quickly
as possible to help our owners
realise market improvements and
support their farm economies.
Arla’s milk prices
reflect a challenging and
volatile market
The generally low price level for
commodity products that
characterised the majority of 2016,
impacted Arla’s ability to safeguard
the milk price for our owners. The
average prepaid milk price for
2016 was 9.4 per cent lower at
29.0 EUR-cent/kg, compared to
32.0 EUR-cent/kg in 2015. It is
important to note, however, that
the development of the prepaid
prices improved significantly in
the latter part of the year, driven
by strong price management.
Between August and December
2016, Arla announced increases
in the prepaid milk price of nearly
30 per cent or 7.25 EUR-cent/kg.
This is the most rapid increase in
the prepaid milk price that Arla has
ever recorded.
The 2016 performance price
decreased 8.3 per cent to
30.9 EUR-cent/kg, compared to
33.7 EUR-cent/kg in 2015. The
performance price reflects the
ability of the Group to add value to
our owners’ milk and hence the
ability to add value through
our innovation, brands, cost
programmes, global growth, and
other strategic and operational
efforts. The performance price is a
key element in measuring Arla's
relative performance versus our
peers, which is done consistently
through our peer group index,
closely linked to our mission.
The preliminary peer group index
for 2016 is 105. This shows that
Arla generated an average of five per
cent more value per kg of member
milk than the average of the peer
group in 2016. The peer group
includes all publicly available
competitors in Northern European
markets, such as Germany, the
Netherlands, the UK, Denmark and
Sweden, representing 80 per cent of
all milk produced in the region. The
index is a solid measure on Arla’s
ability to pay a competitive milk price
in the market. Our strategic ambition
is to deliver a peer group index of
103 to 105 as stated in our strategy,
Good Growth 2020.
Strong profit level supported
by divestment of Rynkeby
Despite lower sales and milk
volumes, Arla's net profit grew
20.7 per cent for the 2016 financial
year, to EUR 356 million from EUR
295 million in 2015. As a percentage
of sales, 2016 profit, excluding
minority interest share of the result,
was 3.6 per cent versus 2.8 per cent
in 2015, and therefore above the
previously communicated target
range of 2.8 to 3.2 per cent.
Our net profit was influenced by
significant one-offs in 2016. On the
positive side, the sale of Rynkeby
increased net profit by 1.2
percentage points or EUR 120
million. Net profit was also impacted
mainly by losses experienced by
our associated company in China,
Mengniu, and currency availability
and devaluation in Nigeria. Despite
having an unfavourable impact
on net profit, we deliberately
increased the prepaid milk price in
the last quarter of the year to
support our farmer owners.
Milk volume declines
2.2 per cent after turbulent
production year
Total milk volumes declined
2.2 per cent to 13.9 billion kg in
2016, compared to 14.2 billion kg
of volume intake in 2015. Milk
volumes from farmer owners
Prepaid milk price 2016
(EUR-cent/kg)
35
30
25
20
Jan
Feb
M ar
Apr
M ay
Jun
Jul
Aug
Sep
Oct
N ov
Dec
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
46
reduced by 1.1 per cent to 12,320
million kg, from 12,463 million kg
in 2015. Contract milk, speciality
milk and milk acquired to meet
local market demands, reduced by
10.1 per cent to 1,554 million kg,
versus 1,729 million kg in the
previous year.
Despite the challenges we have
faced in the market, few members
have left the cooperative other
than through expected develop-
ments such as retirement.
Revenue declines
6.8 per cent in 2016
At Arla, there are four primary
components that determine sales
development: milk prices, volume,
product mix and exchange rates.
In 2016, revenue declined 6.8 per
cent to EUR 9.567 million,
compared to EUR 10.262 million
in 2015. This is primarily a result of
lower milk prices, which dominated
the market for the first three
quarters of the year. Unfavourable
exchange rate developments,
primarily as a result of the
weakened GBP in the UK, which
comprises 25 per cent of Group
revenue, also negatively impacted
overall revenue development.
Read more on page 91.
Price rally in the second half
of 2016
Price management has enabled a
visible increase of 7.25 EUR-cent/kg
in the prepaid milk price from
August 2016, Arla being one of the
first to do so. This has been
achieved by a rapid rollover of
commodity prices into Arla’s retail
and foodservice channels, as well
as our branded business.
Price increases are expected to be
targeted on an annual basis in the
retail and foodservice business
sectors when looking forward
into 2017.
There is a delay in achieving price
increases at retail due to a varying
degree of contract negotiation
windows across our European and
international markets. This is most
notably seen in Germany, the UK,
Sweden and Denmark where
notice periods to retail customers
vary. Retail products represent
80 per cent of Arla’s business, of
which 44.5 per cent is branded
business. This makes our business
composition significantly more
brand-driven relative to our
competitors and has had a
negative impact on our peer
group performance in the second
half of 2016.
Significant steps forward on
business health and structure
We are committed to realising our
strategy and pursuing growth in a
volatile market. The core of the
strategy is a focus on improving
the quality of our revenue with
significant increases in our
branded and international sales, as
well as maintaining a tight control
on costs.
Improving the quality of
revenue, strengthening brand
performance and growing
international positions
Improving the quality of our
revenue is a core element of our
strategy, Good Growth 2020.
Historically, more of our products
were sold via trading and other
commodity-like channels. This is
still the case for the majority of our
competitors. In an effort to get
closer to consumers, reduce sales
volatility and achieve higher mid
and long-term profitability, we
have chosen to move significantly
more milk into the retail and
foodservice channel. Despite lower
overall milk intake, Arla was able to
move more than 340 million kg
from trading to this significantly
more profitable channel. As a
result, sales volumes in this
channel grew 2.7 per cent in 2016.
In addition to a shift to retail and
foodservice, Arla is strongly
committed to increasing our share
of branded products. We believe
this is the strongest opportunity
we have to drive maximum value
for our products. Consumers pay a
premium for brands they know and
trust. They are more loyal to
brands that ensure the right
balance between value, innovation
and a positioning they identify
with. As a result, we believe that
consistently improving the
percentage of branded sales in our
portfolio strengthens our position
in the long-term. In 2016, sales
volumes of our strategic branded
products grew 5.2 per cent, which
is the highest rate ever and double
the rate of 2015. Branded sales
now total 44.5 per cent of total
sales, increasing 2.5 percentage
points compared to 2015. To
support this development,
marketing spend increased to
EUR 309 million from EUR 283
million in 2015.
A further area of strong strategic
focus is growing our International
business. 50 per cent of Arla’s
topline ambition in Good Growth
2020 comes from growing sales
in our above-average margin
International markets, where milk
supply shortages exist, population
growth is high and an emerging
middle class all support increased
demand for high quality dairy
products. In 2016, International
volume driven revenue growth was
9.5 per cent. Although this was
beneath our 15 per cent target for
the year, it still allowed us to add
significant incremental value to
our owners’ milk and achieve an
18.0 per cent International sales
share versus 16.5 per cent in
2015. Another key high-margin
Strategic branded volume
driven revenue growth in 2016
4.5%
2015: 2.5%
7.7%
2015: 6.1%
3.0%
2015: 0.1%
10.6%
2015: 9.9%
Annual report 2016
47
improvement of EUR 372 million.
The released funds were partly
used to pay out a supplementary
payment of EUR 108 million related
to the 2015 profit appropriation.
This was in line with our practice of
paying out 1 EUR-cent/kg of
member milk to our owners.
Furthermore, EUR 22 million was
paid out to leaving or retiring
farmers to reimburse their
individual capital. The remaining
amount was used to repay debt,
significantly improving our
financial position.
Development in free cash flow
(EURm)
800
600
400
200
0
2014
2015
2016
commercial segment is Arla Foods
Ingredients. Sales in this segment
increased in 2016 due to very
strong growth in value added
protein sales.
As a result of the shifts to retail and
foodservice, branded and
International business, Arla was
able to reduce sales to the
commodity-driven trading channel
to 2,936 million kg milk. This
represented 20.1 per cent of sales,
compared to 21.5 per cent in
2015. While a base of sales in this
channel is important to ensure
flexibility with seasonal and
demand volatility, Arla is pleased
with this development and it is
in line with our Good Growth
2020 strategy target to reduce
trading business to less than
20 per cent of sales by 2020.
Maintaining tight control
on costs
As a low margin business, keeping
strict control on costs and rigorously
optimising processes is critical to
our success and competitive
positioning. To ensure that these
opportunities are maximised, Arla
puts continuous focus on
minimising growth in both supply
chain and administrative costs to
the greatest extent possible.
Costs for Arla include three major
areas: production, sales and
distribution and administration.
These costs declined six per cent
to EUR 9,254 million in 2016,
compared to EUR 9,847 million in
2015. The decrease of EUR 593
million is mainly attributable to
lower milk prices, lower milk
volumes, savings and currency
translation effects. Read more on
page 92.
More important for us than cost
development by line item,
however, is the development of
cost across two key metrics:
scalability and conversion costs.
These communicate how our
costs are progressing across critical
dimensions versus changes in sales
volumes. Within the Group, we
regularly monitor these metrics
across all key commercial and
functional areas.
Scalability is a core cost measure
within Arla, as we believe it
provides an objective criterion to
evaluate the overall efficiency of
our core operations when milk
volumes are increasing. Scalability
is the ratio between volume driven
revenue growth and capacity
costs. Capacity costs measure our
fixed cost base and hence also the
foundation for our scalability
measure. We want to consistently
grow our volume driven revenue
growth at twice the pace as our
capacity cost base and hence
consistently grow our margins
through rigid cost control.
In 2016, Arla's scalability was
>2.0, which was in line with our
communicated target and
exemplifies firm control of capacity
costs. In the first half of 2016, we
restructured the organisation by
making more than 500 white collar
employees redundant in order to
drive a functional and aligned
agenda throughout Arla. The
majority of the resulting cost
savings will be visible in 2017.
Supply chain efficiency, expressed
as our conversion cost index,
measures how supply chain costs
develop in relation to volumes. After
strong first half year performance,
lower milk intake in the second
half of the year, drove our full year
conversion cost index of 99.2
versus our target index of <98.5.
Nevertheless, this development
highlights a lower absolute
expenditure for supply chain costs
versus the prior year despite
inflation, dairy closures and
increasing relative capacity costs in
production caused by lower milk
volumes. To support our conversion
cost ambition, our strategy includes
an ambitious cumulative cost
improvement target of EUR 400
million. Over time, all zones and
functions will contribute to these
savings, with the primary focus
being on cost improvements
within supply chain. The efficiency
programme kicked off at the
beginning of 2016 and has
resulted in a EUR 100 million
saving during its first year.
Delivering strong cash flow
improvements
In 2016, Arla delivered a very
strong cash flow. Cash flow from
operating activities increased
20 per cent to EUR 806 million
compared to EUR 669 million in
2015, primarily due to stronger
cash flow from underlying
operational activities, i.e. EBITDA,
and improvements in net working
capital position.
Cash flow from investing activities
reduced by 26 per cent to
EUR -305 million compared to
EUR -410 million in 2015, mainly
as a result of lower investments in
property, plant and equipment.
This reflected our ability to utilise
our production capacity at existing
sites more efficiently, which
allowed us to temporarily reduce
capital expenditure. Capital
expenditure at Arla decreased by
25 per cent to EUR 263 million
from EUR 350 million in 2015.
The Rynkeby divestment also
contributed EUR 138 million to
Arla’s cash flow from other
investing activities.
As a result of the developments,
free cash flow for 2016 grew 239
per cent to EUR 639 million, versus
EUR 267 million in 2015, an
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
48
Building a strong financial
position for the future
Our strong free cash flow had a
favourable impact on our net debt
position, and therefore on our
healthy leverage of 2.4 (including
the divestment of Rynkeby) at
year-end, compared to 3.3 in 2015.
The Group has a strong and
improved financial position and
standing with credit institutions.
Financial leverage is our most
important balance sheet key
performance indicator at
Arla, because it is the measure
used by external parties to
measure our financial strength and
creditworthiness. It is calculated as
the ratio of net interest-bearing
debt to profitability, i.e. EBITDA, and
in 2016 both components of
leverage improved, signaling Arla’s
strong cash flow focus. Net
interest-bearing debt (excluding
pension liabilities) declined
25 per cent to EUR 1.648 million in
2016, compared to EUR 2.203
million in the previous year. EBITDA
(including the divestment of
Rynkeby) improved 11 per cent to
EUR 839 million in 2016, versus
EUR 754 million in the prior year.
As a result, Arla’s year-end financial
leverage ratio improved to 2.4,
compared to 3.3 in 2015,
surpassing our long-term target
range of 2.8 to 3.4, which
underpins the Group’s strong
financial position. This is supported
by an improved solvency ratio of
34 per cent.
Building a strong balance sheet for
the future enables Arla to make
strategic choices and utilise
opportunities, deliver our strategy,
Good Growth 2020, and thereby
secure the highest possible
milk price for our farmers. Our
performance and ability to pay a
competitive milk price to farmers
in 2016, while significantly
strengthening our financial position,
was due to strict financial discipline
in the business and a determined
effort to shift more volumes of
milk into higher-margin products.
Following the restructure in 2016,
we have become an even stronger
cooperative, operationally, financially
and in our mindset. This gives us the
momentum needed to achieve
Good Growth towards 2020.
Net interest-bearing debt and
leverage
(EURm)
3
7
6
2
9
4
3,000
2,500
2,000
1,500
1,000
500
,
2
1
7
1
0
,
2
2
0
3
5
4
3
2
1
0
3
6
9
,
1
6
4
8
2014
2015
2016
Leverage
Pension liabilities
Net interest-bearing debt
excluding pension liabilities
Annual report 2016
49
Financial outlook
We are confident that the improved quality of our business, the new organisational
structure, as well as our strategy put us in a favourable position and will ensure that
we are ready to capture the full potential of the market in 2017 as it continues to
evolve and globalise.
Economic growth lower and
potentially more volatile in 2017
At Arla, we enter 2017 with the
expectation of slightly lower GDP
growth in most markets than 2016,
especially in emerging markets
where oil producing regions
continue to face a variety of
financial constraints. Across the
Western world, recent and pending
elections present potential
protectionist strategies that could
impact trade policies, as well as
fiscal and monetary policies in
many European and global markets.
Experts predict more stable
milk prices in 2017
The significant commodity price
increases of the third and fourth
quarters in 2016 are expected to
drive correlating retail price
increases in Europe and other
global markets during 2017. This is
expected to lead to price increases
that will be visible directly in
consumer prices.
Looking back, the price rally during
the second half of 2016 was driven
primarily by a European decline in
milk supply that led to an increasing
raw material shortage. Unlike the
earlier price cycles of 2007 to 2008
and 2012 to 2013, when global
demand was the key driver for price
increases, the price mechanisms of
2016 were supply-driven. Moving
into 2017, the question will be how
supply will respond to the increasing
market milk prices, and how fast this
supply recovery will take place. Major
regulatory factors such as EU
phosphate regulation and other
environmental regulations are likely
to negatively impact the develop-
ment of the supply and demand
balance in 2017.
External experts now believe lower
milk volumes will be a key driver of
a more stable pricing environment
versus what we saw during the
second half of 2016. We do not
currently foresee significant
changes in global consumption
trends or big shifts in global trade
patterns during 2017.
Arla's revenue to grow in 2017
In 2017, Arla’s revenue is expected
to grow both in absolute as well as
in qualitative terms. The relative
revenue growth is expected to
increase at single digit rates,
primarily driven by year-on-year
price increases. On the qualitative
dimension, we expect 2017 to
show continued growth of our
strategic branded business and
therefore the overall branded
share of our business.
In 2017, we expect the member
milk intake to be on relatively the
same level as in 2016, however
this remains uncertain due to the
current market environment. With
increases in milk prices into 2017,
milk production is expected to
respond positively,
however the timing of potential
supply increases are very difficult
to predict.
Due to the lower expected milk
intake, all of our volume driven
growth metrics are expected to
slow somewhat versus the strong
2016 levels. We continue to
expect to see solid growth in our
profitable and strategically
important branded business, as
well as our International business,
measured as a share of our total
revenue. In 2017, we will continue
to invest more in our strategic
branded positions, which underpin
our long-term strategic ambition of
building value through brands.
If we are to succeed in 2017, we
need to deliver on both profitability
and branded growth. To do so, we
need to further raise prices and
drive strong branded growth
through focused innovation.
In addition, we aim to secure
efficiency gains and release cash
in our business. The focus of our
growth is to truly solidify and
leverage our strong milk, yogurt
and powder position, as well as
grow new leadership positions in
our International market segment.
Due to the lower milk intake and
continued growth of our branded
business, we expect to see the
trading share of our business to
remain below 20 per cent.
Costs remain a focus,
but lower volumes might
challenge performance
Going into 2017, we maintain our
tight focus on delivering the cost
agenda. 2016 and the previous
years proved that a consistent and
clear focus on improvements in
cost measures delivers results. We
regularly target a scalability ratio of
two to one. This means volume
driven revenue growth should
increase at twice the rate of our
capacity costs, i.e. fixed cost base.
In 2017, given that we expect
lower milk volume and lower
overall growth rates, this will be a
highly challenging measure
to deliver. However, other cost
measures, such as conversion and
administrative costs, will become
increasingly relevant.
In supply chain, we maintain our
focus on delivering the planned
cost programmes and the
underlying core key performance
indicator conversion costs at or
below index 100.
Strong cash management
to continue in 2017
For 2017, our cash outlook
continues to be positive, and we
expect to be able to build further
on the positive development of
recent years. We will continue our
year-on-year focus of improving
our working capital accounts and,
despite strong international
growth, enable the Group to
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 50
Financial outlook
Peer group performance
(peer group index)
Milk volume (bkg)
Revenue (EURb)
Profit
Leverage
Strategic branded volume driven
revenue growth
Brand share
International share
Trading share
Actual 2016
Expectations 2017
105*
13.9
9.6
3.6%**
2.4**
5.2%
44.5%
18.0%
20.1%
103-105
~13.9
10-10.5
2.8-3.2%
2.8-3.4
1-3%
>45%
>20%
<20% * Peer group performance index preliminary.
** Including gain from sale of Rynkeby.
operate with a visibly lower
working capital tie up.
We expect 2017 to be another
year of improvement in financial
leverage and other balance sheet
and cash key performance
indicators. Leverage will stay within
the stated long-term target range
of 2.8 to 3.4, calculated as the ratio
of net interest-bearing debt to
profitability, i.e. EBITDA.
Within these boundaries, we
expect to see a significant increase
in our capital expenditure in 2017.
This follows two years of low
investment levels due to the
financial position. Our capital
expenditure is planned to
increase from EUR 263 million in
2016 to approximately EUR 335
million in 2017. Most of the
investments focus on production
upgrades that will increase
profitability of products sold
in markets like Germany, the
UK, Denmark, Sweden, the
Netherlands and Finland, as well
as on production sites that supply
high-quality dairy products to
Arla’s emerging markets outside
the EU. Some examples include
the following: Rødkærsbro which is
one of the leading mozzarella sites
in the world, Danmark Protein
which is a protein, lactose and
other highly value-added
whey-based ingredients for the
global food industry, a cream
cheese dairy site in Holstebro
introducing new, innovative
packaging designs and lastly,
investment in better energy
efficiency across all sites. We will
clearly show our commitment to
deliver our strategy, Good Growth
2020, by investing in our strategic
markets and product priorities.
Our ability to make this significant
increase in capital expenditure
investments reflects the success of
tight cash management in recent
years, providing us the financial
freedom to relentlessly pursue our
long-term strategy.
Net profit expected
within target range of
2.8 to 3.2 per cent
As we continue to focus on paying
out the largest possible share of
our profit via the prepaid milk
price to our farmer owners, we
continue to target a net profit
share for 2017 in the range of
2.8 to 3.2 per cent. As in previous
years, we expect to see seasonality
in our operations impacting the
2017 half-year results. Our net
profit target range is a full year
target and therefore results at
half-year 2017 may be either
above or below the annual
target range.
The Executive Management Team
has presented seven essential
business priorities for 2017,
managing the dual responsibilities
of delivering on current business
objectives and creating growth
opportunities for the future. Read
more on page 29.
Annual report 2016 * Peer group performance index preliminary.
** Including gain from sale of Rynkeby.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
51
Five year financial review
Inflow of raw milk (mkg)
Inflow from owners in Denmark
Inflow from owners in Sweden
Inflow from owners in Germany
Inflow from owners in the UK
Inflow from owners in Belgium
Inflow from owners in Luxembourg
Inflow from owners in the Netherlands
Inflow from others
Total inflow of raw milk
Number of owners
Owners in Denmark
Owners in Sweden
Owners in Germany
Owners in the UK
Owners in Belgium
Owners in Luxembourg
Owners in the Netherlands
Total number of owners
Performance price
EUR-cent/kg owner milk
Financial key figures (EURm)
Income statement
Revenue
EBITDA*
EBIT
Net financials
Profit for the year
Consolidation for the year
Contributed capital
Common capital
Supplementary payment
Balance sheet
Total assets
Non-current assets
Current assets
Equity
Total non-current liabilities
Total current liabilities
Net interest-bearing debt including pension liabilities
Net working capital
Cash flows
Cash flow from operating activities
Cash flow from investing activities
Free cash flow
Cash flow from financing activities
Investments in property, plant and equipment
Purchase of enterprises
Financial ratios
EBIT margin
Leverage*
Interest cover
Equity ratio
Please refer to glossary inside the front flap.
* Including gain from sale of Rynkeby.
2016
2015
2014
2013
2012
4,728
1,909
1,758
3,210
515
144
56
1,554
13,874
2,877
2,972
2,461
2,485
852
218
57
11,922
4,705
1,995
1,741
3,320
531
130
41
1,729
14,192
3,027
3,174
2,636
2,654
882
221
56
12,650
4,550
2,035
1,526
3,088
403
119
17
1,832
13,570
3,144
3,366
2,769
2,854
997
228
55
13,413
4,508
2,016
1,332
1,254
253
111
-
3,202
12,676
3,168
3,385
2,500
2,815
529
232
-
12,629
4,419
2,059
685
286
53
27
-
2,881
10,410
3,354
3,661
2,911
1,584
501
245
-
12,256
30.9
33.7
41.7
41.0
36.9
9,567
839
505
-107
356
30
193
124
6,382
3,714
2,668
10,262
754
400
-63
295
31
141
113
6,736
3,903
2,833
10,614
681
368
-30
320
39
171
104
6,613
3,774
2,839
9,870
737
425
-88
300
43
131
121
6,187
3,427
2,760
8,479
597
336
-70
255
38
63
149
5,828
3,273
2,555
2,192
2,148
1,874
1,708
1,463
1,742
2,448
2,017
831
806
-167
639
-624
-263
-
5.3%
2.4
11.4
34%
2,084
2,504
2,497
999
669
-402
267
-274
-348
-29
3.9%
3.3
13.2
31%
2,137
2,602
2,547
928
511
-416
95
-93
-429
15
3.5%
3.7
8.2
28%
2,189
2,290
2,394
906
342
-470
-128
110
-505
-
4.3%
3.2
11.1
28%
2,049
2,316
2,298
790
510
-715
-204
235
-444
-39
4.0%
3.9
11.5
25%
52
Segment overview
Annual report 2016 53
Arla is the world’s fourth largest dairy company based on milk intake. Our activities
cover all continents and have been streamlined in 2016 to reflect our core business
areas and strategic objectives. They are divided into three main business segments:
Europe, International and Arla Foods Ingredients. Our business segments are
organised to service different market needs in the best possible way sharing global
synergies while respecting local differences.
Europe
6,321
million EUR
in revenue
Read more on page 54.
Arla Foods Ingredients
545
million EUR
in revenue
Read more on page 56.
International
1,428
million EUR
in revenue
Read more on page 55.
*Trading and other revenue is not disclosed as a separate segment
because it is related to sale of excess milk volume.
Trading and other*
1,273
million EUR
in revenue
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 54
Europe
“We made a strong start to Good Growth 2020
in Europe with significant branded growth and
market share gains across most markets and
categories. The yogurt business had a great year
with award winning innovations for skyr and
protein, delivering strong incremental category
growth. Revenue was under pressure
as a result of a depressed global dairy market
during the first half of 2016.”
Peter Giørtz-Carlsen, Executive Vice President
Revenue split by country,
2016
6,321
million EUR
UK
Sweden
Germany
Denmark
Finland
Netherlands and
Belgium
2016 2015
35% 38%
22% 21%
19% 19%
15% 13%
5%
5%
4%
4%
Key brands
Retail and foodservice
volume driven revenue
growth, 2016
Strategic branded
volume driven revenue
growth, 2016
1.3%
2015: 3.3%
Brand share,
2016
47.6%
2015: 46.3%
3.2%
2015: 3.7%
Revenue development,
2016
-6.9%
2015: -2.9%
In 2016, Northern Europe was
characterised by positive volume
driven revenue growth rates in a
flat underlying market. In line with
Good Growth 2020, the growth
was driven by strategic brands
across all major markets, especially
within the butter, spreads and
margarine (BSM) and cheese
categories. Our BSM brands
delivered impressive growth even
against a backdrop of category
declines, and our cheese business
has grown across all markets with
positive developments in most
sub-categories.
The yogurt business had a
great year, with award winning
innovations for skyr and protein
delivering strong growth. Lurpak®
and value-added propositions in
the UK delivered solid market share
gains. In Germany, particularly in
private label, prices were under
considerable pressure due to
historically tough market
conditions until late summer.
However, the Arla® brand
performed strongly with close to
a double digit volume driven
revenue growth rate.
Growth in Sweden was driven by
Arla® and Castello® in the cheese
category, whereas the fresh milk
category experienced a slight
decline. In Denmark, 2016 was a
very strong year, driven by positive
branded growth rates and solid
progress in the Arla Baby & Me®
assortment.
Annual report 2016 55
Revenue split by region,
2016
1,428
million EUR
Middle East
and North Africa
Americas
Russia and others
China and
South East Asia
Sub-Saharan Africa
2016 2015
36% 39%
23%
24%
24% 22%
11%
6%
9%
6%
International
“We have gained market shares in many of our
key international markets, although facing
challenging external factors such as low oil
prices and currency constraints. In light of these
circumstances, we are satisfied with our
achievements in 2016.”
Tim Ørting Jørgensen, Executive Vice President
Retail and foodservice
volume driven revenue
growth, 2016
Strategic branded
volume driven revenue
growth, 2016
Key brands
9.5%
2015: 6.9%
10.7%
2015: 6.2%
Brand share,
2016
81.4%
2015: 80.2%
Revenue development,
2016
5.9%
2015: 6.3%
In 2016, volume driven revenue
growth outside Europe increased by
9.5 per cent due to improvements in
our International branded positions.
In the Middle East and North Africa,
underlying market growth was slow
in 2016 due to the economic impact
from continued low oil prices.
However, we achieved volume
driven growth of 3.8 per cent, mainly
attributable to strong progress in the
Puck® assortment, thereby winning
market share in most markets.
Sub-Saharan Africa had a strong start
to the year, with the newly
established joint venture in Nigeria
as the main driver of higher milk
powder sales. However, the
devaluation of the local Naira
currency in June following scarce
USD availability, limited growth
in the second half of the year.
China and South East Asia continued
the strong branded volume driven
revenue growth journey in 2016, led
by China, mainly in organic UHT.
However, markets such as
Bangladesh and the Philippines
also showed solid progress.
The Americas delivered close to
double-digit branded growth, further
focusing on the Arla® brand within
the important US market.
Furthermore, we established a joint
venture with the largest cooperative
in the world, Dairy Farmers of
America.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 56
Arla Foods Ingredients
“It is our ambition to discover and deliver all the wonders
whey can bring to people’s lives. In 2016, Arla’s third party
manufacturing activities were transferred to AFI. Furthermore,
we completed our new state of the art hydrolysate plant and
launched a major capacity expansion of our range of
innovative whey proteins for premium infant nutrition.”
Henrik Andersen, Group Vice President
Arla Foods Ingredients (AFI) is a
global leader in whey based
ingredients used in a wide range of
categories from bakery, beverages,
dairy and ice cream to clinical,
infant and sports nutrition. The
products, which are produced in
Denmark or by one of our three
joint ventures in Argentina and
Germany, are sold in more than
90 countries.
AFI is a 100 per cent owned
subsidiary of Arla and benefits
tremendously from being part of
the cooperative, in terms of
controlling the quality of raw
materials from cow to end product.
The close connection between our
milk supply, cheese production
and whey processing provides
unique opportunities to deliver
on customers’ expectations
regarding product quality and
food safety.
Arla Foods Ingredients'
business areas
AFI covers two business areas:
whey processing and third party
manufacturing (TPM). AFI operates
a business-to-business model with
all customers being industrial.
AFI’s objective is to turn whey, the
by-product from cheese production,
into ingredients for the food and
nutrition industry. AFI produces
whey proteins and lactose from
what was once a waste product,
and through forceful innovation,
whey has become a valuable raw
material in its own right creating
new value-added whey ingredients
for Arla and other industrial
customers.
Advanced innovation, as well as
research and development
facilities in Nr. Virum, Denmark,
focus on research-based product
innovation and developing new
ingredients proactively. Our two
application centres in Denmark
and Argentina have state of the art
trial and development facilities,
and AFI cooperates closely with
several leading research institutes
and universities on new product
development.
Strategic ambition
AFI’s strategic ambition is to
become the leading global
supplier of value added whey, by
maximising value-add, increasing
our raw material pool, growing an
organisation with winning
capabilities, and becoming a
leading supplier of private label
child nutrition products.
In 2016, highlights for AFI included
the significant expansion of lactose
capacities, both at Danmark
Protein and at our joint venture
ArNoCo, Germany, with both units
now operating at full capacity.
The transfer of Arla’s third party
manufacturing (TPM) to AFI
realises synergies between the two
units, mainly as both product
categories address the same
customer base. AFI’s TPM business
produces a range of organic
and conventional child nutrition
products and expects to grow its
business further in the coming
years. Finally, the new state of the
art hydrolysate plant at Danmark
Protein was completed
in 2016.
Arla Foods Ingredients
operates within four
categories
Paediatric
High-quality ingredients for
the infant segment, which are
obtained from the filtration and
fractionation of milk and
whey. These products offer
carbohydrates, lipids and proteins
that children need to have a
good start in life.
Functional solutions
Speciality milk proteins adapted for
optimum functionality in a range
of food products, such as fresh
dairy, cheese, bakery, beverages,
culinary and meat.
Health and performance
Medical, health and high-end
sports nutrition. The Health and
Performance team develops milk
ingredients with unique benefits
for patients with specific diseases,
as well as athletes and other
people looking for a healthier
lifestyle.
General foods
Global leader in cost efficient
solutions for the food industry,
such as ice cream, sports products,
confectionery, affordable food
and feed.
Annual report 2016 57
Revenue development,
2016
Revenue split by region,
2016
5.0%
2015: 2.0%
Whey intake,
2016
6.6 billion kg
2015: 6.5 billion kg
545*
million EUR
Europe, the Middle
East and Africa
Asia
Americas
2016 2015
**
47%
51%
40% 37%
13% 12%
*A large part of Arla Foods Ingredients activities
are carried out in joint ventures, which are not
included in the consolidated financial
statements. Revenue including joint ventures
amounts to EUR 644 million.
** Revenue split is not comparable to prior year
due to organisational structural changes in
transferring Arla’s third party manufacturing
(TPM) activities to Arla Foods Ingredients.
AFI produces a range of unique value added whey ingredients with advanced and innovative functionalities
Alpha-lactabumin which is used in infant formula and may help reduce protein content in formula, which is believed to
reduce the risk of obesity later in life. It also improves digestion and increases gastro-intestinal comfort.
Osteopontin which is used in infant formula and supports the development of a strong immune system in infants.
Whey protein hydrolysates which are used in sports nutrition and infant formula. Hydrolysates promote better
absorption of protein in the stomach and may help reduce the risk of allergic reactions in babies allergic to milk.
Whey protein isolate which is used in clear drinks and great for clinical nutrition, functional foods and sports nutrition.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements Risk and
opportunity
Content
60
62
Risk and opportunity report:
we promote risk awareness
We aim to look more
to the left
64 Our risk landscape in 2016
66 How to do the right thing
67 The North Star
60
Risk and opportunity
report: we promote
risk awareness
The world is changing quickly and becoming increasingly volatile, presenting both
new risks and new opportunities. The potential of our strategy, Good Growth 2020, is
promising, but there are also a number of new initiatives that will see Arla continually
facing increased risks and uncertainty in the pursuit of growth.
In Arla, we promote and support risk and opportunity awareness for braver decision-making, to seize
key business opportunities and ensure more effective execution. We do this through our strategic risk
management process.
Inside-out changes
Our strategy, Good Growth 2020,
will expand our exposure to more
risky world regions and product
categories.
Outside-in changes
The exponentially changing world
around Arla is presenting new risks
and opportunities.
The world is changing
exponentially and is increasingly
volatile, presenting both new
risks and opportunities. The
potential is huge if we manage
to get risk and opportunity
governance right.
Annual report 2016 61
Failure or breakdown of production facilities
could adversely affect our business operations
and constitutes a significant risk for Arla.
Inherent risk
Risk
Risk
Risk
Risk
Risk
Mitigating actions
Net risk
Risk
In Arla, risk assessment is based on net
risks, which are the residual risks after
mitigating actions.
Strategic risk management
defined
Being in control of the entire value
chain from the cow to the
consumer, is a major foundation
for Arla being well positioned to
manage many of our risks.
However, being a truly global dairy
company engaged in sales and
production across the world, we
are continuously exposed to
uncertainties and change. Seizing
growth opportunities in emerging
markets is critical for the long-term
success of Arla. At the same time, it
is crucial to manage the potential
risk exposure in order to secure the
profitability of our activities.
Furthermore, the increasing role of
our branded business requires a
higher risk awareness regarding
reputational and social media
impacts, in order to protect the
brand value of our company. In
2016, we harmonised our efforts
and principles regarding how we
work with risks across the business,
ensuring that this is performed
according to a more common
structure, assessment and
understanding. We are planning to
further grow our risk management
capabilities during 2017.
Classification of risks and opportunities
In Arla we work with three major clusters of risks: emerging, strategic and operational risks. The differentiation
between these three clusters allows us to apply different techniques and tools, and also helps us to identify
and allocate primary ownership for the various risks in each cluster.
Emerging risks
Strategic risks
Operational risks
Emerging risks
Our focus on emerging risks is to
enable a longer term outlook and
ongoing consideration of risk and
opportunities beyond the horizon
of the current strategy, Good
Growth 2020. The assessment of
this risk cluster requires us to work
closely with both internal and
external stakeholders and to use
many different sources as a mean
to determine future trends and
capture input. The insights
captured are then transformed into
relevant risks and opportunities
that we can monitor or analyse in
further detail.
Strategic risks
The strategic choices we make are
based on a range of assumptions
and naturally involve a level of
uncertainty. As such, we ascertain
risks in our strategic assumptions,
as well as risks related to the
strategic choices we make in
executing our strategy, Good
Growth 2020. These risks address
the core of our business model
and have the potential to harm our
long-term ambitions.
Operational risks
Embedded in our everyday
operations are a number of key risks
that we need to manage. Our focus
regarding the operational risk cluster
is on the integration of existing
processes, business areas and
corporate functions. Based on clear
ownership and accountability,
operational management performs a
set of activities to effectively prevent
and mitigate these risks.
The overarching setup of our
strategic risk management function
is detailed in a framework of annual
activities, roles and responsibilities
for various stakeholders as well as
the involvement of the Board of
Directors and the Executive
Management Team. All colleagues
are responsible for the risks within
their span of control and are overseen
by Risk Owners, who are responsible
for managing risks in major
commercial and functional areas.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 62
We aim to look more
to the left
In order to operate successfully in an increasingly volatile environment, we need
to anticipate developments and understand emerging trends, which can lead to
new risks and opportunities, at an early stage. We call this ‘looking left’ and it
means, wherever possible, we aim to take a proactive approach to strategic risk
management instead of a more problem-solving reactive focus.
Pro-active
Re-active
Emerging
Foreseeble
Problems
Crisis
Recovery
Changing
the business
Running
the business
Our strategic risk management system provides a common framework across Arla, achieving a sound balance
between continuously exploring opportunities and risk avoidance.
Our efforts in strategic risk management are primarily about building capabilities. This allows our colleagues to
make brave decisions with an appropriate level of risk awareness so they can pursue the relevant opportunities.
At the same time, our strategic risk management approach helps us proactively identify key risks and develop
necessary action plans. Our strategic risk management function is focused on integrating risk efforts into existing
processes through capability building, as well as developing harmonised methodologies and tools.
From identification to action
Clear decision-making structures, standardised guidelines and a common
language facilitated by our strategic risk management function, form the
foundation for efficient and effective governance in relation to risks and
opportunities.
Risk and opportunity
identification
Risk and opportunity
assessment
Risk Owner
Successful risk management drives value
To create value, strategic risk management needs to balance the need for
fast decision making with extensive analysis as needed. In 2016, we
expanded our strategic risk management approach to involve all major
areas within the organisation. Assigning Risk Owners with clear roles and
responsibilities, we aim to take risks and seize opportunities successfully,
subsequently also increasing profitability.
Risk and opportunity
monitoring
and reporting
Risk and opportunity
management
Annual report 2016 63
Risk and opportunity identification
Risk and opportunity assessment
At Arla, we continuously monitor the global market situation
as well as internal processes, in order to identify risks
and opportunities as early as possible to ensure proactive
decision making.
The strategic risk management function identifies major risks in
collaboration with leaders from all major areas across the Group.
Further, certain expert functions such as Global Tax, Treasury, Legal and
Procurement monitor their risk profile separately on a regular basis
during the year.
During the annual business planning process, the Board of Directors and
the Executive Management Team discuss risks that are most critical to the
business. The Board of Directors and the Executive Management Team
also identify opportunities with the biggest potential. As an incremental
part of our annual business planning process, risk and opportunity
identification are also embedded in the local activities of our business
functions and commercial zones.
Risk and opportunity assessment is a core Risk Owner
responsibility, supported and guided by the strategic risk
management function in the evaluation process.
Once risks and opportunities have been identified, we assess them both
individually and systematically, allowing adequate prioritisation and
allocation of resources while creating a solid foundation for sound
decision making.
Risks and opportunities are assessed on the basis of two dimensions:
Potential financial impact on profit (mEUR) per incident. This includes
quantitative but also qualitative measurements such as reputational
exposure such as impairment to brand value, impact on market position
and media coverage.
The likelihood that a given risk or opportunity materialises within the
next three to five years.
Based on this assessment, risks and opportunities are classified according
to their relative significance. Risks and opportunities are assessed based
on the net effect of the risk after all expected mitigating actions.
Risk and opportunity management
Risk and opportunity monitoring
and reporting
Working closely together with the strategic risk management
function, Risk Owners develop and implement appropriate
mitigating actions and explore opportunities within their
business function or commercial zone.
As both risks and opportunities are subject to constant change,
Risk Owners not only monitor developments closely, they are
also responsible for consistently ensuring the adequacy and
effectiveness of our risk mitigation and resolution strategies.
The aim of strategic risk management is to use appropriate measures to
reduce risk probability and to minimise their impact by implementing and
driving mitigating actions, or by seizing available or emerging opportunities.
This process is supported by a common language and a clear methodology
for assessing risks and defining opportunities, using tools and processes
tailored for operational, strategic and emerging risks.
Initiated in 2016, for the first time, the strategic risk management function
works in close collaboration with Risk Owners, to monitor progress of
planned mitigating actions and assess the viability of already implemented
mitigating actions. The result is a one-page action plan that is updated
quarterly for all material identified risks and opportunities.
We aim to increase the transparency of risks and opportunities for Arla.
To avoid unnecessary bureaucracy and enable real value creation, risk
and opportunity reporting is integrated into our existing and ongoing
reporting procedures and management tools. This supports an effective
escalation process. In 2017, a risk and opportunity report will be
produced and presented to the Executive Management Team on a
bi-annual basis, whilst risks and opportunities are formally reported to
the Board of Directors annually.
Furthermore, a status update is disclosed to external stakeholders in this
section within the annual report.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 64
Our risk landscape in 2016
Arla’s heatmap includes the top emerging, strategic and operational risks that we
have identified in 2016. Our risk assessment is based on the potential impact for
Arla’s reputation and/or profit per incident and the likelihood of the risk to occur
within the next three to five years.
€
REPUTATION and/or PROFIT
High
H
G
E
C
K
A
M
L
B
N
I
T
C
A
P
M
I
Medium
J
D
F
Low
Low
Medium
LIKELIHOOD
Operational risks
Strategic risks
Emerging risks
High
Supply and production disruptions
Market risks and global instability
Failure or breakdown of Arla’s vital
production facilities could adversely
affect business operations and
potentially cause colleagues injuries
or infrastructure damage. Fire,
chemical spills, explosions, sabotage
and other hazard risks, as well as
non-site-access due to strikes or
quarantines could cause prolonged
business interruption, making it
difficult to deliver products to
customers. The specialisation of
dairies in general increases the level
of exposure. However, an emergency
programme exists across all
production sites and lessons from
historical incidents are continuously
incorporated. Further mitigation
measures include preventing and
responding to fires, annual
inspections, back-up facilities and
safety inventories.
Guaranteeing food safety is also a
key priority. A major product
contamination incident could lead to
a product recall and thereby to
medium or long-term damage to our
brands and positions. Besides clear
and professional crisis management
and recovery processes, our focus is
on avoiding incidents through clear
adherence to the Arlagården® farm
assurance programme and a
comprehensive quality, health,
environment and safety model
safeguarding the impeccability of all
our products across the entire value
chain.
As a global dairy company with sales
and production offices across the
world, we are exposed to specific
country risks and to any general
increase in global instability. The
global trend of more protectionist
politics can increase the costs of
international trade. Taking our
ambition for profitable growth in
emerging markets into account,
terrorism, economic or political
turmoil and civil unrest in some or
several of these countries have the
potential to jeopardise our strategic
initiatives. A prolonged economic
downturn in oil-exporting countries
could, for example, negatively impact
local spending power and availability
of foreign currencies, thereby leading
to lower demand in certain regions
such as the Middle East and
Sub-Saharan Africa. However,
diversification across many
international markets reduces the
dependency on single markets.
Also in our core markets within
Europe, political instability is
currently on the rise. This ranges
from the uncertainties about the final
consequences of the UK leaving the
EU, to a more general nationalistic
and protectionist sentiments such as
‘Buy National’. In an extreme but
unlikely scenario, this could lead to a
collapse of the EU in the light of
further countries leaving. We have
established a task force that
permanently monitors Brexit
negotiations, analyses the impact of
different scenarios and develops
proper strategic responses and
lobbying activities for Arla.
Risk Risk scenario
Trend
Risk Risk scenario
Trend
A
B
C
Major breakdown at key production site
Major product recall
Failure of contract manufacturer that damages the Arla brand
and image
D
E
Political instability and economic turmoil in emerging markets
Consequences of Brexit and further EU exits and protectionism
Annual report 2016 65
Changing consumer demands and digital disruption
Lack of milk supply and member dissatisfaction
Eating habits are differentiating and
changing at a higher pace. For
example, some consumers demand
products that are produced locally,
whilst others are focusing more on
the functional aspects of their diet.
There are also consumers for which
the price level is of major concern.
The way in which consumers are
deciding to purchase grocery
products is also evolving, from
visiting the general retailer around
the corner to e-commerce delivery at
home, or ready-made convenient
products consumed on-the-go. All of
these consumer trends present new
and exciting opportunities for Arla. By
continuously listening to our
consumers, we can ensure that we
respond to these opportunities. To
be equipped for this, we have strong
international research and
development, marketing and
innovation teams that constantly
monitor and explore new technologies,
digital business models and products
innovations.
Animal welfare concerns and the
rising popularity of vegan diets are
generally questioning the ways in
which animal-based products are
produced. Based on our quality
assurance programme, Arlagården®,
our focus on natural and healthy
products and the big source of
organic milk, as well as milk based on
non-genetically modified feed, we
are proactively positioning ourselves
to the forefront of the increasing
animal welfare requirements and the
wish for healthy food.
Milk production increased
significantly in Europe after the
abolishment of the EU milk quota
system in 2015. Together with the
drop in demand from China and the
Russian embargo for agricultural
products from Europe, farmers
experienced a sharp decline of milk
prices and thereby a worsening
financial situation. Due to the low
milk prices, milk production growth
started to slow down during the
second half 2016. The new paradigm
of milk price volatility and regional
price differences could cause a
fragmentation of the owner group. A
prolonged decline of milk prices and
an inability to pay a competitive milk
price compared to competitors could
lead to a loss of owners and lack of
milk supply. Towards the end of 2016
milk prices started to increase again
and the price outlook for 2017
confirms this positive price
development, leading to a more
sustainable financial situation for our
owners. Our strategy focusses on
value creation and on increasing the
performance of our business to
ensure our ability to pay a competi-
tive milk price to our owners. This is
accompanied by a new owner
strategy that strengthens the
democratic processes in Arla.
Risk Risk scenario
Trend
Risk Risk scenario
Trend
F
G
Growing anti-dairy and vegan movements
H
Significant membership reduction
Digital disruption and new competitors or retailers
Financial risks
Business and legal risks
The OECD Base Erosion and Profit
Shifting (BEPS) project, completed in
late 2015, has increased the focus of
tax authorities worldwide on transfer
pricing between affiliated companies.
The BEPS project resulted in additional
transfer pricing documentation
requirements. Our focus is to adapt
to this increased compliance burden.
Read more on page 78 about our key
tax principles.
Arla’s main financial risks relate to
exchange rates, tax disputes, interest
rate changes and pension liability
valuations. Within Europe, the
majority of sales are in EUR, GBP, DKK
and SEK. Due to the increasing size
of our international business, the
sales in USD and other foreign
currencies have increased. To
manage this risk, the Group hedges
expected future cash flows for
selected key currencies. Read more
about on our currency exposure and
corresponding risk on page 116 and
page 123 for details about our
pension liabilities.
The breach of human rights, ethics,
or fraud within Arla or on a supplier
and partner level, would harm the
reputation of Arla and our brands. In
2016, we have strengthened our
programmes, processes and internal
controls on fraud and human rights
management. Further risks include
the loss of intellectual property and
customer or competitor intellectual
property developments, especially
within our ingredients business.
These have the potential to limit our
freedom to operate. Further legal
risks are potential non-compliance
with EU legislation on antitrust or the
disclosure of private data. Legal, IT
and Corporate Social Responsibility
departments are well established
within Arla and utilise clear and
enforced policies supported by
extensive training to ensure effective
risk avoidance through mitigation.
The loss of key personnel in strategic
positions and the inability to identify,
recruit and retain sufficient highly
qualified and skilled people pose
substantial risks to our business
performance. In order to mitigate this
risk, we create the right corporate
culture and work environment,
provide employees development and
career opportunities and establish a
global recruiting organisation.
Risk Risk scenario
Trend
Risk Risk scenario
Trend
I
J
Taxation and transfer pricing risks
Currency, interest and pensions risks
K
Major cyber attack
N
L
Major bribery, fraud and legal non-compliance
M Breach of human rights or ethics in Arla, among suppliers
or partners
Loss of key personnel in strategic positions and recruiting
and retaining the best talent
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 66
How to do the right thing
In Arla, we consider compliance with the law as well as compliance with external and
internal regulations as an imperative. All colleagues are required to act ethically and
in compliance with the law and applicable regulations. However, knowing right from
wrong goes beyond laws and regulations. Our compliance governance system plays
a key role in helping us do the right thing.
Responsible business conduct comes from living our strong company values through a culture of openness and
transparency, starting at the top of the organisation and spanning throughout our business zones and functions
in the entire value chain. Arla’s corporate directives and policies serve as the North Star of our company and
establish a clear link between our values, the way we conduct our business and engage with stakeholders.
Our Code of Conduct reflects
our values and embodies the
essence of Arla’s culture and
provides guidance on our behaviour,
governing how we act and engage.
The Code of Conduct is applicable
to all colleagues and management
globally and is also available on our
website.
Our policies address critical
behavioral aspects of individual
conduct. They are applicable to all
colleagues and management
globally and must be strictly
adhered to. The policies contain
statements on what to do in order
to comply with specific regulations
and requirements.
Our processes and procedures
give details on how our policies
should be implemented in practice
and are applicable to relevant
colleagues and management
globally.
Our guidelines are detailed
recommendations and provide
guidance within certain areas for
the everyday user. They are
applicable to relevant colleagues
globally in their day-to-day
activities.
Compliance management
Identification of potential
compliance risks is essential
for our risk and opportunity
governance system, as they
form part of risk management.
Compliance tells us how to
deal with specific risks.
The compliance management
system delivers value by
supporting the strategic
priorities.
Our compliance management
system is challenging the way the
business thinks strategically about
risks. It optimises functions or
processes and integrates
sustainable solutions throughout
the organisation in order to
prevent, detect and mitigate risks.
Prevention
Prevention includes our policies,
training of colleagues and
other compliance-related
communication. In 2016, we have
strengthened the policy framework
further. All colleagues are regularly
assigned an e-learning and our
policies are readily available on
company mobile devices. In 2016,
87 per cent of colleagues
completed training on at least one
policy. We have also launched a
comprehensive compliance
training programme for higher risk
entities in Africa, the Middle-East
and Asia.
Detection
To ensure timely detection of
potential infringements of
laws, regulations or internal
guidelines we have implemented
a whistleblower service to enable
colleagues in all companies that
are majority owned or controlled
by Arla Foods amba to report
information about possible
irregularities and concerns over
potential compliance violations.
We also have a mandatory
reporting system in place for gifts
and hospitality, which ensures
transparency and compliance
with anti-bribery laws and
internal entertainment policies.
Furthermore, we perform data
analysis to detect compliance
issues, and carry out compliance
visits to selected high-risk entities.
Response
Adherence to our corporate
directives and policies is monitored
closely across the organisation and
immediate action is taken to
remedy non-compliance.
Appropriate sanctions, for example,
warnings or termination of
employment, are used to react
promptly to compliance violations,
and experiences gathered are used
to strengthen the internal control
system.
Annual report 2016 The North Star
One of the cornerstones of our identity is acting
responsibly. Our global policies are like the North Star
of our company, guiding our behaviour and telling us
how to act and work together in a responsible way.
Cyber security
Arla continuously assesses the
threat from the online world to
ensure that we have proper IT
security and internal controls in
place. Our colleagues are the first
line of defence and we prioritise
education in cyber-security.
In 2015, Arla launched a global
campaign ‘Are you cyber-safe?’
for colleagues and vulnerable
customers in international markets
to increase the awareness of cyber
risk. We have also described the
general vulnerabilities within
cyber-security and launched
a roadmap to strengthen our
resilience to cyber threats.
Fraud
Arla has a zero-tolerance approach
to fraud and takes all forms of
non-compliant transactions very
seriously. We have a clear
commitment to thoroughly
investigate the validity of any
credible allegations of fraud and
to ensure that the appropriate
actions are taken.
67
Good practice
We are a large cooperative and
we rely on one another to act
responsibly in accordance with our
shared values. We are dedicated to
managing our resources in the
best possible way. We achieve this
through a combination of policies
and culture framing our behaviour.
Behaviour is monitored actively
and corrective action is taken if
needed.
Bribery
It is our policy to conduct business
in an honest and ethical manner.
We take a zero-tolerance approach
to corruption such as bribery and
facilitation payments. We are
committed to acting professionally,
fairly and with integrity in all our
business dealings and relationships,
implementing and enforcing
effective systems to counter
corruption.
Internal controls
A strong internal control environment is a prerequisite for a ‘no surprise’
culture. We continuously strengthen and automate the internal controls
in core transactional and reporting processes. Using a risk-based approach,
the compliance maturity in Arla is monitored through various compliance
activities and local compliance visits to ensure implementation of
adequate risk mitigating measures. Continuously improving our internal
control framework and anchoring it in the organisation is key for a strong
second line of defence.
A ‘no surprise culture’ in
financial reporting
For Arla, quality and efficiency
in financial reporting is a
fundamental objective. Our
structured approach to internal
control and risk over financial
reporting provides reasonable
assurance regarding the reliability
of our external financial reporting,
by ensuring compliance with the
International Financial Reporting
Standards (IFRS) as adopted by the
EU, additional disclosures in the
Danish Financial Statements Act,
as well as relevant policies,
procedures and guidelines.
All group entities are required to
comply with our finance manual.
We aim to ensure compliance
with the finance manual through
continuous adherence
to segregation of duties in
accounting related processes.
Furthermore, we have implemented
minimum-level controls across
Group entities in order to
strengthen our controlling
foundation and reduce the risk
of fraud and error.
well as to limit and control risks
identified in the consolidated
financial reporting process, which
might result in our consolidated
financial statements not conforming
with internal and external
regulations.
We have structured the internal
controls and compliance activities
according to the COSO framework,
in order to identify and assess, as
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements Values and
considerations
Growing by ensuring safety, taking
responsibility for our impact on
society and the environment, and
having a long-term perspective in
everything we do.
Growing by making natural
products of the highest quality.
Responsible
Growth
Natural
Growth
Cooperative
Growth
Growing by being farmer-owned
and cooperating with all our
stakeholders for mutual benefit.
Good
Growth
Healthy
Growth
Growing by promoting dairy nutrition and
helping people live healthier lives.
Good Growth is our corporate identity. It is at the
centre of everything we do and describes who we
are and how we are creating the future of dairy.
Content
70 Values and considerations
72 Sustainability ambitions
74
Being farmer-owned creates value
among consumers
75
The commercial value of Arlagården®
76 ONE milk pool
77
Milk on the move
78 Our tax affairs
79
Preparing the business for the
potential impact of the Brexit vote
70
Values and
considerations
Arla is a farmer-owned democratic dairy cooperative with a history dating back
to the 1880s. Our cooperative identity fuels our business and represents an
important differentiator in the global dairy market. However, being a multi-national
cooperative also presents a set of realities that need to be addressed.
Values
Insights show that modern consumers value traceability, food safety and high quality. They care about how the milk is
produced at the farm and who is behind the Arla product. Integrated in our identity is the cooperative and responsible
mindset founded in our cooperative roots which demonstrate to consumers that we care about sustainable growth.
Furthermore, Arlagården® and our farmer-owned position provide clarity and build trust in our responsibility standards.
Our identity, Good Growth
Our company identity is defined
by four principles helping to
ensure we create Good Growth:
responsible growth, healthy
growth, cooperative growth and
natural growth. They are at the
centre of everything we do and
guide how we develop our
cooperative, products, markets
and ways of working.
Read more on page 69.
The commercial value
of Arlagården®
Arlagården® is the farm assurance
programme that governs our farms
to ensure food safety, traceability
and quality of our raw milk. As a
cooperative in control of the entire
value chain, our farm assurance
programme ensures milk of the
highest quality. Food safety, animal
welfare and sustainability are core
to our farmers and their effort is
Arla’s license to operate in an
increasingly transparent world.
Read more on page 75.
Being farmer-owned creates
value among consumers
Knowing that Arla is owned by
farmers instills more trust in our
products and makes it easy to
identify them as responsibly
sourced. We introduced the
farmer-owned marque to
strengthen awareness of Arla
being owned by farmers.
Read more on page 74.
Approaching sustainability
As we work to create the future of
dairy, we keep our focus on
corporate social responsibility to
build long-term success for Arla.
Acting responsibly towards
the environment and the
communities in which we operate
will also benefit us commercially.
Read more on page 72.
Annual report 2016 71
Considerations
Working to compete in an increasingly global marketplace requires consideration of many factors. Despite the global reach of
Arla’s cooperative values, we continuously face the realities of local markets, local legislation and different political climates.
As a result, the success of Arla is not determined by looking at local entities but at the Group holistically.
ONE milk pool
Consumers are demanding locally
produced products that support
local economies, and they tend to
associate locally produced
products with fresher, more
nutritious and safer products.
Arla’s continued success depends
on our ability to channel milk to
the markets where the highest
value can be added irrespective of
the origin.
Read more on page 76.
Milk on the move
Earnings are higher in some legal
entities than average while
earnings in other legal entities are
lower than average. Due to the
principle of the cooperative, it is
the average of all earnings that
determines what Arla is paying
farmer owners as the milk price for
their raw milk deliveries.
Read more on page 77.
Our tax affairs
Operating under a cooperative
tax scheme takes continuous
consideration. Arla acknowledges
the role that tax plays in society. As
a cooperative based in Denmark,
our activities are governed by the
Danish tax rules for cooperatives.
Our owners are also our suppliers,
and earnings do not accrue in the
company but go back to them in
the form of the highest possible
payment for their milk.
Read more on page 78.
Preparing the business
for the potential impact of
the Brexit vote
The outcome of the negotiations
on the future trading relationship
between the EU and the UK is
uncertain following the Brexit vote.
Arla is working with all relevant
stakeholders both in the UK and
across the EU to ensure that Brexit
will have as little impact as possible
on Arla. It is important that a trade
agreement is reached that will not
limit the free movement of dairy
products for a prosperous future
for dairy.
Read more on page 79.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 72
Sustainability
ambitions
As the population of the world continues to grow, along with the desire to create
prosperity, the need for accessible and sustainable food options increases. We want
to grow and respond to this need, and we care about how we do it. We operate our
business in a sustainable and responsible manner in order to safeguard and develop
Arla’s reputation and profitability, while caring for people and delivering growth.
Our key principles
Responsible business
We act credibly and with
integrity in all our operations. We
manage our business in a responsible
and cooperative way, promoting the
financial interests of our owners. We
have open and honest relationships
with all of our stakeholders. We expect
our suppliers to support us in our
commitment to abide by our Code of
Conduct.
Health and nutrition
We ensure that our products
are safe, no matter where they are
manufactured. We make healthy and
natural dairy products available to
consumers around the globe to
enhance the quality of peoples’ lives.
Sustainable dairy
production
We care about the environment and
climate and as a result we continually
improve our environmental
performance by applying sound and
sustainable principles throughout our
entire value chain. We maintain high
animal welfare standards and support
sustainable dairy farming.
Responsible relations
We have competent,
committed and engaged colleagues,
and we provide safe and healthy
working conditions. We respect and
support internationally recognised
human rights and we engage in
open, respectful and constructive
community relations. No matter what
our relationship is, we are committed
to maintaining mutual respect and
understanding.
Responsible behaviour
At Arla, we are dedicated to
developing our business in a
responsible manner. This is
embedded in our identity, Good
Growth. We believe sustainability
and profitability go hand in hand,
and that our commitment to
being responsible will benefit us
commercially. Our Code of
Conduct strengthens the
expectations we have of ourselves
and those of our stakeholders,
and further embeds responsibility
in our culture.
Sustainable dairy
Delivering sustainable food
products is the ultimate goal of
our social responsibility and
sustainability commitment. We
progress towards this through
leadership, innovation and
research, and the development of
pioneering products and brands
that are defined by quality, food
safety and environmental and
social care.
Natural products
without additives
The naturalness of our products
has been our focus for many years.
We continue to develop products
without artificial additives, for
example, a new cream cheese that
we have successfully launched in
several markets. We have various
initiatives to communicate
naturalness to our consumers in
response to their increased interest
in this area. For example, we
have begun communicating to
consumers that our Lurpak®
butter is made from 100 per cent
fresh milk.
Focus on research
Through research, we aim to
increase our understanding of the
role that dairy products play in a
balanced and sustainable diet.
We also want to have as much
knowledge as possible about the
link between the nutritional
value of our products and
consumers’ health. We contribute
to international research by being
an active member of global
networks and organisations, such
as the Global Dairy Platform and
the International Dairy Federation.
In 2015, Arla initiated a public-
private partnership in nutrition
research ‘Arla Food for Health’ in
cooperation with Copenhagen and
Aarhus universities. We want to
enable fast and efficient translation
of research into competence
building and prototyping of future
healthy products and solutions.
The ongoing research projects are
focused on cutting edge scientific
knowledge about the health
benefits of dairy and dairy-based
ingredients.
Global perspective
As well as reflecting Arla’s
business priorities and value chain,
our social responsibility and
sustainability approach aims to
address challenges in the global
environment. Following analysis of
global food trends and industry
challenges, we have defined our
list of focus areas. We linked these
to the United Nations’ Sustainable
Development Goals (SDGs).
In our Corporate Responsibility Report,
we demonstrate how we are developing
our responsible business and adhering
to our Code of Conduct. We are proud
of our commitment and achievements
in 2016, and look forward to
highlighting further improvements.
Read more about how we meet our
responsibilities in Arla’s Corporate
Responsibility Report on http://www.
arla.com/company/responsibility/
csr-reports/ in accordance with
section 99a in the Danish Financial
Statements Act.
Annual report 2016
73
“In Arla we are committed to growing
our business responsibly, so that
we can be part of solving the global
challenges.”
Kjell Lundén Pettersson, Ph.D., Senior Manager
Corporate Responsibility
Sustainable Development Goals defined
In September 2015, the United Nations adopted 17 new Sustainable Development Goals (SDGs) relevant for all countries. For the goals to become
reality, all countries, businesses and organisations have been invited to embrace any necessary change. For Arla, the journey has already begun.
The new sustainability goals include health, peace and equality alongside the original areas including poverty, education and climate. The aim is to
create long-term resilient communities.
Our contribution to
the Sustainable
Development Goals
At Arla, we already have a clear
sustainability agenda and linking
our agenda to the SDGs can
contribute to a better understanding
of its importance. We continually
monitor global challenges and
analyse consumer megatrends
and local variations to assess their
impact on our Group and to pursue
new business opportunities.
Our commitments cover our entire
value chain from a social,
economic and environmental
perspective. Arla has chosen to
focus on the SDGs on which we
can have most impact. While
supporting all SDGs, Arla will
particularly contribute to goal 2,
8 and 12. Innovation, technology
and sustainable production are
important for progression on all
goals. We have highlighted som
examples of our actions in 2016.
17
Sustainable
Development
Goals defined
Adopted by the United
Nations General Assembly
in September 2015
Read more on sustainable
development.un.org
Goal 2: Zero hunger
End hunger, achieve food security
and improved nutrition and
promote sustainable agriculture.
Providing healthy, quality
products for broad consumer
needs, for example, high in protein;
containing probiotics, vitamins and
fibre; low-fat; reduced salt and
added sugar; as well as lactose
free.
Teaming up with our owners
to improve environmental
performance and promote
sustainable dairy farming.
Supporting ‘Milky Way to
Development’ in Western Africa,
in collaboration with external
stakeholders.
Goal 8: Decent work and
economic growth
Promote inclusive and sustainable
economic growth, employment
and decent work for all.
Local employment of
diverse staff.
On-the-job technical and
food safety training; as well as a
behaviour-based safety programme
and preventative-tools and
processes on more sites.
Human rights assessment are
included in market entrance and
the business partner process.
Arla supports open markets
and promotes free trade. We are in
favour of negotiating equivalence
agreements with our trading
partners, avoiding technical
barriers to trade.
Goal 12: Responsible
consumption and production
Ensure sustainable consumption
and production patterns.
Resource efficient production
throughout the entire value
chain, through increased use of
renewable energy, increased water
and energy efficiency and reduced
waste, for example.
Support research to find protein
sources for cow feed replacing
food sources for humans.
Arla is the world’s largest
producer of organic dairy products
and growing.
We support consumers to
reduce food waste in several ways,
for example, by optimising
packaging sizes and providing
shopping lists.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 74
Annual report 2016
Being farmer-owned creates
value among consumers
It is a global reality that consumers and customers are increasingly interested in what is
happening on the farm, making Arla’s farmer-owned DNA an important commercial
differentiator. During 2016, we continued to strengthen the awareness of our coopera-
tive roots among consumers with our farmer-owned campaign, that has responsibility
and quality at its core. Knowing that Arla is owned by farmers instills more trust in our
products and makes it easy to identify them as being sourced responsibly.
We introduced the farmer-owned
marque to strengthen awareness
of Arla being owned by farmers,
and the underlying value that this
creates for the consumer. Arla’s
farmer-owned DNA presents two
key advantages to our consumers:
They can rely on Arla® products
being produced in a responsible
manner and all profit flowing
back to the farmer.
Enabling growth
among owners
When consumers buy an Arla®
product, the profit will be
distributed back to the owners of
Arla. This is fundamental to the
structure of a cooperative. Our
mission is to ensure a sustainable
financial position for our owners
enabling them to grow their
business. We know that customers
and consumers care more and
more about who they are
supporting when buying a
product. As a result, it is
particularly valuable and
important to create awareness
that when an Arla product is
purchased, the profit goes to the
dairy farmers, not a group of
shareholders with little or no
association with dairy farming.
This is especially key at a time
when many dairy farmers are
under pressure as a result of
volatility in the global market.
In control of all stages
of production
Consumers can trust that Arla®
products are made from high
quality milk, as we are in control
of all stages of the production
chain - from cow to consumer.
We know all of our owners and
we work closely together to
deliver product traceability and
transparency of origin, which
consumers are increasingly
demanding. Arla’s owners are
committed to delivering natural
and nutritious milk produced in a
responsible manner, in line with
our farm assurance programme,
Arlagården®.
A long-term
worldwide initiative
Arla’s farmer-owned marque on
products was launched as part of
the farmer-owned campaign in
August 2015, and during 2016
the farmer-owned marque was
rolled out in all markets
worldwide. Throughout 2016,
activities have included TV
advertisements and social media
campaigns, opening up farms to
consumers, as well as farmers
and colleagues teaming up
to share the story of the
cooperative. Campaign activities
cover both our core markets, as
well as international markets
where European farmer-owned
products are highly desired by
the consumer.
75
The commercial value
of Arlagården®
Our high food standards and commitment to animal welfare are at the core
of our business and create growth for our products and brands and in turn,
growth for our owners. Our farm assurance programme, Arlagården® ensures
milk of high quality produced responsibly.
High quality is an important part
of our strategy and key to
creating Good Growth in the
future. As high quality in our
products starts on the farm, all
of our 11,922 owners comply
by our farm assurance
programme, Arlagården®.
Arlagården® covers all the good
work our farmers are doing
every day, to ensure superior
raw milk quality and high
welfare standards for both
animals and the environment.
Our farmers are proud of how
they farm and of Arla. It is a
strength that owners are
committed to shared principles
and standards. Arlagården®
enhances our ability to
compete in both European
and International markets and
protects our reputation for
supplying high quality milk
produced according to high
standards.
Ensuring food safety,
traceability and raw milk
quality with Arlagården®
Arlagården® is built on four
cornerstones: milk quality, food
safety, environment and animal
welfare. It includes regulations
and guidelines that are audited
and actively enforced to ensure
excellent food safety, traceability
and raw milk quality. Every
single Arla farm is audited by
trained agricultural advisors to
ensure compliance. As a farmer
owned cooperative, Arla
ensures that farmers who
need support and guidance
in implementing further
improvements receive
sufficient support from farm
advisors.
Milk composition: We strive
to achieve a milk composition
that ensures that our products
live up to the needs and wishes
of the consumer, compensating
our owners according to the
quality of the milk.
Food safety: Starting at the
farm, we provide consumers
with safe milk-based products.
Our owners treat the milk with
care and respect to maintain its
natural fresh taste and health
benefits.
Animal welfare: We strive to
meet the animals’ physiological
and behavioural needs in order
to improve their health and
well-being, because healthy and
happy cows produce more milk
and milk of a higher quality.
Environmental
considerations: We strive to
encourage environmentally
sound milk production on the
farm that is respectful of nature.
Developing Arlagården®
Plus for the benefit of
consumers and owners
More than ever it is important
to tell the story about all the
good we do on the farms every
day, as consumers and
customers become increasingly
interested in how the raw milk is
produced. It has become a
commercial opportunity for
Arla. Principles, facts and figures
are vital to document that our
farmers care for their cows and
farms, thereby creating
transparency for consumers
and customers. As a result, an
ambitious framework has been
established in which Arla and
farmer representatives
collaborate in order to develop
a digital blueprint of, for
example, animal welfare on
Arla farms.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 76
ONE milk pool
With ONE milk pool, we are able to channel the milk to the markets where the
highest value can be added, irrespective of the origin. It gives Arla the opportunity
to create new growth for our owners, which is our company mission.
We constantly seek new
opportunities for global growth in
order to optimise the raw milk
supplied by our owners. Until
recently we handled the raw milk
on a country by country basis. With
the strategy, Good Growth 2020,
we have taken a big step by
establishing ONE European milk
pool to ensure a more holistic use
of our raw milk across Arla.
Over the past years, Arla’s milk
volume has grown to 13,822 million
kg mainly through mergers and
acquisitions, which means that the
majority of the additional raw milk
came with growing market
positions. We have spent the past
few years aligning the different
companies into one and harvesting
the synergies that the mergers
created. Good Growth 2020 has
taken this unity to the next level
with the establishment of ONE
milk pool.
Holistic use of Arla’s raw milk
We anticipate that owners of Arla
will grow their milk production by
another two per cent leading up to
2020, providing Arla with more
growth opportunities than ever
before. However, our continued
success depends on our ability to
increase the value of the raw milk
and develop profitable positions
for the increasing milk volumes
from our existing owners.
We want to create the maximum
value for the increased volume of
raw milk supported by ONE milk
pool with the same quality
requirements through our farm
assurance programme, Arlagården®.
This also creates a more efficient
supply chain, enabling Arla to more
easily balance the raw milk volumes
in the most profitable way.
With ONE milk pool we can
channel the milk to the markets
where the highest value can be
added, irrespective of origin. This
gives Arla the opportunity to
create new growth for our owners,
which is our mission as a company.
Think global and act local
In order to succeed, we need to
think globally whilst acting locally.
Consumers are increasingly
demanding locally produced
products that support local
economies and generate the best
possible social impact. They tend
to associate locally produced
products with fresher, more
nutritious and safer products,
compared to products shipped in
from afar. They are also increasingly
willing to pay a price premium for
locally produced products. We are
acknowledging this reality as we
continuously make local products
available to the consumers seeking
these options.
An example of how Arla responded
to the increased demand for
locally produced products, is the
investment in locally produced
milk from Gotland in Sweden,
which is processed at Visby
dairy. We launched Arla Ko®
Gotlandsmjölk with packaging
inspired by local landmarks in the
area, clearly identifying that the
milk comes from the 190 local
Arla owners in Gotland.
United
Kingdom
3,210
Contract
milk
1,554
Denmark
4,728
Netherlands
56
Belgium
515
Luxembourg
144
Sweden
1,909
Germany
1,758
Inflow of raw milk (mkg) to consumers
around the world.
Annual report 2016 77
Milk on the move
As a dairy cooperative our primary raw material is the raw milk delivered by our
owners. Arla pays the prepaid milk price for this raw milk during the year.
Arla pays the same milk price to all owners, with the exception of limited transition
periods following entry of new members. The prepaid milk price is set with
the ambition to reach a targeted year-end result. As part of the annual profit
appropriation, the farmer-owners receive a supplementary payment based on
their annual milk volumes, subject to approval by the Board of Representatives.
Owners
Sale of raw milk
Payment for raw milk
Arla Foods amba
Inbound
Production
Global administration,
marketing, innovation and sales
Outbound
Sale of raw milk
Markets
Payment for raw milk based on
the average earnings generated
across all markets and product
categories
Production
Local administration and sales
Outbound
The profitability of the Group
entities may differ significantly
between markets and from year to
year, but all entities still contribute
positively to our cooperative.
In our cooperative all raw milk is
weighed in by Arla Foods amba,
the parent company. Subsequently,
Arla Foods amba sells the raw milk
to various Group entities at a price
based on the average earnings
generated across all markets and
product categories. This means
that legal entities in the Group with
a full dairy value chain acquire the
raw milk at the same price,
irrespective of where the milk
originates from.
Global activities
forming ONE milk price
Arla’s dairy activities are global and
earnings are different in individual
markets and across product
categories. Earnings in some
markets and legal entities are
higher than average, while
earnings in other entities are lower
than average. However, due to the
principle of the cooperative, it is
the average of all earnings that
determines what Arla is paying
farmer-owners as the milk price for
their raw milk deliveries.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 78
Our tax affairs
At Arla we are dedicated to developing our business in a responsible way and we believe
that a responsible approach to tax is essential for the sustainability of our business in the
countries in which we operate. Our approach to taxes conforms with Arla’s global Code of
Conduct ‘Our Responsibility’ and is founded on a set of key tax principles approved by the
Board of Directors. We aim to ensure full compliance and support transparency. Our goal is
to proactively manage tax in order to identify, mitigate and report our tax risks.
Our key tax principles
Arla’s strategic ambition is to act as a
good partner in all tax matters, achieving
a balance between managing tax costs,
driving efficiencies and ensuring
optimisation in a responsible way.
Our key tax principles are aligned with this
ambition and are the cornerstones for all
tax-related matters in Arla. The principles
apply to both Arla Foods amba and all other
controlled Group entities. Our key tax
principles are:
Arla aims to report the right and proper
amount of tax according to where value is
created.
Arla is committed to paying taxes legally
due and to ensuring compliance with
legislative requirements in all jurisdictions
in which the business operates.
Arla does not use tax havens to reduce
the Group’s tax liabilities.
Accountability and governance
The complexity of our business requires a
significant focus on tax management. Our
global tax function is organised and driven to
ensure that, as a business, we have the right
policies and procedures in place to adhere to
the key tax principles and ensure a transparent
and strong tax management setup.
We continuously work on establishing the
internal standards and control mechanisms
required to adhere to our key tax principles.
Accountability for tax processes is described
and, with few exceptions, lies within the global
tax function.
Operating under
a cooperative tax scheme
Arla acknowledges the role that tax plays in
society. As a cooperative based in Denmark our
activities are governed by the Danish tax rules
for cooperatives. Danish cooperative tax rules
are based on the fact that the cooperative acts
as its owners’ extended arm. Our owners are
also our suppliers, and earnings do not accrue
in the company but go back to them in the form
of the highest possible payment for their milk.
The company’s earnings can therefore be
viewed as the owners’ personal income.
This means that our owners pay income tax on
the amount of milk they have delivered in a
year multiplied by the milk price, prepaid as well
as any supplementary payment, under the
applicable rules in their countries. It also means
that Arla as a cooperative pays income tax in
Denmark based on its assets (equity). This
income tax can be viewed as interest on the
tax of the portion of earnings retained in the
company.
Arla holds a number of subsidiaries globally.
Our subsidiaries are typically limited liability and
private limited companies, subject to regular
corporate taxation just like all other such
companies.
Arla will not set up tax structures
intended for tax avoidance which have no
commercial substance and do not meet
the spirit of the law.
Guide to cooperative taxes
Danish cooperative tax rules take into account the fact that Arla’s suppliers are also Arla’s owners
and that earnings do not accrue to the company, but are paid to its owners in the form of the
highest possible milk price.
Arla is transparent about our approach
to tax and our tax position. Disclosures are
made in accordance with relevant
regulations and applicable reporting
standards such as International Financial
Reporting Standards (IFRS).
Arla builds good relations with tax
authorities and trusts that transparency,
collaboration and proactiveness minimises
the extent of disputes.
Limited liability company
Cooperative
Profits
Minimum
payment for
commodity
Shareholder
Supplier
Maximum
payment for
commodity
Owner/supplier
Annual report 2016 79
Preparing the business
for the potential impact of
the Brexit vote
Following the EU referendum on 23 June 2016, the UK is expected to initiate
exit negotiations for the country to leave the EU in March 2017. The outcome of
the negotiations on the future trading relationship between the EU and the UK
is uncertain.
As a dairy company with
11,922 owners in seven EU
member states and with
approximately 80 per cent of our
total revenue generated in the EU,
it is essential that our products
can move freely across the
markets in which we operate to
optimise the utilisation of our
ONE milk pool. With 2,485 owners
based in the UK, the country is
Arla’s biggest single market
accounting for approximately
26 per cent including Arla Foods
Ingredients of the total revenue
with approximately 75 per cent
based on local milk and the
remaining share from sales of
imported products. As well as
being our largest market, the UK
is a critical and significant focus
for our European business. For
our branded business in the UK,
Lurpak® has the potential to be
most impacted by the Brexit vote.
Up to, and immediately following
the Brexit vote, the exchange rate
between GBP and EUR was highly
volatile. Compared to the average
exchange rate in 2015, the GBP
decreased by more than 10 per
cent. However, as a result of Arla’s
hedging strategy, the profit for
2016 was not significantly affected
by the volatile exchange rates.
Arla will focus on minimising any
potential negative impact of
Brexit and utilise potential
opportunities for the business as
a result of the Brexit vote. For Arla
it is important that a trade
agreement is reached that will
not limit the free movement of
dairy products for a prosperous
future for dairy. We are working
with all relevant stakeholders
both in the UK and across the EU
to ensure that Brexit has as little
impact as possible on Arla.
Despite these new challenges,
this will not change the
importance of the UK market
for Arla.
In order to support Arla’s
activities in relation to the
upcoming Brexit negotiation,
Arla has established a senior
management taskforce to
analyse and monitor the possible
consequences as well as prepare
the business to deal with the
developments following the
Brexit. The taskforce will regularly
inform the Executive Management
Team and the Board of Directors
on progress.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 80
Consolidated
financial
statements
Annual report 2016 81
Content
Primary statements
Note 4 Funding
82 Consolidated income statement
108 Note 4.1 Financial items
83 Basis for profit appropriation
109 Note 4.2 Net interest-bearing debt
84
Consolidated statement of
comprehensive income
85 Consolidated balance sheet
86
Consolidated statement of changes
in equity
88 Consolidated cash flow statement
Note 1 Operating profit
91 Note 1.1 Revenue
92 Note 1.2 Costs
94
Note 1.3 Other operating income
and costs
Note 2 Net working capital
96 Note 2.1 Net working capital
Note 3 Capital employed
99 Note 3.1 Intangible assets
100 Note 3.2 Impairment tests
102 Note 3.3 Property, plant and equipment
104 Note 3.4 Joint ventures and associates
106 Note 3.5 Provisions
106 Note 3.6 Purchase and sale of business
or activities
114 Note 4.3 Financial risk
114 Note 4.3.1 Liquidity and Funding risk
116 Note 4.3.2 Currency risk
118 Note 4.3.3 Interest rate risk
119 Note 4.3.4 Commodity price risk
120 Note 4.3.5 Credit risk
121 Note 4.4 Derivative financial instruments
122 Note 4.5 Financial instruments disclosed
123 Note 4.6 Transfer of financial assets
123 Note 4.7 Pension liabilities
Note 5 Other areas
129 Note 5.1 Tax
131 Note 5.2 Fees to auditors appointed
by the Board of Representatives
131 Note 5.3 Management remuneration
and transactions
132 Note 5.4 Contractual commitments
and contingent liabilities
132 Note 5.5 Events after
the balance sheet date
133 Note 5.6 General accounting policies
134 Note 5.7 Group companies
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
82
Consolidated income statement
1 January - 31 December
(EURm)
Revenue
Production costs
Gross profit
Sales and distribution costs
Administration costs
Other operating income
Other operating costs
Gain from sale of enterprise
Share of results after tax in joint ventures and associates
Earnings before interest and tax (EBIT)
Specification:
EBITDA excluding gain from sale of enterprise
Gain from sale of enterprise
Depreciation, amortisation and impairment losses
Earnings before interest and tax (EBIT)
Financial income
Financial costs
Profit before tax
Tax
Profit for the year
Minority interests
Arla Foods amba's share of profit for the year
Note
2016
2015 Development
1.1 9,567 10,262
-7,833
1.2 -7,177
2,390 2,429
1.2 -1,642
1.2 -435
1.3 91
1.3 -29
3.6 120
3.4 10
-1,597
-417
37
-74
-
22
505 400
3.6 120
1.2 -334
719 754
-
-354
505 400
4.1 7
4.1 -114
14
-77
398 337
5.1 -42
-42
356 295
-10
-9
347 285
-7%
-8%
-2%
3%
4%
146%
-61%
-55%
26%
-5%
-6%
26%
-50%
48%
18%
0%
21%
-10%
22%
Annual report 2016
Basis for profit appropriation
(EURm)
Profit for the year
Minority interests
Arla Foods amba's share of net profit for the year
Proposed profit appropriation:
Supplementary payment for milk
Interest on contributed capital
Total supplementary payment
Transferred to equity:
Reserve for special purposes
Contributed capital
Total transferred to equity
Appropriated profit
83
2016
2015
356
-9
347
295
-10
285
121
3
124
110
3
113
193
30
223
347
141
31
172
285
Impacts on profit for the year
A key measure expressing Arla’s overall
performance is the performance price.
This measures the value added to
each kg of milk supplied by our
owners. The performance price is
calculated as the prepaid milk price,
included in production costs, plus the
result for the year attributable to
owners of Arla Foods amba, divided by
milk volume supplied. The performance
price in 2016 was 30.9 EUR-cent per
kg owner milk, compared to 33.7
EUR-cent per kg owner milk in 2015.
For more detail, please refer to the
financial review on page 45.
The market situation within the dairy
industry and on financial markets has
significantly impacted the income
statement. Despite our efforts
improving the quality of our sales, the
difficult market situation has resulted
in a decrease in revenue of 7 per cent
compared to last year. For more detail
refer to Note 1.
In general, the income statement was
significantly impacted by effects from
currencies. Revenue was negatively
impacted by EUR 357 million, while
operational costs reduced by EUR 260
million. Positive effects from hedging
were included in other operating
income, while financial costs were
adversely impacted by foreign
exchange adjustments.
The year-end result is significantly
impacted by a number of one-off
effects which were unique to the
2016 financial year. The main one-offs
recognised in the year include a gain
on the divestment of Rynkeby, an
unfavourable impact from the
associate company Mengniu in
China, as well as currency availability
and devaluations which occurred
in Nigeria.
Net profit of the Group was EUR 356
million compared to EUR 295 million
in 2015 corresponding to a 21 per
cent increase. Net profit allocated to
the owners of Arla Foods amba
amounted to EUR 347 million, which
constitutes 3.6 per cent of revenue
compared to 2.8 per cent achieved
last year. This exceeded our target
range of 2.8 to 3.2 per cent. Net profit
as a percentage of revenue (excluding
the divestment) represented 2.4 per
cent in 2016, compared to 2.8 per
cent in 2015.
The proposed supplementary
payment for 2016 is EUR 124 million
corresponding to EUR-cent 1 per kg
owner milk after adjustments in
accordance wtih merger agreements.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
84
Consolidated statement of comprehensive income
1 January - 31 December
(EURm)
Profit for the year
Other comprehensive income
Items that will not be reclassified to the income statement:
Actuarial gains and losses on defined benefit plans
Income tax on actuarial gains and losses on defined benefit plans
Items that may be reclassified subsequently to the income statement:
Deferred gains and losses on cash flow hedges arising during the period
Value adjustments of hedging instruments reclassified to other operating income and costs
Value adjustments of hedging instruments reclassified to financial items
Value adjustments of hedging instruments reclassified to production costs
Value adjustments of financial assets for the period classified as held for sale
Foreign exchange adjustments of foreign entities
Income tax on items that may be reclassified to profit or loss
Other comprehensive income, net of tax
Total comprehensive income
Allocated as follows:
Owners of Arla Foods amba
Minority interests
Total
Note
2016
2015
356
295
4.7
-132
21
34
-13
-23
-34
17
18
-2
-40
-5
-180
-49
53
20
12
-
41
-1
97
176
392
169
7
176
380
12
392
Annual report 2016
Consolidated balance sheet
31 December
(EURm)
Assets
Non-current assets:
Intangible assets
Property, plant and equipment
Investments in associates
Investments in joint ventures
Deferred tax
Other non-current assets
Total non-current assets
Current assets:
Inventories
Trade receivables
Derivatives
Current tax
Other receivables
Securities
Cash and cash equivalents
Total current assets excluding assets held for sale
Assets held for sale
Total current assets
Total assets
Equity and liabilites
Equity:
Equity excluding proposed supplementary payment to owners
Proposed supplementary payment to owners
Equity attributable to the parent company's owners
Minority interests
Total equity
Liabilities
Non-current liabilities:
Pension liabilities
Provisions
Deferred tax
Loans
Total non-current liabilities
Current liabilities:
Loans
Trade payables
Provisions
Derivatives
Current tax
Other current liabilities
Total current liabilities excluding liabilities regarding assets held for sale
Liabilities regarding assets held for sale
Total current liabilities
Total liabilities
Total equity and liabilities
85
Note
2016
2015 Development
3.1
3.3
3.4
3.4
5.1
2.1
2.1
4.7
3.5
5.1
4.2
4.2
2.1
3.5
825
2,310
434
51
74
20
3,714
950
876
31
1
222
504
84
2,668
-
2,668
873
2,457
434
50
64
25
3,903
1,007
910
75
1
202
509
70
2,774
59
2,833
-5%
-6%
0%
2%
16%
-20%
-5%
-6%
-4%
-59%
0%
10%
-1%
20%
-4%
-100%
-6%
6,382
6,736
-5%
2,033
124
2,157
35
2,192
2,000
113
2,113
35
2,148
369
12
80
1,281
1,742
294
8
65
1,717
2,084
947
995
13
168
18
307
2,448
1,076
918
19
158
5
298
2,474
-
2,448
30
2,504
4,190
4,588
6,382
6,736
2%
10%
2%
0%
2%
26%
50%
23%
-25%
-16%
-12%
8%
-32%
6%
260%
3%
-1%
-100%
-2%
-9%
-5%
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
86
Consolidated statement of changes in equity
1 January - 31 December
Common capital
Individual capital
Other equity accounts
t
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-
-
-
-
-
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31
829
901
-
-
-
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-
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f
e
v
r
e
s
e
R
422
-
-
-
30
-
30
-
30
5
-16
-
-
-
-25
-36
416
387
-
-
-
31
-
31
-
31
5
-12
-
-
-
11
4
422
113
121
3
-
-
-
124
-
124
-
-
-
-
-108
-5
-113
124
104
110
3
-
-
-
113
-
113
-
-
-
-
-105
1
-104
113
-95
-
-
-
-
-
-
-27
-27
-
-
-
-
-
-
-
-122
-131
-
-
-
-
-
-
36
36
-
-
-
-
-
-
-
-95
5
-
-
-
-
-
-
-2
-2
-
-
-
-
-
-
-
3
5
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5
92
-
-
-
-
-
-
-38
-38
-
-
-
-
-
-
-
54
54
-
-
-
-
-
-
38
38
-
-
-
-
-
-
-
92
s
t
s
e
r
e
t
n
i
y
t
i
r
o
n
M
i
35
-
-
-
-
9
9
-2
7
-
-
-8
1
-
-
-7
35
23
-
-
-
-
10
10
2
12
-
-
-10
10
-
-
-
35
y
t
i
u
q
e
l
a
t
o
T
2,148
121
3
193
30
9
356
-180
176
5
-22
-8
1
-108
-
-132
2,192
1,874
110
3
141
31
10
295
97
392
5
-18
-10
10
-105
-
-118
2,148
l
a
t
o
T
2,113
121
3
193
30
-
347
-178
169
5
-22
-
-
-108
-
-125
2,157
1,851
110
3
141
31
-
285
95
380
5
-18
-
-
-105
-
-118
2,113
(EURm)
Equity at 1 January 2016
Suplementary payment for milk
Interest on contributed capital
Reserve for special purposes
Contributed capital
Minority interests
Profit for the year
Other comprehensive income
Total comprehensive income
Capital issued to new owners
Payments to owners
Dividend to minority shareholders
Disposal of non-controlling interests
Supplementary payment to owners
Foreign exchange adjustments
Total transactions with owners
Equity at 31 December 2016
Equity at 1 January 2015
Suplementary payment for milk
Interest on contributed capital
Reserve for special purposes
Contributed capital
Minority interests
Profit for the year
Other comprehensive income
Total comprehensive income
Capital issued to new owners
Payments to owners
Dividend to minority shareholders
Disposal of non-controlling interests
Supplementary payment to owners
Foreign exchange adjustments
Total transactions with owners
Equity at 31 December 2015
Understanding the equity
Equity accounts regulated by the
articles of association can be split into
three main categories; common capital,
individual capital and other equity
accounts. The characteristics of each
account is explained in detail below:
Common capital
Common capital is by nature undivided
and consists of the capital account and
the reserve for special purposes. The
capital account represents a strong
foundation for the cooperative’s equity
as the non-impairment clause described
below determines that the account can
not be used for payment to owners. The
reserve for special purposes is an
account that in extraordinary situations
can be used to compensate owners for
losses or impairments affecting the
profit for appropriation. Amounts
transferred from the annual profit
appropriation to common capital are
booked on this account.
Individual capital
Individual capital is capital allocated to
each owner based on their delivered
milk volume. Individual capital consists
of delivery-based owner certificates
and contributed capital. Amounts
registered on these accounts will,
subject to approval by the Board of
Representatives, be paid out if the owner
decides to leave the cooperative.
Amounts allocated to individual capital
as part of the annual profit appropriation
are interest-bearing. Also characterised
as individual capital is the account for
proposed supplementary payment to
owners that will be paid out following
the approval of the annual report.
Other equity accounts
Other equity accounts include
accounts prescribed by IFRS that shall
be disclosed separately and cannot
be used for payment to owners. This
includes reserve for value adjustment
of hedging instruments, available for
sale reserve and reserve for foreign
exchange adjustments.
Minority interests
Minority interests include the share of
Group equity attributable to holders of
minority interests in Group companies.
Annual report 2016
87
Equity improved despite significantly losses on pension liabilities
During 2016, equity increased by
EUR 44 million compared to
31 December 2015.
Profit appropriation
Basis for proposed supplementary
payment is EUR 123 million,
corresponding to EUR-cent 1 per kg
owner milk. As set out in previous years
merger agreements, EUR 2 million of the
supplementary payment is transferred
separately to the reserve for special
purposes. Interest on consolidated
contributed capital amounts to
EUR 3 million, which gives rise to a
supplementary payment of EUR 124
million. This is an increase of EUR 11
million, primarily due to a lower impact
in 2016 from merger agreements.
The average supplementary payment
of EUR-cent 1 per kg owner milk is
unchanged compared to last year.
The gain on the divestment of
Rynkeby, amounting to EUR 120
million, has been transferred to the
reserve for special purposes in
accordance with the consolidation
policy approved by the Board of
Representatives. The basis for
consolidation after adjusting for the
gain on divestment is EUR 101 million.
This is split into 1/3 contributed
capital, amounting to EUR 34 million,
and 2/3 reserve for special purposes,
amounting to EUR 67 million. As set
out in merger agreements, EUR 4
million of the contributed capital is
transferred to the reserve for special
purposes.
Other comprehensive income
Other comprehensive income
amounting to a loss of EUR 180
million is primarily attributable to
actuarial losses on pension liabilities,
adverse value adjustments on hedging
instruments and net assets measured
in foreign currencies.
Payments to and from owners
A supplementary payment relating to
2015 totalling EUR 108 million was
paid out in March 2016. Additionally,
EUR 22 million was paid out to owners
resigning or retiring from the
cooperative. It is expected that EUR 22
million will be paid out in 2017 to
owners resigning or retiring.
Profit appropriation
Performance price
30.9
EUR-cent/kg
Prepaid
28.1 EUR-cent/kg
Profit for the year
347***
EURm
2.8 EUR-cent/kg
Supplementary payment:
1 EUR-cent/kg owner milk
Consolidation principles:
Common capital 2/3
Individual capital 1/3
EURm
Supplementary payment
123 EURm
3*
EURm
-2**
124
Consolidation
101 EURm
120 EURm
221
EURm
EURm
Common capital
67 EURm
120 EURm
2**
EURm
4**
EURm
193 EURm
Individual capital
34 EURm
-4 EURm
30 EURm
* Interest on contributed capital: 0.03 EUR-cent/kg owner milk ** According to merger agreements *** Based on profit allocated to owners of Arla Foods amba
Regulations according to Articles
of Association and IFRS
Recognised within the capital account
are technical items such as movements
on actuarial gains or losses on defined
benefit pension schemes, effects
from disposal and acquisitions of
non-controlling interests in subsidiaries
and exchange rate differences in the
owners’ equity instruments.
Furthermore, the account is impacted
by agreed contributions from new
members of the cooperative.
Recognised within the reserve for
special purposes is the annual profit
appropriation to common capital. It
may, upon the Board of Director’s
proposal, be applied by the Board of
Representatives for the full or partial
off-setting of material extraordinary
losses or impairment in accordance to
article 21(iii) of the Articles of
Association.
Delivery-based owner certificates are
established in accordance with article
21(1)(ii) of the Articles of Association and
related regulations. Consolidation on
this account was suspended from 2010.
Contributed capital is established in
accordance with article 21(1)(iii) of the
Articles of Association and regulation.
Amounts consolidated as contributed
capital via the annual profit
appropriation carry interest at CIBOR
12 months + 1.5 per cent. Amounts
paid into the contributed capital in
connection with mergers carry no
interest. Interest is paid out along with
the supplementary payment.
Individual owners’ balances on
delivery-based owner certificates and
on contributed capital can be paid out
over three years upon termination of
membership of Arla Foods amba in
accordance with the Articles of
Association, subject to the Board of
Representatives’ approval. Balances
on individual accounts are denominat-
ed in the currency relevant to the
country in which the members are
registered. Foreign currency
translation adjustments are calculated
annually, the amount of which is then
transferred to the capital account.
Proposed supplementary payment
to owners is recognised separately in
equity until approved by the Board of
Representatives.
Reserve for value adjustments of
hedging instruments comprises the
fair value adjustment of derivative
financial instruments classified as and
meeting the conditions for hedging of
future cash flows and where the
hedged transaction has not yet been
realised.
Available for sale reserve comprises
value adjustments on securities
classified as held for sale.
Reserve for foreign exchange
adjustments comprises currency
translation differences arising during
the translation of the financial
statements of foreign companies,
including value adjustments relating
to assets and liabilities that constitute
part of the Group’s net investment,
and value adjustments relating to
hedging transactions that hedge the
Group’s net investment.
Non-impairment clause
Under the Article of Association, no
payment may be made by Arla Foods
amba to owners that impair the sum
of the capital account and equity
accounts prescribed by law and IFRS.
The non-impairment clause is
assessed on the basis of the most
recent annual report presented under
IFRS. Individual accounts, reserve for
special purposes and proposed
supplementary payment to owners
are not covered by the non-impair-
ment clause.
Minority interests
Subsidiaries are fully recognised in the
consolidated financial statements.
Minority interests’ share of the results
for the year and of the equity in the
subsidiaries that are not wholly owned
are recognised as part of the
consolidated results and equity,
respectively, but are listed separately.
On initial recognition, minority
interests are measured at either the
fair value of the equity interest or the
proportional share of the fair value of
the acquired companies identified
assets, liabilities and contingent
liabilities. The measurement of
minority interests is selected on a
transactional basis, and disclosure is
made in the note pertaining to
business combinations.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
88
Consolidated cash flow statement
1 January - 31 December
(EURm)
Note
2016
2015
EBITDA
Gain from sale of enterprise
EBITDA excluding gain from sale of enterprise
Share of results in joint ventures and associates
Change in working capital
Change in other working capital
Other operating items without cash impact
Dividends received, joint ventures and associates
Interest paid
Interest received
Tax paid
Cash flow from operating activities
Investment in intangible fixed assets
Investment in property, plant and equipment
Sale of property, plant and equipment
Operating investing activities
Free operating cash flow
Acquisition of enterprises
Sale of enterprises
Financial investing activities
Cash flow from investing activities
Free cash flow
Supplementary payment regarding the previous financial year
Paid in funds from new owners
Paid out from equity regarding terminated membership contracts
Loans obtained, net
Payment to pension liabilities
Change in current liabilities
Net change in marketable securities
Cash flow from financing activities
Net cash flow
Cash and cash equivalents at 1 January
Exchange rate adjustment of cash funds
Transferred to asset held for sale
Cash and cash equivalents at 31 December
3.6
3.4
2.1
5.1
3.1
3.3
3.3
3.6
3.6
4.2
839
-120
719
-10
138
-3
22
12
-59
5
-18
806
-58
-263
16
-305
501
-
138
138
-167
639
-108
-
-22
-400
-45
-54
5
-624
15
70
-8
7
84
754
-
754
-22
-23
10
11
8
-56
6
-19
669
-70
-348
8
-410
259
-29
37
8
-402
267
-105
5
-18
-173
-70
37
50
-274
-7
81
3
-7
70
Annual report 2016 89
Development in cash flow
(EURm)
800
700
600
500
400
300
200
100
0
-100
-200
-300
554
511
386
-160
-84
95
806
639
669
267
2012
2013
2014
2015
2016
Cash flow from operating activities
Free cash flow
Delivering improved cash flow
Accounting policies
The consolidated cash flow statement
is presented according to the indirect
method, whereby the cash flow from
operating activities is determined by
adjusting EBITDA for the effects of
non-cash items such as undistributed
results in joint ventures and associates
and the effects of changes in working
capital items during the period.
Cash flow from operating activities
improved by EUR 137 million, to
EUR 806 million in 2016 from
EUR 669 million in 2015. The change
was attributable to changes in working
capital, as our ongoing efforts to
reduce working capital continue to
release cash.
Cash flow from investing activities
were EUR -167 million, compared to
EUR -402 million in 2015. Cash flow
from operating investment activities
mainly related to facilities in Upahl and
Pronsfeld in Germany, Aylesbury in the
UK, Linköping and Falkenberg in
Sweden and a global innovation
center in construction in Denmark.
Cash flow from financing investment
activities reflected the divestment of
Rynkeby Foods. Free cash flow totalled
EUR 639 million in 2016, compared
to EUR 267 million in 2015. These
are calculated as cash flow from
operating activities less cash flow from
investment activities.
Cash flow from financing activities
were EUR -624 million, compared to
EUR -274 million last year. The
movement was mainly affected by the
supplementary payment relating to
2015, paid out in 2016, as well as
significant loan repayments.
Combined cash and cash equivalents
as at 31 December 2016 were EUR 84
million, compared to EUR 70 million in
prior year.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
90
Note 1
Operating profit
Annual report 2016 91
Note 1.1 Revenue
Improved quality of sales
Revenue decreased by 6.8 per cent to
EUR 9.567 million, compared to EUR
10.262 million in 2015. This is a direct
result of lower sales prices due to
higher milk volumes in the first half of
2016, as well as unfavourable
exchange rates. The lower sales prices
contributed to a EUR 500 million or
4.9 per cent decline in revenue,
particularly in Germany and Finland.
The effect of currency development
resulted in a EUR 357 million decline
in revenue largely based on the GBP
currency, as the UK represents
approximately 25 per cent of revenue.
Following divestment of Rynkeby in
May 2016 revenue was reduced. This
was more than offset by improved sales
volumes within retail and foodservice.
The full year effect of the Rynkeby
divestment will be visible in 2017.
Despite challenging market conditions,
volume driven revenue growth in
branded positions was 5.2 per cent,
demonstrating that we have improved
the quality of our revenue. Branded
sales now total 44.5 per cent of total
sales, increasing 25 percentage points
compared to 2015.
Year-on-year, milk intake from owners
and contract suppliers totalled 13.9
billion kg compared to 14.2 billion kg
in 2015, representing a decline of
2.2 per cent.
Europe is our largest commercial
segment, comprising 66 per cent of
total revenue, followed by International
15 per cent, Arla Foods Ingredients
6 per cent and other (including trading
activities) 13 per cent. We have
achieved a volume driven revenue
growth of 2.7 per cent in retail and
food service. This was achieved despite
an overall decline in milk intake.
Europe contributed to a volume driven
revenue growth of 1.3 per cent. Our
International segment achieved a
growth rate of 9.5 per cent, primarily
due to increased sales in Sub-Saharan
Africa, China and South East Asia.
Revenue split by category remains
largely unchanged compared to last
year. The milk, yogurt, powder and
cooking category is by far the largest
category.
Development in revenue
(EURm)
Revenue split by commercial
segment 2016
Revenue split by commercial
segment 2015
10,262
-33
195
-500
13%
6%
-357
16%
5%
9,567
15%
9,567
million EUR
66%
13%
10,262
million EUR
66%
10,500
10,250
10,000
9,750
9,500
9,250
9,000
2015
M&A and divestments
Volume/mix
Sales prices
Currency
2016
(EURm)
Europe
International
AFI
Trading and other
2016
6,321
1,428
545
1,273
2015
6,793
1,348
519
1,602
Table 1.1 Revenue split by country
(EURm)
UK
Sweden
Germany
Denmark
Netherlands
Finland
Saudi Arabia
China
Belgium
USA
Other*
Total
2016
2,532
1,463
1,302
1,061
373
329
246
202
197
180
1,682
9,567
2015
2,968
1,517
1,370
1,100
389
348
247
174
261
179
1,709
10,262
2016 revenue in per cent
split by country
26%
15%
14%
11%
4%
3%
3%
2%
2%
2%
18%
*Other countries include Canada, Oman, UAE, Spain, France, Australia, Nigeria and Russia.
Table 1.1 represents the total revenue
by country and includes all sales that
occur in the countries, irrespective of
the commercial segment where they
are generated. Therefore, the figures
cannot be compared to our market
review on page 52 to 55.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
92
Revenue by category
2016
2015
Milk, yogurt, powder
and cooking (MYPC)
45%
45%
Cheese
26%
25%
Butter, spreads
and margarine (BSM)
14%
13%
Other
15%
17%
Accounting policies
Revenue from the sale of dairy and
other food products is recognised in
the income statement when delivery
and risk of the products have passed to
the buyer, the amount of revenue can
be measured reliably, and collection is
probable. Revenue comprises invoiced
sales for the year less sales rebates,
cash discounts, VAT and duties.
Revenue by business group/market
and product category is based on the
Group’s internal financial reporting.
Note 1.2 Costs
Tight control on costs
Operational costs for 2016 were
EUR 9,254 million compared to
EUR 9,847 million in 2015,
representing a decrease of 6.0 per
cent. Excluding the cost of raw milk,
total costs have decreased by 1.4 per
cent, partially due to currency effects.
We have maintained a tight grip on
costs, delivering scalability above
2.0 and a conversion cost index of 99.2.
Production costs (excluding cost of
raw milk) decreased by 4.2 per cent
due to a continuous focus on cost
reduction and currency. The cost
efficiency programme focusing on
delivering savings, primarily within
supply chain, has delivered savings
amounting to EUR 100 million in
2016. This has been offset by the
effects from inflation, planned salary
increases and development in
inventory levels.
Sales and distribution costs have
increased by 2.8 per cent, mainly due
to increased marketing spend to
support major branded sales
initiatives. Research and development
spend incurred amounted to EUR 43
million, consistent with the prior year.
EUR 22 million was capitalised in
relation to internal hours and costs
related to development activities.
Administration costs increased by
EUR 18 million, primarily as a result
of extraordinary redundancy and
salary costs attributed to the 2016
restructure.
Cost of raw milk
The cost of raw milk decreased by
EUR 519 million or 11.4 per cent. This
was driven by lower prices, volumes
and currency effects mainly attributed
to the development in the GBP.
Owner milk
Costs related to owner milk decreased
by EUR 415 million or 10,6 per cent. A
lower prepaid milk price reduced the
costs by EUR 246 million, while lower
volumes attributed to a reduction of
EUR 39 million. Currency effects
amounted to EUR 130 million.
Other milk
Costs relating to other milk decreased
by EUR 104 million, whereof currency
effects amounted to EUR 26 million.
Other milk consists of speciality milk
and other contract milk acquired to
meet local market demands. Volumes
decreased by 10.1 per cent, as a result
of an active focus to drive a reduction.
Staff costs
Staff costs decreased to EUR 1,223
million in 2016 from EUR 1,225
million in 2015. The development in
staff costs was positively impacted by
currency effects and the divestment
of Rynkeby, despite one-off
redundancy costs related to the
restructure.
To deliver the strategy, Good Growth
2020, a restructure was designed and
implemented during 2016. The key
driver of the new organisation is to
drive a more global agenda in Arla and
to strengthen collaboration, synergies
and efficiencies across countries. As
a result, more than 500 white collar
employees were made redundant. The
full year effect of the reduction in full
time employees will be realised in 2017,
as well as the resulting cost savings.
Marketing spend
Marketing costs increased 9.2 per cent
to EUR 309 million in 2016 from
EUR 283 million in 2015. This
represents an increase of EUR 37
million excluding currency effects.
We centralised marketing depart-
ments into one global marketing
team, enabling us to harvest
significant synergies across markets
and to negotiate better marketing
contracts.
Major marketing initiatives for the year
included investment in yogurt and
milk in the UK (skyr, protein product
ranges, organic and Best of Both milk),
milk and powder in China (Milex and
Baby and Me), milk, powder and
cheese in South East Asia (launching
cheese spread in the Philippines and
Dano milk in Bangladesh), as well as
an Arla brand campaign in the US. The
increased marketing spend is in line
with our strategy, Good Growth 2020,
focusing on growing our brands. Read
more about significant marketing
events on page 12.
Development in operational cost
(EURm)
9,847
-24
-39
-246
10,000
9,750
9,500
9,250
Depreciation, amortisation
and impairment
Depreciation, amortisation and
impairment amounted to EUR 334
million, corresponding to a decrease
of EUR 20 million compared to last
year. Useful lives of fixed assets are
assessed annually. The useful lives of
major production buildings were
revised in the current year, extending
the useful lives of buildings from 20 to
30 years to better reflect the actual
lifetime. The re-evaluation has
reduced the depreciation by EUR
18 million.
-78
54
-260
9,254
0
2015
Milk volume effect
M&A effect
Milk price effect
Other milk
Growth in cost base
excluding milk
Currency
2016
Annual report 2016
Table 1.2.a Operational costs split by function
(EURm)
Production costs
Sales and distribution costs
Administration costs
Total
Specification:
Cost of raw milk
Other production materials*
Staff costs
Transportation costs
Marketing costs
Depreciation, amortisation and impairment
Other costs**
Total
*Other production materials include packaging, additives, consumables and change in inventory
**Other costs mainly includes maintenance, utilities and IT
93
2016
2015
7,177
1,642
435
9,254
7,833
1,597
417
9,847
4,028
1,463
1,223
1,010
309
334
887
9,254
4,547
1,435
1,225
1,044
283
354
959
9,847
Table 1.2.b Cost of raw milk
Owner milk
Other milk
Total
Table 1.2.c Staff costs
(EURm)
Wages, salaries and remuneration
Pensions - defined contribution plans
Pensions - defined benefit plans
Other social security costs
Total staff costs
Staff costs relate to:
Production costs
Sales and distribution costs
Administration costs
Staff costs recognised as inventory or fixed assets
Total staff costs
2016
2015
Weighed in
mio. kg.
EURm
Weighed in
mio. kg.
EURm
12,320
1,554
13,874
3,503
525
4,028
12,463
1,729
14,192
3,918
629
4,547
2016
2015
1,038
73
3
1,043
70
5
109 107
1,225
1,223
668
676
346 355
182
12
1,225
200
9
1,223
Average number of full time employees
18,765
19,025
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 2016
2015
42
34
292
334
320
354
269
32
33
334
287
31
36
354
94
Table 1.2.d Depreciation, amortisation and impairment losses
(EURm)
Intangible assets, amortisation
Property, plant and equipment, depreciation
Total depreciation, amortisation and impairment losses
Depreciation, amortisation and impairment losses relate to:
Production costs
Sales and distribution costs
Administration costs
Total depreciation, amortisation and impairment losses
Accounting policies
Production costs
Production costs comprise purchased
goods, including the purchase of milk
from cooperative owners, as well as
direct and indirect costs including
depreciation and impairment losses
on production plant as well as payroll
costs related to production. The
purchase of milk from cooperative
owners is recognised at prepaid
prices for the accounting period and
therefore does not include the
supplementary payment, which is
classified as distributions to owners
and recognised directly in equity.
Sales and distribution costs
Costs incurred on the sale and
distribution of goods sold in the
course of the year, and for promotion-
al campaigns are recognised as sales
and distribution costs. Costs relating
to sales staff, write-down of
receivables, sponsorship, research
and development, advertising and
exhibits, depreciation and impairment
losses, are also recognised as sales
and distribution costs.
Administration costs
Administration costs incurred in the
course of the year relate to
management and administration,
including administrative staff, office
premises and office costs, as well as
depreciation and impairment losses.
Note 1.3 Other operating income and costs
Hedging gains drive increase in net operating income
Other operating income and costs
consist primarily of the following
items: gains and losses relating to
divestment of intangible assets,
property, plant and equipment, gains
and losses relating to financial
instruments, and compensation from
insurance contracts. Net other
operating income for 2016
constituted EUR 62 million, compared
to a net other operating costs of EUR
37 million last year. This is mainly a
result of gains on financial instruments
used for hedging of future sales, which
have increased by EUR 86 million due
to fluctuations in GBP and USD.
Other operating income and costs
include items related to the sale of
surplus power from condensation
plants.
Annual report 2016
95
Note 2
Net working capital
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 96
Note 2.1 Net working capital
Strong net working capital improvement
To secure long-term earnings for our
owners, we optimise our operational
cash flow to fund new activities and
investments. One way to release cash
is by reducing the net working capital.
The Group has a constant focus on
improving our net working capital
position. Processes are continuously
being improved to optimise payment
terms, the accuracy of inventory
forecasting and internal planning.
In 2016, net working capital improved
by EUR 168 million (17 per cent), to
EUR 831 million in 2016 compared to
EUR 999 million in 2015. The
movement in net working capital,
adjusted for owner milk, represents an
improvement of EUR 195 million.
Currency effects contributed EUR 41
million of the improvement in net
working capital. These currency
effects are mainly caused by the
decreased value of the GBP and SEK.
Inventory
Inventory decreased to EUR 950
million in 2016 from EUR 1,007
million in 2015. The majority of the
decrease is attributed to currency
development as a result of the
decrease in the value of the GBP and
SEK. The remainder of the decrease in
inventory EUR 16 million was due to
reduced volumes at year-end,
combined with a lower milk price
compared with 2015.
Trade receivables
Trade receivables decreased to EUR
876 million in 2016 from EUR 910
million in 2015. The net movement,
excluding currency effects, is a
decrease of EUR 4 million compared
to 2015. The main drivers for the
reduction in trade receivables include
the lower sales price and our
continued focus on cash collection.
Trade payables
Trade payables improved to EUR 995
million in 2016 from EUR 918 million
in 2015. The movement in trade
payables, excluding owner milk and
currency effects, was an improvement
of EUR 134 million. The increase was
driven by focus on payments terms,
including launch of a new supply
chain financing programme in 2016.
Owner milk decreased by EUR 27
million, mainly as a result of a new
aligned settlement structure.
Exposure to credit risk on trade
receivables is managed locally in the
operating entities. Credit limits are set
based on the customer’s financial
position and the current market
conditions. Generally, the Group does
not hold collateral as security for trade
receivables. The customer portfolio is
diversified in terms of geography,
industry sector and customer size.
The Group is not extraordinarily
exposed to credit risk related to
significant individual customers but
to the general credit risk in the retail
sector. Historically, amounts written
off as irrecoverable have been
relatively low, which was also the
case in 2016. Overdue above 90 days
on trade receivables amounted to
1.5 per cent (2015: 1.8 per cent).
Net working capital
(EURm)
1,025
801
1,500
1,000
500
0
1,177
906
1,233
928
1,199
999
1,004
831
2012
2013
2014
2015
2016
Net working capital excluding owner milk
Net working capital
Development in net working capital
(EURm)
1,000
999
-16
-4
-134
900
800
700
600
1 January 2016
27
-41
831
Inventory
owner milk
Trade receivables
Trade payables excluding
Owner milk
31 December 2016
Currency
Table 2.1.a Net working capital
(EURm)
Inventories
Trade receivables
Trade payables
Net working capital
Payables for owner milk
Net working capital excluding owner milk
2016
950
876
-995
831
173
1,004
2015
1,007
910
-918
999
200
1,199
Annual report 2016
Table 2.1.b Inventory
(EURm)
Inventory
Write-downs
Total inventory
Raw materials and consumables
Work in progress
Finished goods and goods for resale
Total inventory
Table 2.1.c Trade receivables
(EURm)
Trade receivables before provision for bad debts
Write-downs for bad debts
Total trade receivables
97
2016
2015
969
-19
950
257
292
401
950
1,036
-29
1,007
224
294
489
1,007
2016
2015
887
-11
876
922
-12
910
Accounting policies
Uncertainties and estimates
Trade receivables
Trade receivables are recognised at
the invoiced amount less write-downs
for amounts considered irrecoverable
(amortised cost). Write-downs are
measured as the difference between
the carrying amount and the present
value of anticipated cash flow.
Write-downs are assessed on major
individual receivables or in groups at
portfolio level based on the
receivables’ age and maturity profile
as well as historical records of losses.
Trade payables
Trade payables are measured at
amortised cost, which usually
corresponds to the invoiced amounts.
Inventories
Inventories are measured at the lower
of cost or net realisable value,
calculated on a first-in, first-out basis.
The net realisable value is established
taking into account the inventories’,
marketability and estimate of the
selling price, less completion costs
and costs incurred to execute the sale.
The cost of raw materials, consumables
as well as commercial goods includes
the purchase price plus delivery costs.
The prepaid price to Arla’s owners is
used as the purchase price for owner
milk.
The cost of work in progress and
manufactured goods also includes an
appropriate share of production
overheads, including depreciation,
based on the normal operating
capacity of the production facilities.
Receivables
Receivables are written down based
on individual assessment if signs of
impairment regarding customers’
insolvency are present and insolvency
is anticipated. Furthermore, a
mathematical computation is used
based on several parameters including
number of days overdue.
The financial uncertainty associated
with write-downs for bad debt losses is
usually considered to be limited.
However, if a customer’s ability to pay
deteriorates in the future, further
write-downs may be necessary.
Customer specific bonuses are
calculated based on actual
agreements with retailers, however,
some uncertainty exists when
estimating exact amounts to be
settled and timing of these
settlements.
Inventories
The Group uses monthly standard
costs to calculate inventory and
revises all indirect production costs at
least once a year. Standard costs are
also revised if they deviate materially
from the actual cost of the individual
product. A key component in the
standard cost calculation is the cost of
raw milk from farmers. This is
determined using the average prepaid
milk price that matches the
production date of inventory on
different product categories.
Indirect production costs are
calculated based on relevant
assumptions with respect to capacity
utilisation, production time and other
factors characterising the individual
product.
The assessment of the net realisable
value requires judgement, particularly
in relation to the estimate of the
selling price of certain cheese stock
with long maturities and bulk products
to be sold in the world market.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
98
Note 3
Capital
employed
Annual report 2016 99
Note 3.1 Intangible assets
Intangible assets reduction driven by currency
Intangible assets amounted to EUR
825 million at 31 December 2016,
representing a decrease of EUR 48
million compared to last year, primarily
related to effects of changes in
currencies.
EUR 488 million hereof was allocated
to activities in the UK, compared to
EUR 550 million last year. This decrease
in goodwill relates to exchange rate
adjustments. For details on the
impairment test refer to Note 3.2.
Goodwill
Carrying value of goodwill amounted
to EUR 615 million at year-end,
compared to EUR 678 million in 2015.
Licences and trademarks
Licences and trademarks recognised
at a total carrying amount of
EUR 30 million include Cocio®,
Anchor® and Hansano®. Other brands
including the strategic brands, Arla®,
Lurpak®, Castello® and Puck® are not
recognised on the balance sheet.
IT and other development projects
The Group continues to invest in the
development of IT. During 2016, the
integration of seven UK cheese sites,
as well as Finland, Upahl in Germany
and Falbygden in Sweden, into the
Arla IT platform was completed.
Similar integration was started in the
Netherlands and Westbury in the UK.
Other capitalised development costs
related to innovation activities
attributed to the development of new
products.
Table 3.1 Intangible assets
(EURm)
2016
Cost at 1 January
Exchange rate adjustments
Additions
Reclassification
Disposals
Cost at 31 December
Amortisation and impairment at 1 January
Exchange rate adjustments
Amortisation for the year
Amortisation on disposals
Amortisation and impairment at 31 December
Carrying amount at 31 December
2015
Cost at 1 January
Exchange rate adjustments
Additions
Mergers and acquisitions
Reclassification
Disposals
Cost at 31 December
Amortisation and impairment at 1 January
Exchange rate adjustments
Amortisation for the year
Amortisation on disposals
Amortisation and impairment at 31 December
Carrying amount at 31 December
Goodwill
Licenses and
trademarks
IT and other
development
projects
Total
678
-63
-
-
-
615
-
-
-
-
-
615
102
1
-
-
-3
100
-65
-1
-6
2
-70
30
281
-1
58
-1
-10
327
-123
2
-36
10
-147
180
1,061
-63
58
-1
-13
1,042
-188
1
-42
12
-217
825
645
26
-
10
-3
-
678
-
-
-
-
-
678
103
-2
-
2
-
-1
102
-60
1
-6
-
-65
37
206
-
70
-
13
-8
281
-103
-
-28
8
-123
158
954
24
70
12
10
-9
1,061
-163
1
-34
8
-188
873
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
100
Intangible assets
2016
Intangible assets
2015
22%
4%
18%
4%
74%
78%
Goodwill
Licences and trademarks
IT and other development projects
Accounting policies
Goodwill
Goodwill represents the premium paid
by the Group above the fair value of
the net assets of an acquired
company. On initial recognition,
goodwill is recognised at cost.
Goodwill is subsequently measured at
cost less any accumulated impair-
ment. The carrying amount of
goodwill is allocated to the Group’s
cash-generating units that follow the
management structure and internal
financial reporting. Cash-generating
units are the smallest Group of assets
which are able to generate independent
cash inflows.
Licences and trademarks
Licences and trademarks are initially
recognised at cost. The cost is
subsequently amortised on a
straight-line basis over their expected
useful lives.
IT and other development projects
Costs incurred during the research
phase in carrying out general
assessments of the Group’s needs and
available technologies are expensed
as incurred. Directly attributable costs
incurred during the development
stage for IT and other development
projects relating to the design,
programming, installation and testing
of projects before they are ready for
commercial use are capitalised as
intangible assets. Such costs are only
capitalised provided the expenditure
can be measured reliably, the project
is technically and commercially viable,
future economic benefits are probable
and the Group intends to and has
sufficient resources to complete and
use the asset. IT and other development
projects are amortised on a
straight-line basis over five to eight
years.
Note 3.2 Impairment tests
Goodwill supported by the Good Growth 2020 strategy
Goodwill in the UK was generated in
connection with the purchase of
Express Dairies Limited in 2003 and
2007, the acquisition of AFF in 2009
and the merger with Milk Link in 2012.
In Finland, the goodwill arose in
connection with the purchase of
Ingman in 2007. The remaining
goodwill arose primarily from the
purchase of Tholstrup in 2006.
Applied estimates
The impairment test is based on
expected future cash flow derived
from forecast and targets supporting
the Good Growth 2020 strategy. The
impairment tests do not include
growth in the terminal value, as the
growth rate has been set to the
expected inflation rate.
Procedure for impairment tests
Milk costs are recognised at a milk
price that corresponds to the price at
the time the test is performed. In the
applied forecasts, the key operational
assumption is future profitability
based on a combination of the impact
from moving milk intake into value
added products and more profitable
markets. Other key assumptions are
sustainable cost reduction initiatives.
Test results
Impairment testing showed that there
was no need for impairment in 2016.
In that regard, sensitivities to changes
in milk prices and discount rates were
calculated. The discount rate could
rise by 4 percentage points before the
need for impairment arises.
Annual report 2016
Table 3.2 Impairment tests
(EURm)
2016
UK
Finland
Sweden
Other
Total carrying amount at 31 December
2015
UK
Finland
Sweden
Other
Total carrying amount at 31 December
101
Carrying amount,
goodwill
488
40
23
64
615
550
40
24
64
678
Applied key assumptions
Discount rate,
net of tax
7.1%
6.2%
6.4%
6.2%
Discount rate,
before tax
8.9%
7.6%
8.3%
6.9%
7.2%
6.1%
6.3%
6.3%
9.1%
7.8%
8.3%
6.9%
Accounting policies
Impairment occur when the carrying
amount of an asset is greater than its
recoverable amount through either
use or sale. For impairment testing,
assets are grouped together into
the smallest group of assets that
generates cash inflows from
continuing use (cash-generating unit)
that are largely independent
of the cash inflows of other assets
or cash-generating units. The
cash-generating units are determined
based on the management structure
and the internal financial reporting.
The cash-generating units are
reassessed each year.
The carrying amount of goodwill is
tested for impairment together with
the other non-current assets in the
cash-generating unit to which the
goodwill is allocated. The recoverable
amount of goodwill is recognised as
the present value of the expected
future net cash flows from the
cash-generating unit to which the
goodwill is linked, discounted using a
pre-tax discount rate that reflects the
current market assessment of the
time value of money and risks specific
to the asset or cash-generating unit.
Any impairment of goodwill is
recognised on a separate line in the
income statement and cannot be
reversed. The carrying amount of
other non-current assets is assessed
annually to determine whether there
is any indication of impairment. The
assets are measured on the balance
sheet at the lower value of the
recoverable amount and the carrying
amount.
The recoverable amount of other
non-current assets is the higher value
of the asset’s value in use and the
market value (fair value), less expected
disposal costs. The value in use is
calculated as the present value of the
estimated future net cash flows
from the use of the asset or the
cash-generating unit of which the
asset is part of.
An impairment loss on other
non-current assets is recognised in
the income statement under
production costs, sales and
distribution costs or administration
costs, respectively. Impairment made
is reversed to the extent that the
assumptions and estimates that led to
the impairment have changed. An
impairment loss is reversed only to the
extent that the asset’s carrying
amount does not exceed the carrying
amount that would have been
determined, net of depreciation or
amortisation, if no impairment loss
had been recognised.
Uncertainties and estimates
Goodwill is allocated to the
cash-generating unit it concerns. The
cash-generating units are defined based
on the management structure and are
linked to individual markets. Cash
generating units are assessed each year.
The impairment test of goodwill is
performed annually for each
cash-generating unit to which goodwill
is allocated.
The most important parameters in the
impairment test include expectations on
future free cash flow and assumptions
on discount rates.
Anticipated future free cash flows
The anticipated future free cash flows
are based on current forecasts and
targets set in the strategy period
2017-2020 within Good Growth 2020
strategy. These are based on
management’s best estimates and
expectations, which are judgmental by
nature. They include expectations in
strategy period on revenue growth, EBIT
margins and capital expenditures. This
includes moving milk intake into
value-added products, more profitable
markets and cost reduction initiatives.
The growth rate beyond the strategy
period has been set to the expected
inflation rate in the terminal period.
Following the Brexit vote, expected cash
flows relating to goodwill in the UK are
inherently more uncertain. Read more
about the Brexit on page 79.
Discounts rates
A discount rate (WACC) is applied for the
specific business areas based on
assumptions regarding interest rates, tax
rates and risk premiums. Changes in the
future cash flow or discount rate
estimates used may result in materially
different values.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
102
Note 3.3 Property, plant and equipment
Focused capital expenditure
The Group’s main tangible assets are
located in Denmark, the UK, Germany
and Sweden. The carrying value
decreased by EUR 147 million to EUR
2,310 million in 2016, mainly driven
by currency and depreciation.
Capital expenditure at Arla decreased
by 25 per cent to EUR 263 million from
EUR 350 million in 2015. This reflected
our ability to utilise our production
capacity at existing sites more
efficiently which allowed us to
temporarily reduce capital expenditure.
Significant investments for the year
included Navita, our global innovation
centre in Denmark, increased capacity
in Upahl and a milk separation facility
in Pronsfeld in Germany. Furthermore,
capacity was expanded at our dairies
in Aylesbury in the UK, as well as
Linköping and Falkenberg in Sweden.
Table 3.3 Property, plant and equipment
(EURm)
Land and
buildings
Plant and
machinery
Fixture and
fitting, tools
and equipment
Assets in
course of
construction
Total
2016
Cost at 1 January
Exchange rate adjustments
Additions
Transferred from assets in course of construction
Disposals
Cost at 31 December
Depreciation and impairment at 1 January
Exchange rate adjustments
Depreciation for the year
Depreciation on disposals
Depreciations and impairment at 31 December
Carrying amount at 31 December
Of which assets held under finance lease
2015
Cost at 1 January
Exchange rate adjustments
Additions
Acquisitions
Transferred from assets in course of construction
Reclassification
Disposals
Cost at 31 December
Depreciation and impairment at 1 January
Exchange rate adjustments
Depreciation for the year
Reclassification
Depreciation on disposals
Amortisation and impairment at 31 December
Carrying amount at 31 December
Of which assets held under finance lease
1,466
-64
2
37
-11
1,430
-553
20
-43
3
-573
857
37
2,547
-84
41
227
-67
2,664
-1,402
45
-204
62
-1,499
1,165
13
519
-34
12
28
-25
500
-375
22
-45
22
-376
124
1
255
-7
208
-292
-
164
-
-
-
-
-
164
-
4,787
-189
263
-
-103
4,758
-2,330
87
-292
87
-2,448
2,310
51
1,382
48
18
2
65
-24
-25
1,466
-500
-15
-72
13
21
-553
913
44
2,368
36
97
2
154
-43
-67
2,547
-1,273
-12
-203
22
64
-1,402
1,145
21
472
24
16
-
31
-6
-18
519
-336
-16
-45
5
17
-375
144
4
286
1
219
-
-250
-1
-
255
-
-
-
-
-
-
255
-
4,508
109
350
4
-
-74
-110
4,787
-2,109
-43
-320
40
102
-2,330
2,457
69
Annual report 2016
103
Property, plant and equipment
by country 2016
Property, plant and equipment
by country 2015
Investments and depreciation property,
plant and equipment (EURm)
8%
13%
7%
11%
550
450
40%
37%
350
27%
32%
12%
13%
250
150
Denmark
Sweden
UK
Germany
Other
2012
2013
2014
2015
2016
Investments property, plant and equipment
Depreciation property, plant and equipment
Accounting policies
Property, plant and equipment are
measured at cost less accumulated
depreciation and impairment.
Depreciation aims to allocate the cost
of the asset, less any amounts
estimated to be recoverable at the
end of its expected use, to the periods
in which the Group obtains benefits
from its use. Assets under construc-
tion, land and decommissioned plants
are not depreciated.
depreciation charge in the income
statement. Subsequent expenditure
items of property, plant and
equipment are only recognised as an
addition to the carrying amount of the
item, when it is likely that incurring the
cost will result in financial benefits for
the Group. Other costs such as general
repair and maintenance are
recognised in the income statement
when incurred.
Cost
Cost comprises the acquisition price
as well as costs directly associated
with an asset until such time as the
asset is ready for its intended use. For
self-constructed assets, cost
comprises direct and indirect costs
relating to materials, components,
payroll and the borrowing costs from
specific and general borrowing that
directly concerns the construction of
assets. If significant parts of an item of
property, plant and equipment have
different useful lives, they are
recognised as separate items (major
components). When component parts
are replaced, any remaining carrying
value of replaced parts is removed
from the balance sheet and
recognised as an accelerated
Depreciation
Property, plant and equipment are
depreciated on a straight-line basis
from the time of acquisition, or when
the asset is available for use based on
an assessment of the anticipated
useful life.
The estimated useful lives are as
follows:
Office buildings: 50 years
Production buildings: 20 to 30 years
Technical facilities and machinery:
5 to 20 years
Other fixtures and fittings, tools and
equipment: 3 to 7 years
The depreciation base is measured
taking into account the residual value
of the asset, being the estimated value
the asset can generate through sale or
scrappage at the end of its useful life,
and reduced by any impairment made.
The residual value is determined
at the date of acquisition and is
reviewed annually. Depreciation
ceases when the carrying value of an
item is lower than the residual value.
Changes during the depreciation
period or in the residual value are
treated as changes to the accounting
estimates, the effect of which is
adjusted only in the current and future
periods. Depreciation is recognised
in the income statement within
production costs, sales and
distribution costs or administration
costs.
Uncertainties and
estimates
Estimates are made in assessing the
useful lives of items of property, plant
and equipment that determine the
period over which the depreciable
amount of the asset is expensed to the
income statement. The depreciable
amount of an item of property, plant and
equipment is a function of the asset’s
cost or carrying amount and its residual
value. Estimates are made in assessing
the amount that the Group can recover
at the end of the useful life of an asset.
An annual review is made with respect
to the appropriateness of the
depreciation method, useful life and
residual values of items of property,
plant and equipment.
Useful life of buildings
The Group revaluates the useful lives of
fixed assets annually. During the year,
management reassessed the useful lives
of major production buildings,
prolonging these from 20 to 30 years to
better reflect the actual lifetime. This has
reduced the Group’s depreciation by
EUR 18 million in 2016.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
104
Note 3.4 Joint ventures and associates
Financial comments
COFCO Dairy Holdings Limited
(China) and China Mengniu Dairy
Company Limited
The Group has a 30 per cent
investment in COFCO Dairy Holdings
Limited (China), which is considered
an associated company based on a
cooperation agreement extending
significant influence, including right of
board representation. The cooperation
agreement with COFCO also entitles
Arla to representation on the board of
China Mengniu Dairy Company
Limited, a Hong Kong listed dairy
company controlled by COFCO. It has
been agreed that Arla and China
Mengniu Dairy Company Limited
cooperate regarding the exchange of
technical dairy knowledge and
expertise, and that Arla grants
intellectual rights to China Mengniu
Dairy Company Limited. Based on the
underlying agreements, it has been
determined that Arla has significant
influence in China Mengniu Dairy
Company Limited. Currently, COFCO
Dairy Holdings Limited holds no other
investments.
As at 31 December 2016, the Group’s
proportionate share of the net asset
value of COFCO Dairy Holdings
Limited, including China Mengniu
Dairy Company Limited, is EUR 309
million, compared to EUR 325 million
last year. The carrying amount of the
investment in COFCO Dairy Holdings
Limited includes goodwill amounting
to EUR 160 million, compared to EUR
158 million last year.
The fair value of the indirect share in
China Mengniu Dairy Company
Limited equals EUR 383 million,
compared to EUR 311 million last
year.
The investment in COFCO Dairy
Holdings Limited is part of the China
business unit and is currently
managed in China together with sales
activities with similar characteristics.
A potential impairment of the
investment is tested at the China
business unit level, using expected
future net cash flow of the China
business unit.
Vigor Alimentos S.A., Brazil
The Group holds an 8 per cent
investment in Vigor Alimentos S.A.,
which is considered an associated
company based on a cooperation
agreement extending significant
influence, including the right to
representation on the board.
In July 2016, Vigor Alimentos S.A was
delisted from the stock exchange and
is no longer a publicly-held company.
Joint ventures
Carrying value of joint ventures
amounted to EUR 51 million at year-
end compared to EUR 50 million last
year. The carrying value includes no
goodwill.
Impairment testing showed that there
was no indication of impairment need
in 2016. Impairment risks could
include substantial and long-term
reductions in leading stock indexes in
Asia, issue of import restrictions on
dairy products in China, or an adverse
and permanent reduction in the
expected performance of China
Mengniu Dairy Company Limited.
Lantbrukarnas Riksförbund,
Sweden (LRF)
The Group has an ownership interest
of 23 per cent in LRF, which is a
politically independent professional
organisation for Swedish entrepre-
neurs involved in agriculture, forestry
and horticulture.
Based on a detailed analysis of the
LRF arrangement, Arla’s active
ownership interest constitutes
significant influence over LRF. This
includes, but is not limited to, the
representation on the Board of
Directors; historically a member of
Arla’s Board of Directors has represented
the Swedish dairy industry at the
Board of Directors in LRF.
Table 3.4.a Associates
Reconciliation of recognised value of associates
(EURm)
Share of equity in material associates
Goodwill in material associates
Share of equity in non-material associates
Recognised value
2016
2015
149
160
125
434
167
158
109
434
Annual report 2016
Table 3.4.b Material associates
Financial information for associates that are considered material to the Group
(EURm)
Revenue
Results after tax
Other comprehensive income
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Dividends received
Ownership share
Group share of result after tax
Recognised value
Table 3.4.c Transactions with joint ventures and associates
(EURm)
Sales of goods to joint ventures
Sales of goods to associates
Total sale of goods to joint ventures and associates
Purchase of goods from joint ventures
Total purchase of goods from joint ventures and associates
Trade receivables joint ventures*
Trade receivables associates*
Total trade receivables joint ventures and associates
Trade payables joint ventures**
Total trade payables joint ventures and associates
* Included in other receivables
** Included in other payables
105
COFCO Dairy
Holdings Limited,
China
COFCO Dairy
Holdings Limited,
China
2016
2015
15
15
-
789
-
-
-
10
10
-
722
-
-
-
4
30%
-6
309
4
30%
21
325
2016
2015
9
21
30
52
52
26
9
35
7
7
4
155
159
60
60
-
2
2
3
3
Accounting policies
Investments in which Arla exercises
significant influence, but not control,
are classified as associates. Invest-
ments in which Arla has joint control
are classified as joint ventures.
The proportionate share of results of
associates and joint ventures after tax
is recognised in the consolidated
income statement, after elimination of
the proportionate share of unrealised
intra-group profit or loss.
is deducted. Dividends received from
associates and joint ventures reduce
the value of the investment.
For investments held in listed
companies, computation of the
Group’s share of profit and equity is
based on the latest published financial
information of the company, other
publicly available information on the
company’s financial development, and
the effect of reassessed net assets.
Investments in associates and joint
ventures are recognised according to
the equity method, and measured at
the proportionate share of the entities’
net asset values, calculated in
accordance with the Group’s
accounting policies. The proportionate
share of unrealised intra-group profits
and the carrying amount of goodwill
are added. Whereas the proportionate
share of unrealised intra-group losses
Investments in associates and joint
ventures with negative net asset
values are measured at EUR 0. If the
Group has a legal or constructive
obligation to cover a deficit in the
associate or joint venture, the deficit is
recognised under provisions. Any
amounts owed by associates and joint
ventures are written down to the
extent that the amount owed is
deemed irrecoverable.
An impairment test is performed
when there is objective evidence of
impairment, such as significant
adverse changes in the environment
in which the equity-accounted
investee operates, or a significant or
prolonged decline in the fair value of
the investment below its carrying
value. Where the equity-accounted
investment is considered to be an
integral part of a cash generating unit
(CGU) the impairment test is
performed at the CGU level, using
expected future net cash flow of the
CGU. An impairment loss is recognised
when the recoverable amount of the
equity-accounted investment (or CGU)
becomes lower than the carrying
amount. The recoverable amount is
defined as the higher of value in use
and fair value less costs to sell, of the
equity-accounted investment (or CGU).
Uncertainties and
estimates
Significant influence is defined as the
power to participate in the financial and
operating policy decisions of the
investee, but does not constitute control
or joint control over those policies.
Judgement is necessary in determining
when significant influence exists. When
determining significant influence,
factors such as representation on the
Board of Directors, participation in
policy-making, material transactions
between the entities and interchange of
managerial personnel are considered.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
106
Note 3.5 Provisions
Financial comment
Provisions for 2016 totalled EUR 25
million, compared to EUR 27 million
last year. Provisions primarily pertain
to insurance provisions for insurance
incidents that occurred but have not
been reported, restructuring
provisions, and onerous contracts.
Insurance provisions primarily concern
occupational injuries. No major
occupational incidents occurred
during the year. A general provision for
occupational injuries of EUR 8 million
is recorded as long-term provisions.
In March 2016, a restructure of Arla
Foods was communicated. As a
consequence of the restructure, a
provision for indemnity payments of
EUR 5 million was recognised as at
31 December 2016 as a short-term
provision.
Uncertainties and
estimates
Provisions are particularly associated
with estimates on restructuring and
insurance provisions. The scope and size
of onerous contracts, as well as
employee and other liabilities related to
the restructure are also estimated.
Insurance provisions are assessed based
on historical records of, among other
things, the number of insurance events
and related costs considered.
Note 3.6 Purchase and sale of business or activities
Divestment of Rynkeby Foods A/S
In May 2016, Arla concluded an
agreement to divest Rynkeby Foods
A/S. The company and its subsidiaries
have juice activities primarily in
Denmark, Sweden and Finland, and a
production site in Denmark. The
Rynkeby Group had an annual
revenue of EUR 130 million and
200 employees. This divestment
represented the last non-core
business activity within Arla, thus
enabling sole focus on the dairy
sector. The activities in Rynkeby Foods
A/S were deconsolidated with effect
from May 2016 and the divestment
resulted in a gain of EUR 120 million.
Divestments in 2015 related to
Walhorn and K/S Danske Immobilen,
a divestment of EUR 37 million.
No purchases were made in 2016.
Purchases in 2015 related to
Falbygden Ost, an investment of
EUR 29 million.
Table 3.6 Sale of business or activities
(EURm)
Selling price on divestment of enterprise
Cash transferred as part of the transaction
Net cash received
Other assets transferred
Liabilities transferred
Gain on divestment of enterprises in the income statement
Accounting policies
Enterprises divested are recognised in
the consolidated income statement
up to the date of disposal. Compara-
tive figures are not restated to reflect
disposals. Gain or losses on
divestment of subsidiaries and
associates are determined as the
difference between the selling price
and the carrying amount of the net
assets, including goodwill, at the date
of divestment and costs necessary to
make the sale.
2016
2015
145
-7
138
-52
34
120
37
-
37
-37
-
0
Annual report 2016
107
Note 4
Funding
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 108
Note 4.1 Financial items
Increased financial cost due to currencies
Net financial cost increased by
EUR 44 million to EUR 107 million
in 2016, mainly due to currency
adjustments.
Net interest cost amounted to
EUR 63 million, representing a
decrease of EUR 7 million compared
to last year. Net interest cost
decreased due to a lower level of net
interest-bearing debt, while the
average interest cost, excluding
pension liabilities, totalled 3.0 per cent
compared to 2.6 per cent last year.
The average interest cost increased
due to the increase in committed
liquidity reserves and a higher relative
proportion of fixed interest on debt.
Exchange rate losses relate primarily
to the devaluation in the Nigerian
currency, which amounted to
EUR 28 million, as well as other costs
related to effects from functional
currency and costs of converting
funding currencies into currencies
with funding needs.
Table 4.1 Financial income and financial costs
(EURm)
Financial income:
Interest securities, cash and cash equivalents
Fair value adjustments and other financial income
Total financial income
Financial costs:
Interest on financial instruments measured at amortised cost
Net exchange rate losses
Interest on pension liabilities
Interest on transferred to property, plant and equipment
Fair value adjustments and other financial costs
Total financial costs
Net financial costs
2016
2015
5
2
7
5
9
14
-60
-48
-8
7
-5
-114
-65
-6
-9
8
-5
-77
-107
-63
Accounting policies
Financial income and financial costs
Interest income and costs, as well as
capital gains and losses, are
recognised in the income statement
at amounts that can be attributed to
the year. Financial items comprise
realised and unrealised value
adjustments of securities and
currency adjustments on financial
assets and financial liabilities, as well
as the interest portion of financial
lease payments. Additionally, realised
and unrealised gains and losses on
derivative financial instruments not
classified as hedging contracts are
also included. Borrowing costs from
general borrowing, or loans that
directly relate to the acquisition,
construction or development of
qualified assets are attributed to the
cost of such assets, and are therefore
not included in financial cost.
Capitalisation of interest has been
performed by using an interest rate of
3 per cent, matching the Group’s
average external interest rate in 2016.
Financial income and costs relating to
financial assets and financial liabilities
are recognised using the effective
interest method.
Annual report 2016
109
Commercial papers: the Group has
a commercial paper program in
Sweden denominated in SEK and
EUR. The average utilization in
2016 was EUR 170 million. For the
first time, Arla was able to obtain
debt with a negative interest
including the credit margin.
Repo: the Group entered into a sale
and repurchase arrangement based
on its investment in listed
AAA-rated Danish Mortgage Bonds.
This sale and repurchase agreement
is described in further detail in
Note 4.6.
The credit facilities contain financial
covenants on equity/total assets and
minimum equity, as well as standard
non-financial covenants. The Group
did not default on or fail to fulfil any
loan agreements in 2016.
During 2016, the Group raised the
following mix of funding:
Bank and credit institutions:
exercised extension options in our
revolving credit facilities for an
amount of EUR 682 million,
increasing maturity by 1 year.
Mortgage credit institutions:
obtained new UK mortgage debt
amounting to DKK 700 million
(EUR 94 million). The mortgage
loans are governed by the Danish
Mortgage Act with mandatory
security in land and buildings.
EMTN bond programme: given
Arla’s commitment to be a
repeating issuer in the Swedish
bond market, Arla issued a new
bond issue on SEK 1 billion
(EUR 105 million) to partly refinance
a SEK 1.5 billion (EUR 157 million)
bond issue that matured in 2016.
Leverage
Pension liabilities
Net interest-bearing debt excluding pension liabilities
Target range leverage 2.8- 3.4
Note 4.2 Interest-bearing debt
Strong cash flow resulted in improved leverage
Net interest-bearing debt, excluding
pension liabilities, decreased by
EUR 555 million to EUR 1,648 million
as at 31 December 2016. This was a
result of a strong cash flow in the
underlying business, including the
effects from an improved working
capital position, reduced capital
expenditure and the divestment of
Rynkeby.
The leverage ratio decreased by 0.9
to 2.4 as at 31 December 2016,
including the effect from the
divestment of Rynkeby. This surpassed
the Group’s long-term target range of
2.8-3.4, underpinning the Group’s
strong financial position. Leverage,
excluding the gain form the
divestment of Rynkeby, ended at 2.8
for the financial year 2016.
Pension liabilities at the end of 2016
increased by EUR 75 million to
EUR 369 million and were adversely
affected by the significant decrease in
long-term interest rates, partly offset
by a weaker GBP. As a result, net
interest-bearing debt, including
pension liabilities, amounted to
EUR 2,017 million as at 31 December
2016 compared to EUR 2,497 million
last year.
The average maturity of the interest
bearing borrowings increased by
1.5 years to 5.9 years at 31 December
2016. The average maturity is
impacted by a lapse of time to
maturity, refinancing of committed
facilities, new bond issue and the level
of net interest-bearing debt.
The equity ratio measured 34 per cent
at year end, compared to 31 per cent
in 2015.
Funding
The Group applies a diversified
funding strategy in order to balance
the liquidity and refinancing risk with
the desire to achieve a low financing
cost. Any major acquisitions or
investments are funded separately.
A diverse funding strategy includes
diversification of markets, currencies,
instruments, banks, lenders and
maturities in order to secure access to
funding to ensure that the Group is
independent of any one creditor or
any one market. All funding
opportunities are measured against
EURIBOR 3 months and derivatives are
applied to match the currency of our
funding needs. The interest profile is
managed with interest rate swaps
independent of the single loan.
Net interest-bearing debt and leverage
(EURm)
3,000
2,500
2,000
1,500
1,000
500
0
4
2
0
,
1
8
8
1
3
4
7
,
2
0
4
7
3
7
6
,
2
1
7
1
2
9
4
,
2
2
0
3
3
6
9
,
1
6
4
8
2012
2013
2014
2015
2016
5
4
3
2
1
0
Net interest-bearing debt consists of current and non-current liabilities, less
interest-bearing assets. The definition of leverage is the ratio between net
interest-bearing debt including pension liabilities and EBITDA, and expresses the
Group’s capacity to service the debt. The Group’s long-term target range for
leverage is between 2.8 and 3.4.
Leverage in 2012 was influenced by mergers with Milk Union Hocheifel,
Germany and Milk Link in the UK, and the acquisition of a minority interest in the
Mengniu Dairy Group, China.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
110
Table 4.2.a Net interest-bearing debt
(EURm)
Securities, cash and cash equivalents
Other interest-bearing assets
Long-term borrowings
Short-term borrowings
Net interest-bearing debt excluding pension liabilities
Pension liabilities
Net interest-bearing debt including pension liabilities
Table 4.2.b Borrowings
(EURm)
Long-term borrowings:
Issued bonds
Mortgage credit institutions
Bank borrowings
Finance lease liabilities
Other non-current liabilities
Total long-term borrowings
Short-term borrowings:
Issued bonds
Commercial papers
Mortgage credit institutions
Bank borrowings
Finance lease liabilities
Other current liabilities
Total short-term borrowings
Total interest-bearing borrowings
2016
2015
-588
-12
1,281
967
1,648
369
2,017
-579
-24
1,717
1,089
2,203
294
2,497
2016
2015
419
798
52
12
-
1,281
330
700
657
27
3
1,717
-
115
1
815
16
20
967
164
115
1
778
18
13
1,089
2,248
2,806
Table 4.2.c Net interest-bearing debt excluding pension liabilities, maturity
(EURm)
December 31, 2016
DKK
SEK
EUR
GBP
Other
Total
December 31, 2015
DKK
SEK
EUR
GBP
Other
Total
Total
872
558
175
37
6
1,648
Total
794
679
229
434
67
2,203
2017
86
115
1
14
-9
207
2016
75
317
34
6
57
489
2018
12
181
134
12
15
354
2017
38
-
76
40
10
164
2019
20
157
7
3
-
187
2018
12
198
32
127
-
369
2020
20
-
7
3
-
30
2019
21
164
30
3
-
218
2021
32
105
6
3
-
146
2020
28
-
30
252
-
310
2022
22
-
4
2
-
28
2021
30
-
6
3
-
39
2023 2024-2026 After 2026
498
153
-
-
15
1
-
-
-
-
513
154
29
-
-
-
-
29
2022 2023-2025 After 2025
442
118
-
-
7
12
-
-
-
-
449
130
30
-
2
3
-
35
Annual report 2016 111
Maturity of net interest-bearing debt excluding pension liabilities
at 31 December 2016
(EURm)
Maturity of net interest-bearing debt excluding pension liabilities
at 31 December 2015
(EURm)
600
500
400
300
200
100
0
600
500
400
300
200
100
0
0-1Y
1-2Y
2-3Y
3-4Y
4-5Y
5-6Y
6-7Y
7-10Y
10Y>
0-1Y
1-2Y
2-3Y
3-4Y
4-5Y
5-6Y
6-7Y
7-10Y
10Y>
Unused committed facilities
Debt
Unused committed facilities
Debt
Table 4.2.d Interest rate risk at 31 December
(EURm)
Interest
rate
Average
interest rate
Fixed for
Carrying
amount
Interest
rate risk
2016
Issued bonds:
SEK 500m maturing 04.06.2018
SEK 800m maturing 28.05.2019
SEK 500m maturing 31.05.2021
SEK 1.000m maturing 04.06.2018
SEK 700m maturing 28.05.2019
SEK 500mmaturing 31.05.2021
Commercial papers
Total issued bonds
Mortgages credit institutions:
Floating-rate
Total mortgages credit institutions
Bank borrowings:
Fixed-rate
Floating-rate
Total bank borrowings
Other borrowings:
Finance leases
Other borrowings
Total other borrowings
Fixed
Fixed
Fixed
Floating
Floating
Floating
Fixed
3.25%
2.63%
1.88%
1.08%
0.56%
1.09%
0.07%
1.32%
1-2 years
2-3 years
4-5 years
0-1 years
0-1 years
0-1 years
0-1 years
52
84
53
105
73
52
115
534
Fair value
Fair value
Fair value
Cash flow
Cash flow
Cash flow
Fair value
Floating
0.75%
0-1 years
799
Cash flow
Fixed
Floating
Floating
Floating
-0.30%
1.75%
0.57%
2.15%
2.87%
2.45%
0-1 years
0-1 years
0-1 years
0-1 years
497
370
867
28
20
48
Fair value
Cash flow
Cash flow
Cash flow
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
112
2015
Issued bonds:
SEK 1.150m maturing 22.06.2016
SEK 500m maturing 04.06.2018
SEK 800m maturing 28.05.2019
SEK 350m maturing 22.06.2016
SEK 1.000m maturing 04.06.2018
SEK 700m maturing 28.05.2019
Commercial papers
Total issued bonds
Mortgages credit institutions:
Floating-rate
Total mortgages credit institutions
Bank borrowings:
Fixed-rate
Floating-rate
Total bank borrowings
Other borrowings:
Finance leases
Finance leases
Other borrowings
Total other borrowings
Interest
Rate
Average
Interest rate
Fixed for
Carrying
Amount
Interest
Rate risk
Fixed
Fixed
Fixed
Floating
Floating
Floating
Fixed
Floating
Fixed
Floating
Fixed
Floating
Floating
5.00%
3.25%
2.63%
1.40%
1.27%
0.73%
0.08%
2.14%
0.70%
0.70%
0.01%
1.25%
0.82%
4.85%
2.25%
2.37%
2.81%
0-1 years
2-3 years
3-4 years
0-1 years
0-1 years
0-1 years
0-1 years
126
57
87
38
109
77
115
609
Fair value
Fair value
Fair value
Cash flow
Cash flow
Cash flow
Fair value
0-1 years
701
701
Cash flow
0-1 years
0-1 years
498
953
1,451
0-4 years
0-1 years
0-1 years
10
35
31
76
Fair value
Cash flow
Fair value
Cash flow
Cash flow
Interest profile for net interest-bearing debt excluding pension
Interest profile for net interest-bearing debt excluding pension
liabilities at 31 December 2016
liabilities at 31 December 2016
(EURm)
(EURm)
Interest profile for net interest-bearing debt excluding pension
Interest profile for net interest-bearing debt excluding pension
liabilities at 31 December 2015
liabilities at 31 December 2015
(EURm)
(EURm)
D
D
B
B
N
N
I
I
2,500
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
0
0
D
D
B
B
N
N
I
I
2,500
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
0
0
1Y
1Y
2Y
2Y
3Y
3Y
4Y
4Y
5Y
5Y
6Y
6Y
7Y
7Y
10Y
10Y
15Y
15Y
25Y
25Y
1Y
1Y
2Y
2Y
3Y
3Y
4Y
4Y
5Y
5Y
6Y
6Y
7Y
7Y
10Y
10Y
15Y
15Y
25Y
25Y
Floating
Fixed via swap
Fixed debt
Floating
Fixed via swap
Fixed debt
Annual report 2016
113
Table 4.2.e Currency profile of net interest-bearing debt excluding pension liabilities
(EURm)
Currency profile of net interest-bearing debt excluding pension liabilities before and after
derivative financial instruments
Original
principal
Effect
of swap
After
swap
2016
DKK
SEK
EUR
GBP
Other
Total
2015
DKK
SEK
EUR
GBP
Other
Total
872
558
175
37
6
1,648
-
-470
261
209
-
-
872
88
436
246
6
1,648
794
679
229
434
67
2,203
-
-546
273
273
-
-
794
133
502
707
67
2,203
Capitalised residual lease obligations
related to financial lease agreements
are recognised under liabilities,
measured at amortised cost.
Other financial liabilities are measured
at amortised cost. For details on
pension liabilities, see Note 4.7.
Accounting policies
Financial instruments
Financial instruments are recognised
at the date of trade.
The Group ceases to recognise
financial assets when the contractual
rights to the underlying cash flows
either cease to exist or are transferred
to the purchaser of the financial asset,
and substantially all risk and reward
related to ownership are also
transferred to the purchaser.
Financial assets and liabilities are
offset and the net amount is
presented in the balance sheet when,
and only when, the Group obtains a
legal right of offsetting and either
intends to offset or settle the financial
asset and the liability simultaneously.
Available for sale financial assets
Financial assets classified as available
for sale consist of mortgage credit
bonds, which correspond in part to
raised mortgage debt.
Available for sale financial assets are
measured on first-time recognition at
fair value plus transaction costs. The
financial assets are subsequently
measured at fair value with
adjustments made in other
comprehensive income and
accumulated in the available-for-sale
reserve in equity. Interest income,
impairment and foreign currency
translation adjustments of debt
instruments are recognised in the
statement of income on a continuous
basis under financial income and
financial costs.
In connection with sale of financial
assets classified as available for sale,
accumulated gains or losses,
previously recognised in the
available-for-sale reserve, are recycled
to financial income and financial costs.
Financial assets measured
at fair value
Securities classified at fair value
consist primarily of listed securities,
which are monitored, measured and
reported continuously, in accordance
with the Group’s treasury and funding
policy. Changes in the fair value are
recognised in the income statement
under financial income and financial
costs.
Cash and cash equivalents
Cash and cash equivalents consist of
readily available cash at bank and
deposits together with exchange
listed debt securities with an original
maturity of three months or less,
which have only an insignificant risk of
changes in value and can be readily
converted to cash or cash equivalents.
Liabilities
Debts to mortgage and credit
institutions, as well as issued bonds,
are measured at the trade date upon
first recognition at fair value plus
transaction costs. Subsequently,
liabilities are measured at amortised
cost with the difference between the
loan proceeds and the nominal value
recognised in the income statement
over the expected life of the loan.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
114
Note 4.3 Financial risks
Financial risk management
Financial risks are an inherent part of
the Group’s operating activities and as
a result the Group’s profit is impacted
by the development in currencies,
interest rates and certain types of
commodities. The global financial
markets are volatile and thus it is
critical for the Group to have a well
implemented financial risk manage-
ment approach in place in order to
mitigate short-term market volatility,
whilst simultaneously achieving the
highest possible milk price.
The Group’s comprehensive financial
risk management strategy and system
builds on a thorough understanding of
the interaction between the Group’s
operating activities and the underlying
financial risks. The overall framework
for managing financial risks, being the
treasury and funding policy, is
approved by the Board of Directors
and managed centrally by the treasury
department. The policy outlines risk
limits for each type of financial risk,
permitted financial instruments and
counterparties.
Each month, the Board of Directors
receives a report on the Group’s
financial risk exposure from the
treasury department, who manage
the financial risks on a continuous
basis.
Hedging the volatility of milk prices is
not within the scope of financial risk
management, but an inherent
component of the Group’s business
model.
Note 4.3.1 Liquidity risk
Very strong liquidity reserves
The strong cash generation in 2016
positively influenced the liquidity
reserves by reducing the utilisation of
loan and credit facilities. Liquidity
reserves increased by EUR 423 million
to EUR 937 million as at 31 December
2016.
Ensuring availability of sufficient
operating liquidity and credit facilities
for operations is a primary goal of
Table 4.3.1.a Liquidity reserves
(EURm)
Cash and cash equivalents
Securities (free cash flow)
Unutilised committed loans facilities
Unutilised other loan facilities
Total
Table 4.3.1.b Gross financial liabilities
(EURm)
2016
Issued bonds
Mortgage credit
institutions
Credit institutions
Finance lease liabilities
Other non-current
liabilities
Interest expense - interest
bearing debt
Trade payable
Derivative instruments
Total
Carrying
amount
419
799
982
28
20
-
995
168
3,411
managing liquidity risk. According to
the liquidity model inspired by the
rating agencies, the Group’s current
liquidity reserves covering the next
12 months of expected cash flow is
more favourable than required.
However, given the relatively low cost
required to maintain current facilities
these will remain in place.
The management of day-to-day
liquidity flow, representing more than
95 per cent of the net revenue of
the Group, is conducted by Arla
Foods Finance A/S via cash pooling
arrangements with the Group’s banks
and credit institutions. This secures a
scalable and efficient operating
model.
Within the Group, companies with
excess liquidity finance companies
with liquidity deficits. As a result, the
Group achieves a cost-efficient
utilisation of credit facilities.
2016
2015
84
7
666
180
937
70
8
333
103
514
Non-discounted contractual cash flows
Total
418
2017
-
2018
157
2019
157
2020
-
2021
104
2022
-
2023
-
817
990
28
20
128
995
168
3,564
1
760
16
18
14
995
81
1,885
9
161
11
2
13
-
20
373
19
40
1
-
10
-
17
244
19
12
-
-
9
-
9
49
27
10
-
-
8
-
8
157
29
7
-
-
6
-
7
49
29
-
-
-
6
-
6
41
2024-
2026
-
After
2026
-
154
-
-
-
18
-
5
177
530
-
-
-
44
-
15
589
Annual report 2016
115
Table 4.3.1.b Gross financial liabilities (continued)
(EURm)
2015
Issued bonds
Mortgage credit
institutions
Credit institutions
Finance lease liabilities
Other non-current
liabilities
Interest expense - interest
bearing debt
Trade payable
Derivative instruments
Total
Carrying
amount
494
Total
492
2016
164
2017
-
2018
164
2019
164
2020
-
2021
-
2022
-
2023-
2025
-
After
2025
-
Non-discounted contractual cash flows
701
1,551
45
720
1,541
45
2
845
19
1
142
15
10
220
10
20
34
1
20
283
-
28
10
-
31
7
-
135
-
-
473
-
-
15
15
13
2
-
-
-
-
-
-
-
-
918
158
3,882
113
918
158
4,002
22
918
71
2,054
19
-
18
197
15
-
16
435
11
-
14
244
7
-
7
317
5
-
6
49
5
-
6
49
12
-
8
155
17
-
12
502
Assumptions
Contractual cash flows are based on the following assumptions:
The cash flows are based on the earliest possible date at which the Group can be required to settle the financial liability; and
The interest rate cash flow is based on the contractual interest rate. Floating interest payments have been determined using the current floating rate
for each item at the reporting date.
Risk mitigation
Risk
Liquidity and funding is vital for the
Group to be able to pay its financial
liabilities as they become due. It also
impacts the ability to attract new
funding in the long-run, and is crucial
to fulfil the Group’s strategic ambitions.
Policy
The treasury and funding policy states the minimum average maturity threshold
for net interest-bearing debt, and sets limitations on debt maturing within the
next 12 and 24 month periods. Unused committed facilities are taken into
account when calculating average maturity.
Average maturity, gross debt
Maturity < 1 year, net debt
Maturity > 2 year, net debt
2016
2015
Minimum
Maximum
Policy
5.9 years
0%
94%
4.4 years
5%
86%
2 years
-
50%
-
25%
-
How we act and operate
In addition to the treasury and funding
policy, the Board of Directors has
approved a long-term financing
strategy which defines the direction
for financing of the Group. This
includes, for example, counterparties,
instruments and risk appetite and also
describes future funding opportunities
yet to be explored and implemented.
The funding strategy is supported by
members’ long-term commitment to
invest in the business. It is the Group’s
objective to maintain its credit quality
at a robust investment grade level.
The Group has, to a very high degree,
centralised its funding and cash
management in order to control and
optimise its funding position. The
Group seeks to have a diversified
funding platform comprising bilateral
bank financing, mortgage loans,
supranationals, capital market bond
issues, commercial papers and finance
leases. The Group aims to have
adequate liquidity and credit facility
reserves, meeting the requirements
for an investment grade company.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
116
Note 4.3.2 Currency risk
Significant currency fluctuations
Compared to recent years, the USD
was relatively stable in 2016, whereas
the GBP weakened significantly from
an average rate of 0.72 EUR/GBP in
2015 to 0.82 EUR/GBP in 2016. Our
hedging strategies helped to mitigate
the majority of the impact from the
movement in the GBP in 2016. The
hedging activities delivered a gain of
EUR 35 million in 2016, compared to
a loss of EUR 51 million in 2015. The
result of hedging activities classified as
hedge accounting is recognised in
other income and other cost.
The Group is increasingly involved in
emerging markets where efficient
hedging is not possible, either due to
currency regulations or illiquid
financial markets. These markets are
mainly Nigeria, Ivory Coast, Senegal,
Egypt and Bangladesh.
Access to foreign currency in Nigeria
and Egypt was very challenging in
2016, which limited Arla’s possibilities
to grow in these markets. The Nigerian
currency devalued by 40 per cent in
2016. The devaluation, in combina-
tion with unavailability of a market for
attractive hedging, triggered a loss of
EUR 28 million recognised under
financial cost.
The business in Saudi Arabia is a large
part of the Group’s export to MENA.
The Saudi Arabia currency (SAR) has
been pegged to USD since 1986,
however, given the low oil price and
increased uncertainty regarding the
Saudi Arabia economy, we have
chosen to significantly increase our
hedge of SAR within the limits of our
treasury and funding policy.
Revenue split by currency
in 2016
Revenue split by currency
in 2015
6%
2%
8%
4%
2%
9%
30%
30%
13%
15%
12%
14%
26%
29%
EUR
GBP
SEK
DKK
USD
SAR
Other
Table 4.3.2 Currency exposure
(EURm)
2016
External exposure:
Financial liabilities
Financial assets
Derivatives
Net external exposure
Internal exposure:
Financial liabilities
Financial assets
Derivatives
Net internal exposure
Net exposure
The net exposure relates to:
Hedging of expected commercial cash flow that qualify for hedge accounting
Hedging of expected commercial cash flow where hedge accounting is not used
Exposure not hedged
Applied sensitivity
Impact on profit or loss
Impact on other comprehensive income
* Incl. AED
EUR/DKK
USD/DKK*
GBP/DKK
SEK/DKK
SAR/DKK
-191
148
-362
-405
-24
303
-
279
-26
190
-593
-429
-
-
-
-
-35
204
-538
-369
-
257
-
257
-710
39
499
-172
-4
-
216
212
-15
80
-198
-133
-
15
-
15
-126
-429
-112
40
-118
-
-126
-
1%
-1
-
-357
-72
-
5%
-4
-18
-152
-
40
5%
2
-8
-
-
40
5%
2
-
-95
-23
-
5%
-1
-5
Annual report 2016
117
Table 4.3.2 Currency exposure (continued)
(EURm)
EUR/DKK
USD/DKK*
GBP/DKK
SEK/DKK
SAR/DKK
2015
External exposure:
Financial liabilities
Financial assets
Derivatives
Net external exposure
Internal exposure:
Financial liabilities
Financial assets
Derivatives
Net internal exposure
Net exposure
The net exposure relates to:
Hedging of expected commercial cash flow that qualify for hedge accounting
Hedging of expected commercial cash flow where hedge accounting is not used
Exposure not hedged
-238
176
-393
-455
-23
228
-
205
-17
183
-616
-450
-24
-
-24
-494
577
-901
-818
-
616
-
616
-690
38
490
-162
-2
252
-
250
-
69
-111
-42
-
15
-
15
-250
-474
-202
88
-27
-
-250
-
1%
-2
-
-421
-53
-
5%
-3
-21
-203
-
1
5%
-
-10
-
-
88
5%
4
-
-51
24
-
5%
1
-3
Applied sensitivity
Impact on profit or loss
Impact on other comprehensive income
* Incl. AED
Risk mitigation
The Group’s net external exposure is
calculated as external financial assets
and liabilities denominated in
currencies different from the
functional currency of each legal
entity, plus any external derivatives
converted on Group level into
currency risk against DKK, i.e. EUR/
DKK, USD/DKK etc. The same applies
to net internal exposure. These sum
up to the Group’s aggregate currency
exposure, net exposure.
This analysis excludes net foreign
currency investments in subsidiaries,
as well as instruments hedging those
investments. The hedging relationships
are fully effective.
Assumptions for
sensitivity analysis
The sensitivity analysis only includes
currency exposure arising from
financial instruments and thus the
analysis does not include hedged
future commercial transactions. The
applied change in exchange rates
based on historical currency
fluctuations.
Risk
Currency risk arises from the Group’s
export activities, investments and
financing activities. The Group
operates in many different countries
and has significant investments in
operations outside of Denmark, of
which the UK, Germany and Sweden
represent the largest part of the
business by net revenue, profit and
assets. A major part of the currency
risk from net revenue denominated in
foreign currencies is offset by sourcing
in the same currency.
Currency risks primarily exist due to
transactional risks in the form of future
commercial and financial payments
and translation risks relating to
investments in foreign operations in
the form of subsidiaries, joint ventures
and associated companies.
Transaction risks arise as a result of
sales or sourcing in currencies
different from the functional currency
in each subsidiary. Measured in
nominal EUR, the Group’s consolidated
risk is largest in EUR, followed by USD,
GBP, SEK and SAR.
Income statement
Volatility in currency rates impact the
Group’s revenue, cost of sales and
financial items with potential adverse
or positive effects on milk prices and
cash flow.
Balance sheet
Changes in currency rates could cause
volatility in balance, equity and cash
flow. The majority of local funding is
obtained in local currencies.
Investments in subsidiaries are not
normally hedged.
Policy
According to the treasury and funding
policy, the treasury department can
hedge:
Up to 15 months of the net
forecasted cash receipts and
payables. The level of hedging
activity is affected by factors such
as the underlying business
development, currency rates and
the time until forecasted cash
flow occur.
Up to 100 per cent of net
recognised trade receivables and
trade payables.
The currency exposure is continuously
managed by the treasury department.
Individual currency exposures are
hedged in accordance with the
treasury and funding policy.
Financial instruments used to hedge
the currency exposure need not
necessarily qualify for hedge
accounting, and hence some of the
applied financial instruments, i.e. some
option strategies, are accounted for as
fair value through the income
statement.
Arla Foods amba’s functional currency
is DKK. However, the risk in relation to
the EUR currency is assessed in the
same manner as for DKK, hence as an
example, in companies using DKK as
functional currency, a borrowing in
EUR is treated the same as a
borrowing in DKK.
How we act and operate
Throughout the year, the Group
continued to hedge the forecasted
sales and purchases in foreign
currency, always taking the current
market situation into consideration.
The Executive Management Team has
the discretion to decide if and when
investments in foreign operations
should be hedged (translation risks)
with an obligation to inform the Board
of Directors at the next meeting.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
118
Note 4.3.3 Interest rate risk
Limited hedging activities due to decreased debt levels
The average duration of the Group’s
interest on interest-bearing debt,
including derivatives but excluding
pension liabilities, has increased by
1.0 to 4.5 as at 31 December 2016.
The duration is positively impacted by
reduced levels of interest-bearing
debt, partly offset by matured interest
rate hedges and a reduction in time to
maturity on the remaining hedges.
Even though interest rates were
extremely low in 2016, our hedging
activity was limited due to the
decrease in net interest-bearing debt.
Table 4.3.3 Sensitivity based on a 1 percentage point increase in interest rate
(EURm)
2016
Financial assets
Derivatives
Financial liabilities
Net interest-bearing debt excluding pension liabilities
2015
Financial assets
Derivatives
Financial liabilities
Net interest-bearing debt excluding pension liabilities
Carrying value
Sensitivity
-600
-
2,248
1,648
-603
-
2,806
2,203
1%
1%
1%
1%
1%
1%
Risk mitigation
Risk
The Group is exposed to interest rate
risk on interest-bearing borrowings,
pension liabilities, interest-bearing
assets and the impairment test of
non-current assets. The risk is divided
between profit exposure and exposure
to other comprehensive income. Profit
exposure relates to net interest paid,
valuation of marketable securities and
potential impairment of fixed assets.
Exposure to other comprehensive
income relates to revaluation of net
pension liabilities and interest hedging
of future cash flow.
Fair value sensitivity
A change in interest rates will impact
the fair value of the Group’s
interest-bearing assets, interest rate
derivative instruments and debt
instruments measured at either fair
value through the income statement,
or through other comprehensive
income. The table above shows the
fair value sensitivity. The sensitivity is
based on a 1 per cent increase in
interest rates. A decrease in the
interest rate would have the reverse
effect.
Cash flow sensitivity
A change in interest rates will impact
interest rate payments on the
Group’s unhedged floating rate debt.
The table above shows the one-year
cash flow sensitivity, depicting a
1 per cent increase in interest rates on
the unhedged floating rate for
instruments recognised as at
31 December 2016. A decrease in the
interest rate would have the reverse
effect.
Potential accounting impact
Income
statement
Other
comprehensive
income
4
7
-17
-6
-2
57
-
55
4
12
-22
-6
-2
63
-
61
Policy
Interest rate risk must be managed
according to the treasury and funding
policy. Interest rate risk is measured as
the duration of the debt portfolio
including hedging instruments, but
excluding pension liabilities.
Duration of net-interest bearing debt
2016
4.5
2015
Minimum
Maximum
Policy
3.5
1
7
How we act and operate
The purpose of interest rate hedging is
to mitigate risk and secure a relatively
stable and predictable financing cost.
The interest rate risk from net
borrowing is managed by having an
appropriate split between fixed and
floating interest rates.
The Group actively uses derivative
financial instruments to reduce risks
related to fluctuations in the interest
rate and to manage the interest profile
of the interest-bearing debt. By
having a portfolio approach and using
derivatives, the Group can inde-
pendently manage and optimise
interest rate risk, as the interest rate
profile can be changed without having
to change the funding itself. Thereby
the Group can operate in a fast, flexible
and cost efficient manner without
changing underlying loan agreements.
The mandate from the Board provides
the Group with the opportunity to use
derivatives like interest rate swaps and
options, in addition to interest
conditions embedded in the loan
agreements. At present, no options
have been utilised to the portfolio.
Annual report 2016
119
Note 4.3.4 Commodity price risk
Limited hedging activities in accordance with strategy
In order to strengthen the focus on
procurement and risk management,
the decision was made in 2016 to
centralise energy hedging within the
treasury department. Thereby
procurement can concentrate on
selecting the right suppliers,
measured by quality, price and other
relevant parameters. The supply
contracts are predominately related to
a floating official price index. The
treasury department then uses
financial derivatives to centrally hedge
commodity price risk. This secures full
flexibility to change suppliers without
having to take future hedging into
consideration.
The hedging activities concentrate on
the most significant risks, including
electricity, natural gas and diesel in
Denmark, Germany, Sweden and the
Table 4.3.4 Hedged commodities
(EURm)
2016
Diesel / natural gas
Electricity
2015
Diesel / natural gas
Electricity
Risk mitigation
Risk
The Group is exposed to commodity
risks related to the production and
distribution of dairy products.
Increased commodity prices
negatively impact the costs of
production and distribution. The most
significant risk relates to energy
consumption. However, the Group is,
to a minor extent, also exposed to
commodities used in packaging,
vegetable oils and other ingredients
used within production. The risk is
divided between profit exposure and
exposure to other comprehensive
income. The profit exposure relates to
future purchases, whereas the
exposure to other comprehensive
income relates to the revaluation of
commodities hedges.
Fair value sensitivity
A change in commodity prices will
impact the fair value of the Group’s
hedged commodity derivative
instruments, measured through other
comprehensive income and the
unhedged energy consumption
through the income statement. The
table shows the sensitivity of a 5 per
cent increase in commodity prices for
both hedged and unhedged
commodity purchases. A decrease in
commodity prices would have the
reverse effect.
Policy
According to the Risk Management
Policy- Utilities, the risk on electricity,
natural gas and diesel can be hedged
for up to 24 months of the net
forecasted consumption.
How we act and operate
Energy commodity price risks are
managed by the treasury department.
Going forward, commodity price risks
will mainly be hedged by entering into
financial derivative contracts,
independent of the physical supplier
UK. The total energy commodity
spend, excluding taxes and distribution
costs, amounts to approximately EUR
90 million a year.
The purpose of hedging is to reduce
a short-term volatility in costs
related to energy due to changing
commodity prices.
In 2016, hedged volumes decreased
due to contracts expiring. As at
31 December 2016, 24 per cent of
the energy spend for 2017 was
hedged. A 5 per cent increase in
commodity prices would negatively
impact profit by approximately
EUR 4 million. Conversely, other
comprehensive income would be
positively impacted by EUR 1 million.
Sensitivity
Contract value
Potential accounting impact
Income
statement
Other
comprehensive
income
5%
5%
5%
5%
2
1
-3
-1
1
-
-12
-7
-1
-
1
1
contracts. Arla is also exploring other
commodities relevant for financial risk
management.
and will likely play a role in the future,
in relation to managing fixed price
commodity contracts with customers.
The Group can use derivative financial
instruments such as swaps, futures
and options to reduce the risk of
fluctuations in the price of energy
commodities. Currently no options are
in use.
The energy exposure and hedging is
managed as a portfolio across energy
type and country. Not all energy
commodities can effectively be
hedged by matching the underlying
costs, but Arla aims to minimise the
base risk.
The Group started hedging price risk
on selected milk commodity products
for an insignificant value in the still
relatively undeveloped dairy derivative
markets in the EU and New Zealand.
The dairy derivative market is evolving
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
120
Note 4.3.5 Credit risk
Limited losses
The Group has experienced very
limited losses from defaulting
counterparties such as customers,
suppliers and financial counterparties.
For financial counterparties, the credit
risk is minimised by only entering into
new derivative transactions with those
that have a credit rating of at least
A-/A-/A3 from either S&P, Fitch or
Moody’s. All financial counterparties
had satisfactory credit ratings at
year-end. In some geographies which
are not serviced by our relationship
banks and where financial counter-
parties with a satisfying credit rating
do not operate, the Group might
deviate from the rating requirement.
The risk is however limited. According
to the treasury and funding policy,
credit ratings are not required from
lenders, however, only in one case has
a credit facility been obtained from a
counterparty with a lower credit rating
than A-/A-/A3.
Other counterparties, customers and
suppliers, are subject to an continous
monitoring of the fulfilment of their
contractual obligations and their
credit quality. Outside the Group’s core
markets, credit insurance and trade
finance instruments are widely used to
reduce the risks.
Further information on trade
receivables is provided in Note 2.1c.
The maximum exposure to credit risk
is approximately equal to the carrying
amount.
The Group has, like in previous years,
continuously worked with credit
exposure and experienced a very low
level of losses arising from customers.
Netting of credit risk
In order to manage financial
counterparty risk, the Group uses
master netting agreements when
entering into derivative contracts with
counterparties.
Table 4.3.5 shows the counterparty
exposure for those agreements
covered by entering into netting
agreements.
Table 4.3.5 External rating of financial
counterparties
(EURm)
Assets
Qualifying
for netting
Net
assets
Liabilities
Qualifying
for netting
Net
liabilities
2016
AA-
A+
A
A-
Total
2015
AA-
A+
A
A-
Total
12
11
7
1
31
11
11
7
1
30
1
-
-
-
1
64
20
71
13
168
11
11
7
1
30
53
9
64
12
138
32
9
14
2
57
32
9
14
1
56
-
-
-
1
1
42
17
60
1
120
32
9
14
1
56
10
8
46
-
64
In addition, the Group has entered into sales and repurchase agreements on mortgage bonds, described in further details in Note 4.6.
Risk mitigation
Risk
Credit risks arise from operating
activities and engagement with
financial counterparties. Losses occur
when customers, suppliers or financial
counterparties default on their
obligations towards the Group.
Furthermore, a weak counterparty
credit quality can reduce their ability
to support the Group going forward,
thereby jeopardising the fulfilment of
our Group’s strategy. As an example,
there is a risk when money is
borrowed, and a counterparty is
unable to refinance the credit facility
due to its own financial difficulties.
When investing in new entities, a
thorough due diligence is performed,
including a review of the financial
condition of the partner.
Policy
Financial counterparties must be
approved by a member of the
Executive Board and the CFO of Arla
Foods amba, and have a credit rating
of a least A-/A-/A3 by S&P, Fitch or
Moody’s in order for the financial
counterparty to have a liability
towards Arla. A credit assessment is
performed of all new customers, and
existing customers are subject to
ongoing monitoring of their credit
worthiness. The same process is
applied to important suppliers, both
for ongoing supply and capital
expenditures.
coverage with the required rating,
however, the Group then applies for
the best coverage available. The
Group has determined that this is an
acceptable risk as the Group has
decided to grow and invest in these
emerging markets.
How we act and operate
The Group has an extensive credit risk
policy and uses credit insurance and
other trade financing products
extensively in connection with exports.
In certain emerging markets it is not
always possible to obtain credit
If a customer payment is late, internal
procedures are followed to mitigate
losses. The Group uses a limited
number of financial counterparties
where credit ratings are monitored on
an ongoing basis.
Annual report 2016
121
Note 4.4 Derivative financial instruments
Financial comments
Hedging of future cash flows
The Group uses forward currency
contracts to hedge currency risks
against expected future net revenue
and costs. Interest rate swaps are used
to hedge risks against movements in
expected future interest payments
and commodity swaps are used for
energy hedging.
Hedging of net investments
As at 31 December 2016, the Group
hedged an insignificant part of
currency exposure relating to
investments in subsidiaries, joint
ventures and associated companies,
using loans and derivatives.
Fair value of hedge instruments not
qualifying for hedge accounting
(financial hedge)
The Group uses currency options
which hedge forecasted sales and
purchases. Some of these options do
not qualify for hedge accounting and
hence, the fair value adjustment is
recognised directly in the income
statement.
Currency swaps are used as part of the
daily liquidity management. The
objective of the currency swaps is to
match the timing of in- and outflow of
foreign currency cash flows.
Table 4.4 Hedging of future cash flow from highly probable forecast transactions
(EURm)
Expected recognition
Fair value
recognised
in other
comprehen-
sive income
Carrying
value
2017
2018
2019
2020
2016
Currency contracts
Interest rate contracts
Commodity contracts
Hedging of future cash flow
-23
-23
-100
-100
3
3
-120 -120
-23
-20
-
-43
-
-17
-
-17
-
-15
-
-15
-
-9
-
-9
Fair value
recognised
in other
comprehen-
sive income
Carrying
value
2016
2017
2018
2019
2015
Currency contracts
Interest rate contracts
Commodity contracts
Hedging of future cash flow
8
-85
-19
-96
8
-85
-19
-96
8
-15
-19
-26
-
-14
-
-14
-
-13
-
-13
-
-11
-
-11
Later than
2020
-
-39
-
-39
Later than
2019
-
-32
-
-32
Accounting policies
Derivative financial instruments are
recognised from the trade date and
measured in the financial statement at
fair value. Positive and negative fair
values of derivative financial
instruments are recognised as
separate line items in the balance
sheet. Offsetting of positive and
negative amounts only take place
once the Group has obtained the legal
right and intends to settle several
financial instruments on a net basis.
Fair value hedging
Changes in the fair value of derivative
financial instruments, which meet the
criteria for hedging the fair value of
recognised assets and liabilities, are
recognised alongside changes in the
value of the hedged asset or the
hedged liability for the portion that is
hedged.
recognised under the same line item as
the hedged item (basic adjustment).
Cash flow hedging
Changes in the fair value of derivative
financial instruments, that are
classified as hedges of future cash
flows and effectively hedge changes
in future cash flows, are recognised
under other comprehensive income in
a special reserve for hedging
transactions under equity, until the
hedged cash flows impact the income
statement. The reserve for hedging
instruments under equity is presented
net of tax.
The cumulative gains or losses from
hedging transactions that are retained
in equity are reclassified and
If a hedging instrument no longer
meets the criteria for hedge
accounting, the hedge will cease from
that point onward.
The accumulated change in value
recognised in other comprehensive
income is recycled to the income
statement once the hedged cash
flows affect the income statement or
are no longer likely to be realised.
If the hedged cash flows are no longer
expected to be realised, the
cumulative value change is
immediately recycled from equity to
the income statement.
For derivative financial instruments
that do not meet the conditions for
treatment as hedging instruments,
changes in fair value are recognised
on a continuous basis in the income
statement under financial income and
financial costs.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
122
Note 4.5 Financial instruments
Table 4.5.a Categories of financial instruments
(EURm)
Available for sale financial assets
Loans and receivables
Financial assets measured at fair value through profit or loss
Derivatives
Financial liabilities measured at amortised cost
2016
2015
504
911
50
168
3,243
509
949
100
158
3,658
The fair value of financial assets and financial liabilities measured at amortised cost is approximately equal to the carrying amount.
Table 4.5.b Fair value hierarchy - carrying amount
(EURm)
Level 1
Level 2
Level 3
Total
2016
Financial assets:
Bonds
Shares
Derivatives
Total financial assets
Financial liabilities:
Issued bonds
Mortgage credit institutions
Derivatives
Total financial liabilities
2015
Financial assets:
Bonds
Shares
Derivatives
Total financial assets
Financial liabilities:
Issued bonds
Mortgage credit institutions
Derivatives
Total financial liabilities
504
13
-
517
-
-
31
31
-
-
-
-
504
13
31
548
-
798
-
798
419
-
168
587
-
-
-
-
419
798
168
1,385
509
14
-
523
-
-
75
75
-
-
-
-
509
14
75
598
-
701
-
701
494
-
158
652
-
-
-
-
494
701
158
1,353
Risk mitigation
Methods and assumptions applied
when measuring fair values of financial
instruments:
and consequently, the value is not
adjusted for credit risks.
Bonds and shares
The fair value is determined using the
quoted prices in an active market.
Non-option derivatives
The fair value is calculated using
discounted cash flow models and
observable market data. The fair value
is determined as a termination price
Option instruments
The fair value is calculated using
option models and observable market
data, such as option volatilities. The
fair value is determined as a
termination price and consequently,
the value is not adjusted for credit
risks.
Fair value hierarchy
Level 1: Fair values measured using
unadjusted quoted prices in an active
market
Level 2: Fair values measured using
valuation techniques and observable
market data
Level 3: Fair values measured using
valuation techniques and observable
as well as significant non-observable
market data
Annual report 2016
123
Note 4.6 Transfer of financial assets
Financial comments
The Group has invested in mortgage
bonds underlying its mortgage debt.
The reason for investing in mortgage
bonds is that the Group is able to
achieve a lower interest rate than
current market interest rates on
mortgage debt by entering into a sale
and repurchase agreement on the
listed Danish mortgage bonds. The
net interest rate payable, by raising
financing through this kind of sale and
repurchase agreement, is the interest
rate inherent in the sale and
repurchase agreement and the
contribution to the mortgage institute.
Due to the repurchase agreement, the
risks and rewards arising from the
ownership of transferred mortgage
bonds have been retained by the
Group. These mortgage bonds
have been classified as available
for sale with value adjustments
recognised through other compre-
hensive income. The received
proceeds create a repurchase
obligation which has been recognised
within short-term loans.
Table 4.6 Transfer of financial assests
(EURm)
Carrying
value
Notional
amount
Fair value
2016
Mortgage bonds
Repurchase liability
Net position
2015
Mortgage bonds
Repurchase liability
Net position
496
508
496
-496
-507
-496
-
1
-
501
513
501
-498
-513
-498
3
-
3
Note 4.7 Pension liabilities
Lower interest rate causes higher pension deficit
In 2016, responsibility for the
Group’s defined benefit pension plans
was centralised to the treasury
department and is thereby managed
as an integrated part of the Group’s
external debt.
Pension liability consists primarily of
defined benefit plans in the UK and
Sweden. The defined benefit plans
provide pension disbursements to
participating employees based on
seniority and final salary. Net pension
liabilities on 31 December 2016 were
recognised at EUR 369 million, an
increase of EUR 75 million compared
to last year. The carrying value of
defined benefit plans increased
primarily in the UK due to actuarial
losses related to lower discount rates.
This was partly offset by payments to
the schemes and currency translation
effect.
Pension plans in Sweden
The defined benefit plan in Sweden
does not currently require the Group
to make cash contributions. The
recognised net liability stood at EUR
185 million on 31 December 2016,
the same level as last year. An actuarial
loss of EUR 11 million, resulting from a
decrease in the discount rate, was
offset by a foreign exchange rate
adjustment of EUR 9 million.
These pension plans are contribu-
tion-based plans, guaranteeing
defined benefit pension at retirement.
Contributions are paid by the Group.
The schemes do not provide any
insured disability benefits. The plan
assets are legally structured as a trust
and the Group has control over the
operation of the plans and their invest-
ments. The investment of the assets is
based on the investment strategy
defined by the board of the trust.
These pension plans do not include a
risk-sharing element between the
Group and the plan participants.
Pension plans in the UK
The defined benefit plans in the UK
are administered by independent
pension funds that invest deposited
amounts to cover pension liabilities.
At 31 December 2016 the recognised
net liability was EUR 150 million,
representing an increase of EUR 73
million compared to last year. The
value of the liability totalled EUR
1,425 million, an increase of EUR 61
million compared to last year. The
increase in the net pension liability is
primarily related to actuarial losses of
EUR 119 million due to lower discount
rates, partly offset by payments into
the plans amounting to EUR 34
million, and a foreign exchange rate
adjustment of EUR 14 million.
These pension plans are defined
benefit final salary schemes. The
schemes are closed to both new
entrants and future accrual. Employer
contributions are determined with the
advice of independent qualified
actuaries on the basis of tri-annual
valuations. The schemes do not
provide any insured disability benefits.
The schemes are legally structured as
trust-based statutory sectionalised
pension schemes. The Group has
limited control over the operation of
the plans and their investments.
The trustees of the scheme set the
investment strategy and have
established a policy on asset
allocation to best match the assets to
the liabilities of the scheme. The
trustees appoint an independent
external advisor to the schemes who
is responsible for advising on the
investment strategy and investing the
assets.
The pension plans do not include a
risk-sharing element between the
Group and the plan participants.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
124
Table 4.7.a Pension liabilities recognised on the balance sheet
(EURm)
Sweden
UK
Other
Total
2016
Present value of funded liabilities
Fair value of plan assets
Deficit of funded plans
Present value of unfunded liabilities
Net pension liabilities recognised on the balance sheet
Specification of total liabilities:
Present value of funded liabilities
Present value of unfunded liabilities
Total liabilities
2015
Present value of funded liabilities
Fair value of plan assets
Deficit of funded plans
Present value of unfunded liabilities
Net pension liabilities recognised on the balance sheet
Specification of total liabilities:
Present value of funded liabilities
Present value of unfunded liabilities
Total liabilities
196
-11
185
-
185
1,425
-1,275
150
-
150
45
-24
21
13
34
196
-
196
1,425
-
1,425
45
13
58
194
-11
183
-
183
1,364
-1,287
77
-
77
39
-18
21
13
34
194
-
194
1,364
-
1,364
39
13
52
1,666
-1,310
356
13
369
1,666
13
1,679
1,597
-1,316
281
13
294
1,597
13
1,610
Table 4.7.b Development in defined benefit pension liabilities
(EURm)
Present value of liability at 1 January
Reclassification
Current service cost
Interest cost
Actuarial gains/losses from changes in financial assumptions (other comprehensive income)
Benefits paid
Curtailments and settlements
Exchange rate adjustment
Present value of pension liability at 31 December
2016
2015
1,610
-
4
52
282
-59
-3
-207
1,679
1,563
15
3
55
-51
-65
-
90
1,610
Annual report 2016 Table 4.7.c Development in fair value of plan assets
(EURm)
Fair value of plan assets at 1 January
Reclassification
Interest income
Return on plan assets excluding interest income (other comprehensive income)
Contributions to plans
Benefits paid
Administration expenses
Exchange rate adjustments
Fair value of plan assets at 31 December
The Group expects to contribute EUR 36 million to the plan assets in 2017 and EUR 136 million in 2018-2021.
Actual return on plan assets:
Calculated interest income
Return excluding calculated interest
Actual return
125
2016
2015
1,316
-
44
150
34
-48
-2
-184
1,310
1,187
16
46
-17
70
-57
-2
73
1,316
44
150
194
46
-17
29
Maturity of pension liability at 31 December 2016
(EURm)
Maturity of pension liability at 31 December 2015
(EURm)
600
500
400
300
200
100
0
600
500
400
300
200
100
0
>1Y
1-5Y
5-10Y
10-20Y
20-30Y
30-40Y
>40Y
>1Y
1-5Y
5-10Y
10-20Y
20-30Y
30-40Y
>40Y
UK
Sweden
Other
Total
Total
1,425
196
58
1,679
>1Y
55
9
3
67
1-5Y
192
34
11
237
5-10Y 10-20Y 20-30Y 30-40Y
141
16
3
160
446
58
19
523
283
36
8
327
247
37
13
297
>40Y
61
6
1
68
UK
Sweden
Other
Total
Total
1,364
194
52
1,610
>1Y
54
9
2
65
1-5Y
198
33
10
241
5-10Y 10-20Y 20-30Y 30-40Y
120
17
3
140
435
57
17
509
248
36
12
296
260
36
7
303
>40Y
49
6
1
56
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 126
Table 4.7.d Sensitivity of defined benefit liabilities to key assumptions
(EURm)
2016
2016
2015
2015
Impact on defined liabilities at 31 December 2016
Discount rate +/- 10bps
Salary increases +/- 10bps
Life expectancy +/- 1 year
Inflation +/- 10 bps
Table 4.7.e Pension assets recognised on the balance sheet
(EURm)
Diversified Growth Funds
Liability-Driven Investments
Absolute Return Bonds
Equity instruments
Properties
Bonds
Other assets
Total assets
+
-25
2
66
18
2016
486
246
198
154
130
11
85
1,310
-
25
-2
-66
-18
%
37%
19%
15%
12%
10%
1%
6%
100%
+
-27
15
47
44
2015
503
175
199
200
154
10
75
1,316
-
26
-15
-47
-44
%
38%
13%
15%
15%
12%
1%
6%
100%
Pension assets are invested in a diversified portfolio including equity and debt instruments, structured investment products, as well as properties. Structured
investments include the following:
Diversified Growth Funds are pooled funds invested in a range of return-seeking asset classes, including equity and debt instruments. Liability-Driven Investments
is a method of investing where the portfolio of assets is built with the objective of its value moving in line with the respective scheme’s liabilities, which is typically
invested in government bonds and swaps. Absolute Return Bonds are pooled funds, which aim to provide a positive return in different market conditions, using mainly
bond-type assets or derivatives to obtain exposure that matches the bond markets.
Table 4.7.f Recognised in the income statement for the year
(EURm)
Current service cost
Administration cost
Curtailments and settlements
Recognised as staff costs
Interest cost on obligations
Interest income on plan assets
Recognised as financial (gains)/losses
2016
2015
4
2
-3
3
3
2
-
5
52
-44
8
55
-46
9
Total amount recognised in the income statement
11
14
Table 4.7.g Recognised in other comprehensive income
(EURm)
Accumulated actuarial gains/(losses) at 1 January
Actuarial gains/(losses) for the year
Accumulated actuarial gains/(losses) at 31 December
Table 4.7.h Assumptions for the actuarial calculations at the balance sheet date are:
Discount rate, Sweden
Discount rate, UK
Expected payroll increase, Sweden
Expected payroll increase, UK
Inflation (CPI), UK
Inflation (CPI), Sweden
2016
2015
-155
-132
-287
-189
34
-155
2016
2.8%
2.7%
2.2%
4.5%
2.2%
1.7%
2015
3.4%
3.8%
2.4%
4.3%
2.0%
1.5%
Annual report 2016 127
Accounting policies
Pension liabilities and
similar non-current liabilities
The Group has entered post-employ-
ment pension plan agreements with a
significant number of employees. The
post-employment pension plan
agreements take the form of defined
benefit plan and defined contribution
plan agreements.
Defined contribution plans
For defined contribution plans, the
Group pays fixed contributions to
independent pension companies.
The Group has no obligation to make
supplementary payments beyond
those fixed payments, and the risk and
reward of the value of the pension
plan therefore rests with the plan
members, and not the Group.
Amounts payable for contributions to
defined contribution plans are
expensed in the income statement as
incurred.
Defined benefit plans
Defined benefit plans are character-
ised by the Group’s obligation to make
specific payments from the date the
plan member is pensioned, depending
on, for example, the member’s
seniority and final salary. The Group is
subject to the risks and rewards
associated with the uncertainty that
the return generated by the assets are
able to meet the pension liability,
which are affected by assumptions
concerning mortality and inflation.
The Group provides both funded and
unfunded defined benefit plans to
certain employees. Funded plans are
where the Group pays cash
contributions into a separately
administered fund, which invests the
contributions into various assets, with
the aim of generating returns to meet
present and future pension liabilities.
Unfunded plans are where no cash or
other assets are set aside from the
Group’s assets used in operations to
cover the future pension liability.
The Group’s net liability is the amount
presented on the balance sheet as
pension liability.
The net liability is calculated
separately for each defined benefit
plan. The net liability is the amount of
future pension benefits that
employees have earned in current and
prior periods (i.e. the liability for
pension payments for the portion of
the employee’s estimated final salary
earned at the balance sheet date)
discounted to a present value (the
defined benefit liability), less the fair
value of assets held separately from
the Group in a plan fund.
changes arising from contributions
and benefit payments. The net
interest cost and other costs relating
to defined benefit plans are
recognised in the income statement.
The provision primarily covers defined
benefit plans in the UK and Sweden.
The Group uses qualified actuaries to
annually calculate the defined benefit
liability using the projected unit credit
method.
The balance sheet amount of the net
obligation is impacted by remeasure-
ment, which includes the effect of
changes in assumptions used to
calculate the future liability (actuarial
gain and losses) and the return
generated on plan assets (excluding
interest). Remeasurements are
recognised through other compre-
hensive income.
Interest cost for the period is
calculated using the discounted rate
used to measure the defined benefit
liability at the start of the reporting
period applied to the carrying amount
of the net liability, taking into account
Uncertainties
and estimates
The costs relating to defined benefit
pension plans and their carrying
amounts are assessed based on a
number of assumptions, including
discount rates, inflation rates, salary
growth and mortality. A small
difference in actual experience
compared to assumptions and any
changes in assumptions can have a
significant impact on the carrying
amount of the net liability.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
128
Note 5
Other areas
Annual report 2016 129
Note 5.1 Tax
Financial comment
Tax in the income statement
The 2016 tax cost is EUR 42 million
and on the same level as last year. Of
the total tax cost, EUR 10 million,
compared to EUR 8 million in 2015,
relates to cooperative tax and EUR 16
million compared to EUR 11 million in
2015, to corporate tax. The effect of
higher current taxes in 2016 has been
offset by a reduced deferred tax cost.
Read more about our tax affairs on
page 78.
Deferred tax
The net deferred tax liability
increased to EUR 6 million in 2016
from EUR 1 million in 2015.
Deferred tax assets are primarily based
on temporary differences on property,
plant and equipment together with
pension liabilities. Deferred tax
liabilities mainly relate to provisions
and other temporary differences on
property, plant and equipment.
The 2016 increase is explained
through the utilisation of tax losses
carried forward and temporary
differences arising from other
liabilities, as well as differences in
accounting and tax depreciation on
property, plant and equipment.
Net deferred tax liability amounted to
EUR 6 million, of which EUR 45 million
related to accumulated movements
recognised as net income in other
comprehensive income and EUR 51
million as net cost in the income
statement.
A deferred tax asset of EUR 154 million
was not recognised, as the Group does
not expect to be able to utilise it
within the near future. In 2015 the
unrecognised deferred tax asset
amounted to EUR 110 million.
Table 5.1.a Tax in the income statement
(EURm)
Cooperative tax
Current tax
Deferred tax
Change in deferred tax resulting from a change in the tax rate
Adjustment regarding previous years, actual tax
Adjustment regarding previous years, deferred tax
Total tax in the income statement
Table 5.1.b Calculation of effective tax rate
(EURm)
Statutory corporate income tax rate in Denmark
Net deviation in foreign subsidiaries' tax rates compared with the Danish tax rate
Adjustment for cooperative tax
Net non-taxable income less non-tax-deductible costs
Change in tax percentage
Adjustment regarding previous years
Other adjustments
Effective tax rate
2016
2015
10
16
8
-
3
5
42
8
11
14
2
6
1
42
2016
22.0%
-3.7%
-13.1%
-5.0%
0.1%
2.0%
8.2%
10.5%
2015
23.5%
-2.9%
-23.3%
3.5%
0.5%
2.1%
9.0%
12.4%
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
130
Table 5.1.c Deferred tax
(EURm)
Intangible
assets
Property,
plant and
equipment
Financial
assets
Current
assets
Provisions
Other
liabilities
Tax loss
carry-
forwards
Other
category
Total
2016
Net deferred tax asset/liability at 1 January
Income/charge to the income statement
Income/charge to other comprehensive income
Change in tax rate
Exchange rate adjustment
Other adjustments
Net deferred tax asset/liability at 31 December
Specification:
Deferred tax asset at 31 December
Deferred tax liability at 31 December
2015
Net deferred tax asset/liability at 1 January
Income/charge to the income statement
Income/charge to other comprehensive income
Change in tax rate
Exchange rate adjustment
Other adjustments
Net deferred tax asset/liability at 31 December
Specification:
Deferred tax asset at 31 December
Deferred tax liability at 31 December
-1 1 2 -3 26 5 10 -41 -1
- -2 -5 - -8 3 -3 2 -13
- - - - 21 -4 - -1 16
- -2 - - 2 - - - -
-1 -3 - - -3 - -1 - -8
- 14 - - -11 -3 - - -
-2 8 -3 -3 27 1 6 -40 -6
- 39 - - 28 1 6 - 74
-2 -31 -3 -3 -1 - - -40 -80
- -10 11 - 40 2 13 -30 26
- 6 2 - -20 -1 -2 - -15
- - - -1 -13 - - - -14
- -3 - - 2 - -1 - -2
- - - - 4 - - - 4
-1 8 -11 -2 13 4 - -11 -
-1 1 2 -3 26 5 10 -41 -1
- 32 - - 17 5 10 - 64
-1 -31 2 -3 9 - - -41 -65
earnings or by offsetting against
deferred tax payable in companies
within the same legal tax entity or
jurisdiction.
Deferred tax is calculated at the tax
rates that are expected to apply to the
respective countries and the period in
which the asset will be realised or the
liability is settled, based on tax rules
and tax rates that are enacted or
substantively enacted at the reporting
date. Changes in deferred tax assets
and liabilities as a result of changes in
the tax rate are recognised in the
comprehensive income for the year.
Uncertainties
and estimates
Deferred tax
Deferred tax reflects assessments of
actual future tax due for items in the
financial statements, taking into
account timing and probability. These
estimates also reflect expectations
about future taxable profits and the
Group’s tax planning. Actual future
taxes may deviate from these
estimates as a result of changes to
expectations relating to future taxable
income, future statutory changes in
income taxation or the outcome of
tax authorities’ final review of the
Group’s tax returns. Recognition of a
deferred tax asset also depends on
an assessment of the future use of
the asset.
Accounting policies
Tax in the income statement
Taxable income is assessed according
to national rules and regulations that
apply to the entities in the Group. Tax
is assessed on the basis of cooperation
or income tax.
Tax in the income statement comprises
current tax and adjustments to
deferred tax. Tax is recognised in the
income statement, except to the
extent that it relates to a business
combination or items (earnings and
costs) recognised directly in equity or
in other comprehensive income.
Current tax
Current tax is assessed on the basis of
cooperation or income tax.
Cooperative taxation is based on
capital, while income tax is based on
the company’s income for the year.
Current tax payable and receivable are
recognised in the balance sheet as tax
calculated on the taxable income for
the year, adjusted for any tax from
previous years’ taxable income as well
as prepaid on-account taxes. The
amount is calculated using tax rates
enacted or substantively enacted at
the balance sheet date.
Deferred tax
Deferred tax and related adjustments
for the year are calculated applying
the balance sheet liability method, this
is the temporary differences between
carrying amounts and the tax base of
assets and liabilities.
Deferred tax is not recognised on
temporary differences relating to
goodwill, which is not deductible for
tax purposes, or arising at the
acquisition date of an asset or liability
without affecting either the profit or
loss for the year or taxable income,
with the exception of those arising
from business combinations.
Deferred tax assets, including the
value of tax losses carried forward, are
recognised under other non-current
assets at the value at which they are
expected to be used, either by
elimination in the tax of future
Annual report 2016
131
Note 5.2 Fees to auditors appointed by the Board of Representatives
Fees paid to EY
The fees to auditors are attributable
to EY.
Table 5.2 Fees to auditors appointed by the Board of Representatives
(EURm)
Statutory audit
Other assurance engagements
Tax assistance
Other services
Total fees to auditors
2016
2015
1.3
0.1
1.4
1.4
4.2
1.2
-
1.1
1.6
3.9
Note 5.3 Management remuneration and transactions
Financial comment
The remuneration of the Executive
Board is proposed by the Chairman-
ship and approved by the Board of
Directors. Principles applied to
management remuneration are
described on page 34. Remuneration
for the Board of Directors is approved
by the Board of Representatives.
Remuneration is negotiated on an
annual basis. Related parties exercising
significant influence comprise the
Board of Directors and Executive
Board. Members of the Board of
Directors are paid for milk supplies to
Arla Foods amba on equal terms with
other owners of the company.
Table 5.3.a Management remuneration
(EURm)
Board of Directors
Wages, salaries and remuneration
Total
Executive Board
Fixed compensation
Pension
Other benefits
Short-term variable incentives
Long-term variable incentives
Total
Table 5.3.b Transactions with the Board of Directors
(EURm)
Purchase of goods
Supplementary payments received regarding previous years
Total
Trade payables
Owner accounts
Total
2016
2015
1.3
1.3
1.4
1.4
2.2
0.3
0.1
0.6
0.2
3.4
2.1
0.3
0.1
0.5
0.3
3.3
2016
2015
10.7
0.3
11.0
10.7
0.3
11.0
0.7
2.3
3.0
0.6
2.1
2.7
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
132
Note 5.4 Contractual commitments and contingent liabilities
Financial comment
The Group is party to a small number
of lawsuits, disputes, and other claims.
Management believes that the
outcome of these will not impact the
Group’s financial position beyond
what is already recognised in the
balance sheet and/or disclosed in the
financial statements.
As security for mortgage debt based
on the Danish Mortgage Act with a
nominal value of EUR 817 million,
compared with EUR 720 million at 31
December 2015, the Group provided
security in property as security for the
debt.
Contingent assets
The Finnish Supreme Administrative
Court ruled on 29 December 2016,
that the Finnish dairy company Valio
violated the applicable competition
law rules by its predatory pricing on
the fresh liquid milk market in Finland.
The decision is final. The violations by
Valio have led to losses for Arla in
previous years, for which Arla has
raised a claim for damages of
approximately EUR 58 million. This
civil claim for damages is being
pursued by Arla before the Helsinki
District Court in Finland. We expect
the court proceedings to continue
throughout the course of 2017.
Table 5.4 Contractual commitments and contingent liabilities
(EURm)
Guarantee commitments
0-1 years
1-5 years
Over 5 years
Operating rent and lease commitments
2016
2015
5
5
58
126
32
216
65
118
43
226
Commitments in relation to agreements on the purchase of intangible assets
Commitments in relation to agreements on the purchase of property, plant and equipment
Total commitments in relation to agreements
-
92
92
6
139
145
Uncertainties
and estimates
The Group has entered into a number
of lease agreements. Management
assesses the substance of the
agreements in order to classify the
lease agreements as either financial or
operating leases. The Group has
mainly entered into lease agreements
for standardised assets that are
short-term in relation to the asset’s
useful lives. As such, the lease
agreements have been classified as
operating leases.
Note 5.5 Events after the balance sheet date
No events with a significant impact on the business have occurred after the
balance sheet date.
Annual report 2016
133
amount that reflects the consideration
to which an entity expects to be
entitled in exchange for transferring
goods or services to a customer.
The standard is endorsed by EU in
October 2016 and will be effective for
annual periods beginning on or after
1 January 2018. The standard will
apply for all industries, where there is
revenue from contracts with
customers.
The Group performed a preliminary
assessment of IFRS 15 including a
high-level analysis of the most
complex contracts with complex price
structures like variable considerations,
right of returns etc. This high level
analysis indicates that the new
standard would not have any material
impact on Group figures. The impact
will continuously be analysed and the
Group expects to adopt the new
standard on 1 January 2018.
In January 2016, the IASB issued the
final version of IFRS 16 “Leases”.
The standard, which is effective for
annual periods beginning on or after
1 January 2019, brings significant
changes to the treatment of leasing
contracts currently treated as
operating leases. At the moment, no
in-depth analysis of the impact of the
new standard has been performed.
The standard is expected to have
some impact on the consolidated
financial statements, as a significant
part of the Group’s operating leases
will be required to be recognised on
the balance sheet.
Other new or revised accounting
standards and implementations are
not expected to have a material
impact on the consolidated financial
statements of the Group.
Note 5.6 General accounting policies
Consolidated financial
statements
The consolidated financial statements
included in this Annual report have
been prepared in accordance with the
International Financial Reporting
Standards (IFRS) as adopted by the
EU and additional disclosure
requirements in the Danish Financial
Statement Act for class C large
companies. Arla is not an EU public
interest entity, as the Group has no
debt instruments traded on a
regulated EU market place. The
consolidated financial statements
were authorised for issue by the
Company’s Board of Directors on
21 February 2017 and presented
for approval by the Board of
Representatives on 1 March 2017.
The consolidated financial statements
are prepared as a compilation of the
parent company’s and the individual
subsidiaries’ financial statements
prepared under the Group’s
accounting policies. Revenue, costs,
assets, liabilities together with items
included in the equity of subsidiaries
are aggregated and presented on a
line-by-line basis in the consolidated
financial statements. Intra-group
shareholdings, balances and
transactions as well as any unrealised
income and expenses arising from
intra-group transactions are
eliminated.
The consolidated financial statements
comprise Arla Foods amba (parent
company) and the subsidiaries in
which the parent company directly or
indirectly holds more than 50 per cent
of the voting rights or otherwise
maintains control in order to obtain
benefits from its activities. Entities in
which the Group exercises joint
control through a contractual
arrangement are considered to be
joint ventures. Entities in which the
Group exercises a significant but not
controlling influence are considered
to be associates. A significant
influence is typically obtained by
holding or having at the Group’s
disposal, directly or indirectly, more
than 20 per cent but less than 50 per
cent of the voting rights in an entity.
Unrealised gains (i.e. profits arising
from sales to joint ventures or
associates, whereby the customer
pays with funds partly owned by the
Group) from transactions with joint
ventures and associates are
eliminated against the carrying
amount of the investment in
proportion to the Group’s interest in
the company. Unrealised losses are
eliminated in the same way as
unrealised gains, but only to the
extent that there is no evidence of
impairment.
The consolidated financial statements
are prepared on a historical cost basis
except for certain items with alternative
measurement bases, which are
identified in these accounting policies.
Translation of transactions
and monetary items in foreign
currencies
For each reporting entity in the Group,
a functional currency is determined,
being the currency used in the
primary economic environment where
the entity operates. Where a reporting
entity transacts in a foreign currency,
it will record the transaction in its
functional currency using the
transaction date rate. Monetary assets
and liabilities denominated in foreign
currencies are translated into the
functional currency using the exchange
rate applicable at the reporting date.
Exchange differences are recognised in
the income statement under financial
items. Non-monetary items, e.g.
property, plant and equipment which
are measured based on historical cost
in a foreign currency, are translated into
the functional currency on initial
recognition.
Translation of foreign operations
The assets and liabilities of consolidated
entities, including the share of net
assets and goodwill of joint ventures
and associates with a functional
currency other than EUR, are
translated into EUR using the year-end
exchange rate. The revenue, costs and
share of the results for the year are
translated into EUR using the average
monthly exchange rate if this does not
differ materially from the transaction
date rate. Foreign currency differences
are recognised in other comprehensive
income and accumulated in the
translation reserve.
transferred to the results for the year
along with any gains or losses related
to the divestment. Repayment of
outstanding balances considered part
of the net investment is not in itself
considered to be a partial divestment
of the subsidiary.
Alternative
performance measures
The Group presents a range of
financial measures in the consolidated
annual report that are not defined
according to IFRS. The Group believes
that these measures provide valuable
information to external stakeholders
and management and enable better
evaluation of overall performance and
trends. The financial measures should
not be considered as a replacement
for performance measures as defined
under IFRS, but rather as supplemen-
tary information.
Adoption of new
or amended IFRSs
The Group has implemented all new
standards and interpretations effective
in the EU from 2016. None of these
newly adopted standards and
interpretations have had or are
expected to have an impact on the
consolidated financial statements
of Arla.
IASB has issued a number of new or
amended and revised accounting
standards and interpretations that
have not yet come into effect. Arla
expect to incorporate the new
standards when they become
mandatory.
In November 2016, the EU endorsed
IFRS 9 “Financial Instruments” which is
effective for annual periods beginning
on or after 1 January 2018. A
preliminary assessment has been
performed which shows that the new
standard would not have any material
impact on classification of Group
financial assets. Furthermore it is not
expected that the new three-step
expected loss model for trade
receivables or the change in hedge
accounting will have a material impact
on recognition or measurement in the
Group figures.
On partial divestment of associates
and joint ventures, the relevant
proportional amount of the
cumulative foreign currency
translation adjustment reserve is
IFRS 15 was issued in May 2014 and
establishes a five-step model to
account for revenue arising from
contracts with customers. Under IFRS
15, revenue is recognised at an
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 134
Note 5.7 Group companies
Company name
Arla Foods amba
Arla Foods Ingredients Group P/S
Arla Foods Ingredients Energy A/S
Arla Foods Ingredients KK
Arla Foods Ingredients Inc.
Arla Foods Ingredients Korea, Co. Ltd.
Arla Foods Ingredients Trading (Beijing) Co. Ltd.
Arla Foods Ingredients S.A. *
Arla Foods Ingredients Singapore Pte. Ltd.
Arla Foods Ingredients S.A. de C.V.
AFI Partner ApS
Cocio Chokolademælk A/S
CBI P/S
CBI GP ApS
Andelssmør A.m.b.a.
Aktieselskabet J. Hansen
J.P. Hansen Inc.
Mejeriforeningen
Arla Foods Holding A/S
Arla Foods Distribution A/S
Cocio Chokolademælk A/S
Arla Foods International A/S
Arla Foods UK Holding Ltd
Arla Foods UK plc
Arla Foods Finance Ltd
Arla Foods Holding Co. Ltd
Arla Foods UK Services Ltd
Arla Foods Naim Limited
Arla Foods Limited
Milk Link Holdings Ltd.
Milk Link Processing Ltd.
Milk Link (Crediton No 2) Limited
Milk Link Investments Ltd.
The Cheese Company Holdings Ltd.
The Cheese Company Ltd.
Cornish Country Larder Ltd.
The Cheese Company Investments Ltd.
Westbury Dairies Ltd.
Arla Foods (Westbury) Ltd.
Arla Foods Cheese Company Ltd. UK
Arla Foods Ingredients UK Ltd.
MV Ingredients Ltd. *
Arla Foods UK Property Co. Ltd.
Arla Foods B.V.
Arla Foods Ltda
Danya Foods Ltd.
AF A/S
Arla Foods Finance A/S
Kingdom Food Products ApS
Ejendomsanpartsselskabet St. Ravnsbjerg
Arla Insurance Company (Guernsey) Ltd
Arla Foods Energy A/S
Arla Foods Trading A/S
Arla DP Holding A/S
Arla Foods Investment A/S
Arla Senegal SA.
Tholstrup Cheese A/S
Tholstrup Cheese USA Inc.
Arla Foods Belgium A.G.
Walhorn Verwaltungs GmbH
Arla Foods Ingredients (Deutschland) GmbH
Arla Tagatose Holding GmbH
Arla CoAr Holding GmbH
ArNoCo GmbH & Co. KG *
Arla Biolac Holding GmbH
Biolac GmbH & Co. KG *
Biolac Verwaltungs GmbH *
Country
Currency
Group
Equity
interest (%)
Denmark
Denmark
Denmark
Japan
USA
Korea
China
Argentina
Singapore
Mexico
Denmark
Denmark
Denmark
Denmark
Denmark
Denmark
USA
Denmark
Denmark
Denmark
Denmark
Denmark
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Netherlands
Brazil
Saudi Arabia
Denmark
Denmark
Denmark
Denmark
Guernsey
Denmark
Denmark
Denmark
Denmark
Senegal
Denmark
USA
Belgium
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
DKK
DKK
DKK
JPY
USD
KRW
CNY
USD
SGD
MZN
DKK
DKK
DKK
DKK
DKK
DKK
USD
DKK
DKK
DKK
DKK
DKK
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
EUR
BRL
SAR
DKK
DKK
DKK
DKK
DKK
DKK
DKK
DKK
DKK
XOF
DKK
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
100
100
100
100
100
100
50
100
100
100
50
100
100
98
100
100
91
100
100
50
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
50
100
100
100
75
100
100
100
100
100
100
100
100
100
100
100
100
99
100
100
100
100
50
100
50
50
Annual report 2016 135
Company name
Country
Currency
Group
Equity
interest (%)
Arla Foods Kuwait Company LLC
Arla Kallassi Foods Lebanon S.A.L.
Arla Foods Qatar WLL
AFIQ WLL **
Arla Foods Trading and Procurement Ltd.
Arla Foods Sdn. Bhd.
Arla Foods Panama S.A.
Dofo Cheese Inc.
Arla Foods Limited
Arla Global Dairy products Ltd.
TG Arla Dairy Products LFTZ Enterprise
TG Arla Dairy Products Ltd.
Arla Milk Link Limited
Arla Foods AB
Boxholm Mejeri AB
Arla Oy Ab
Ranuan Meijeri Oy
Massby Facility & Services Oy
Osuuskunta MS tuottajapalvelu **
Restaurang akademien Aktiebolag **
Vardagspuls AB
Arla Foods Russia Holding AB
Arla Foods LLC
L&L International AB
Milko Sverige AB
Videbæk Biogas A/S **
Arla Foods Inc.
WNY Cheese Enterprise LLC **
Arla Foods Production LLC
Arla Foods Transport LLC
Arla Foods SA
COFCO Dairy Holdings Limited **
Arla Foods Inc.
Arla Global Financial Services Centre Sp. Z.o.o.
Arla National Foods Products LLC
Arla Foods FZE
Arla Foods Deutschland GmbH
Arla Foods Verwaltungs GmbH
Arla Foods Agrar Service GmbH
Arla Foods LLC
Martin Sengele Produits Laitiers SAS
Team-Pack GmbH
Arla Foods France, S.a.r.l
Arla Foods Agrar Service Luxemburg GmbH
Arla Foods Agrar Service Belguim AG
Hansa Verwaltungs und Vertriebs GmbH
Arla Foods Logistics GmbH
Vigor Alimentos S.A. **
Arla Foods Srl
Arla Foods S.a.r.l.
Arla Foods AS
Arla Foods S.A.
Arla Foods Hellas S.A.
Svensk Mjölk Ekonomisk förening **
Lantbrukarnas Riksförbund upa **
Arla Foods UK Farmers JV Company Limited
Arla Côte d'lvoire
Arla Foods Mayer Australia Pty, Ltd.
Arla Foods S.R.L.
Arla Foods Bangladesh Ltd.
Arla Foods Dairy Products Technical Service (Beijing) Co. Ltd.
Dofo Cheese Eksport K/S
Dofo Inc.
Marygold Trading K/S
Arju For Food Industries S.A.E.
Arla Foods Mexico S.A. de C.V.
Kuwait
Lebanon
Qatar
Bahrain
Hong Kong
Malaysia
Panama
Philippines
Ghana
Nigeria
Nigeria
Nigeria
UK
Sweden
Sweden
Finland
Finland
Finland
Finland
Sweden
Sweden
Sweden
Russia
Sweden
Sweden
Denmark
USA
USA
USA
USA
Poland
Hong Kong
Canada
Poland
UAE
UAE
Germany
Germany
Germany
Russia
France
Germany
France
Luxembourg
Belgium
Germany
Germany
Brazil
Italy
France
Norway
Spain
Greece
Sweden
Sweden
UK
Ivory Coast
Australia
Dominican Republic
Bangladesh
China
Denmark
USA
Denmark
Egypt
Mexico
KWD
USD
QAR
BHD
HKD
MYR
USD
PHP
GHS
NGN
NGN
NGN
GBP
SEK
SEK
EUR
EUR
EUR
EUR
SEK
SEK
SEK
RUB
SEK
SEK
DKK
USD
USD
USD
USD
PLN
HKD
CAD
PLN
AED
AED
EUR
EUR
EUR
RUB
EUR
EUR
EUR
EUR
EUR
EUR
EUR
BRL
EUR
EUR
NOK
EUR
EUR
SEK
SEK
GBP
XOF
AUD
DOP
BDT
CNY
DKK
USD
DKK
EGP
MXN
49
50
40
25
100
100
100
100
100
100
50
100
100
100
100
100
99
60
39
50
100
100
80
100
100
33
100
20
100
100
100
30
100
100
40
100
100
100
100
20
100
100
100
100
100
100
100
8
100
100
100
100
100
73
23
100
51
51
100
51
100
100
100
100
49
100
* Joint ventures ** Associates *** Joint operation
The Group also owns a number of entities without material commercial activities.
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements 136
Independent
auditor’s report
To the owners of Arla Foods amba
Opinion
We have audited the consolidated
financial statements and the parent
company financial statements of Arla
Foods amba for the financial year
1 January – 31 December 2016, which
comprise income statement,
statement of comprehensive income,
balance sheet, statement of changes
in equity, statement of cash flow and
notes, including a summary of
significant accounting policies, for the
Group as well as for the parent
company. The consolidated financial
statements and the parent company
financial statements are prepared in
accordance with International
Financial Reporting Standards as
adopted by the EU and additional
disclosure requirements of the Danish
Financial Statements Act.
In our opinion, the consolidated
financial statements and the parent
company financial statements give a
true and fair view of the financial
position of the Group and the parent
company at 31 December 2016 and
of the results of the Group’s and the
Parent Company’s operations and
cash flows for the financial year
1 January – 31 December 2016 in
accordance with International
Financial Reporting Standards as
adopted by the EU and additional
disclosure requirements of the Danish
Financial Statements Act.
Basis for opinion
We conducted our audit in accordance
with International Standards on
Auditing (ISAs) and the additional
requirements applicable in Denmark.
Our responsibilities under those
standards and requirements are
further described in the “Auditor’s
responsibilities for the audit of the
consolidated financial statements and
the parent company financial
statements” section of our report.
We are independent of the Group in
accordance with the International Ethics
Standards Board for Accountants’
Code of Ethics for Professional
Accountants (IESBA Code) and
additional requirements applicable in
Denmark, and we have fulfilled our
other ethical responsibilities in
accordance with these rules and
requirements. We believe that the
audit evidence we have obtained is
sufficient and appropriate to provide
a basis for our opinion.
Statement on
Management’s review
Management is responsible for the
Management’s review.
Our opinion on the consolidated
financial statements and the parent
company financial statements does
not cover the Management’s review,
and we do not express any assurance
conclusion thereon.
In connection with our audit of the
consolidated financial statements and
the parent company financial
statements, our responsibility is to
read the Management’s review and,
in doing so, consider whether the
Management’s review is materially
inconsistent with the consolidated
financial statements or the parent
company financial statements or our
knowledge obtained during the audit,
or otherwise appears to be materially
misstated.
Moreover, it is our responsibility to
consider whether the Management’s
review provides the information
required under the Danish Financial
Statements Act.
Based on our procedures, we conclude
that the Management’s review is in
accordance with the consolidated
financial statements and the parent
company financial statements and has
been prepared in accordance with the
requirements of the Danish Financial
Statements Act. We did not identify
any material misstatement of the
Management’s review.
Management’s responsibilities for
the consolidated financial
statements and the parent
company financial statements
Management is responsible for the
preparation of consolidated financial
statements and parent company
financial statements that give a true
and fair view in accordance with
International Financial Reporting
Standards as adopted by the EU and
additional disclosure requirements of
the Danish Financial Statements
Act, and for such internal control as
Management determines is necessary
to enable the preparation of
consolidated financial statements
and parent company financial
statements that are free from material
misstatement, whether due to fraud
or error.
In preparing the consolidated financial
statements and the parent company
financial statements, Management is
responsible for assessing the Group’s
and the Parent Company’s ability to
continue as a going concern,
disclosing, as applicable, matters
related to going concern and using
the going concern basis of accounting
in preparing the consolidated financial
statements and the parent company
financial statements unless
Management either intends to
liquidate the Group or the Parent
Company or to cease operations, or has
no realistic alternative but to do so.
Auditor’s responsibilities for the
audit of the consolidated financial
statements and the parent
company financial statements
Our objectives are to obtain
reasonable assurance about whether
the consolidated financial statements
and the parent company financial
statements as a whole are free from
material misstatement, whether due
to fraud or error, and to issue an
auditor’s report that includes our
opinion. Reasonable assurance is a
high level of assurance, but is not a
guarantee that an audit conducted in
Annual report 2016 137
accordance with ISAs and additional
requirements applicable in Denmark
will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or
error and are considered material if,
individually or in the aggregate, they
could reasonably be expected to
influence the economic decisions of
users taken on the basis of these
consolidated financial statements and
parent company financial statements.
As part of an audit conducted in
accordance with ISAs and additional
requirements applicable in Denmark,
we exercise professional judgment
and maintain professional skepticism
throughout the audit. We also:
Identify and assess the risks of
material misstatement of the
consolidated financial statements
and the parent company financial
statements, whether due to fraud or
error, design and perform audit
procedures responsive to those
risks, and obtain audit evidence that
is sufficient and appropriate to
provide a basis for our opinion. The
risk of not detecting a material
misstatement resulting from fraud is
higher than for one resulting from
error, as fraud may involve collusion,
forgery, intentional omissions,
misrepresentations, or the override
of internal control.
Obtain an understanding of internal
control relevant to the audit in order
to design audit procedures that are
appropriate in the circumstances,
but not for the purpose of
expressing an opinion on the
effectiveness of the Group’s and the
Parent Company’s internal control.
Evaluate the appropriateness of
accounting policies used and the
reasonableness of accounting
estimates and related disclosures
made by Management.
Conclude on the appropriateness of
Management’s use of the going
concern basis of accounting in
preparing the consolidated financial
statements and the parent
company financial statements and,
based on the audit evidence
obtained, whether a material
uncertainty exists related to events
or conditions that may cast
significant doubt on the Group’s and
the Parent Company’s ability to
continue as a going concern. If we
conclude that a material
uncertainty exists, we are required
to draw attention in our auditor’s
report to the related disclosures in
the consolidated financial
statements and the parent
company financial statements or, if
such disclosures are inadequate, to
modify our opinion. Our conclusion
is based on the audit evidence
obtained up to the date of our
auditor’s report. However, future
events or conditions may cause the
Group and the Parent Company
to cease to continue as a going
concern.
Evaluate the overall presentation,
structure and contents of the
consolidated financial statements
and the parent company financial
statements, including the
disclosures, and whether the
consolidated financial statements
and the parent company financial
statements represent the
underlying transactions and events
in a manner that gives a true and fair
view.
Obtain sufficient appropriate audit
evidence regarding the financial
information of the entities or
business activities within the Group
to express an opinion on the
consolidated financial statements.
We are responsible for the direction,
supervision and performance of the
group audit. We remain solely
responsible for our audit opinion.
We communicate with those charged
with governance regarding, among
other matters, the planned scope and
timing of the audit and significant
audit findings, including any significant
deficiencies in internal control that we
identify during our audit.
Aarhus, 21 February 2017
Ernst & Young
Godkendt Revisionspartnerselskab
CVR no. 30 70 02 28
Jesper Ridder Olsen
State Authorised Public Accountant
Morten Friis
State Authorised Public Accountant
Business review | Strategy | Governance | Performance | Risk and opportunity | Values and considerations | Consolidated financial statements
138
Statement by the
Board of Directors and
the Executive Board
Today, the Board of Directors and the
Executive Board discussed and
approved the annual report of Arla
Foods amba for the financial year
2016. The annual report has been
prepared in accordance with
International Financial Reporting
Standards as adopted by the EU and
additional disclosure requirements in
the Danish Financial Statements Act.
It is our opinion, that the consolidated
financial statements and the parent
company financial statements give a
true and fair view of the Group’s and
the parent company’s financial
position as at 31 December 2016 and
of the results of the Group’s and the
parent company’s activities and
cash flows for the financial year
1 January – 31 December 2016.
In our opinion, the management’s
review of the annual report includes a
true and fair view of the developments
of the Group’s and the parent
company’s financial position, activities,
financial matters, results for the year
and cash flows, as well as a description
of the most significant risks and
uncertainties that may affect the
Group and the parent company.
We hereby recommend the annual
report for adoption by the Board of
Representatives.
Aarhus, 21 February 2017
Peder Tuborgh
CEO
Povl Krogsgaard
Vice CEO
Åke Hantoft
Chairman
Jan Toft Nørgaard
Vice Chairman
Viggo Ø. Bloch
Palle Borgström
Jonas Carlgren
Manfred Graff
Heléne Gunnarson
Markus Hübers
Bjørn Jepsen
Thomas Johansen
Steen Nørgaard Madsen
Torben Myrup
Jonathan Ovens
Johnnie Russell
Manfred Sievers
Haakan Gillström
Employee
representative
Ib Bjerglund Nielsen
Employee
representative
Harry Shaw
Employee
representative
Annual report 2016 Corporate calendar
Financial reports and major events
1 – 2 March 2017
Board of Representatives meeting in Sweden
2 March 2017*
23 May 2017
Publication of consolidated annual report for 2016
Board of Representatives meeting in Denmark
25 August 2017
Publication of consolidated half-year report for 2017
11 – 12 October 2017
Board of Representatives meeting in Sweden
* Dependent on Board of Representatives approval.
E N
DIC
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O
N
V I RONME
N
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A
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A
B
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Arla Foods amba
Sønderhøj 14
DK-8260 Viby J.
Denmark
CVR no.: 25 31 37 63
Arla Foods UK plc
4 Savannah Way
Leeds Valley Park
Leeds, LS10 1AB
England
Phone +45 89 38 10 00
E-mail arla@arlafoods.com
Phone +44 113 382 7000
E-mail arla@arlafoods.com
www.arla.com
www.arlafoods.co.uk