CONSOLIDATED ANNUAL REPORT
2017
Driving
innovation
in dairy
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As people all over the world
are focusing on obtaining the
most out of life, a healthy
lifestyle is becoming the new
normal. How we fuel ourselves
and our families starts by what
we find in our fridge.
At Arla, we create innovative
products that delight consumers
and help them live a balanced
and healthier life. We push
the boundaries of science and
technology to build a bright
future for dairy, and natural
food for everyone.
Project management: Corporate external reporting, Arla. Copy, design and production: We Love People.
Translation: TextMinded. Photos: Jens Bangsbo, Hans-Henrik Hoeg and Arla. The annual report is published in
English, Danish, Swedish, German and French. Only the original English text is legally binding. The translation has
been prepared for practical purposes.
Financial statements of the parent company
Under section 149 of the Danish Financial Statements Act, these consolidated financial statements represent an
extract of Arla’s complete annual report. In order to make this report more manageable and user-friendly, we publish
Group consolidated financial statements 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 available on www.
arlafoods.com. Profit sharing and supplementary payment from the parent company are set out in the equity
section of the consolidated financial statements. The full annual report contains the statement from the Board
of Directors and the Executive Board as well as the independent auditor’s report.
Content
MANAGEMENT REVIEW
04 Performance at a glance
06
Message from the Chairman of
the Board of Directors
08 Message from the CEO
10 Highlights
12 Financial overview
13 Business priorities 2017
Our Strategy
16 Good Growth 2020
18 Trends in the world around us
20 Responding to change
22 Business priorities 2018
Our Brands and
Commercial Segments
26 Arla®
28 Lurpak®
29 Castello®
29 Puck®
30 Europe
32
34 Arla Foods Ingredients
35 Trading
International
Arlagården® quality programme
Our Cooperative
38 Our business model
40
42 Code of conduct
43 Compliance
44 Corporate responsibility
46 Risk management
48 Our risk landscape
50 Preparing for Brexit
51 Our tax affairs
Our Governance
54 Governance framework
56 Executive Management Team
58 Board of Directors
60 Management remuneration
61 Diversity and inclusion
Our Financial Review
64 Market overview
66 Financial review
72 Financial outlook
CONSOLIDATED FINANCIAL
STATEMENTS
74 Primary financial statements
84
Statement by the
Board of Directors and the
Executive Board
85 Notes
Endorsement
132 Independent auditor’s report
134 Glossary
135 Corporate calendar
2017
Performance
at a glance
4
Milk volume
BILLION KG
14.2
2015
13.9
2016
13.9
2017
Performance price
EUR-CENT/KG
38.12017
38.1
33.7
30.9
2015
2016
2017
All targets are based on full-year results.
• Target fully achieved
• Achievement on major components
• Target not achieved
*
**
International share is based on retail and foodservice revenue, excluding revenue from third party manufacturing, Arla Foods Ingredients and Trading activities.
Based on profit allocated to owners of Arla Foods amba.
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017 Revenue
10.3
BILLION EUR
Profit share**
2.8%
OF REVENUE
Strategic branded volume
driven revenue growth
3.0%
3.4%
5.2%
3.0%
2015
2016
2017
• Target 2017 1 - 3%
International share*
20.2%
5
2017
2016
2015
20,2%
19,7%
18,1%
• Target 2020 >20%
2017
2016
2015
2017
2016
2015
2017
2016
2015
10.3
2017
9.6
2016
10.3
2015
2.8%
2.8%
3.6%
• Target 2017 EUR 10 - 10.5 billion
• Target 2017 2.8 - 3.2 %
Brand share
44.6%
44.6%
44.5%
42.1%
• Target 2020 >45%
Conversion cost
103.9
Leverage
2.6
103.9
2017
99.2
98
2016
2015
2.6
2.4
3.3
• Target 2017 <100
• Target 2017 2.8 - 3.4
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017 MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS
A significant year
on a positive journey
2017 was a good year for both Arla dairy farmers and dairy products,
supported by a much-needed recovery in the milk price after the tough times
farmers experienced last year. Our business remains focused on adding value
to our products and responding to changing market dynamics.
6
Milk prices improved throughout 2017 and
Arla succeeded in closing the year with the
highest milk price in three years. Fat prices
outperformed protein for the first time, with
butter prices rising far beyond expectations,
highlighting a significant change in market
demands. Although butter prices declined
modestly at the end of the year, they remain
at a historically high level. Milk volumes were
virtually unchanged for the year, with lower
levels in the first half offset by increases in the
second half as farmer owners responded to the
recovering milk price.
Declining prices on the world market have
begun as we enter 2018, meaning that Arla will
need to continue its efforts to value-up
products in order to secure highest possible
returns to farmer owners through the milk price.
Nevertheless, even if price declines persist in
the months to come, we continue to expect
reasonable price levels.
Operating in a consumer-driven market
It is crucial for us to understand that we operate
in an extremely consumer-driven market, where
demands on transparency are high and there is
a growing interest from both consumers and
customers in the origin of dairy products. They
seek answers regarding how we treat our cows,
what we feed them and how we operate our
farms in relation to environmental issues.
In this market, being a farmer-owned cooperative
is an immense strength, but only if we succeed
in keeping a firm connection between consumers,
customers, farmer owners and our cooperative.
The value of our high standards
This is the reason why Arlagården® Plus was
launched in 2017 as an essential tool in
securing our continued growth. This quality
assurance programme delivers data that
enables us to provide fact-based insights about
the high standards on our farms. We closed the
first round of data collection in December 2017,
and the participation from our farmer owners in
all owner countries was promising. 75 per cent of
all farmer owners delivering milk in November
and December 2017 participated in the
programme, thereby qualifying to receive an
additional 1 EUR-cent/kg of milk. This is a result
to be proud of as it demonstrates that our
farmer owners understand the signs from the
market and meet demands from customers and
consumers. Our expectations are high for 2018,
where Arlagården® Plus will continue and grow
into being an important instrument in securing
Arla’s position as a unique and industry-leading
cooperative, adding even more value to our
brands and products.
Evolving our cooperative
Throughout 2017, we have seen our owner
strategy evolve. The Board of Representatives
adopted a new governance structure, an eligibility
and election procedure and an annual meeting
cycle. The first elections in our new governance
structure were also conducted. Two Area Forum
rounds, consisting of all elected representatives
in each area, increased cross-border interaction
and were very positively received for all
involved. In the coming year, our goal is extend
this strategy even further, amending the Articles
of Association and offering direct membership
for all owners, respecting that as we strive for
equality across borders, all should be working
under the same Articles. Direct membership for
all farmer owners will further strengthen our
democracy as we step up our efforts to act as a
truly global company. As part of this process,
our elected farmer owners are taking on
increasing responsibility and will continue to
develop the relevant education programmes
needed to further strengthen their roles
going forward.
Embracing the future
Given the significant market volatility of recent
years, it has become increasingly difficult to
predict milk volume developments as well as
how the market will evolve. We expect milk
prices to decline during the first half of 2018.
However, Arla is well equipped to react, in line
with the Good Growth 2020 strategy. The
market is changing and becoming ever more
consumer-driven, and we must work continu-
ously to ensure that our brands and products
remain strong and competitive. We are doing it
together, as farmer owners in cooperatives have
done for centuries.
ÅKE HANTOFT
Chairman of the Board of Directors
Performance price
EUR-CENT/KG
38.1
38.1
33.7
30.9
2015
2016
2017
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017 ARLA’S MISSION
To secure the highest
value for our farmers’
milk while creating
opportunities for their
growth.
7
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017 ARLA’S VISION
Creating the future of
dairy to bring health
and inspiration to the
world, naturally.
8
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER
Growing our brands
to transform the business
In 2017, the shape of our business continued to improve as we grew our brands
and delivered EUR 1 billion worth of sales price increases, an achievement
that could not have been possible without focused effort and commitment
across Arla. However, there remain challenges to overcome.
9
It was quite a turbulent year for the European
dairy industry which started with a significant
raw milk shortage, a reaction to the low market
prices in 2016. With milk intake remaining at a
low level, there was an unprecedented fat price
rally in the second quarter, creating an
extremely volatile market.
From an Arla perspective, 2017 showcased
strong increases in market and farmer milk
prices, although volatility continued across the
dairy industry. For Arla, it was a year in which we
focused on driving our long-term strategy,
strong branded growth and a significant
investment in innovation. From a business point
of view, not all targets were met, especially due
to the effects of Brexit on the milk price relative
to competitors and increased production
complexity to meet consumer demands for new
and more differentiated dairy products. This
approach, however, resonated with consumers
who rewarded us with market share gains in
nearly all our major brands and markets.
Strengthening our brands
An increased consumer demand for dairy
products richer in fat drove fat prices to a
historical high level in 2017. Combined with a
growing demand for a diversified choice of dairy
products, over the last year we saw a growing
interest for organic and lactose-free dairy
products, and those based on non-GMO feed.
We held true to our heritage of producing
natural products, and developed new
innovations, encouraged by our strategy,
Good Growth 2020. Thereby, we continue to
send a clear signal to our consumers, customers,
and business partners, that we are committed
to creating the future of dairy by focusing our
strong brands and having the confidence to
innovate and adapt.
Innovation and bold moves
Another important milestone was the opening
of our global Innovation Centre in Aarhus,
Denmark, employing 150 experts from around
the world. This is now the central hub for
innovation in Arla and will be for many years to
come. Not only developing new products,
innovation is also about creating packaging and
technologies to ease transport of fresh milk and
dairy products across continents, and exploring
new sales channels.
E-commerce is growing rapidly, and we
increased our focus on this area in 2017 and
will continue to do so in 2018 in close
cooperation with some of the biggest players
in the field.
Another crucial success factor is our Ingredients
business, which showed significant top and
bottom line growth in its specialty protein range.
We made some important milk moves for the
future this year, expanding our world-leading
position for high-margin mozzarella with our
cooperations with DMK in Germany and
Mengniu in China, who will deliver approximately
35,000 tonnes and 13,000 tonnes respectively
starting in 2019. These bold moves pave the
way for our future, ensuring important margin
gains for farmer owner milk in the future.
Developments in our markets
Our International business continued to
develop strongly in 2017, with impressive
growth seen in Sub-Saharan Africa, China and
South East Asia. Europe continued to deliver
solid sales growth despite volume declines and
adverse currency effects. Arla is in a strong
position to create joint ventures and strategic
partnerships all over the world, being a truly
global company with operations in 38 countries.
In 2017, a great example of this was in Nigeria,
where product innovation, brand and retail
knowledge, local consumer understanding and
execution power resulted in a reach to ten
thousands of shops. This represents a role
model for partnerships in Arla.
Expectations for 2018
In 2018, we will continue to strengthen Arla’s
business even further in line with our strategy,
Good Growth 2020, having identified eight
essential business priorities on which we will
focus in the coming year. One of these is to
further strengthen our cornerstone Arla® brand.
Another is to transform our business with a
group-wide focus on value creation and
efficiencies, through our new transformation
programme, Calcium. Calcium will allow us to
reinvest back into our business, creating a
stronger company that is able to invest even
more in growth.
There is no doubt that we will meet an even
more consumer-driven market, where
inclusiveness with the whole value chain and
holistic responsibility will be more important for
us than ever. As a farmer-owned dairy company,
we must meet these demands by being even
more transparent and using the tools we have
in our quality assurance programme, Arlagården®,
to bring consumers and customers closer
to Arla.
We have seen market milk prices begin to
decline, but we are well-positioned to deliver in
2018. We intend to keep our strategic promise
of brand growth, knowing that the forecast for
2018 is for another volatile year. We have come
out of 2017 as a stronger company, and
financially we have never had more room to
operate and invest in the future.
PEDER TUBORGH
CEO
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017
Highlights
By growing our brands, pursuing innovative ideas and making key
investments for the future, Arla continued to improve the shape of our
business in 2017. With commitment and inspiration, all segments of our
business contributed new product launches and exciting initiatives
as we continue to fulfil our Good Growth 2020 strategy.
StarbucksTM finishes
the year on a high
StarbucksTM continued its double-digit
growth streak, fuelled by a lot of
activities in 2017. Finishing the year
on a high note, distinctive Christmas
packaging was released and
consumers were invited to share a
moment of connection over social
media, reaching over 12 million
people across five markets.
1
0
Cocio® bridging
retail and digital
Cocio® delivered strong engagement
with its young millennial consumers.
A shopper campaign, Shake To Win,
bridged retail with the digital space through
a mobile campaign site and successful
engagement via Facebook and YouTube.
The campaign ran across several
markets, including Norway,
Greece, the Netherlands
and Denmark.
Getting going in Ghana
Arla added another market to its
Sub-Saharan Africa business region,
by establishing a new sales and
packaging facility in Ghana. The
subsidiary began selling Arla® branded
products in Ghana from September
2017 in response to a growing demand
for nutritious dairy products.
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017 Celebrating World Milk Day
World Milk Day successfully took place in 81
countries on 1st June 2017, initiated by the
Food and Agriculture Organisation of the
United Nations. Milk and all dairy products
were celebrated by farmers, chefs, nutritionists,
academics and others raising their glasses to
the benefits of milk in their lives, starting at
sunrise in New Zealand and ending with the
sunset in Hawaii.
Arla® Organic Milk launches
in MENA
Arla® Organic Milk hit the shelves of leading
retailers across the United Arab Emirates as
Arla’s ambition to win as an innovative dairy
brand in this region picked up pace. The launch
presents a sizeable opportunity to share our
organic products with consumers that seek a
stronger availability, awareness, and affordability
of more natural and organic products.
Grand opening of the
Arla Innovation Centre
Arla’s new state-of-the-art Innovation
Centre officially opened in May 2017,
and continues to play a pivotal role in
the pursuit of our strategy by adding
more value-added products to the
market. Chefs, scientists, consumers
and customers collaborate at the
centre to redefine trends
and technologies that shape
worldwide dairy.
1
1
Proudly farmer-owned
Our farmer-owned campaign raises
consumer awareness, differentiates us
from competitors and instills higher
consumer trust in our products. To
date we have integrated the marque
on 90 per cent of all Arla® branded
packaging, displayed on more than
900 different products.
Creating our own
Lurpak® Christmas tree
Key seasons are important times of the
year for the Lurpak®. We increased our
ambition on Ramadan and Easter and had
a significant presence at Christmas this
year, with a successful media campaign
spanning across markets. We also created
our own Lurpak® Christmas tree in the UK
that we took to high footfall shopping
locations and our retail partners.
12MILLION EUR
Invested in an upgrade
of AKAFA site.
Investing in
high-quality child nutrition
Arla aims to be among the world’s
leading dairy companies within the
high-growth child nutrition category,
investing EUR 12 million in an
upgrade of our AKAFA production
site in Denmark, which is essential
in a category where quality is the
key differentiator.
RAISE A GLASSWORLD MILK DAYMANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017 Financial overview
Financial key figures (EURm)
Performance price
EUR-cent/kg owner milk
Income statement
Revenue
EBITDA
EBIT
Net financials
Profit for the year
Profit appropriation for the year
Individual capital
Common capital
Supplementary payment
Balance sheet
Total assets
Non-current assets
Current assets
Equity
Non-current liabilities
Current liabilities
Net interest-bearing debt including pension liabilities
Net working capital
1
2
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
Profit share
EBIT margin
Leverage
Interest cover
Equity ratio
Inflow of raw milk (mkg)
Inflow from owners in Denmark
Inflow from owners in the UK
Inflow from owners in Sweden
Inflow from owners in Germany
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 Sweden
Owners in Denmark
Owners in Germany
Owners in the UK
Owners in Belgium
Owners in Luxembourg
Owners in the Netherlands
Total number of owners
Please refer to glossary on page 134.
2017
2016
2015
2014
2013
38.1
30.9
33.7
41.7
41.0
10,338
738
385
-64
299
38
120
127
6,422
3,551
2,871
2,369
1,554
2,499
1,913
970
386
-286
100
-155
-248
-7
2.8%
3.7%
2.6
12.9
36%
4,827
3,203
1,855
1,759
524
151
54
1,564
13,937
2,780
2,675
2,327
2,395
815
215
55
11,262
9,567
839
505
-107
356
30
193
124
6,382
3,714
2,668
2,192
1,742
2,448
2,017
831
806
-167
639
-624
-263
-
3.6%
5.3%
2.4
13.3
34%
4,728
3,210
1,909
1,758
515
144
56
1,554
13,874
2,972
2,877
2,461
2,485
852
218
57
11,922
10,262
754
400
-63
295
10,614
681
368
-30
320
31
141
113
6,736
3,903
2,833
2,148
2,084
2,504
2,497
999
669
-402
267
-274
-348
-29
2.8%
3.9%
3.3
13.2
31%
4,705
3,320
1,995
1,741
531
130
41
1,729
14,192
3,174
3,027
2,636
2,654
882
221
56
12,650
39
171
104
6,613
3,774
2,839
1,874
2,137
2,602
2,547
928
511
-416
95
-93
-429
15
3.0%
3.5%
3.7
8.2
28%
4,550
3,088
2,035
1,526
403
119
17
1,832
13,570
3,366
3,144
2,769
2,854
997
228
55
13,413
9,870
737
425
-88
300
43
131
121
6,187
3,427
2,760
1,708
2,189
2,290
2,394
906
342
-470
-128
110
-505
-
3.0%
4.3%
3.2
11.1
28%
4,508
1,254
2,016
1,332
253
111
-
3,202
12,676
3,385
3,168
2,500
2,815
529
232
-
12,629
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017 Essential business priorities
for 2017
In 2017, our essential business priorities focused on delivering price increases
and driving margin focus as our strategic focus shifted to driving bold brand growth
to create the future of dairy and deliver the highest value to our farmer owners.
As volatility persisted in the global dairy industry, we knew that there would
be challenges to overcome, but a firm focus on our essential business priorities and
Good Growth 2020 strategy were, and continue to be, central to our success.
Deliver price increases
and drive margin focus
Our strategic focus to
proactively manage prices in
2017 across all European and
International markets and
categories delivered over EUR 1
billion of sales price increases,
and was driven by improved
price management analytics
and processes. Solid
commercial and financial
discipline enabled us to
succeed, and thereby provide a
competitive milk price to our
farmer owners.
Make leadership matter in
the milk, yogurt and powder
category
Successful launches of specialty
product ranges, such as Arla®
Organic, Lactose-free, skyr, and
Protein, in combination with
strong branded growth led to
advances in driving market
leadership in our biggest
product category MYPC. We also
continued to improve our
position with non-genetically
modified feed across the
European markets.
Drive bold brand growth
and bold innovation
Partner for growth with
leading customers
We maintained focus on
growing our strategic brands
Arla®, Lurpak®, Castello®, and
Puck® to improve the
profitability of our product mix,
reflected in higher market
shares. Brands accounted for
44.6 per cent of sales in 2017,
close to our 2020 goal of a
brand share greater than 45 per
cent. Our new state of the art
Innovation Centre will boost the
innovation pipeline to support
further branded growth.
In 2017, we made significant
progress on our ambition to
strengthen the customer
centricity of our business and
win with leading customers.
This required special attention
to growth and profitability, joint
category development, and
delivery service, amongst
others. In 2017, we successfully
launched a new organisation
within Foodservice in Europe.
1
3
•
•
•
•
Control costs, drive
operational efficiencies
and release cash
Financial leverage outperformed
our long-term target range of 2.8
to 3.4 at 2.6 in 2017, illustrating
our strong financial position. An
increasing mix complexity of our
branded portfolio impacted
conversion cost in supply chain.
Higher price levels challenged
our working capital on inventory
and receivables, countered by
improvements on overdue
collection. Marketing spend
efficiency increased materially.
Build leading market
positions in International
Strengthen the important
German market position
Our International commercial
segment achieved significant
growth, fueled by numerous
new product launches. Across
the Middle East and North
Africa, Sub-Saharan Africa, the
Americas, China and South-East
Asia, and other markets
including Russia, this was
driven by strengthened
relevance with consumers,
increased market investments,
as well as local partnerships.
In the challenging German
market where margins are
pressured, our increased focus
on brands and innovation was
crucial to improve quality and
profitability of our business,
and strategic choices towards
a new value-focused direction
were made. Our commercial
bets in Germany focused on
managing prices, strengthening
our branded positions as well as
improving our operational
basics.
Accelerating the value
journey in Arla Foods
Ingredients
Our Ingredients business
continued to deliver growth in
2017 with its high-value added
products. New investments
and strong research and
development efforts paved the
way to transform the business
with a focus on higher-value
specialties. Collaboration with
partners continued to be a
priority to increase the supply
of raw materials, supporting
our growth ambitions.
•
•
•
•
• Target fully achieved
• Achievement on major components
•
Target not achieved
MANAGEMENT REVIEWARLA FOODS ANNUAL REPORT 2017
Y
G
E
T
A
R
T
S
R
U
O
As the world’s largest producer of organic
dairy products, we constantly develop and
produce new, high quality organic products.
Arla Baby&Me® Organic is our 100% organic
product line for little ones. This product
range is designed to give babies a great,
organic start to life.
Towards
Good Growth
2020
Good Growth is a name with a dual purpose. It identifies both our corporate
identity and the strategy that will help us create the future of dairy towards
2020. We want to develop Arla’s role as a global food company that
adds value to people’s lives through natural nutrition and responsible
operations. The Good Growth 2020 strategy is our foundation to do so,
proactively acting to changing supply and demand for milk, competition,
the occurrence of new demographic realities and fast developing consumer
trends. By excelling in eight categories, focusing on six regions
and winning as one Arla, we strive to achieve global growth
and create value for our farmer owners towards 2020.
1
6
Our strategy
With the Good Growth 2020 strategy, Arla has a
fantastic foundation in place to fulfil people’s needs
and our dairy products play an important role in doing
so. We have matched or own strengths in the dairy
categories to the consumer demands we see
globally, identifying growth opportunities on a global
and regional scale in eight categories. Determining
the regions in which Arla has the greatest potential to
grow a long-term profitable business for our farmer
owners has focused us geographically as we strengthen
our global category and brand building, our innovation
across borders and our commercial excellence.
OUR STRATEGYARLA FOODS ANNUAL REPORT 2017 Our vision
Create the future of dairy to bring health and inspiration to the world, naturally.
Our identity
Good
Growth
Good Growth describes who we are and how we are creating the future of dairy. It is what we stand for as a company, defined and
shaped by our actions. It guides how we develop our cooperative, products, markets and ways of working.
Responsible Growth
Growing by ensuring safety,
taking responsibility for our
impact on society and the
environment, and having a
long-term perspective in
everything we do.
Cooperative Growth
Growing by being
farmer-owned and
cooperating with all our
stakeholders for mutual
benefit.
Healthy Growth
Growing by promoting dairy
nutrition and helping people
live healthier lives.
Natural Growth
Growing by making natural
products of the highest
quality.
Our mission
To secure the highest value for our farmers’ milk while creating opportunities for their growth.
1
7
Excel
in eight categories
Focus
on six regions
Win
as ONE Arla
The global dairy industry is developing
at high speed and is characterised by a
constant evolution of consumer habits
and preferences. Analysing consumer
needs and trends and matching these to
our own strengths, we identified eight
product categories that are the core
focus for our efforts to shape the dairy
market. By offering innovative products
with natural ingredients, great taste and
good nutrition, we are making it easier
for consumers to live healthy lives. Our
key categories are milk and powder;
milk-based beverages; spreadable cheese;
yogurt; butter and spreads; specialty
cheeses; mozzarella and ingredients.
The six regions represent the markets in
which we believe Arla has the biggest
potential to grow a long-term profitable
business. Arla has a strong position in
Northern Europe as the preferred dairy
company for consumers, and in Middle
East and North Africa where our brands
are among the strongest in the food
industry. Arla is continually expanding
market positions in growth markets such
as China, South East Asia and Sub-Saharan
Africa, whilst further engaging in
opportunities in the US and Nigeria. The
six regions are Europe, Middle East and
North Africa, Sub-Saharan Africa, China
and South East Asia, USA, and Russia.
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. Arla’s ambition is that all our 18,973
employees work from ONE strong
common platform. We want to create
ONE global Arla where we actively use
each other’s different competencies
and, in so doing, contribute to our
success.
OUR STRATEGYARLA FOODS ANNUAL REPORT 2017 Trends in the world around us
Arla is an international business. Key market dynamics impact the global dairy
market as we move towards 2020. Analysing these is critical to our success. Shifting
economic power, rapidly developing technology, population growth, environmental
shifts and changing values are all drivers for an exponentially changing world.
Megatrends shape the world around us, presenting both new opportunities and
challenges. We have identified the trends most influential to Arla.
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Authenticity
Authenticity is a standout consumer value declared by everyone
from changemakers and celebrities to supermarkets and chefs. In
a world where millions share their lives on social media, there is a
consumer eagerness to be ‘real’ and authentically different.
Consumers are making more considered purchasing decisions,
buying from ‘responsible’ brands that sell quality products with
real value, and following alternative eating trends like flexitarian,
vegan and vegetarian. With excellent products and strong brands,
a business can be close to consumers as a key differentiator. Arla
is in a unique position in this sense, being the largest organic dairy
producer in the world and a leading producer of lactose-free
alternative dairy products. These characteristics, along with
being a farmer-owned cooperative, make our brands and
products authentic.
Organic and
lactose-free
dairy alternatives
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Healthy living
Whilst being healthy is not a new trend, aspirations for healthy living are more comprehensive today,
including aspects of health, wellness and conscious living. This development has led to the creation of
new dairy products as well as dairy-free alternatives. Consumers are increasingly looking for transparency
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, continually pushing for ways to differentiate milk in
order to gain customer loyalty. Our product portfolio caters to a broad range of health needs and we
continuously innovate to meet consumers’ demands and to aid a balanced lifestyle.
Innovative
dairy products
to aid a balanced
lifestyle
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Simplicity
Almost 70 per cent of people are looking for ways to simplify their lives, according to Euromonitor’s Global Consumer Trends Survey. As
technology is becoming so engrained in all aspects of life, consumers have a growing desire for simplicity, an antidote to consumerism, endless
choice and constantly updated products and services. Freedom to choose, to see, to listen, to do and to say is crucial for today’s consumer. The
trend for increased simplicity also applies to food products. As consumers look for items with limited or no artificial ingredients, Arla’s product
benefits, a clean label and short ingredient lists, meet consumer demands of today. Compelling attributes of Arla products are no synthetic
hormones and no preservatives features - natural products from cow to consumer.
Natural
products from
cow to
consumer
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Connected consumers
Consumers are becoming increasingly
connected. Connected consumers use
smartphones, computers, tablets and other
devices to connect to the internet, in order
to experience and interact with digital
content. These digital connections disrupt
and challenge the traditional structures of
shopping, entertainment and socialising,
amongst others, and underpin shifts in how
consumers live, work and consume. The
experience is becoming almost more
important than the product itself. While
connectivity first spread through developed
markets, the growth of affordable mobile
technology has enabled consumers in the
developing world to come online. This is
underpinning generational shifts in how they
live, work, shop and play. Digitalisation is
essential in all industries but also in creating
the future of dairy.
Connecting with
farmers and
consumers via
virtual reality
Market
presence in
developing
markets
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Shifting market frontiers
As some areas of the globe become over-populated or otherwise
reach their maximum potential, others gain prominence for their
unexploited potential. By 2030, emerging and developing
countries will account for almost half of global GDP and 86 per
cent of the population. Rising business investment, increasing
disposable incomes, better infrastructure and growing access to
internet have contributed to exponential growth in areas of the
world such as China, Nigeria, Ghana and Bangladesh. To ensure
future growth, businesses need to adapt to changing demographic,
economic and technological developments bringing new
markets from frontier into the spotlight. Understanding and
reacting to these critical shifts is a global differentiator. Arla’s
European origin has an international appeal and our International
business segment is continuing to delivering solid double digit
growth rates.
The trends on this and the previous page were identified by Euromonitor International, 2017.
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Responding to change
In December 2015, Arla presented a new five-year strategy, Good Growth 2020.
Two years into the strategic period, we are tracking well against our initial ambitions for
growth with key brands, markets and customers. However, we also believe that our strategy
must constantly evolve to incorporate changing market conditions, consumer
trends and base assumptions. It is our job to analyse, understand and respond to these
trends and their potential impact on our strategy and financial results. Here we highlight the
major trends and changed assumptions over the last two years and our corresponding
responses to maximise our strategy.
Consumers
Customers
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Change
Our
Response
Consumers are becoming more and more
conscious and selective of what they
consume, which has led to, amongst others,
a very strong drive for a healthy lifestyle and
buzz around naturalness of products. Growing
urbanisation is driving a liking for on-the-go
food consumption. These developments have
accelerated versus our original evaluation, and
we acknowledge that flexitarian consumption
with less meat and more lifestyle protein
alternatives, and the demand for more milk
types in the EU has grown faster than we
expected.
Digitalisation of the industry is progressing at
an even faster than anticipated pace and on
multiple levels with, for example, digital
platforms and digital marketplaces. In China,
our e-commerce sales grew by 11.5 per cent
in 2017. Other customer developments are
continuing as expected in 2017 and beyond,
for example the ongoing private label pressure
in the EU. It is important to adapt, together
with our customers, to the growing
developments in order to stay relevant to
the consumers.
For Arla, naturalness is at the core of our
identity and heritage. We continuously
innovate to fulfill consumers’ demands and
to aid a balanced lifestyle. In response to
changing consumer demands, we have
expanded our product portfolio to cater to a
broad range of health needs and consumption
preferences, from high-protein to low sugar
and on-the-go. Arla is also the largest organic
dairy producer in the world and a leading
producer of lactose-free alternative dairy
products. We are also a farmer owned
cooperative and uphold high animal welfare
standards. These niche traits contribute to our
products’ and brands’ unique characteristics
and give consumers the possibility of
purchasing products to either meet their
dietary preferences, contribute to animal
welfare or support a community of farmers.
Digitalisation is essential to creating the future
of dairy. Arla sells through e-commerce
channels in many countries, introduced the
concept of virtual reality farming on social
media and engaged in an array of digital
marketing initiatives, for example, live
streaming how everyday people experience
our products, as well as virtual reality cheese
tastings.
We drive the dairy category together with
our customers through joint category
development to ensure growth in value above
volume. Our largest focus is on our brands-
brand growth is key for stronger profitability
and to drive less volatile earnings. At the same
time, our aim is to optimise our private label
positions and to be a strategic own-label
partner to our customers and forge
long-lasting relationships.
OUR STRATEGYARLA FOODS ANNUAL REPORT 2017 “We believe that the best strategies are
those that are dynamic and adaptable to
change. At Arla, we continuously evaluate
developments and trends as they unfold in
order to ensure that we are directed by the
best strategy for our business.”
Peder Tuborgh, CEO
Owners
Emerging macro
EU macro
The dairy industry is global, but the supply
and demand for milk are increasingly
geographically detached. Since the abolition
of the EU quota system in 2015, farmers are
able to produce unlimited quantities of milk
for the first time ever, which led to an
underlying assumption of increased
production in the EU. As a result, we expect
approximately 1.5 billion kg more milk in Arla
by 2020, however, this is approximately
1 billion kg less than originally anticipated.
Emerging markets other than the EU and US
continue to drive firm growth and generate
approximately 95 per cent of dairy growth.
Meanwhile, the economic outlook in the
Middle East and North Africa was affected by
oil price declines. Whilst this development
was considered when setting our strategy,
the impact in the region has been more
severe than originally anticipated. Other
macro developments such as the embargo in
Russia which is still present, are in line with
original expectations.
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The majority of our revenue is generated in
Europe which makes it a very important
market to us. We continue to expect a stable
development in this region, however, Brexit is
a destabilising factor in the EU and the
severity of it remains unknown. That said, as
negotiations progress and we fully take
charge of the opportunity to ensure our views
are heard at the highest level in the UK, the
great unknown of Brexit becomes less
destabilising.
Ensuring that we create the most value
possible for the existing milk pool is critical.
In order to do so, we continue to channel our
milk through the means and to the markets
where the highest value can be added. The
premium of the branded business is
generating higher margins than other
alternatives. Prices remain volatile across the
dairy industry, which emphasises the need to
continually improve the underlying business
composition. In the long run, the branded
business will win over the commodity market
through stability and prices. Our branded
business has grown dramatically in recent
years and now represents approximately
44.6 per cent of total revenue.
With a wide presence in emerging markets,
International continues to drive solid double
digit growth rates in 2017 and exhibits a
positive growth outlook for the foreseeable
future. The Middle East is a special focus area
for us, being our biggest strategic growth
market outside Europe and the aim is for
Arla’s business in the region to double by
2020. We recently launched organic milk
here under the Arla® brand, a first for
consumers in this region. To sustain
double-digit International growth and
balance risks, we continue to broaden our
distribution networks and strengthen our
production footprint. To respond to the
embargo in Russia for example, we managed
to set up local production and limited imports
of speciality cheese.
As a company, we are in favour of the free
movement of goods and people. We want the
final trade deal between the UK and EU to be
free from tariff and non-tariff barriers in milk
and dairy. As the negotiations progress, we
continue to deliver strong, evidence-based
arguments to politicians and policy makers
hand in hand with our farmer owners and
peers in the dairy industry. We are also
collaborating with partners in the dairy
industry and the wider food and farming
community to build support for our position
across Europe. For Arla, this is a mission to
work to protect the competitiveness of the
UK dairy industry within the wider EU, as well
as the global dairy market. Refer to page 50
for more on Brexit.
OUR STRATEGYARLA FOODS ANNUAL REPORT 2017 Essential
business
priorities for
2018
To achieve our long-term strategy, we need a
short-term action plan. The essential business
priorities are an enabler for our strategy, Good
Growth 2020, as they consist of critical areas
that we should prioritise in the short-term on
our journey to success. In order to continuously
deliver strong results for our owners, the
Executive Management Team determines our
Essentials each year, subject to approval by the
Board of Directors. The Essentials are a set of
clear and aligned business priorities, aiming to
support the growth agenda and direction for
the business set out in our strategy.
Improve gross margins
Create the future of dairy with
more innovation
Take efficiencies to a new level
Drive strategic brand growth
Drive growth
in high-profit areas
Win with customers
Transform Germany and the UK
in light of new realities
Arla Foods Ingredients next
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As volatility in the underlying commodity market continues, we will maintain a strategic focus on proactive price management.
Managing a continually diversifying milk pool, we aim to implement gross margin-enhancing initiatives to optimise the balance
between complexity and customer requirements, short-term price volatility, and long-term market positions. With commercial and
financial discipline, we are confident that we can ensure a competitive milk price for our farmer owners.
Innovation is a core lever to realise our vision to create the future of dairy, and we will take the next steps towards this by further
enhancing our pipeline. Our focus is on the Arla® brand as we cater to the growing demand for lifestyle dairy products, including Arla®
Lactofree and Organic. We will empower innovative digital solutions as we expand our presence across digital platforms, and plan to
combine our social responsibility, brand and corporate communication programmes to enhance our identity.
Continually realising efficiencies in our business allows us to reinvest significantly into areas that fuel growth, which is what our holistic
transformation programme, Calcium, will help us achieve. Calcium will cover activities throughout Arla, from further improving
marketing efficiency to supply chain productivity initiatives, and will be a key driver in increasing our performance price. Our ambition is
to achieve a bottom line impact of EUR 30 million in 2018.
In 2018, we will continue to develop and sharpen the profile of our strategic brands Arla®, Castello®, Lurpak® and Puck®, specifically,
by introducing new sub-brands to our broad product portfolio. We believe that continuing to invest in our brands to increase the share
of branded sales will ensure our future growth and profitability. We plan to invest in areas where we see the most growth potential,
supported by exciting new marketing initiatives as we secure the identity of our global brands.
In 2018, we will strategically focus on delivering branded growth in high-profit market segments, such as Bangladesh, Nigeria, China,
the US and MENA. We will continue to strengthen our partnerships, for example with StarbucksTM, and continue to focus innovation on
these key markets to ensure future growth. As the European food services market continues to grow, we aim to further develop this
line of business in key markets.
Maintaining and building on our strong customer partnerships is at the core of Arla, and in 2018 we plan to continue to do so by
driving category growth through our strategic brands, as well as through own-label innovation. Customer service is also a top priority
for 2018, as we aim to improve and build long-term customer relationships. Another important and rapidly growing focus area is
e-commerce, where we aim to closely cooperate with some of the biggest players.
The UK is an important market for us and as Brexit negotiations progress, we will continue to make our position clear and ensure that
we can serve our great customer and consumer base in the UK post Brexit. Germany continues to be a challenging market, but we are
committed to transforming the German business. Within supply chain, we will focus on continued development of our production
footprint. An increased focus on brands and innovation will be crucial to improve product mix and profitability.
For Arla Foods Ingredients, we will focus on the continued transformation of existing products to higher-value specialties through new
investments and focused research and development efforts. As the demand for our specialised ingredients keeps accelerating, we will
strive to grow our raw material pool to secure more whey, enabling us to serve our global customer base. We will also strengthen our
customer focus and sales capabilities as the business continues to grow in 2018.
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We strive to redesign the future with
renewable packaging. By removing a material
layer of our Arla® organic milk carton in
Sweden, the carton's climate impact has been
reduced by 24 per cent.
Arla's overall ambition is to reduce the climate
impact of packaging by 25 per cent by 2020,
compared to 2005. We are already
a good way along this journey, with new
innovations like these paving the way for
further climate footprint reductions.
The journey of our Arla® brand
The Arla® brand is our most widespread global brand with over 50 sub-brands in
its broad portfolio. Arla® branded products are sold in more than 80 countries,
including Northern Europe, China and more recently the US and the Middle East
- it ranks as the fastest growing FMCG brand in many countries. The identity of the
Arla® brand is very close to our heritage, staying true to our core values of healthy,
natural, responsible and being farmer-owned. We bring these values and the
goodness of dairy through our products to consumers across the globe.
In 2017, we identified an opportunity to sharpen and shift the Arla® brand, driven by a clear position of what our trusted brand
represents, namely a close connection to our Scandinavian heritage and dairy filled with natural goodness. We will continue
the journey in 2018 with more consumer facing activities and communication, building a stronger, trusted and
loved brand. To enable this journey, we will move focus from many small local products to creating the future of dairy with
big innovative global concepts that can travel to more markets and consumers.
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The Arla® brand showed strong growth due to increased
investment in innovative product ranges, such as Arla®
Lactofree, skyr and other natural and high-protein
products, as well as infant nutritional formula such as
Arla Baby & Me®. The Arla® brand delivered a strategic
volume driven revenue growth of 3.4 per cent and revenue
for the brand grew by 10.1 per cent to EUR 3,026 million
compared to last year, through stronger activation and
roll-out of new product developments. The brand also won
21 awards in 2017 and the celebrated prize for being on
the list of 'Brands Top-100 Fastest Growing brands in retail'
in the Netherlands, achievements we are proud of.
In 2017, we focused particularly on growing the Arla®
brand position among consumers. Through winning
awards from large retailers globally this year for our Arla®
products, we are gaining the acknowledgement from
retailers in general which is integral for our continued success.
Fat free,
reduced sugar,
high protein.
Protein contributes to growth in muscle mass
They say he starts his day with Arla® skyr, 2017
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 Staying strong with Arla® Protein
Supporting consumers to live an active and
healthy lifestyle, in 2017, Arla® Protein extended
its range through new package innovation with its
on-the-go protein pouch, launched in Finland
and the UK. Arla® Protein is now available in
14 markets worldwide and continues to deliver
strong growth.
Bringing health and naturalness through good food habits
We believe that creating good food habits can make a positive impact on our lives. The choices we make when
purchasing and preparing our meals have an effect on ourselves and the world around us. With the Arla® brand,
we want to make eating well, simple and joyful for everyone. Our raw material milk is the best foundation on our
journey, being both nutritious and natural.
We continue to stay true to our natural principles and in 2017, we strengthened our health focus with the use
of the Arla® brand nutrition criteria, ensuring that all Arla branded products carrying a health claim always deliver
on dairy goodness, such as calcium and protein. This builds a trusted and strong position in the long-run.
In addition, we joined the the EU Pledge initiative on responsible food marketing to children in 2017. Together
with 21 other major international food brand owners, Arla is committed to responsible marketing to children
across Europe.
Building on our farmer-owned platform
We are trustworthy because we are farmer-owned and we will continue to build on this platform. It gives us the
right to speak about healthy and natural food, sustainability and good food habits. It is clearly understood by
consumers 'that when you grow it, you know it', making it trustworthy for Arla as a farmer-owned brand to have
a voice when it comes to origin, naturalness and sustainability. This goes hand in hand with increased responsi-
bility and commitment linking to the importance of our quality assurance programme, Arlagården®.
Our farmer owners play an important role in spreading the fact that we are farmer-owned and what this entails.
For Open Farm Days, Organic Days and school visits, farmers in Denmark, Sweden, Germany and the UK invite
the public to explore farm life. In 2017, we had a total of over 463,000 visitors in these core markets and
educated as many as 33,000 Danish and 24,000 Swedish school children at our farms this year. Our farmer
owners also welcomed hundreds of Arla employees to their farms, sharing their passion and knowledge for
them to utilise and commercialise in their everyday work.
Focusing on growth areas as we continue our journey
Driven by our resharpened position of the Arla® brand, we will continue our journey in 2018. We identified a
number of focus areas that have shown successful growth. We will be targeting our brand to these growth areas,
such as Arla® Lactofree and Organic, for consumers seeking a more diverse choice of lifestyle dairy products, and
fill-and-fuel for those that seek a balanced diet whilst consuming on-the-go.
Arla® skyr excels in Germany
With revenue growth of more than 94 per
cent compared to last year, Arla® skyr is the
success story in the German brand business.
Arla® skyr will continue to make an
important contribution in achieving
Good Growth towards 2020.
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Revenue
3,026
MILLION EUR
Revenue development
10.1%
Strategic branded volume driven
revenue growth
3.4%
2016: 4.5%
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 Good food deserves
Lurpak®
Lurpak® has long been a symbol of Denmark’s dairy heritage, since 1901. Last year,
Lurpak® celebrated its 115th birthday, and the high-quality standards of our butter
still remain and are the foundation for the brand. Our brand mission is to make
good food central to the lives of people by being the champion of good food.
Lurpak® is sold in more than 75 countries, from Denmark to the UK and beyond,
boasting a global fan base that spans the world.
Impact of rising fat prices
Market fat prices were at a historical high in
2017, being valued more than protein for the
first time ever. The increase in the market price
eventually translated into increases in sales
prices across all core markets for high-fat dairy
products such as butter. This development
challenged the strategic branded revenue
growth for the Lurpak® brand, which was
-2.7 per cent for 2017, most notable for Arla
in the UK and Denmark.
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Reaching consumers with digital
Everything Lurpak® says and does is designed
to emotionally engage the public with the full
wonder of good food. Be that its creation,
enjoyment or discovery. 2017 was the year of
step change for digital engagement of our
Lurpak® brand. With increased media investment
into prioritised channels, data-led targeting and
high-quality content, the brand over-delivered
compared to our 2020 engagement target,
engaging 42 million consumers worldwide.
Digital will continue to be a priority channel for
Lurpak® going forward, as media landscapes
change and we have the opportunity to reach
more consumers in new ways.
Exciting initiatives in 2017
In 2017, we continued to roll out our global
‘Game on Cooks’ campaign into new markets
such as Greece, Australia and Sweden to create
a truly global campaign. Communicating the
naturalness of our products was also a success
this year, with a solid increase in the naturalness
perception of our brand with a strong digital,
shopper and public relations activation plan in
key markets.
Revenue
528
MILLION EUR
Revenue development
8.3%
Strategic branded volume driven
revenue growth
-2.7%
2016: 7.7%
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 Indulgent sensations
with Castello®
not be a one-dimensional experience, so we use
our experience and creativity to create cheeses
to surprise your senses with every bite.
Castello® achieving growth
The Castello® brand achieved a solid strategic
branded growth of 2.7 per cent in 2017. The
brand showed especially strong growth in
Australia and Greece.
Castello® is a heritage and tradition of creative
cheese making since 1893. Innovative new
cheeses, dozens of varieties and intriguing
flavours, all that tell their own unique story.
Castello® cheeses are developed with a real
understanding of how we perceive flavour as
well as taste, so you can experience something
special with every bite. Our speciality cheeses
are sold all around the world under the
Castello® brand.
Our latest campaign
“Sensations by Castello®”
Castello® cheeses each bring to the consumer
a unique and indulgent sensation. Be it the
intensity of Castello® yellow cheese, the
creaminess of the whites or the sharpness of
the blues, each cheese delivers an everyday
indulgent sensation. Castello® cheeses are
developed with a real understanding of how we
perceive flavour as well as taste, so our
consumers can experience something special
with every bite. We believe that eating should
Revenue
181
MILLION EUR
Revenue development
3.1%
Strategic branded volume driven
revenue growth
2.7%
2016: 3.0%
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Celebrating the everyday
chef with Puck®
Puck® is MENA’s leading brand and is reaping
the benefits of its transformation, a journey that
started two and a half years ago. A new brand
positioning based on strong consumer insights,
upgraded packaging graphics for the entire
portfolio and a fresh new look and feel across all
communication platforms are just some of the
things that Puck® underwent. Its trusted and
natural product range includes mozzarella,
labneh, and several cream cheeses.
Continuing Puck's® growth streak
The Puck® brand achieved solid results in 2017.
As MENA’s leading brand, Puck® continued to
perform strongly with a strategic branded growth
of 4.4 per cent in 2017.
Puck® also reached the number one market
share this year in Saudi Arabia, an especially solid
achievement given the turbulent macroeconomic
environment in MENA in 2017.
MENA Effies 2017 award winners
Ending 2017 strongly, Puck® celebrated the
success of its Ramadan Lend #AHelpingHand
campaign. The effectiveness of this campaign
was recognised at the prestigious MENA Effies
of 2017, where it won two silver awards and
a bronze.
Revenue
339
MILLION EUR
Revenue development
6.8%
Strategic branded volume driven
revenue growth
4.4%
2016: 10.6%
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 Europe
The Europe zone, representing 63 per cent of total revenue, continued its Good Growth journey
in 2017. It grew its branded milk and yogurt business against a backdrop of volume declines and
adverse currency effects. The zone delivered significant sales price increases, which
contributed to an increase in revenue of 3.9 per cent, also reflecting the rising fat price market.
Despite these volatile and challenging conditions, we maintained our brand position in Europe and even saw the Arla brand grow and take
market share in the UK, Netherlands and Germany. Cross-Europe big bets contributed significantly to growth, with Arla® skyr and Protein
continuing their successful growth across Europe and our Lactofree and organic product lines delivering sustained growth.
We followed consumers into new channels like e-commerce, working with existing customers and online retailers like Amazon in the UK
and Germany. The European food services market continued to grow. This year we stepped up our food services businesses and
established Arla Pro which delivered strong growth, mainly driven in the Netherlands, Finland and the UK.
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Arla® was the fastest growing brand among
large manufacturers in the UK and our Arla®
BoB (Best of Both) white milk was voted product
of the year. Our farmer-owned model was key to
winning a significant contract to supply
liquid milk to Morrisons. The weak GBP,
a consequence of Brexit, challenged the
business’ profitability. However, we continue
to develop robust plans to deal with the
eventual outcome of the Brexit negotiations.
Refer to page 50 for more detail.
Revenue split by country
Germany
The German business continued to mature as
we executed our strategy and lifted profitability.
It was a challenging year, especially regarding
price evolution, but we saw significant growth in
the Arla® and StarbucksTM brands in retail. Arla®
skyr won several awards and our strong position
in organic fresh milk with the Arla® Bio brand
was reinforced.
Denmark
Our Danish business continued to develop
positively despite a challenging domestic dairy
market. The business delivered innovations
such as launching white milk based on non-GMO
feed and new Arla Baby and Me® products. We
also had record positive reputation scores that
reflect the high level of consumer trust
in Arla.
34%
21%
15%
2016: 35%
2016: 19%
2016: 15%
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 “We ended the year stronger as a zone
and leveraged our scale, allowing us to roll
out innovations quickly. We lifted revenue
across the board through significant sales
price increases, whilst maintaining our
brand positions and growing our market
share with the Arla® brand. A weakened
GBP put pressure on our business and
rising market prices for fat slowed growth
in branded fat products.”
Peter Giørtz-Carlsen, Executive Vice President
Revenue, MILLION EUR
6,568
2016: 6,321
Strategic branded volume driven
revenue growth
-0.1%
2016: 3.2%
Brand share
48.3%
2016: 47.6%
Revenue development
3.9%
2016: -6.9%
Sweden
Arla’s reputation continued to improve
throughout the year, which contributed to the
long-term health of our brands. Sweden was a
key market for our Arla® Lactrofree products,
which tapped into a growing consumer trend
for lifestyle dairy products.
Netherlands and Belgium
Our market share in fresh dairy reached the
highest level ever and is now running above
10 per cent. Our growth was achieved with a
leading position in organic, innovations such
as Arla® skyr, Protein and Lactofree and close
cooperation with our customers. Our focus in
Belgium was to build the business to deliver at
a similar pace as the Netherlands.
Finland
Despite a long-term trend of decreasing dairy
consumption, the key focus brands, Arla®
Luonto+ in yoghurt and Lempi in cooking, kept
growing. In yellow cheeses, both Arla® family
cheeses gained market share and the Castello®
launch into the category exceeded
expectations.
3
1
21%
4%
5%
2016: 22%
2016: 4%
2016: 5%
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 International
The International zone, which comprises 16 per cent of total revenue,
continued its journey of delivering profitable growth in 2017. We achieved
double digit growth with our strategic and local brands. We continued to seek
new opportunities and in 2017 we expanded into new markets in the
Sub Saharan Africa, North Africa and South East Asia regions. The zone was
challenged by volatile global market conditions, but we successfully executed
our growth strategy and delivered on our big bets.
3
2
Sub-Saharan Africa
Our business in Sub-Saharan Africa continued
to grow. We navigated a challenging currency
environment in Nigeria, our main market, in the
first half of the year and the business almost
doubled its revenue in 2017. The increase in
revenue was driven by the growth of the Arla®
Dano Milk Powder brand. We also strengthened
our footprint across the region, opening
operations in Ghana and increasing our capacity
in Lagos. And we invested in our next generation
product portfolio for the West Africa region.
Middle East and North Africa
Our strategic agenda in the Middle East and
North Africa progressed well in 2017, despite
low economic growth and political uncertainty
affecting the region. Revenue grew and we
continued to develop new opportunities,
including launching the Arla® Organic Brand in
the UAE and locally produced cheese in Egypt.
We strengthened our branded positions on
Puck® and Lurpak® in the region throughout
2017. Our focus on growth, particularly in
high-margin product ranges through
innovation, gave us a great foundation to
build on going forward.
Americas
2017 was a big year for Arla in the US. We
entered the market by positioning Arla as a
challenger in the cheese category, leveraging
our brand proposition and high-quality natural
products. Our products are performing strongly
and we created great brand awareness with our
marketing investment. Alongside this, Canada
drove strong profit growth. We also divested our
shares in Vigor in Brazil, and continued to
develop our cooperation with Dairy Farmers of
America as part of our strategy to grow in the US.
Revenue split by region
9%
34%
20%
2016: 6%
2016: 36%
2016: 24%
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 “We had strong performance this year,
building on the gains we made last year.
We achieved a solid strategic volume
driven revenue growth, grew our branded
market share in key markets and delivered
strong price management which drove
profitability in a year of volatile market
conditions. Investments in markets such
as Africa and China are paying off and give
us a strong foundation to deliver in 2018
and beyond.”
Tim Ørting Jørgensen, Executive Vice President
Revenue, MILLION EUR
1,616
2016: 1,428
Strategic branded volume-driven
revenue growth
10.5%
2016: 10.7%
Brand share
83.9%
2016: 81.4%
Revenue development
13.2%
2016: 5.9%
Russia and others
There was a strong turnaround in our Russian
business which delivered profitable growth
despite the ongoing embargo. We continued to
drive branded positions and saw very strong
growth of Lurpak® in distributor sales markets,
Australia and Greece. Castello® showed good
growth in Australia and Norway. Our milk-based
beverages business, under the brands of Arla®
Protein and Starbucks, grew significantly in
Spain and Greece in retail and convenience
channels. Our foodservice business continued
to develop and we will continue this journey
next year under the Arla® Pro brand.
China
We almost doubled our revenue in China during
2017 and the business improved its profitability.
Our partnership with Mengniu is progressing
well. We continued to strengthen our branded
position, particularly with Infant Milk Formula
and organic products, but saw imported UHT
move towards European price levels. Our
reorganisation of the Asia business into two
separate regions, China and South East Asia,
will go live in January 2018.
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3
South East Asia
Bangladesh continued to grow through the
Arla® Dano brand and our businesses in
Singapore, Japan and Korea delivered profitable
growth. We continued to expand our footprint
in the region, including signing a partnership
agreement with Indofood, one of the leading
FMCG companies and dairy players in Indonesia.
This gives us a significant platform to grow in
this market.
23%
6%
8%
2016: 22%
2016: 4%
2016: 7%
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 Arla Foods Ingredients
Arla Foods Ingredients (AFI) is a 100 per cent owned subsidiary of Arla and 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.
AFI contributes 6 per cent of total revenue. The products, which
are produced in Denmark or by one of AFI’s three joint ventures in Argentina
and Germany, are sold in more than 90 countries.
“Through a strong
innovation agenda, we
continuously push the
boundaries of what
technology can bring
to whey. In 2017, we
addressed future
demands for quality
and food safety in
collaboration with our
customers, and
invested heavily
in our child nutrition
business.”
Henrik Andersen, Group Vice President
2017 was another successful year for AFI,
delivering 19.6 per cent revenue growth
compared to last year, largely driven by a
strategic focus on value-added ingredients
and a strong Third Party Manufacturing (TPM)
business. In 2017, Arla's child nutrition plant
was transferred to AFI. For more than 20 years,
AFI has delivered double digit annual growth
rates by pushing the boundaries of technology
and innovation, growing our volume and
revenue.
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4
Volume of standard products and
value-add products
Index
140
Index
100
Standard products
The whey industry is entering a new phase
Significant changes are impacting the industry
in which AFI operates. In the past, whey was
regarded as a simple by-product from cheese
production. Today whey is treated as an
ingredient in its own right, and in the future,
AFI’s core markets will need even more product
differentiation. Whey is no longer a commodity
product where one size fits all. Our customers
and consumers are the most demanding in the
dairy industry, and they want specialised
products of the highest quality.
AFI aims to take full advantage of the
developing industry
In order to succeed in becoming the global
supplier of value added whey, AFI seeks to grow
its raw material pool in the coming years
through sourcing, partnerships and joint
ventures. AFI will deliver an ambitious
innovation agenda, by continuing to grow and
refine the existing products and implement new
innovative concepts.
AFI’s growth will be based on value-added
sales, refining our products for our strategic
business segments: Infant Nutrition, Clinical
Nutrition, Sports Nutrition, and Food. We will
increase our value-add ratio compared to
standard products, delivering more value to
our customers and creating more value for
our farmer owners. Over the past five years,
we invested approximately EUR 220 million
in our value-add business, by amongst
others, increasing our capacities.
68%
74%
Value products
2012
2017
In our TPM business, we conducted large
investments to increase our supply of infant
formula. Arla’s Child Nutrition plant, ARINCO,
was transferred to AFI, realising synergies
between sales and supply chain and enabling
us to continue to grow the infant formula
business even stronger in the coming years.
We worked hard in 2017 to address the
future demands to quality and food safety
performance in collaboration with our
customers. AFI intend to be recognised as a
market leader in food safety and quality, and
we will invest heavily in both people and
infrastructure to implement it.
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017 Revenue split by regions,
MILLION EUR
651*
2016: 545
Europe, the Middle
East and Africa
Asia
Americas
2017
2016
49% 47%
41% 40%
10% 13%
Revenue development
19.6%
2016: 5.0%
*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 766 million.
AFI’S MISSION
To discover and
deliver all the
wonders whey
can bring to
people’s lives.
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5
Trading
In addition to our main sales channels, Arla conducts
business-to-business sales to other companies for use in their
production, as well as industry sales of cheese, milk powder
and butter. Trading activities contribute 15 per cent of total
revenue, and although this is not a core business segment for
Arla, it is critical to our success.
The market for dairy has become increasingly volatile, especially since
the abolition of the EU quota system in 2015 in Europe, making it difficult
to predict milk volumes. Trading allows us to manage seasonal and
geographical availability in milk intake. Trading and other sales increased
18.0 per cent in 2017 to EUR 1,503 million, versus EUR 1,273 million last
year. The average value of commodities was higher in 2017 compared to
last year and for the first time in history, fat was more valuable than
protein. The adjacent graph illustrates the extreme volatility cycle in the
dairy industry.
Combined fat and protein prices, three year cycle
showing volatility in the dairy industry
G
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N
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C
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50
40
30
20
10
0
Jan 2007
Jan 2008
Jan 2009
Jan 2010
Jan 2011
Jan 2012
Jan 2013
Jan 2014
Jan 2015
Jan 2016
Dec 2017
OUR BRANDS AND COMMERCIAL SEGMENTSARLA FOODS ANNUAL REPORT 2017
I
E
V
T
A
R
E
P
O
O
C
R
U
O
Through continuous innovation and
uncompromising standards for the highest
quality, our milk powder products provide
the reassurance of a strong heritage and
proudly display our Farmer Owned marque.
Arla Dano® milk powder provides the
essential energy and nutrition families need
for growth and strong health, especially
in developing countries.
Our business model
Arla is the fourth largest dairy company in the world based on milk intake and the
world’s largest and leading organic dairy producer. Our farmer owners are at the
core of our business model, true to our cooperative structure. Rooted in our
mission, it is our objective to secure the highest value for our farmer owners’ milk
while creating opportunities for growth and fulfilling the needs of our consumers
and customers with our natural and innovative products and brands.
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8
Creating value, from cow to consumer
Arla is a farmer-owned cooperative. Creating value for
our farmer owners’ milk is embedded throughout the
value chain, from cow to consumer. We continuously
seek growth opportunities worldwide, strive for
sustainable market leadership and improve value
creation through investment in innovation and our
brands. We operate our entire value chain with a
continuous focus on quality, efficiency and
optimisation of our raw materials, capital and human
resources. This promotes growth among our current
farmer owners and inspires new members to pursue
their future with Arla.
Proudly farmer-owned
As the world’s oldest dairy cooperative, our philosophy
of producing natural, healthy and high quality dairy
products dates back to the 1880s when dairy farmers
joined forces with one common goal: to produce and
provide the best dairy products. Our heritage has laid
the foundation for our cooperative today, empowering
Arla to drive innovation for dairy.
ONE milk pool
As a dairy cooperative, our primary raw material is the
raw milk delivered by our farmer owners. Having ONE
milk pool irrespective of the origin of the milk, allows a
holistic use of our raw milk across Arla. In the pursuit of
securing the highest value for our farmer owners’ milk
in accordance with our mission. Operating as ONE
ensures that milk can flow to markets with the best
opportunities. We want to create the maximum value
for all collected raw milk: ONE milk pool, with the same
quality requirements through our quality assurance
programme, Arlagården®, together with an efficient
supply chain, enables Arla to balance the raw milk
volumes in the most profitable way in support of
our ambition.
ONE milk price
Our farmer owners farm across seven countries and are
all paid ONE milk price, i.e. the prepaid milk price for
raw milk delivered during the year, with the exception
of limited transition periods following the entry of new
members. The prepaid milk price is set with the
ambition to reach a targeted range of 2.8 to 3.2 per
cent annual result net profit. As part of the annual
profit appropriation subject to approval by the Board
of Representatives, our farmer owners receive a
supplementary payment based on their annual
milk volumes.
Milk flow across legal entities
In our cooperative, all raw milk from our farmer owners
is purchased by the parent company, Arla Foods amba.
Subsequently, the parent company sells the raw milk
to relevant Group entities at the same price paid to our
farmer owners – a price based on the average earnings
generated across all markets and product categories.
Our dairy activities are global and earnings are different
in individual markets and across product categories.
Earnings in some markets and legal entities may be
higher or lower than average. However, based on the
cooperative principle, it is the average of all earnings
that determines the milk price paid to farmer owners.
The profitability of the Group entities may differ
significantly between markets and year to year, but all
entities contribute positively to our cooperative.
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017
Consumers
and customers
With our unique brands and products we are able to provide our
consumers and customers the opportunity to live a healthy and
balanced lifestyle. Our extensive product portfolio caters to a broad
range of consumer preferences and needs.
Production
and logistics
With 18,973 employees
across 120 countries, we
work to achieve efficient
and streamlined
operations - from ensuring
world-class food safety
standards in our production
line, to reaching worldwide
markets in our supply chain.
Innovation
We aim to fulfil the growing
demand for more and better
natural dairy products by
using all our knowledge in
dairy farming, milk expertise,
nutrition science, product
and packaging design to
bring new and exciting
products to market. These
innovations build our strong
brands and create the future
of dairy.
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9
Value
creation
A competitive milk price
creates sustainable growth
improvements for our
farmer owners. In order to
achieve this, Arla creates
value per kg of milk
through proactive price
management, innovation,
brands, cost programmes,
international growth and
economies of scale.
Farmer
owner
As both owners and suppliers,
our farmers are at the centre of
our business. As a cooperative,
Arla is obliged to collect all of
our farmer owners’ milk,
at ONE milk price, with a
commitment to add value to it.
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 The value of Arlagården®
Food safety and animal welfare enables Arla to operate and
create growth for our products and brands and thereby growth
for our farmer owners. As a cooperative in control of the entire
value chain, our quality assurance programme, Arlagården®,
ensures high quality milk produced responsibly.
High quality is an important part of our strategy and key to creating the future of dairy. As high
quality in our products starts on the farm, all of our 11,262 farmer owners are governed by our
quality assurance programme, Arlagården®.
Arlagården® covers all the good work our farmers are doing every day, to ensure superior raw milk
quality and welfare for both animals and the environment. Our farmers are proud of how they farm
and to Arla, it is a strength that as owners they 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 the same high standards.
4
0
Food safety, traceability and raw milk
quality assured by 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
third party agricultural advisors to ensure that
farms comply with Arlagården®. As a farmer
owned cooperative, Arla makes sure that farmers
who need support and guidance in implementing
further improvements receive sufficient support
from farm advisors to develop further.
Launch of Arlagården® Plus for the benefit
of consumers and owners
It is increasingly important to share the story
about all the good we do on the farms every day
as consumers and customers are more and more
interested in the origin of our products, specifically
what farmers feed their cows and how they look
after them. This has presented a commercial
opportunity for Arla. Principles, facts and figures
are vital in strengthening the Arla® brand as well
as our position with consumers and customers.
As a result, Arla and 152 farmer representatives
collaborated to develop a new online documen-
tation centre, Arlagården® Plus.
Arlagården® Plus was launched in November
2017 and presented to all farmer owners, with
voluntary participation by means of farmers
inputting their data. Farmer owners that
participated in the programme in November and
December 2017 collectively contributed 88 per
cent of the total milk delivered by members.
As the programme develops, farmer owners
will have access to their own data which can be
used as a farm management tool and thereby, for
example, to develop animal welfare on farms.
Furthermore, Arlagården® Plus will serve as a
benchmarking tool, enabling the individual
farmer to benchmark his or her own progress
against groups of other Arla farmer owners.
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 Four cornerstones of Arlagården®:
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 strive to provide
consumers with a safe milk-based product. 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 behavioral 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 an environmentally sound production
on the farm that is respectful of nature.
For more details on our four cornerstones refer to www.arla.com/arlagaarden/
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1
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 Our Code of Conduct
Responsibility is part of Arla’s DNA. This is why we continue to maintain high standards
for our healthy, safe and natural products, the environment, and the people we employ
and do business with. We are committed to constant improvement, combining tradition
and world-class innovation, and incorporating nature into the entire value chain from
cow to consumer. The Code of Conduct applies to all Arla employees and at all our sites
worldwide and forms the foundation for how we act and operate.
4
2
Responsible company
In Arla, it is a given that profitability
and ethical business practices go
hand in hand. This is achieved
through commitment, know-how,
willpower and hard work.
Business principles
We comply with our Code of
Conduct and the local laws in all
the countries in which we operate.
Operational principles
We manage our business in a
responsible and cooperative way
that promotes the financial
interests of our farmer owners.
We enable our farmer owners’
participation in important decisions.
Market conduct
We have a transparent and
ongoing dialogue with consumers
and customers, and we support
competition on equal terms.
Procurement and supplier
relations
We expect our suppliers to assume
social and environmental
responsibility as we do ourselves,
so we can achieve our objective of
purchasing goods and services in a
sustainable manner.
Confidence in products
Supplying safe products is our
top priority. And we strive to do
even more- we aim to make it
possible for consumers to make
their own informed and healthy
choices of products based on
clear information and knowledge.
Food safety
Food safety cannot be compro-
mised. This is why we have
certified food safety systems,
quality programmes and committed
employees which ensure safe
products of high quality throughout
our global supply chain. We ensure
our products are safe, no matter
where they are manufactured.
Nutrition and health
We are committed to meeting our
consumers’ demand for natural
and healthy products and reliable
labelling of nutritional information
and ingredients, helping consumers
make well-informed decisions.
Care for the environment
and animal welfare
As a dairy company, we have
a natural interest in good
environmental and dairy
farming practices. We work to
continuously reduce our adverse
environmental impact, and
maintain high animal welfare
standards.
Environment and climate
Our ambition is to reduce our
environmental impact from cow
to consumer through food
production and transportation of
goods. We continually improve our
environmental performance by
applying sound and sustainable
principles throughout our entire
value chain.
Dairy farming
We actively support the develop-
ment of sustainable dairy farming.
Healthy cows on well-kept farms
give better milk. Together with our
farmer owners, we formed the
quality assurance programme
Arlagården®, which covers aspects
such as animal welfare, milk quality
and the environment. Refer to
page 40 for more detail.
Responsible relations
We have relationships with
people, organisations and
communities in many countries.
No matter what the relationship
is, we are committed to
maintaining mutual respect and
understanding.
Workplace
We provide safe and healthy
working conditions, for our
competent, committed and
engaged employees, creating a
workplace that is inclusive,
stimulating and respectful.
Human rights
Arla not only provides food
products but also a culture that
upholds internationally recognised
human rights, respecting the
human rights of all people.
Society and community
relations
We engage in open, respectful
and constructive community
relations and establish long-term
relationships to contribute to both
local and global development.
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 Our compliance activities
Responsible business conduct comes from living our Code of Conduct and strong
company values through a culture of honesty and integrity. We expect all
employees to act ethically and in compliance with Arla’s Code of Conduct.
Our corporate policies are built on this foundation and are business principles
that address critical aspects of individual or business conduct.
Our corporate policies guide us to act responsibly and with integrity, and help us
govern our ways of working as ONE aligned and efficient Arla.
Through our compliance framework we drive compliance with our
Code of Conduct by ensuring that adequate policies, processes and
guidelines are established, embedded and enforced throughout the
business. All white-collar employees are trained in our Code of Conduct
and asked to complete the mandatory policy awareness e-learning.
Other high risk compliance training courses are also provided, such as
global security and competition law.
High risk compliance areas are monitored continuously through review
and audit activities. Furthermore, all employees are encouraged to
speak up and voice any concerns or violations to the Code of
Conduct, including corporate policies, for example, through our
whistleblower service.
Code of
Conduct
Policies
4
3
Processes, procedures
and standards
Guidelines and instructions
Examples of our compliance activities
Safeguarding of assets
Arla works continuously to develop a robust internal control environment,
by strengthening and automating existing internal controls and
establishing new controls to mitigate identified significant risks. Risk
assessments are performed to identify and prioritise high risk areas for
detailed compliance reviews and self-assessments. This provides Arla with
a transparent overview of financial and operational risks and highlight
areas of weakness or with significant control gaps, which are addressed
with mitigating activities.
IT security
Arla continuously assesses the increasing threats from the online world to
ensure that we have proper and adequate IT security and internal controls
in place. Our employees are the first line of defence and we prioritise
education in cyber-security whereby all Arla employees are educated in
cyber security in a mandatory ‘Are you cyber-safe?’ e-learning. Our
stronger focus on the increased IT security risks that we face means
that we continuously assess our IT controls and governance around
access to our systems, including our SAP platform, to secure that we are
strengthening our resilience towards IT security risks and cyber threats.
Data protection
In 2018, the new General Data Protection Regulation (GDPR) will come
into force imposing new and stricter obligations on Arla when processing
personal data relating to employees, members, business partners and
consumers. In 2017, Arla initiated a GDPR compliance project and put in
place a project team that will ensure compliance going forward.
Fraud and Bribery
It is Arla’s policy to conduct business in an honest and ethical manner and
we have a zero-tolerance to fraud and bribery. We are committed to
acting professionally, fairly and with integrity in all our business dealings,
transactions and relationships and we systematically implement and
enforce effective systems to counter corruption and fraud.
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 Our responsibility
We operate our business in a sustainable and responsible manner based on our
Code of Conduct. We believe that in developing our operations in this way, we
are able to respond to the increased demand for accessible and sustainable
food options as the population of the world grows. Working in this manner
safeguards and develops Arla’s reputation and profitability, while caring for
people and delivering growth. In 2017, we divided our activities into four main
strategic areas: health, inspiration, natural and human rights.
4
4
Health
Inspiration
As one of the world’s largest dairy companies, Arla has the
opportunity to influence millions of consumers’ food habits.
We make dairy available in a variety of tasty products, and
enable consumers to live healthier lives.
Inspiration is evident in all parts of Arla, and we aim to inspire
through our farmer owners sharing experiences on
new farming practices, and consumers feeling inspired to
cook different recipes or try new products.
Highlights 2017
Highlights 2017
93 per cent of Arla® branded products in the milk, yogurt and
everyday cheese categories now comply with
the Arla® Nutrition Criteria.
Arla has joined 21 other major food companies in signing up
to the voluntary EU Pledge initiative on responsible food
marketing to children.
Arla Foods Ingredients is engaged in a project with NGOs to
increase the general health of Ethiopia’s children by making
better use of the milk from the country’s 11 million cows.
Many consumers were engaged in 2017
through our wide range of digital networks, for example
through social media or recipes on our website.
Our digital sites had 148 million interactions.
With our ‘little farmer programmes’ we invited 70,000 school
children to our farmer owners’ farms, educating more than a
million children to date about life on the farm
and the origin of their food.
Arla Next, our farmer owner training programme , involved
60 participants in 2017 from Denmark, Sweden,
the UK and Central Europe.
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 “Authentic socially responsible brands and businesses
are winning the world over as more people are
using their purchasing power to create change and
to support issues and causes they believe in. As a
cooperative, Arla will create greater awareness of
our Good Growth identity and strategy and show
how we will create the future of dairy.”
Peder Tuborgh, CEO
Read more about our commitments and achievements
for 2017 in Arla’s Corporate Responsibility Report on
http://www.arla.com/csr-reports/ in accordance with
section 99a in the Danish Financial Statements Act.
Natural
Human rights
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5
Together with our farmer owners, we are in the unique position
of being able to work with every step in the whole value chain,
to make a positive contribution to a more sustainable future.
We contribute to the UN sustainability goals through job
creation, responsible sourcing, and competencies on quality,
food safety and product innovation. We are committed to
meeting international human rights principles.
Highlights 2017
Highlights 2017
Increased use of biogas at our dairies with 5.7 per cent of Arla’s
total use of energy derived from biogas, and 24 per cent from
renewable sources in total in 2017.
Focus on operations, packaging and transport with Arla’s total
climate impact decreasing by 18 per cent since 2005, despite
increased production.
Launch of a digital documentation centre, Arlagården® Plus,
which is a database that details information about the farm,
animals and animal welfare. Refer to page 40 for more detail.
During 2017, we published a Modern Slavery statement,
outlining our commitment to tackling modern slavery and
human trafficking, and adapted our procurement
tendering process to secure that suppliers comply with
the Modern Slavery Act.
In our strengthened focus on human rights impacts, we
conducted human rights due diligences in Indonesia and Ghana,
both in terms of country assessments and partner assessments.
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 Promoting and supporting
risk awareness
The potential of our strategy, Good Growth 2020, is promising, but there are also
a number of areas where Arla faces increased risks and uncertainty in pursuit
of growth. In 2017, we significantly enhanced our risk management processes
throughout the organisation and reorganised our set-up to elevate strategic risk
management (SRM) in our business. Our goal is to promote
and support risk awareness for braver decision-making, to seize key business
opportunities and ensure more effective execution.
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6
Risk and opportunity
identification
Risk and opportunity
assessment
4
1
Risk
owner
3
2
Risk and opportunity
monitoring and reporting
Risk and opportunity
management
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017
1
Risk and opportunity identification
To identify risks and opportunities at Arla, we continuously monitor the global market
situation as well as internal processes, ensuring early and proactive decision making.
Our SRM process is designed to identify major risks using the insights of leaders from all major areas
across the Group. Furthermore, certain expert functions such as Global Tax, Treasury, Legal and
Procurement also monitor their specific risk profiles on a regular basis during the year. In 2017, we
revised our risk and opportunity categorisation into either events or trends. including new areas such
as cyberattack and changing consumer demands etc. We also integrated it to our annual business
planning process on all levels of organisation to ensure incorporation into daily decision-making .
Risk and opportunity assessment
Risk and opportunities are assessed both individually and systematically, allowing
adequate prioritisation and allocation of resources.
2
Assessment is performed based on two dimensions: Potential financial impact on profit and
likelihood of occurrence. The former includes quantitative and qualitative measurements such as
reputation, impairment to brand value, impact on market position and media coverage. The
likelihood aspect considers if a given risk or opportunity materialises within the next three to five
years. During 2017, we enhanced our focus on building risk management capabilities and held a
number of work and training sessions across the global Arla organisation.
4
7
Risk and opportunity management
We continuously manage our risks and opportunities by developing and implementing
appropriate mitigating actions and exploring opportunities within our business.
Our SRM function is focused on integrating risk efforts into existing processes, as well as developing
harmonised methodologies and tools. This process is supported by a common language and a clear
methodology for assessing risks and defining opportunities. In 2017, we completed a one year
collaboration with external consultants to ensure that we had implemented best practice SRM. We
also established task forces to manage mitigation plans for key focus areas, for example, Brexit and
General Data Protection Regulation.
Risk and opportunity monitoring and reporting
As both risks and opportunities are subject to constant change, we aim to increase
their transparency.
Risk owners monitor development in risk trends and identified or emerging opportunities in their
respective business areas. They are also responsible for consistently ensuring the adequacy and
effectiveness of our risk mitigation and resolution strategies. To enable a real value creation, in 2017
we aligned reporting timelines across all functions and integrated risk and opportunity management
throughout our performance management reporting procedures and tools. The result is a summary
of top risks and mitigating actions, which is revised formally to the Board of Directors twice a year.
3
4
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017
Our risk landscape
Arla’s risk landscape highlights our top emerging, strategic and operational risks,
characterised as either event or trend risks. Our increased risk awareness through
2017 is reflected in the risk landscape. We assess risks based on the
potential impact on Arla’s reputation and/or profit, as well as the likelihood of
the risk to occur within the next three to five years. The assessment is
based on the net effect after all current mitigating actions.
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Supply and production disruptions
Milk price and volume volatility
Continued milk volume and price volatility strongly influence our sales
volumes and profit respectively. Arla’s Good Growth 2020 strategy
focuses on value creation through our strong brands and products,
which continually reduces exposure to commodity pricing. Nevertheless,
to reduce these risks, we significantly enhanced our price and perfor-
mance management in 2017. Market milk prices increased in 2017 in
comparison to last year, leading to a more sustainable financial situation
for our farmer owners.
Being in control of the entire value chain gives Arla a major foundation
to manage our risks well. Guaranteeing food safety is our key priority.
Besides clear and professional crisis management processes, upgraded
in 2017, and active application of analyses to improve product quality
and prevent reoccurring failures, our focus is on adherence to the
Arlagården® quality assurance programme and our comprehensive
quality, health, environment and safety model to safeguard the highest
quality for all our products. Furthermore, failure or breakdown of our
vital production facilities, or any hazard risks like explosions or strikes
could affect business operations. An emergency programme exists
across all production sites and lessons from historical incidents are
continuously incorporated. In 2017, an explosion and fire occurred in
a section of a drying facility, which did not impact the business. Crisis
plans were in place and damages were repaired within a month.
Deliveries were covered by safety stock and processes have been
adapted accordingly.
Risk Risk scenario
Risk Risk scenario
.
A
B
Major product recall damaging the Arla brand and image
G
Milk price and volume volatility
Major breakdown at key production site
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017
Market risks and global instability
Financial and IT risks
Having sales and production across the world means that we are
exposed to both specific country risk as well as most macroeconomic
developments. Economic turmoil in emerging markets, volatility in
commodity prices and political instability increase our risk exposure,
leading to thorough monitoring of developments and trends, and
continuous internal agility to changes. We review both external factors
and internal levers as a part of our business review process, plan
mitigation steps and monitor the developments.
Brexit will have inevitable consequences for Arla and was determined as
our most critical risk. Hence, we undertook extensive study and scenario
planning to understand Brexit implications and secure a robust plan for
Arla for the different possible Brexit outcomes. For more information on
Brexit, refer to page 50.
Arla’s main financial risks relate to exchange rates, tax disputes, interest
rate changes and pension liability valuations. Due to exposure to
international markets, our sales occur in a range of currencies. To
manage this risk, the Group hedges expected future cash flows for
selected key currencies. Furthermore, we constantly monitor and review
worldwide tax matters to ensure our compliance in all locations.
Based on external incidents in 2017, as well as the expansion of our
operations to new markets, we assessed that risks relating to cyber
security have increased. To minimise cyber security risks, we continuously
review our activities. Furthermore, in 2017 we rearranged our task
force to strengthen our work on IT control requirements and in
monitoring compliance in this area across the global organisation.
Risk Risk scenario
Risk Risk scenario
4
9
C
D
Political instability and economic turmoil in emerging markets
Consequences of Brexit and further EU exits and protectionism
H
I
J
Taxation and transfer pricing risks
Currency, interest and pensions risks
Major cyber attack
Changing consumer demands and digital disruption
Business ethics, legal and HR risks
The increasing role of our branded business requires a higher risk
awareness regarding reputational and social media impacts to protect
the brand value of our company. In 2017, we distinguished changing
consumer demands and digital disruption risks as trends. Hence, we
dramatically increased our digital engagements with consumers,
allowing us to improve our understanding of consumers and continu-
ously monitoring behavioral trends and hereby supporting product
innovations, exploring new technologies and digital business models.
Negative impacts on human rights and a violation of business ethics
could severely harm Arla’s and our brands’ reputation. These risks are
part of our major risks due to our geographical exposure combined with
increased societal expectations. To minimise business ethics and legal
risks, a number of activities are performed by our Legal, IT and
Corporate Responsibility departments. During 2017, we significantly
increased our resources on data privacy to ensure compliance with
upcoming EU General Data Protection Regulation.
Furthermore in 2017, we experienced a rising popularity of alternative
eating trends like flexitarian, vegan and vegetarian, and saw animal
welfare concerns in social media. Based on our quality assurance
programme, Arlagården®, our focus on natural and healthy products
and being the world’s largest organic milk producer, we proactively
position ourselves at the forefront of natural food options.
The loss of key personnel in strategic positions and the inability to
recruit and retain sufficiently qualified people also pose risks to our
business performance. To mitigate this risk, we create the right
corporate culture and work environment, as well as provide employees
development and global career opportunities. In 2017, we set a new
record achieving an engagement score of 84 per cent in our annual
employee survey.
Risk Risk scenario
Risk Risk scenario
E
F
Digital disruption and new competitors or retailers
Growing anti-dairy and vegan movements
K
L
Negative impact on human rights and/or non-compliance
Loss of key personnel in strategic positions and recruiting and retaining the
best talent
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 5
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Preparing for Brexit
The effects of Brexit are our biggest risk. As negotiations progress,
Arla continues to make our position clear, as a company in favour
of the free movement of goods and people. The future trading
relationship between the EU and the UK remains uncertain and
we are preparing to handle a variety of Brexit scenarios.
It is important for Arla’s customers
and consumers that our products
can move freely across the
markets in which we operate to
optimise the utilisation of our
ONE milk pool and global supply
chain. With 3,203 farmer owners
based in the UK, the country is
Arla’s biggest commercial market,
accounting for approximately
25 per cent of the total revenue.
A recent CEBR Economic Impact
Assessment valued Arla’s total
economic footprint in the UK at
more than GBP 6 billion in Gross
Value Added terms once direct
and indirect impacts are factored
in. Successful and loved brands in
the UK market, including Lurpak®,
Arla® Lactofree and skyr, are
imported to the UK, with some
others such as Castello® yellow
cheeses being exported from the
UK, and changes to the EU-UK
trade relationship may signifi-
cantly challenge this business.
The Arla Brexit Task Force has
been appointed to assess the
impact of Brexit from a total value
chain perspective, focusing on
three possible outcomes:
Free Trade Agreement (FTA),
our preferred outcome, without
tariffs for dairy products;
World Trade Organisation (WTO)
relationship, under which certain
quotas would be apportioned
without any tariff impacts; and
'No-deal scenario', under which
dairy would be traded under
WTO most-favoured-nation
tariffs with a significant impact
on our business as well as the
UK dairy industry.
We want the final trade deal
between the UK and EU to be
free from tariff and non-tariff
barriers in milk and dairy and are
collaborating with partners in the
dairy industry and the wider food
and farming community. Arla has
contributed to dairy being the
first industry to reach a public
united position on the best future
EU-UK relationship for our
industry. We have advocated a
positive solution for the future
trading relationship in high level
engagements with the UK
government and the EU.
As the negotiations progress, we
will continue to deliver strong,
evidence-based arguments to
politicians and policy makers
hand in hand with our farmer
owners and peers in the dairy
industry. And as the UK govern-
ment begins developing its post
Brexit agricultural policy, we will
work closely with them to protect
the competitiveness of the UK
dairy industry within the EU and
the global dairy market.
Brexit negotiations: key dates
Jan 2018
Negotiations
directive for the
transitional
agreement
Mar 2018
Guidelines for the
framework of the
future relations
negotiations
Oct 2018
Agreement on
withdrawal
agreement and
transitional
agreement, plus a
political declaration
on defining the
scope of the future
relationship
Nov 2018 -
Mar 2019
Ratification of
the agreement
(European Council,
European
Commission and
European Parliament
plus UK)
Mar 2019 -
end 2020
Detailed
negotiations of
the FTA, and
transition period
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 Our tax affairs
In recent years, multinationals have experienced a growing interest from
media, non-governmental organisations and the public in general in how
their tax matters are organised. As a globally operating company,
Arla acknowledges the key role of taxes in the budgets of the countries in
which we operate. Our approach to taxes conforms with Arla’s global
Code of Conduct and is founded on a set of key tax principles
approved by the Board of Directors.
The BEPS project of the OECD led to the
development of new tax principles and
increased reporting and documentation
requirements for multinationals. We are fully
committed to meeting the new requirements
for reporting and transparency. As we have
always done, we will continue to strive for
an open dialogue with tax authorities around
the world, regarding our business and our
tax reporting.
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, people 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, with a few
exceptions, resides within the global tax
function.
Operating under a cooperative
tax scheme
As a cooperative based in Denmark, our
activities are governed by the Danish tax rules
for cooperatives. Arla’s members are also our
suppliers, and earnings do not accrue in the
company but go back to the members in the
form of the highest possible payment for their
milk. The cooperative’s earnings can therefore
be viewed as the farmer owners’ personal
income.
The members of Arla will generally pay income
tax on the amount received for their milk.
Danish cooperative tax rules reflect the fact that
the cooperative acts as its members’ extended
arm, and as such, Arla pays income tax in
Denmark based on our assets, namely equity.
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 similar
companies.
Limited liability company
Cooperative
Profits
Minimum
payment for
commodity
Shareholder
Supplier
Maximum
payment for
commodity
Owner/supplier
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1
Our key tax principles
Arla’s strategic ambition is to act as a
responsible citizen 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.
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 pay taxes legally
due and to ensure 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
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
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
Arla builds on good relations with tax
authorities and trusts that
transparency, collaboration and
proactiveness minimises the extent of
disputes.
OUR COOPERATIVEARLA FOODS ANNUAL REPORT 2017 E
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Puck® offers a wide range of dairy products
right across the Middle East and
is a perennial favourite in the region
for its cream cheese.
As consumers are seeking better choices
with health being of growing importance in
the region, we are expanding our range to
include low fat and low salt variants to help
consumers make better choices.
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Governance framework
Arla appreciates the value of sound governance as a fundamental
base in achieving trusting relations with our farmer owners,
employees and other key stakeholders. Good governance represents
responsible and transparent management and corporate control.
As a cooperative owned by dairy farmers in seven countries, good
governance is essential for achieving success and enhances
the confidence placed in our cooperative.
Arla’s governance model
Cooperative governance
District councils and
Area councils
Different democratic
structures in DK, SE,
UK, DE, BE, NL and LUX
Board of Directors
18**
Functional experts and
commercial leaders
5
Employees
18,973
Owners
11,262
Board of
Representatives
187*
Executive
Board
2
Executive
Management Team
7
Corporate governance
* 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
In 2017, 11,262 milk producers in Denmark,
Sweden, the UK, Germany, Belgium,
Luxembourg and the Netherlands were joint
owners of Arla. Last year, the cooperative had
11,922 joint owners. Refer to page 12 for more
detail. As a cooperative, all cooperative owners
have the opportunity to influence significant
decisions.
District councils
Each year, the cooperative owners convene for
a local annual assembly in Denmark, Sweden,
the UK and Central Europe (Germany, the
Netherlands, Belgium and Luxembourg) to
ensure democratic influence of the cooperative
owners in the seven owner countries. The
members in the district council elect members
to represent their district on the Board of
Representatives.
Board of Representatives
The Board of Representatives is the supreme
body comprising 187 members of whom 175
are cooperative owners, while 12 are Arla
employees. Cooperative owners are elected
every other year in odd years. Following the
2017 election, over 20 per cent of the members
are new and the diversity of the Board has
improved. 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
Appointed by 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 farmer owners and three
employee representatives. Two new members
joined the Board for the period 2017 to 2019,
replacing two members not seeking re-election.
Following the election this year, the Board
reappointed Åke Hantoft as Chairman and Jan
Toft Nørgaard as Vice Chairman. 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, maintaining
the accounts satisfactorily and appointing the
Executive Board. The Board of Directors is also
responsible for ensuring that Arla is managed in
the best interest of the farmer owners and
making decisions concerning the ownership
structure.
Area councils
Arla has four area councils that are sub-
committees of the Board of Directors and
consists of members of the Board of Directors,
as well as members of the Board of
Representatives. The area councils are
established in the four democratic areas:
Sweden, Denmark, Central Europe and the UK;
to take care of the matters that are of special
interest to the farmer owners in each
geographic area.
Owner strategy
As a thriving cooperative democracy, we are
developing an owner strategy to further evolve
and prepare Arla as a cooperative for the future.
The strategy will ensure the organisational
structure and processes are more uniform and
transparent across all seven owner countries.
In March 2017, the Board of Representatives
decided to adopt a new governance structure,
eligibility and election procedures, as well as an
annual meeting cycle. The first elections in the
new governance structure took place during
spring and the new aligned meeting structure
across all areas, for example two rounds of Area
Forum meetings, was implemented
successfully.
The owner strategy will continue to progress
into 2018. The next step will be considering
amendments to the Articles of Association to
support the new structure, which the Board of
Representatives will decide on in February.
Furthermore, the UK and Central European
cooperative members will make a decision in
May regarding potential direct membership.
These decisions are part of the owner strategy
and aim to achieve harmonisation following the
mergers in 2011-2015.
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Corporate governance
Corporate governance in Arla is shared
between the Executive Management Team
and the Board of Directors. Together they
define the company’s strategic direction
and ensure adherence thereof, organise
and manage the company, supervise
management and ensure compliance.
Executive Board
The Executive Board, appointed by the Board of
Directors, is responsible for 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. In the first quarter of
2018, Povl Krogsgaard, Vice CEO and Executive
Vice President Supply Chain, is retiring after a
longstanding career with Arla.
Executive Management Team
The Executive Management Team is responsible
for Arla’s day-to-day business operations,
preparing strategies and planning the future
operating structure. The Executive
Management Team consists of the Executive
Board plus three functional experts and two
commercial leaders: Europe and International.
In addition to 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 each other
informed on all significant developments in
their business area and align on all cross-
functional measures. In 2018, further increasing
the diversity of the team, Sami Naffakh, a French
national, will join Arla as an Executive Vice
President and Head of Supply Chain.
Functional experts
and commercial leaders
The leadership teams within the functional
areas and commercial zones are Arla’s other
executive bodies and focus on ensuring that
Arla is result-oriented across organisational
units, while also defining policies and sharing
and implementing best practices.
Employees
Arla has 18,973 employees globally, compared
to 18,765 last year. Our employees are
represented by three members in the Board of
Directors and 12 members in the Board of
Representatives.
OUR GOVERNANCEARLA FOODS ANNUAL REPORT 2017
Executive Mangagement Team
The Executive Management Team consists of the Executive Board plus three
functional experts and two commercial leaders: Europe and International. With
a range of different backgrounds and expertise, the Executive Management
Team is responsible for Arla’s day-to-day business operations, preparing
strategies and planning the future operating structure. In addition to their
overall responsibility, the members of the Executive Management Team are
individually responsible for managing their respective business areas.
Executive Board
Other Executive Management Team
1
Peder Tuborgh
CEO
Head of Milk, Members and Trading
Head of Arla Foods Ingredients
Year of birth: 1963
Nationality: Danish
3
Natalie Knight
CFO
Executive Vice President,
Finance, IT and Legal
Year of birth: 1970
Nationality: American
5
Hanne Søndergaard
CMO
Executive Vice President,
Marketing and Innovation
Year of birth: 1965
Nationality: Danish
7
Tim Ørting Jørgensen
Executive Vice President, International
Year of birth: 1964
Nationality: Danish
5
6
Peder has been with Arla for 30 years,
formerly under MD Foods, and has held
various senior management and executive
positions including Marketing Director,
Divisional Director and Executive Group
Director. He has worked in Germany,
Saudi Arabia and Denmark as part of his
longstanding career with Arla. He is also
the Chairman of the Board of Pandora and
the Vice Chairman of Aarhus University.
Above all, he enjoys spending time with his
wife, son and four daughters. His favourite
product is an Arla classic, Castello®.
Natalie joined Arla Foods as CFO in 2016,
following 17 years at adidas where she
held several senior finance positions,
including SVP Group Functions Finance,
SVP Brand and Commercial Finance, CFO
of adidas North America and VP Investor
Relations and M&A. Prior to adidas, Natalie
held Investor Relations roles in BASF and
Bankgesellschaft Berlin. After having lived
and worked in five countries, Natalie is
now based in Aarhus, Denmark with her
husband and teenage daughter. Her
favourite product is Arla® Protein, which
she loves as a healthy follow-up to a
variety of sport activities.
Hanne has been with Arla for 28 years, first
joining under MD Foods and then moving
to the UK where she played a leading role
in developing the Arla UK business. She
became the Vice CEO for Arla UK before
moving back to Denmark in 2010. With a
natural ability for marketing, Hanne was
responsible for Global Categories and
Brands before taking on her current role.
She lives in Aarhus with her partner and
enjoys kayaking and cooking. If she were
an Arla product, it would have to be Arla®
skyr with its Nordic heritage, and strong
and healthy characteristics.
Tim joined Arla in 1991 under MD Foods.
He has worked in many senior and
executive positions across Denmark, Saudi
Arabia, Brazil and Germany before
becoming the Executive Vice President for
International. Tim has been part of the
team since 2007. When he is not working,
Tim loves spending time with his wife and
four children. When he gets the chance, he
enjoys hunting and music. If he was an
Arla product, Tim would be Lillebror®, he is
the youngest brother, and after 26 years in
Arla, his favourite product is the staple
Danish summer dessert, Koldskål®.
2
Povl Krogsgaard*
Vice CEO
Executive Vice President, Supply Chain
Year of birth: 1950
Nationality: Danish
4
Ola Arvidsson
CHRO
Executive Vice President,
HR and Corporate Affairs
Year of birth: 1968
Nationality: Swedish
6
Peter Giørtz-Carlsen
Executive Vice President, Europe
Year of birth: 1973
Nationality: Danish
Povl has been with Arla for more than 30
years, and has served as Vice CEO since
2004 with the responsibility for Arla’s
supply chain and CAPEX. In his
longstanding career at Arla, Povl has also
held various senior management and
executive positions from Product Manager
to Executive Group Director. Povl is known
for his constant focus on increasing
profitability everywhere in the company.
His big passion is reading about history,
bird watching and his family, which
includes his wife and their three grown-up
sons. His favourite Arla product would
have to be Castello® Danablu cheese.
Ola joined Arla in 2006 as Corporate HR
Director, and has been the Chief HR Officer
of Arla since 2007. He previously came
from Unilever, where he held various
director positions across Europe and the
Nordics, with his last position as Vice
President in HR. Prior to Unilever, Ola
served as an Officer in the Royal Combat
Engineering Corps in the Swedish Army.
Ola dedicates his free time to his wife and
three children. His favourite product is a
cold glass of Arla® Mellanmjölk together
with one of his children’s homemade
cinnamon buns.
Peter joined Arla in 2003 as Vice President
of Corporate Strategy, and has held various
senior positions in Arla, including
Managing Director of Cocio
Chokolademælk and Executive Vice
President of Consumer DK and most
recently Consumer UK. He has been
Executive Vice President of Europe since
2016. Outside of Arla, Peter has also
served as the Vice CEO at Bestseller China
Fashion Group (Tianjin). Peter is currently
an executive advisor at FSN Capital
Partners AS since 2012. He enjoys road
biking, skiing and golfing, and spending
time with his partner their two children.
His favourite product is Unika® rød løber.
* In January 2018, Povl Krogsgaard retired after a longstanding career with Arla. Sami Naffakh joined Arla as an Executive Vice President and Head of Supply Chain.
OUR GOVERNANCEARLA FOODS ANNUAL REPORT 2017 1
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OUR GOVERNANCEARLA FOODS ANNUAL REPORT 2017 Board of Directors
Our Board of Directors has a wealth of knowledge, consisting of 15 elected
Arla farmer owners and three employee representatives. In 2017, we
welcomed two new members to the Board, Inger-Lise Sjöström and Simon
Simonsen. The composition of the Board of Directors reflects Arla’s
ownership. One of the Board of Directors’ responsibilities is to ensure that Arla
is managed in the best interest of all farmer owners.
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15
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OUR GOVERNANCEARLA FOODS ANNUAL REPORT 2017 1
Åke Hantoft
Chairman
2
Jan Toft Nørgaard
Vice Chairman
Year of birth: 1952
Nationality: Swedish
Member of the board since 2000
Year of birth: 1960
Nationality: Danish
Member of the board since 2000
3
Manfred Sievers
4
Harry Shaw
Year of birth: 1955
Nationality: German
Member of the board since 2013
Employee representative
Year of birth: 1952
Nationality: British
Member of the board since 2013
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Heléne Gunnarson
Johnnie Russell
Viggo Ø. Bloch
Markus Hübers
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9
Year of birth: 1969
Nationality: Swedish
Member of the board since 2008
Year of birth: 1950
Nationality: British
Member of the board since 2012
Year of birth: 1955
Nationality: Danish
Member of the board since 2003
Year of birth: 1975
Nationality: German
Member of the board since 2016
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Steen Nørgaard Madsen
Simon Simonsen
Ib Bjerglund Nielsen
Bjørn Jepsen
Year of birth: 1956
Nationality: Danish
Member of the board since 2005
Year of birth: 1970
Nationality: Danish
Member of the board since 2017
Employee representative
Year of birth: 1960
Nationality: Danish
Member of the board since 2013
Year of birth: 1963
Nationality: Danish
Member of the board since 2011
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Inger-Lise Sjöström
Torben Myrup
15
Manfred Graff
Year of birth: 1973
Nationality: Swedish
Member of the board since 2017
Year of birth: 1956
Nationality: Danish
Member of the board since 2006
Year of birth: 1959
Nationality: German
Member of the board since 2012
16
Håkan Gillström
Employee representative
Year of birth: 1953
Nationality: Swedish
Member of the board since 2015
17
Jonas Carlgren
Year of birth: 1968
Nationality: Swedish
Member of the board since 2011
Not pictured: Thomas Johansen and Palle Borgström, served until May 2017;
Jonathan Ovens, served until December 2017; and Arthur Fearnall, appointed in
February 2018.
OUR GOVERNANCEARLA FOODS ANNUAL REPORT 2017 Management remuneration
Arla’s executive remuneration policy is designed to encourage high performance and
support value creation. The policy supports alignment with our strategic direction and
the interests of our farmer owners. We have a structured approach to remuneration,
ensuring that salaries are unbiased towards gender, nationality and age.
Our philosophy
We want our executives and senior management to share our farmer owners interest. The remuneration package is constructed to ensure
attraction, engagement and retention of the best senior leaders, at the same time driving strong performance by means of 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.
Bringing together the
interests of our farmer
owners and top
management
Supporting
the growth of the
business
Retaining
senior executives in
critical positions
Making sure we offer
a competitive
remuneration package
6
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Our performance measures
Arla’s remuneration is designed to
enable us to recruit and retain
individuals with the expertise and
ability required to run a growing
international company, and to do
so in a way that drives our business
success and rewards executives
and senior management when
farmer owners are rewarded. Levels
of fixed remuneration are set
based on individuals’ experience,
contribution and function.
Board of Directors
The remuneration of the Board of
Directors comprises a fixed fee and
is not incentive-based. This
ensures that the Board pursues the
cooperative’s long-term interests
without taking into consideration
what this may mean in terms of
the value of incentive-based
remuneration. The Chairman and
the Vice Chairman receive a fee
that is three times and two times
the base fee respectively, and the
remaining members of the Board
receive equal compensation.
Beyond a minimal travel per diem,
no additional compensation is paid
for meeting attendance or
committee services. In 2017, the
Board of Directors received a three
per cent fee increase, in line with
the by-laws. The Board of Directors’
remuneration for the year is
approved annually by the Board
of Representatives.
Executive Board, Executive
Management Team and other
senior management
The Executive Board consists of
Arla’s CEO and Vice CEO, appointed
by the Board of Directors and
elevated from the Executive
Management Team. During 2017,
other senior management included
92 employees defined as Vice
Presidents and above. The Board of
Directors seeks to incentivise
executives and senior management
to ensure the continued positive
development of Arla and, as a result,
good value creation for our farmer
owners. The Board of Directors finds
that the best results are achieved
when a relatively high proportion of
an executive’s or senior leader’s
total remuneration is dependent on
achieving Arla’s financial, social and
environmental targets.
The remuneration package is
based on external benchmarks
against European and international
FMCG companies, providing a
competitive and sustainable mix of
fixed and variable pay. The majority
of the package is fixed pay and
consists of an annual base salary,
as well as a matching benefit
package including a pension
contribution. The variable pay
component consists of both an
annual short-term variable
incentive (STI) plan, as well as a
three-year long-term variable
incentive (LTI) programme. During
2017, the STI was based on
internally measured profitability,
strategic branded revenue growth,
net working capital and leadership
index, and the LTI was based on
strategic branded revenue growth
and performance according to
peer group index. The Board of
Directors assesses the fees paid to
the Executive Board annually,
based on recommendations from
the Chairmanship. In making
Fixed pay
its recommendations, the
Chairmanship is guided by relevant
benchmarks, including Arla’s peers
and for 2017, the salary was
maintained on par with last year.
Refer to Note 5.3.a. The Board of
Representatives is regularly
updated on variable pay parameters
and the development in variable
pay for executives and senior
management.
All executives and members of
senior management are employed
on terms according to international
standards, including adequate
non-compete restrictions, as well
as confidentiality and loyalty
restrictions.
Variable pay
(STI)
Variable pay
(LTI)*
Benefits
(pensions
etc.)
*LTI only applies to a small number of senior and executive management.
OUR GOVERNANCEARLA FOODS ANNUAL REPORT 2017 Diversity and inclusion
In Arla, we believe that no matter who you are, you can be yourself. Diversity and
inclusion are imperative to the success of our business and a diverse and inclusive
workforce creates energy, innovation and results. 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.
Promoting diversity and inclusion
As an organisation, we strive for an inclusive and welcoming culture for all employees. To achieve a diverse and inclusive workforce, the 30 to 70 per
cent ambition guides our initiatives and targets. Our aim is that all teams have a representation of a minimum of 30 per cent and no more than 70 per
cent of the same gender, nationality and age group. This is to secure diversity of thought in all teams and an environment of inclusivity, creativity
engagement and performance across Arla.
In our recruitment processes, we have a strong focus on ensuring high predictive validity in our assessment tools. We apply a competency-based
approach when assessing candidates to ensure decisions are data-based, thereby removing the bias in the selection process. All recruiters are
continuously trained in securing unbiased processes and being close to our hiring managers is also a way of making sure that we hire based on sound
arguments not led by intuition.
As men are highly overrepresented in our industry, the gender composition in our owner group reflects the composition among our farmer owners.
Similarly, the demographics of the Board of Representatives is representative of the owner group due to democratic elections every other year.
Our workforce
Nationality
Arla has employees from a total
of 74 countries. We focus on
non-core nationality parameters
to ensure continuous progress
towards a diverse workplace
regarding nationality. In 2017,
the majority of our workforce
originated from Denmark, Sweden,
the UK and Germany, with other
countries including Poland,
the Netherlands, Finland, India,
Saudi Arabia and the US, amongst
various others.
Age
Our employees have a wide range
of ages and we believe that a
workforce diverse in age groups
helps us better fulfil the wishes
and multi-faceted demands of our
consumers around the world. In
2017, the average employee age
across Arla as a whole was 40
years. Across all main age brackets,
Arla had balanced distribution of
employees.
Gender
Gender is another important
element of diversity, however, we
believe that experience, back-
ground, knowledge, skills and
insight are equally important.
Total Arla
Women comprise 28 per cent of
Arla’s entire workforce, consistent
with last year.
White collar
Blue collar
Total Arla
33%
40%
11% 21%
19% 14%
9% 10%
28% 15%
<30
22%
30-39 25%
40-49 24%
50-59 22%
7%
>60
Other
2017
28%
72%
2016
28%
72%
Executive Management Team
In 2017, the Executive Management
Team is unchanged from last year,
having a female representation of
29 per cent.
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Our owners
In accordance with section 99b of
the Danish Financial Statements
Act, Arla has set a medium-term
target to achieve a female
representation in the Board of
Directors of at least 20 per cent, to
be reviewed going forward. In
order to work towards this target,
members of the underrepresented
gender are put forward in the
elections for the Board of
Representatives.
Board of Directors
2017
12%
88%
2016
7%
93%
Board of Representatives
2017
29%
2017
71%
8%
92%
2016
29%
71%
2016
13%
87%
OUR GOVERNANCEARLA FOODS ANNUAL REPORT 2017
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We add the natural power of milk to the best
branded products in the world,
making it easier to live a healthy life.
The new doubleshot espresso with no added
sugar offers coffee lovers the opportunity to
experience coffee with a great StarbucksTM
experience when on-the-go.
Market overview
High market and farmer milk prices, as well as significant volatility characterised 2017
both on a European and global scale, mainly driven by record-high fat price increases.
2017 again proved that milk price fluctuations remain a fundamental reality within
the dairy industry. Worldwide milk production increased only modestly compared to
last year on the back of higher market prices. Whilst the overall macroeconomic
environment was healthy, the GBP remained under significant pressure as uncertainty
continues to strain the UK economy during Brexit negotiations.
6
4
Healthy macroeconomic environment
Macroeconomic development was positive by
nearly all measures during 2017, with stock
markets up at record levels globally. Gross
Domestic Product (GDP) increased in all major
regions, with Europe and the US growing
2.2 per cent and China up 6.8 per cent. The
development across emerging markets varied,
with oil producing countries such as Saudi
Arabia and Nigeria being impacted by continued
relatively low oil prices.
Ongoing discussions about increased
protectionism and potential negative impacts
on international trade from political events
abated following major elections in France and
Germany, signalling a lessening of nationalist
agendas throughout Europe. Despite positive
macroeconomic indicators, exchange rates for
the GBP remained low and the USD deteriorated
when measured against the EUR. The GBP
averaged 10.6 per cent below average rates of
the last three years due to ongoing Brexit
negotiations and open scenarios of negotiation
outcomes. For currency development and risk
mitigation measures refer to Note 4.3.2.
Strong milk price development driven by
historic increases in fat prices
Following milk price increases in late 2016,
markets were characterised by significant
volatility throughout 2017. European and
global prices diverged, which became most
obvious with European cheese prices increasing
significantly and then dropping again towards
the end of the year. This was in contrast to
Global Dairy Trade prices, which remained
relatively stable in 2017. In Europe, prices of fat
and protein, the two main components in milk,
deviated significantly. Fat moved from a 27
per cent discount in 2016 to a 47 per cent
premium versus protein in 2017, due to a lack
of supply and increasing demand for fat-rich
products versus plant-based alternatives. As a
result, fat reached an all-time high price level
at EUR 6,371 per tonne in the autumn of 2017.
This led to a unique market situation, where
prices paid to farmers hit three-year highs at
year-end, driven exclusively by the value of fat,
while skim milk products continued to sell at or
near intervention prices throughout the year.
The market for organic milk is relatively more
stable than the market for conventional milk,
therefore, given the increases in conventional
milk prices, the price difference between
organic and conventional milk became smaller.
Milk production increases in the second
half of the year due to higher milk prices
Since the removal of milk production quotas in
2015, European milk production has followed
price changes with a time lag of approximately
six to nine months. Milk production followed the
same pattern in 2017, with lower volumes in
the first half of the year, followed by an increase
in the second half. This development is the
opposite of the market price and production
patterns of 2016. As a result, European milk
production increased 1.5 per cent in 2017,
driven strongly by a surge in production late in
the year. Milk production in other regions also
increased in the second half of 2017, however
only moderately due to unfavourable weather
conditions in Oceania. New Zealand and US
full-year milk volumes grew by 2.5 per cent and
1.5 per cent respectively.
Global dairy demand grows modestly
driven by emerging markets
In a pattern similar to the last five years,
increasing demand for dairy products continued
to be driven largely by emerging markets,
where expanded distribution and increasing
consumption ensured demand growth at levels
at or above GDP growth rates. Two examples
were Nigeria and China, where dairy demand
grew 2.6 per cent and 8.7 per cent respectively.
Dairy demand remained solid in Europe and the
United States, driven mainly by cheese and
Global Dairy Trade development,
average, Whole Milk Powder
USD/TONNE
3,057
2,418
2,463
2015
2016
2017
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 butter, while relatively low oil prices in MENA
resulted in continued subdued demand.
Milk price volatility a fundamental
reality for the dairy industry
The paradigm of milk price volatility
highlighted in recent years is now a
fundamental reality for the dairy industry.
While milk prices and volumes both grew in
2017, this development masks the strong
movements, up and down, that were now
largely caused by changes in market supply.
Global markets moved from a supply deficit in
the first half of 2017 to a growing surplus
towards the end of the year. The growing
farmer milk supply towards the end of 2017
was driven by high milk prices. Hence, global
market milk prices revealed the shifting
supply and demand balance throughout 2017.
More concrete signs of sustained supply
growth from major exporters indicated that
global prices had peaked for the current cycle
and hence prices eased towards year-end.
7,000
6,000
5,000
4,000
3,000
0
Monthly average protein and fat prices
EUR/TONNE
Fat
47%
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5
Protein
-27%
2016
2017
6.8
Real GDP growth 2017
ANNUAL PER CENT CHANGE
1.9
2.0
1.8
1.7
2.2
2.2
3.1
3.6
China
Den m ark
Germ any
0.8
Nigeria
Russian Federation
0.1
Saudi Arabia
S w eden
U nited Kingdo m
U nited States
Europe
W orld
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 Financial review
In 2017, Arla delivered a 27.4 per cent increase in milk prices to our farmer owners
with a performance price of 38.1 EUR-cent/kg. Our commercial efforts in 2017
focused on converting increasing market prices for milk into tangible
sales price increases while also delivering strategic branded volume growth.
These efforts were rewarded with both an increase of EUR 1 billion in sales prices
and nearly achieving our Good Growth 2020 share of strategic branded
sales target of 45 per cent three years ahead of schedule.
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In 2017, revenue grew to EUR 10.3 billion
despite unchanged sales volumes, and a
leverage of 2.6 underlined our strong financial
position and cash flow. All key performance
indicators developed positively, with the
exception of conversion cost and working
capital, which were negatively impacted by
scale challenges in supply chain to accommo-
date growth in consumer demand for new milk
types and an increasingly complex brand and
product portfolio, as well as higher underlying
raw material prices respectively.
Milk price to farmer owners increases
due to strong commercial execution
Arla’s mission is to secure the highest value for
our farmers’ milk while creating opportunities
for their growth. This commitment to maximise
both short- and long-term value for our farmer
owners requires strong commercial execution
on all levels of our business. This is achieved by
constantly honing our price management
practices to succeed in increasingly volatile
markets, delivering favourable branded growth
to improve our product mix and profitability for
the future and always delivering firm cost
control. In most years, our development tends
to favour either high milk prices for our farmer
owners or taking important steps to enhance
the shape of our business going forward. In
2017, however, we were able to deliver on both
of these important objectives.
The performance price is the most relevant KPI
for Arla, measuring the value Arla creates per
kg of owner milk. In 2017, the average
performance price increased by 23.3 per cent
versus the prior year to 38.1 EUR-cent/kg,
compared to 30.9 EUR-cent/kg in 2016. The
drivers of this increase were higher sales prices, as
well as improving geographical and product mix.
The prepaid milk price represents the
on-account payment farmer owners receive
per kg of milk delivered during the settlement
period. The prepaid price increased to 35.8
EUR-cent/kg during the 2017 year versus 28.1
EUR-cent/kg during last year, which represents
a 27.4 per cent increase for our farmer owners.
Milk volumes from farmer owners versus prepaid milk prices
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k
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i
k
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K
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O
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1,200
1,100
1,000
900
800
Jan 2017
Feb 2017
M ar 2017
Apr 2017
M ay 2017
Jun 2017
Jul 2017
Aug 2017
Sep 2017
O ct 2017
N ov 2017
Dec 2017
Milk intake
Prepaid milk price
40
35
30
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C
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K
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p
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Arla milk intake in 2017 grew by 0.5 per cent
compared to 2016 levels. The overall
year-on-year stability masks a significant
seasonality in milk intake throughout the year.
During the first and second quarter of 2017,
milk intake contracted by -4.5 and -1.2 per cent
year-on-year in the aftermath of the low milk
prices of 2016. During the third and fourth
quarter of 2017, milk intake grew by 2.2 and
4.1 per cent year-on-year, driven by the significant
milk price increases over the last 12 months.
Strong revenue growth
due to higher sales prices and product
mix improvements
In 2017, revenue increased by 8.1 per cent to
EUR 10.3 billion, compared to EUR 9.6 billion in
2016. At Arla, there are four components of
revenue development: sales prices, volumes
and product mix, exchange rates, as well as
changes due to acquisitions and/or divestments.
Sales prices and to a lesser extent product mix
were the drivers of sales growth in 2017 despite
negative development of exchange rates and
lost revenues from divestments. As a result, the
underlying revenue development, excluding
foreign exchange effects and prior year
divestments, was 11.6 per cent.
The biggest impact on revenue development in
2017 was higher sales prices. Our strategic
decision to focus on increasing sales prices to
allow us to maximise milk prices paid to our
farmer owners resulted in EUR 1 billion in sales
price increases. We are especially proud that in
a year with significant price increases, we
achieved unchanged sales volumes and a
favourable volume/mix effect.
Improving product mix, especially the
continued strategic branded volume driven
revenue growth, representing an increase of
3.0 per cent compared to last year, versus
private label business, which declined 4.1 per
cent compared to last year, also contributed
positively to revenue development in 2017. As
a result, the share of branded business at Arla
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017
148 million
interactions
Digital interactions, million
2017
2016
148
87
6
7
years following commercial launch. Arla’s
innovation pipeline focuses on strategic growth
areas, with particular focus in 2017 placed on
Arla® Lactofree and Organic products, as well as
dairy products to be consumed on-the-go.
In recognition of increasing digital interfaces
with consumers, we began to officially measure
digital engagement for our brands in 2017.
Digital engagement measures interactions on
digital platforms such as Google, YouTube and
Facebook, through actions such as number of
likes, shares, comments, clicks, as well as
website and video viewing based on a
predefined time, as is an important indicator in
measuring our digital reach. 2017 was the year
of step change for digital engagement of our
brands. With increased media investment into
prioritised channels, our brands achieved an
impressive digital engagement of 148 million
interactions versus 87 million in 2016. As a
result of this increased brand prioritisation
throughout the Group, our brand recognition
equity and market share increased in 2017. In
particular, the Arla® brand won over 21 awards
during the year, based on campaigns and new
product launches, and ranked as the fastest
growing FMCG brand in many countries, for
example the Netherlands and the UK.
In 2017, revenue were also negatively impacted
with a full-year effect of EUR 90 million, due to
the sale of the Rynkeby juice business in 2016,
which was Arla’s last remaining non-dairy
business unit. For more detail on revenue
development please refer to Note 1.1.
Brand growth and innovation journey
continues
Our brands are at the heart of our business and
drive the majority of Arla’s profitability, and we
are committed to strengthening and growing
them further. In May, we opened the doors to
our new Innovation Centre, which will now
serve as the home to many product and brand
developments. Increasing branded sales is
critical for us to achieve stronger relative
profitability on a medium- and long-term basis.
We also know that branded revenue is less
volatile and drives a fundamentally strong
connection with consumers. For this reason,
Arla continues to focus on growing our branded
share of volume and increasing our investments
in product innovation.
Strategic branded volume driven revenue grew
3.0 per cent, a significant achievement in an
inflationary price environment. This development
was led by Nigeria in Sub-Saharan Africa, as well
as China and South-East Asia for International,
and Germany, the UK, the Netherlands and
Belgium for Europe. Brand share for 2017 was
44.6 per cent, compared to 44.5 last year,
illustrating continued growth in our brands
despite significant raw material price increases,
which impact non-branded revenue significantly
more and faster than branded revenue. At
constant prices, the brand share has improved
to 46.4 per cent, which represents a very
positive development.
In 2017, we identified an opportunity to
strengthen the positioning of the Arla® brand
with a renewed focus on innovation. We
formalised how we capture Arla’s innovation
pipeline and measure, monitor closely and
increase the value of products during the three
reached 44.6 per cent. This is already very close
to our Good Growth 2020 long-term ambition
of 45 per cent and represents our most
important quality of business indicator within
the Group.
Due to our increasing share of sales outside the
eurozone, Arla is also exposed to currency
fluctuations. In 2017, these negatively
impacted our revenue by EUR 250 million,
primarily due to the weakened GBP in the UK.
Revenue development
MILLION EUR
111
-90
1,000
-250
10,500
10,000
9,567
9,500
Revenue 2016
Sales prices
Volume/mix
10,338
M&A
Revenue 2017
Currency
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 Sales increase for all strategic brands
Strategic branded
revenue by brand
Arla®
The Arla® brand is at the heart of our global business and is the key driver
of our branded growth. In 2017, Arla® brand sales grew 10.1 per cent to
EUR 3,026 million. This development was largely driven by sales price
increases. Nevertheless, Arla® branded volumes grew by 3.4 per cent.
This improvement was primarily a result of the expansion in the milk-
based beverages, family and child nutrition and mozzarella categories. It
was also strongly impacted by new growth platforms such as Arla® BoB
(Best of Both), Arla Baby & Me®, Arla® skyr and Arla® Protein. The Arla®
brand also gained market share in most markets. In Europe, we recorded
market share gains in the UK, Germany, and the Netherlands. In our
International commercial segment, Arla market share grew most
significantly in Nigeria, Saudi Arabia, and China.
66%
Lurpak®
Revenue for Lurpak®, our leading brand for butter and spreads, increased
8.3 per cent to EUR 528 million in 2017. This was driven by sales price
increases at double-digit rates in all core markets. However, in maximising
these revenue gains, volumes decreased by 2.7 per cent. Nevertheless,
Lurpak® remains the world’s biggest global butter brand. We believe that
we are the industry leader in innovation for this category.
12%
6
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Castello®
Sales of our Castello® specialty cheese brand grew 3.1 per cent to EUR
181 million. However, volumes increased 2.7 per cent, and product mix
also improved through good growth in Australia and Norway.
Puck®
MENA’s leading brand, Puck®, continued to perform strongly for Arla in
2017. This multi-faceted brand is core to our sales in our largest
international commercial region. Puck® revenues grew 6.8 per cent in
2017 to EUR 339 million. In line with all of Arla’s brands, higher sales
prices were the biggest contributor to sales growth for the Puck® brand.
Volumes increased by 4.4 per cent in 2017. Puck® also made strong
market share gains in all markets where it is sold, and achieved the
number one position in Saudi Arabia.
4%
8%
Other supported brands : 10%
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 Revenue by commercial segment
MILLION EUR
Europe
6,568
2016: 6,321
Arla Foods Ingredients
651
2016: 545
International
1,616
2016: 1,428
Trading
1,503
2016: 1,273
6
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Sales grow in all commercial segments
Europe
Sales to European retail and
foodservice comprise our largest
commercial segment, accounting
for 63 per cent of total revenue
during 2017, and excludes
European revenue from Arla Foods
Ingredients and Trading. Sales in
Europe grew 3.9 per cent to EUR
6,568 million compared to EUR
6,321 million last year, driven by
higher sales prices and an
improved product mix. Despite
volume declines, adverse currency
effects and declining consumption
for the entire industry, we
maintained our position with
unchanged volumes of strategic
branded products. This proves that
we were able to deliver the optimal
mix of maximum sales price
increases while avoiding volume
trade-offs for our big brands. In the
European market, the branded
business grew approximately one
per cent, driven by butter and
yoghurt. For developments of each
of our strategic European markets
please refer to page 30.
International
Our International commercial
segment comprised 16 per cent of
total revenue during 2017. This
business focuses on sales to retail
and foodservice partners in
countries outside Northern and
Central Europe, and excludes the
International revenue from Arla
Foods Ingredients and Trading.
International sales grew 13.2 per
cent to EUR 1,616 million,
compared to EUR 1,428 million
last year. This development was
the result of strong volume
increases and to a lesser extent
price increases. In this high-margin
segment, volumes of our strategic
brands grew by 10.5 per cent
despite challenging market
dynamics in the Middle East, our
largest International commercial
region. China and Nigeria, where
sales grew 49.5 per cent and 55.6
per cent respectively, performed
particularly well. For more detail on
the performance of each of our
strategic International markets
please refer to page 32.
Arla Foods Ingredients
Arla Foods Ingredients (AFI) was
our fastest growing commercial
segment and delivered 6 per
cent of Arla sales in 2017. This
subsidiary, which is separately
managed and 100 per cent owned
by Arla, excels in producing highly
specialised whey-based ingredients
and child nutrition products for
Arla and third parties. In 2017,
sales grew 19.6 per cent to EUR
651 million versus EUR 545 million
last year. This strong revenue
development was driven by the
sale of higher volumes in our third
party manufacturing business, as
well as strong price and volume
growth in the value-added protein
segment. Refer to page 34 for
more on our AFI journey.
Trading
Trading encompasses our
business-to-business sales to
other companies for use in their
production, as well as industry
sales of cheese, butter or milk
powder. Although this is not a core
business segment, it is critical to
our success because it allows us to
better manage seasonal and
geographical availability in milk
intake. Trading and other sales
increased 18.0 per cent to EUR
1,503 million versus EUR 1,273
million last year as a direct result of
higher market prices. This
represents 15 per cent of total
revenue for Arla in 2017. However,
the trading share of overall milk
intake volumes remained stable at
20.2 per cent compared to 20.1
per cent last year, a result of our
continued focus on growing the
strategic branded portion of our
business.
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 A growing range of milk
types increases complexity
and cost in our production, but
as the world’s largest organic dairy
producer with 931 organic farms, Arla
is in a unique and strong position to
profit from the growing demand for
lifestyle dairy products
such as organic.
Net profit hitting target range
At Arla we target an annual net profit share in
the range of 2.8 to 3.2 per cent of revenue.
This allows us to balance the retained capital for
future investments, and provide supplementary
payment for our farmer owners while continuing
to pay out the largest possible share of our
profit to our farmer owners via the prepaid milk
price. To maximise overall prepaid prices to
farmer owners, which also helps drive increased
sales prices towards retail and foodservice
customers, we prioritised prepaid prices
throughout the year and thereby achieved a
profit share of 2.8 per cent for 2017. This
compares to a profit level of 3.6 percent last
year, when the sale of our Rynkeby subsidiary
impacted profit by 1.2 percentage points or
EUR 120 million. Net profit achieved in 2017
was positively influenced by 0.4 percentage
points or EUR 44 million, as a result of the sale
of shares in the Brazilian-based associate, Vigor.
The divestment was a strategic choice to
reduce our position in markets not driving
sizeable growth, as part of our ambition to focus
on continually expanding into growth markets
as the preferred dairy company for consumers.
Cost development in supply chain
challenged by growing complexity
Costs for Arla include four major areas: milk,
production, sales and distribution, as well as
administration. Operating expenses increased
8.8 per cent in 2017 to EUR 10.1 billion
7
0
compared to EUR 9.3 billion last year. However,
the majority of this increase was in the form of
higher milk prices paid to our farmer owners.
Costs excluding milk prices decreased by
3.9 per cent due a strong focus on cost
management, as well as due to the valuation
of inventory on the basis of the prepaid milk
price and currency translation rates. Read more
in Note 1.2.
As part of our efforts to prioritise sales prices
over volumes in 2017, sales volumes to retail
and foodservice customers declined slightly.
This meant scale efficiencies, which are only
possible with increasing volumes could not be
achieved in 2017. In addition, consumer
demand for a diverse range of dairy products
meant increased complexity caused by a
broader and more diverse portfolio of branded
products and use of different milk types, and
corresponding supply chain production costs.
As a result, our conversion cost index, which
measures the total cost of supply chain per kg
of processed milk, increased to an index of
103.9 compared to 99.2 last year. Supply chain
efficiency was especially challenged in
Germany, where strategic commercial decisions
throughout 2017 to step out of significant UHT
private label contracts negatively impacted
supply chain costs in this region.
We have a strong focus on monitoring cost
developments. In 2017, scalability became a
Composition of total operational costs
MILLION EUR
10,500
7
4
5
4
,
7
4
8
9
,
8
2
0
4
,
4
5
2
9
,
8
4
0
5
,
6
6
0
0
1
,
5,250
0
0
3
5
,
6
2
2
5
,
8
1
0
5
,
0
2015
2016
2017
Weighed-in raw milk
Other non-milk costs
Total operational costs
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 less relevant cost performance indicator for
our business, as it measures the relationship
between retail and foodservice volume growth
and capacity costs. With increased volatility in
the dairy industry, the ability to manage an
optimal trade-off between retail and food service
and more trading-related products becomes
increasingly important and we therefore need a
core value driver that holistically reflects our cost
development. The capacity cost index exempli-
fies the cost of running our general business as a
suitable performance driver. In 2017, we reached
a capacity cost index of 101.9, primarily driven by
Arla Foods Ingredients and International to
support the strong commercial growth.
Strong financial leverage proves
increasing cash generation capabilities
in 2017
Our balance sheet is a critical lever for success.
It provides Arla the financial strength to invest in
delivering our strategy, Good Growth 2020, and
continually developing to create the future of
dairy. Arla is considered to be a robust
investment grade company, and we continually
strive to uphold this status, which requires a
strong balance sheet.
Financial leverage is calculated as the ratio of
net interest-bearing debt to profitability, i.e.
EBITDA. The ratio measures Arla’s ability to
generate profit compared to our net financial
debt. Financial leverage is our most important
balance sheet performance indicator, and we
have therefore defined a long-term target range
of 2.8 to 3.4 for this key ratio.
In 2017, financial leverage was successfully
delivered below our target range at 2.6. The
underlying performance excluding gains from
one-offs, Rynkeby in 2016 and Vigor in 2017,
was stable at approximately 2.8. Net interest-
bearing debt, excluding pension liabilities, was
unchanged at EUR 1.6 billion in 2017,
compared to EUR 1.6 billion last year. EBITDA
was EUR 738 million in 2017 versus EUR 839
million in the prior year.
The increase in milk prices negatively impacted
working capital. Inventory values on our
balance sheet grew 18.5 per cent to EUR 1,126
million versus EUR 950 million last year, driven
by higher underlying raw material prices and
slightly higher stock on hand. Receivables, also
impacted by higher sales prices, further
increased 7.5 per cent to EUR 942 million
versus EUR 876 million last year, and reduced
our absolute cash position. Working capital in
days also slightly deteriorated compared to last
year despite significant improvements in trade
payables and trade receivables due to the
increased use of our supply chain financing
programme as well as a continued focus on
cash collection and overdue reduction.
However, the slightly increased stock on hand,
to improve delivery accuracy as well as a
change in product mix, partly offset these
improvements.
Approved capital expenditure, also referred to
as CAPEX, for 2017 was EUR 335 million in
2017, increasing by 46.9 per cent from EUR
228 million last year. Actual spend of EUR 298
million was incurred in 2017 due to the timing
of finalising investment projects. Major CAPEX
focus areas in 2017 included new production
methods, production capacity expansions, and
investments based on non-GMO feed milk
and organic.
Solid cash flow in 2017
Cash flow from operating activities decreased to
EUR 386 million compared to EUR 806 million
last year, mainly due to the increase in milk
price and the corresponding increase in trade
receivables and inventory values. Consequently,
free operating cash flow for 2017 was EUR 100
million, compared to EUR 501 million last year.
Cash flow from investing activities was EUR
-219 million compared to EUR -167 million in
2016. The difference was mainly driven by the
sale of Rynkeby in 2016. Furthermore, our
increased approved CAPEX volume did not fully
materialise in 2017 due to the timing of
projects. As a consequence of the reduced free
cash flow, less debt was paid off in 2017
resulting in cash flow from financing activities of
EUR -155 million compared to EUR -624 million
last year. A supplementary payment of EUR 120
million was made in line with the Board of
Representative’s decision to pay out 1 EUR-cent/
kg of member milk to our farmer owners.
7
1
Leverage
2.6
Net interest-bearing debt
including pensions
MILLION EUR
7
9
4
2
,
7
1
0
2
,
3
1
9
1
,
2017
2016
2015
2.6
2.4
3.3
Target 2017 2.8 - 3.4
2015
2016 2017
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 Financial outlook
In 2018, we will continue our journey of branded transformation and are committing
our investments into areas that deliver the most growth to our business,
guided by our strategy, Good Growth 2020. The dairy industry remains volatile, and
market price declines in the first quarter of the year are creating further uncertainty
in the marketplace. However, demand for our products continues to be strong
as we shape and shift our global strategic brands to create the future of dairy.
7
2
Solid underlying economic growth
continues, driven by emerging
economies
We enter 2018 with the expectation of slightly
higher GDP growth in most markets compared
to 2017. Demand signals for dairy products also
look positive. Underlying growth is again
expected to be predominantly driven by a
growing demand from emerging economies
where rising business investment, increasing
disposable incomes, better infrastructure, and
growing access to the Internet have contributed
to strong growth rates in markets like China,
Nigeria, Ghana, and Bangladesh. Despite solid
macroeconomic signals overall, uncertainty
remains in several European and global
countries where recent and pending elections
have the potential to impact trade as well as
fiscal and monetary policies. We do not
currently foresee significant changes in global
consumption trends or big shifts in global trade
patterns during 2018. Continuous monitoring
and ensuring our ability to react and adapt
quickly will be imperative in the year ahead, and
beyond.
Continued focus on managing sales
prices and margins across our portfolio
Within Arla, we will continue to focus on
delivering the highest possible milk price for our
farmers, and a competitive milk price in the
market. As volatility in the underlying commodi-
ty market continues, we are strengthening our
efforts in price management with our retail and
foodservice customers.
successful 2017, where we achieved sales price
increases of EUR 1 billion across our portfolio,
we expect revenue in 2018 to be at a similar
level of between EUR 10 to 10.5 billion. This will
result from higher milk volumes and improving
product mix being at least partially offset by
lower milk prices and negative exchange rate
developments.
Market milk price environment
declining from a high level
Market milk prices have begun to decline as we
enter 2018. However, even if price declines
persist, we continue to expect reasonable price
levels in 2018. In response to strong market and
farmer milk price increases in 2017, Arla
expects a growing milk supply in 2018 as farmer
owners react to higher prices and increase their
production on the farm.
Accelerated focus on branded growth
In 2018, we will continue to expand the value
of our business by accelerating and sharpening
the profile of our strategic brands Arla®,
Castello®, Lurpak® and Puck®. We will introduce
new sub-brands to our broad product portfolio
and continue to invest in our brands to increase
the share of branded sales, thereby ensuring
our future growth and profitability. We plan to
deliver a strategic branded volume driven
revenue growth of 1 to 3.5 per cent, and a
brand share greater than 45 per cent as we
invest in areas where we see the most growth
potential, supported by exciting new marketing
initiatives.
Managing an increasingly diverse milk pool to
meet the demand for a broad range of lifestyle
dairy products, we aim to implement gross
margin-enhancing initiatives to optimise the
balance between complexity and customer
requirements, short-term price volatility and
long-term market positions. After a very
International growth remains a firm focus
As part of our ambition to secure a high milk
price for our farmer owners in the long-term, we
will focus on driving growth in high-profit areas,
including many of our International markets. In
2018, we plan to launch new and innovative
products in profitable categories across the
globe. This includes boosting our milk-based
beverages business, building infant formula,
relaunching our successful Arla Dano® brand,
driving Arla® Organic into International markets,
and accelerating our foodservice business. Also,
we are planning to strengthen our local
partnerships and production footprint in
International markets to provide a sustainable
base supporting our growth. As a result, we aim
to achieve an International share of our
business greater than 20 per cent in 2018.
Approved CAPEX investments
MILLION EUR
527
527
335
228
210
2015
2016
2017
2018
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 Significantly investing
in marketing and CAPEX
Safely within our leverage target range of 2.8
to 3.4, in 2018, we will increase our CAPEX
significantly, enabling further growth and value
creation by investing in innovative technology
and new, expanded and improved production
capacity. We will focus on increasing our
European production capacity in 2018. A large
part of investments targets projects aimed at
growing Arla’s business outside of Europe,
where our strategic growth markets include the
MENA, China and Southeast Asia, Sub-Saharan
Africa and the US. With a continued investment
in healthy and natural lifestyle dairy products, a
new Lactofree production will be established in
the UK. In addition, Arla Foods Ingredients will
drive value-add speciality products by investing
in groundbreaking technology and capacity
expansions. Furthermore, we will pursue
renewable energy sources, helping to reduce
our carbon emissions and achieve our goal of
having at least half the energy we use derived
from renewable sources like biomass, wind and
water by 2020.
Profit share 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 profit share for 2018
in the range of 2.8 to 3.2 per cent of revenue.
More visibly than in previous years, we expect
to see seasonality in our operations impacting
the 2018 half-year results. Our net profit target
range is a full-year target, and results at
half-year 2018 are expected to be below
the annual target range.
Committed to our strategy
Good Growth 2020
We are committed to our strategy Good Growth
2020, and will continue to focus management
attention where we believe it adds most value
for our farmer owners. In a volatile market and
an uncertain geopolitical environment, we will
build the strength of our brands and business.
In 2018, we will also focus energy to realise
efficiencies through our transformation
programme, Calcium. Calcium will cover
activities throughout Arla and our ambition is
to achieve a bottom line impact of EUR 30
million in 2018. Moving forward, we anticipate
even greater savings and plan to reinvest
significantly into areas that fuel future growth.
The Executive Management Team has
presented eight essential business priorities for
2018. Read more on page 22.
Expectations for 2018
7
3
Revenue
Profit share
10-10.5
BILLION EUR
2.8-3.2%
OF REVENUE
Brand share
>45%
International share
>20%
Strategic branded volume driven
revenue growth
1-3.5%
Calcium
30
MILLION EUR
Leverage
2.8-3.4
OUR FINANCIAL REVIEWARLA FOODS ANNUAL REPORT 2017 D
E
T
A
D
I
L
O
S
N
O
C
S
T
N
E
M
E
T
A
T
S
I
L
A
C
N
A
N
I
F
Whatever moves you, Arla® skyr
brings you further. Arla® skyr is a great source
of go-to goodness being low fat, high in
protein and low in sugar.
Arla® skyr has been hugely successful in
Europe. In Germany, for example, sales
nearly doubled in 2017, making an
important contribution to achieving our
Good Growth 2020 strategy.
Income statement
(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
7
6
Tax
Profit for the year
Minority interests
Arla Foods amba's share of profit for the year
Note
2017
2016 Development
1.1
1.2
1.2
1.2
1.3
1.3
3.6
3.4
3.6
1.2
4.1
4.1
5.1
10,338
-8,063
2,275
-1,584
-419
71
-39
44
37
385
694
44
-353
385
13
-77
321
-22
299
-14
285
9,567
-7,177
2,390
-1,642
-435
91
-29
120
10
505
719
120
-334
505
7
-114
398
-42
356
-9
347
8%
12%
-5%
-4%
-4%
-22%
34%
-63%
270%
-24%
-3%
-63%
6%
-24%
86%
-32%
-19%
-48%
-16%
56%
-18%
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Profit appropriation
(EURm)
2017
2016
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
299
-14
285
124
3
127
120
38
158
285
356
-9
347
121
3
124
193
30
223
347
Significant increase in performance price
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 farmer
owners. The performance price is
calculated as the standardised prepaid
milk price, included in production
costs, plus Arla Foods amba’s share of
profit for the year, divided by milk
volume supplied. In 2017, the
performance price was 38.1
EUR-cent/kg owner milk, compared
to 30.9 EUR-cent/kg owner milk last
year. For more detail, please refer to
the financial review on page 66.
The higher sales prices achieved
during 2017 significantly impacted
both revenue and our ability to
increase the payment for milk from
farmer owners and thereby our cost.
Furthermore, the income statement
was again impacted negatively by
effects from currencies this year.
Revenue was adversely impacted by
EUR 250 million, while operational
costs were reduced by EUR 192
million. For more detail refer to
Note 1.
Net profit of the Group was EUR 299
million compared to EUR 356 million
last year, corresponding to a 16 per
cent decrease, due to the effect from
the divestment of Rynkeby in 2016.
Net profit allocated to the farmer
owners of Arla Foods amba amounted
to EUR 285 million, which constitutes
2.8 per cent of revenue compared to
3.6 per cent last year.
7
7
The proposed supplementary
payment is EUR 127 million,
including interest, corresponding to
1 EUR-cent/kg owner milk.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Comprehensive income
(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:
Value adjustments of hedging instruments
Value adjustments of financial assets classified as available for sale
Adjustments related to foreign currency translation
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
7
8
Note
4.7
4.4.b
2017
299
58
-10
48
14
-77
-1
32
331
321
10
331
2016
356
-132
21
-22
-2
-40
-5
-180
176
169
7
176
Comprehensive income
Total comprehensive income
amounted to EUR 331 million,
compared to EUR 176 million last
year. Other comprehensive income
amounted to EUR 32 million and was
affected by a positive development in
defined benefit plans amounting to
EUR 58 million, compared to a loss of
EUR 132 million last year. Read more
about pension liabilities in Note 4.7.
Adjustments related to currency
translation had a negative effect of
EUR 77 million, while the value
adjustment of hedging instruments
had a positive impact of EUR 48 million.
Other comprehensive income
explained
Other comprehensive income
includes revenue, expenses, gains and
losses that are excluded from the
income statement. Typically, they
have not yet been realised and mainly
relate to adjustments related to
currency translation, actuarial gains
and losses on pension plans and
unrealised value adjustments on
hedging activities to secure future
cash flow.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Balance sheet
(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
Inventory
Trade receivables
Derivatives
Current tax
Other receivables
Securities
Cash and cash equivalents
Total current assets
Total assets
Equity and liabilites
Equity
Common capital
Individual capital
Other equity accounts
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
Total liabilities
Total equity and liabilities
Note
2017
2016 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
811
2,212
401
53
43
31
3,551
1,126
942
19
1
181
511
91
2,871
6,422
1,781
502
-77
127
2,333
36
2,369
277
12
59
1,206
1,554
1,013
1,098
11
87
11
279
2,499
4,053
6,422
825
2,310
434
51
74
20
3,714
950
876
31
1
222
504
84
2,668
6,382
1,595
503
-65
124
2,157
35
2,192
369
12
80
1,281
1,742
947
995
13
168
18
307
2,448
4,190
6,382
7
9
-2%
-4%
-8%
4%
-42%
55%
-4%
19%
8%
-39%
0%
-18%
1%
8%
8%
1%
12%
0%
18&
3%
8%
3%
8%
-25%
0%
-26%
-6%
-11%
7%
10%
-15%
-48%
-39%
-9%
2%
-3%
1%
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Changes in equity
Common capital
Individual capital
Other equity accounts
t
n
u
o
c
c
a
l
a
t
i
p
a
C
829
-
-
-
-
-
-
48
48
3
-
-
-
15
18
895
909
-
-
-
-
-
-
-111
-111
-
-
-
-
-
31
31
829
l
a
i
c
e
p
s
r
o
f
e
v
r
e
s
e
R
s
e
s
o
p
r
u
p
766
-
-
120
-
-
120
-
120
-
-
-
-
-
-
886
573
-
-
193
-
-
193
-
193
-
-
-
-
-
-
-
766
s
e
t
a
c
fi
i
t
r
e
c
r
e
n
w
o
d
e
s
a
b
-
y
r
e
v
i
l
e
D
87
-
-
-
-
-
-
-
-
-
-7
-
-
-1
-8
79
94
-
-
-
-
-
-
-
-
-
-6
-
-
-
-1
-7
87
l
a
t
i
p
a
c
d
e
t
u
b
i
r
t
n
o
C
416
-
-
-
38
-
38
-
38
-
-21
-
-
-10
-31
423
422
-
-
-
30
-
30
-
30
5
-16
-
-
-
-25
-36
416
s
r
e
n
w
o
o
t
t
n
e
m
y
a
p
y
r
a
t
n
e
m
e
l
p
p
u
s
d
e
s
o
p
o
r
P
124
124
3
-
-
-
127
-
127
-
-
-
-120
-4
-124
127
113
121
3
-
-
-
124
-
124
-
-
-
-
-108
-5
-113
124
s
t
n
e
m
u
r
t
s
n
i
i
g
n
g
d
e
h
e
u
l
a
v
r
o
f
e
v
r
e
s
e
R
f
o
t
n
e
m
t
s
u
d
a
j
-122
-
-
-
-
-
-
47
47
-
-
-
-
-
-
-75
-95
-
-
-
-
-
-
-27
-27
-
-
-
-
-
-
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-122
e
l
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r
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14
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54
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92
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T
2,157
124
3
120
38
-
285
36
321
3
-28
-
-120
-
-145
2,333
2,113
121
3
193
30
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347
-178
169
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-125
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299
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331
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-154
2,369
2,148
121
3
193
30
9
356
-180
176
5
-22
-8
1
-108
-
-132
2,192
8
0
(EURm)
Equity at 1 January 2017
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
Supplementary payment to owners
Foreign exchange adjustments
Total transactions with owners
Equity at 31 December 2017
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
Understanding 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 are explained in detail:
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 on page 81, ensures that the
account cannot 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 to 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
to these accounts will, subject to
approval by the Board of Representatives,
be paid out when owners 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 supplementa-
ry 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 are disclosed
separately and cannot be used for
payment to owners. These include
reserves for value adjustment of
hedging instruments, the available for
sale reserve and the reserve for foreign
exchange adjustments.
Minority interests
Minority interests include the share of
Group equity attributable to holders of
minority interests in Group companies.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Equity improved
During 2017, equity increased by EUR
177 million compared to last year.
Profit appropriation
Proposed supplementary payment is
EUR 124 million, corresponding to
1 EUR-cent/kg owner milk. Interest on
consolidated contributed capital
amounts to EUR 3 million, which gives
rise to a proposed supplementary
payment of EUR 127 million. The
average supplementary payment of
1 EUR-cent/kg owner milk is
unchanged compared to last year.
Profit appropriation
cooperative. It is expected that
EUR 30 million will be paid out in
2018 to owners resigning or retiring.
The gain on the divestment of the
associated company Vigor, amounting
to EUR 44 million, was 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 114
million. This is split into 1/3 to
individual capital (contributed capital),
amounting to EUR 38 million, and 2/3
to common capital (reserve for special
purposes), amounting to EUR 76
million.
Other comprehensive income
Other comprehensive income
amounting to a gain of EUR 32 million
is primarily attributable to actuarial
gains on pension liabilities, value
adjustments on hedging instruments
and net assets measured in foreign
currencies.
Payments to and from owners
A supplementary payment relating to
2016 totalling EUR 120 million was
paid out in March 2017. Additionally,
EUR 28 million was paid out to owners
resigning or retiring from the
Performance price
38.1
EUR-cent/kg
Prepaid
35.8 EUR-cent/kg
Profit for the year
285*
2.30 EUR-cent/kg
EURm
Supplementary payment:
1 EUR-cent/kg owner milk
Supplementary payment
124 EURm
3**
127
EURm
EURm
Consolidation
114 EURm
44***
158
EURm
EURm
Consolidation principles:
Common capital 2/3
Individual capital 1/3
Common capital
76 EURm
44***
120 EURm
EURm
Individual capital
38 EURm
8
1
* Based on profit allocated to owners of Arla Foods amba ** Interest on contributed capital: 0.04 EUR-cent/kg owner milk *** Gain on the divestment of associated company Vigor
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 denominated
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 basis of the most recent
annual
report presented under IFRS.
Individual capital accounts and
reserve for special purposes are not
covered by the non-impairment
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.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Cash flow
(EURm)
Note
2017
2016
EBITDA
Gain from sale of enterprise
EBITDA excluding gain from sale of enterprise
Share of results in joint ventures and associates
Change in net 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
8
2
Cash flow from investing activities
Free cash flow
Supplementary payment regarding the previous financial year
Paid out from equity regarding terminated membership contracts
Loans obtained, net
Payment to pension liabilities
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
738
-44
694
-37
-200
8
-10
7
-52
5
-29
386
-50
-248
12
-286
100
-7
74
67
-219
167
-120
-28
32
-39
-155
12
84
-5
-
91
839
-120
719
-10
138
-3
22
12
-59
5
-18
806
-58
-263
16
-305
501
-
138
138
-167
639
-108
-22
-449
-45
-624
15
70
-8
7
84
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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.
flow is a measure of the amount of
cash generated after investing
activities.
A supplementary payment of
EUR 120 million was made in relation
to the 2016 profit allocation. Further
payments, representing EUR 28
million in individual capital, were paid
out to owners who resigned or retired.
Combined cash and cash equivalents
as at 31 December 2017 were
EUR 91 million, compared to
EUR 84 million last year.
Solid cash flow
Cash flow from operating activities
was EUR 386 million, significantly
impacted by additional cash tied up in
working capital due to higher milk
prices. This represents a reduction
compared to last year, where lower
milk prices had a positive effect on
working capital.
After operating investments of EUR
286 million, the free operating cash
flow was EUR 100 million. Free
operating cash flow is a measure of
the amount of cash generated by
normal business operations.
As a result of our financial investing
activities, primarily related to sale of
the investment in Vigor, the free cash
flow was EUR 167 million. Free cash
Development in cash flow
(EURm)
900
800
700
600
500
400
300
200
100
0
694
-200
-286
-148
84
-7
-46
91
Loans obtained,
Cash 1 January 2017
Supplementary payment
EBITDA excluding gain
Operating investing activities
Net working capital
including pensions
and leaving members
from sale of enterprise
Other
Cash 31 December 2017
8
3
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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
2017. The annual report was 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 2017 and
of the results of the Group’s and the
parent company’s activities and
cash flows for the financial year
1 January to 31 December 2017.
In our opinion, 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
flow, as well as a description of the
most significant risks and uncertain-
ties that may affect the Group and the
parent company.
We hereby recommend the annual
report for adoption by the Board of
Representatives.
Aarhus, 20 February 2018
8
4
Peder Tuborgh
CEO
Åke Hantoft
Chairman
Jan Toft Nørgaard
Vice Chairman
Viggo Ø. Bloch
Jonas Carlgren
Arthur Fearnall
Manfred Graff
Heléne Gunnarson
Markus Hübers
Bjørn Jepsen
Steen Nørgaard Madsen
Torben Myrup
Johnnie Russell
Manfred Sievers
Simon Simonsen
Inger-Lise Sjöstrom
Håkan Gillström
Employee
representative
Ib Bjerglund Nielsen
Employee
representative
Harry Shaw
Employee
representative
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 Introduction
The following sections provide additional disclosures supplementing the primary
financial statements. This section gives a summary of the basis for preparation,
applied materiality, description of significant accounting estimates and assessments
performed by management and currency translation exposure. Further detail
can be found in the individual notes to the financial statements.
Basis for preparation
The annual report is based on the Group’s
monthly reporting procedures, where Group
entities follow a structured process, providing
consistent financial reports, which form a basis
for both internal and external reporting purposes.
Group entities are required to report using
standard accounting principles in accordance
with the International Financial Reporting
Standards (IFRS). At year-end, ordinary monthly
reporting is supplemented with additional
disclosures.
and coordinated with the respective sub-entities.
Consolidation also follows a standardised
monthly process, supported by relevant controls.
The Group uses a standard ERP system
implemented in the majority of Group entities.
Through standardised and harmonised processes
and controls, there is a continuous focus on
securing the reporting quality and avoiding
surprises. EY, the Group’s external auditors,
conducts an annual audit, which is centralised
The information in the annual report is presented
in classes of similar items in the financial
statements as required by IAS 1. For more detail
on the basis for preparation and accounting
policies applied, please refer to chapter 5.6.
Applying materiality
When preparing the annual report, management
seeks to improve the value of the information in
the report by focusing on information that will
help the understanding of the Group’s
performance in the reporting period and the
financial position at year end. The focus is on
presenting information that is considered of
material importance for our stakeholders, rather
than generic descriptions.
Disclosures that are required by IFRS are included
in the annual report, unless the information is
considered of immaterial importance to the users
of the annual report. Materiality is not applied for
items where disclosures are required for control
purposes.
8
5
Significant accounting estimates and
assessments by management
Preparing the Group’s consolidated financial
statements requires management to make
accounting estimates and judgements that affect
the recognition and measurement of the Group’s
assets, liabilities, income and expenses. The
performed estimates and judgements are based
on historical experience and other factors. By
nature, these are associated with uncertainty and
unpredictability, which can have a significant
effect on the amounts recognised in the
consolidated financial statements.
The most significant accounting estimates relate to:
Measurement of revenue and rebates
Revenue, net of rebates, is recognised when
goods are transferred to customers. Estimates are
applied when measuring the accruals for rebates
and other sales incentives.
The majority of rebates are calculated using
terms agreed with the customer. For some
customer relationships, the final settlement of
the rebate depends on future volumes, prices
and other incentives. Thus, there is to some
degree an element of uncertainty relating to the
exact value. Read more in Note 1.1 Revenue.
Valuation of goodwill
Estimates are applied in assessing the value in
use of goodwill.
Goodwill is not subject to amortisation but is
tested annually for impairment. Significant
estimates are performed when assessing
expected future cash flow and setting discount
rates. The majority of our goodwill is allocated to
the activitives in the UK. Following the Brexit vote,
expected cash flows supporting the carrying value
of goodwill are inherently more uncertain. Read
more in Note 3.2 Impairment tests.
Classification of investment in associated
companies
To classify an investment as an associated
company requires significant influence in the
company. Judgement is necessary in determining
when significant influence exists. The Group has
exercised judgement in classifying the
investments in COFCO Dairy Holdings Limited
and Lantbrukarnas Riksförbund. Read more in
Note 3.4 Joint ventures and associates.
Valuation of inventory
Estimates are applied in assessing net realisable
values of inventory. Most significantly, this
includes the assessment of expected future
market prices and the quality of certain products
within the cheese category, some of which need
to mature for up to two years. Read more in Note
2.1 Net working capital.
Valuation of pension liabilities
The Group uses external and independent
actuaries when determining the value of pension
liabilities. When measuring the Group’s defined
benefit plans, judgements are performed when
setting actuarial assumptions such as discount
rate, expected future salary increases, inflation
and mortality. The actuarial assumptions vary
from country to country, based on national
economic and social conditions. They are set
using available market data and compared with
benchmarks to secure that they are set
consistently from year to year and in compliance
with best practice. Read more in Note 4.7
Pension liability.
Currency exposure
The Group’s financial reporting is significantly
exposed to currencies, both due to transactions
conducted in currencies other than the EUR, and
due to the translation of financial reporting from
entities not part of the eurozone. The most
significant exposure relates to financial reporting
from entities operating in GBP and SEK, and to
transactions relating to sales in USD or
USD-related currencies. Read more in Note 4.3.2
Currency risk.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
NOTE 1
REVENUE AND
OPERATIONAL COST
Note 1 Operating profit
87 Note 1.1 Revenue
88 Note 1.2 Costs
90
Note 1.3 Other operating income and costs
Note 2 Net working capital
92 Note 2.1 Net working capital
Note 3 Capital employed
95 Note 3.1 Intangible assets
96 Note 3.2 Impairment tests
97 Note 3.3 Property, plant and equipment
99 Note 3.4 Joint ventures and associates
101 Note 3.5 Provisions
101 Note 3.6 Purchase and sale of business or activities
Note 4 Funding
104 Note 4.1 Financial items
105 Note 4.2 Net interest-bearing debt
110 Note 4.3 Financial risk
110 Note 4.3.1 Liquidity and Funding risk
112 Note 4.3.2 Currency risk
114 Note 4.3.3 Interest rate risk
115 Note 4.3.4 Commodity price risk
116 Note 4.3.5 Credit risk
117 Note 4.4 Derivative financial instruments
119 Note 4.5 Financial instruments disclosed
120 Note 4.6 Transfer of financial assets
120 Note 4.7 Pension obligations
Note 5 Other areas
125 Note 5.1 Tax
127 Note 5.2 Fees to auditors appointed by the Board of Representatives
127 Note 5.3 Management remuneration and transactions
128 Note 5.4 Contractual commitments and contingent liabilities
128 Note 5.5 Events after the balance sheet date
128 Note 5.6 General accounting policies
130 Note 5.7 Group chart
Note 1.1 Revenue
Higher sales prices and better brand positions
Revenue increased by 8.1 per cent to
EUR 10,338 million, compared to
EUR 9,567 million last year. The
underlying revenue development,
excluding foreign exchange effects
and divestments, was 11.6 per cent.
Milk intake was 13.9 billion kg in 2017,
unchanged compared to the milk
intake of 13.9 billion kg last year.
The strong increase in revenue was a
direct result of higher sales prices in
2017 compared to last year. Arla’s
strategic decision to focus on achieving
sales prices to allow us to maximise
owner milk prices contributed to a
EUR 1,000 million, or a 10 per cent
increase in revenue. In a year with
significant price increases, sales
volumes were unchanged and a
favourable volume/mix effect
contributed to an increased revenue
of EUR 111 million. Branded sales
represented 44.6 per cent of total
sales in 2017, compared to 44.5 per
cent last year, and strategic branded
volume revenue growth was 3.0 per
cent.
represented the last non-core
business activity within Arla, thus
enabling sole focus on the dairy
sector.
In 2017, Arla divested Vigor. This has
and will not impact revenue as it was
an associated company.
The increase in revenue was
negatively impacted by exchange rate
developments of EUR 250 million,
driven primarily by the weakened GBP
with the UK representing approximately
25 per cent of total revenue. The
divestment of the Rynkeby juice
business including the related
distribution activities in 2016
attributed to a negative full-year
impact of EUR 90 million. Rynkeby
Europe is Arla’s largest commercial
segment, comprising
63 per cent of total revenue,
compared to 66 per cent last year.
International accounts for 16 per cent
of Arla’s revenue compared to 15 per
cent last year. The increase in revenue
for International reflects a revenue
growth of 13.2 per cent and a retail
and foodservice volume driven
revenue growth of 8.4 per cent,
primarily resulting from increased
sales in China and Nigeria.
The remaining part is contributed by
Trading and other with 15 per cent, up
2 per cent due to price increases on
the commodity market. Arla Foods
Ingredients comprises 6 per cent of
total revenue, remaining on the same
level as last year.
The strategic branded revenue split by
brand remains largely unchanged
compared to last year. The four
strategic brands, Arla®, Lurpak®,
Castello® and Puck®, all achieved
higher sales in 2017 as a result of the
Group’s strategic focus on branded
sales. The cornerstone Arla brand
contributed to 66 per cent of the
overall branded revenue in 2017.
Development in revenue
(EURm)
Revenue split by commercial
segment, 2017
Revenue split by commercial
segment, 2016
11,000
10,500
10,000
9,567
9,500
Revenue 2016
1,000
111
-90
-250
15%
13%
6%
10,338
million EUR
63%
15%
9,567
million EUR
10,338
6%
16%
8
7
66%
Sales prices
Volume/mix
M&A
Currency
Revenue 2017
(EURm)
Europe
International
AFI
Trading and other
2017
6,568
1,616
651
1,503
2016
6,321
1,428
545
1,273
Table 1.1 Revenue split by country
(EURm)
2017
2016
Revenue split by country, 2017
UK
Germany
Sweden
Denmark
Netherlands
Finland
China
Saudi Arabia
Belgium
USA
Other*
Total
2,614
1,525
1,522
1,031
460
304
302
276
215
179
1,910
10,338
2,532
1,302
1,463
1,062
373
329
202
247
197
180
1,680
9,567
4%
3%
3%
3%
2%
2%
15%
15%
10%
25%
18%
*Other countries include, amongst others, Nigeria, Bangladesh, Oman, Canada, Spain, France, Australia and Russia.
Table 1.1 represents the total revenue by country and includes all sales that occur in the countries, irrespective of organisational structure.
Therefore, the figures cannot be compared to our commercial segment review on page 30 to 35.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Strategic branded revenue by brand
2017
2016
Arla®
Lurpak®
66%
65%
12%
11%
Castello®
4%
5%
Puck®
8%
8%
Other
supported brands
10%
11%
Accounting policies
Revenue is recognised in the income
statement when the performance
obligation was satisfied, meaning all
obligations stated in the contract are
fulfilled. This is defined at the point in
time when all risks and rewards of the
products have been passed on to the
buyer, the amount of revenue can be
measured reliably, and collection is
probable. The transfer of risks and
rewards to customers takes place
according to the trade agreement
terms, i.e. the Incoterms.
Revenue comprises invoiced sales for
the year less customer specific
payments such as sales rebates, cash
discounts, listing fees, promotions, VAT
and duties. Revenue by commercial
segment/market and brand is based
on the Group’s internal financial
reporting. Accumulated experience
with customers is used to accurately
estimate variable parts of contracts to
correctly recognise revenue.
In general, contracts with customers
have industry-wide payment terms
with a short duration, therefore an
adjustment of the transaction price
with regards to a financing compo-
nent in the contracts is not necessary.
Uncertainties and
estimates
Revenue, net of rebates, is recognised
when goods are transferred to
customers. Estimates are applied
when measuring the accruals for
rebates and other sales incentives.
The majority of rebates are calculated
using terms agreed with the customer.
For some customer relationships the
final settlement of the rebate depends
on future volumes, prices and other
incentives. Thus, there is an element
of uncertainty relating to the exact
value.
8
8
Note 1.2 Costs
Tight cost control challenged by higher production complexity
Operational costs were EUR 10,066
million compared to EUR 9,254
million last year, representing an
increase of 8.8 per cent.
million, compared to EUR 43 million
last year. Additionally, EUR 20 million
related to development activities was
capitalised.
Cost of production increased to EUR
8,063 million from EUR 7,177 million
last year. Excluding costs of raw milk,
production costs decreased to EUR
3,014 million compared to EUR 3,149
million last year primarily due to
currency. Our strong focus on cost
management was challenged by
increased complexity caused by a
broader and more diverse portfolio of
branded products and use of different
milk types. Thus, the conversion cost
index, which measures the total cost
of production per kg of milk
processed, grew to an index of 103.9
compared to 99.2 in last year.
Sales and distribution costs decreased
by 3.5 per cent, mainly due to
currency effects and lower marketing
spend. Research and development
spend incurred amounted to EUR 37
Administration costs decreased by
EUR 16 million, primarily due to
savings in salaries and the non-recur-
rence of one time expenses in 2016
related to the restructure programme,
Organise-to-Win.
Cost of raw milk
The cost of raw milk increased by EUR
1,020 million or 25.3 per cent. This
was primarily driven by higher milk
prices to our owners.
Owner milk
Costs related to owner milk increased
by EUR 975 million, representing an
increase of 27.8 per cent. A higher
average prepaid milk price increased
the costs by EUR 949 million, and
higher volumes attributed to an
increase of EUR 26 million.
Other milk
Costs of other milk increased by EUR
45 million, equivalent to 8.6 per cent,
due to higher market prices partly
offset by currency effects. Other milk
consists of speciality milk and other
contract milk acquired to meet local
market demands.
Staff costs
Staff costs amounted to EUR 1,218
million, a decrease of EUR 5 million
compared to last year. Staff costs were
positively impacted by the results of
Organise-to-Win programme, the
divestment of Rynkeby and
currencies.
Within sales and distribution, as well as
administration, staff costs decreased
EUR 19 million, which were offset by
increases within production to
manage the more diverse product
portfolio.
Marketing spend
EUR 300 million was spent on
marketing activities in 2017,
compared to EUR 309 million last
year. Marketing spend increased in
International due to new initiatives, for
example, the launch of Arla® Organic
Milk in MENA. In Europe, marketing
spend was slightly lower than last year
with the exception of Germany, where
the marketing of especially Arla® skyr
increased the spend.
Depreciation, amortisation
and impairment
Depreciation, amortisation and
impairment amounted to EUR 353
million, corresponding to an increase
of EUR 19 million compared to last
year. The increase in amortisation was
mainly related to the investments in IT
and other development projects.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Development in costs
(EURm)
Cost split by type, 2017
Cost split by type, 2016
10,500
10,000
9,500
9,000
949
26
45
72
-88
-192
10,066
9%
4%
3%
10%
4%
3%
9,254
2016
Milk price effect
Milk volume effect
Other milk
Growth in cost base
excluding milk
M&A effect
Currency
2017
10,066
million EUR
10%
12%
50%
11%
9,254
million EUR
43%
13%
12%
16%
Weighed-in raw milk
Other production materials*
Staff costs
Transportation costs
Marketing costs
Depreciation, amortisation
and impairment
Other costs**
Table 1.2.a Operational costs split by functions
(EURm)
Production costs
Sales and distribution costs
Administration costs
Total
Specification:
Weighed-in raw milk
Other production materials*
Staff costs
Transportation costs
Marketing costs
Depreciation, amortisation and impairment
Other costs**
Total
*Other production materials includes packaging, additives, consumables and changes in inventory
**Other costs mainly includes maintenance, utilities and IT
Table 1.2.b Weighed-in raw milk
Table 1.2.c Staff costs
(EURm)
2017
2016
Weighed in
mio. kg.
12,373
1,564
13,937
EURm
4,478
570
5,048
Weighed in
mio. kg.
12,320
1,554
13,874
EURm
3,503
525
4,028
Wages, salaries and remuneration
Pensions - defined contribution plans
Pensions - defined benefit plans
Other social security costs
Total staff costs
Owner milk
Other milk
Total
Staff costs relate to:
Production costs
Sales and distribution costs
Administration costs
Total staff costs
2017
2016
8,063
1,584
419
10,066
5,048
1,231
1,218
1,002
300
353
914
10,066
8
9
7,177
1,642
435
9,254
4,028
1,463
1,223
1,010
309
334
887
9,254
2017
2016
1,034
72
4
108
1,218
691
336
191
1,218
1,038
73
3
109
1,223
677
346
200
1,223
Average number of full-time employees
18,973
18,765
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 1.2.d Depreciation, amortisation and impairment
(EURm)
Intangible assets, amortisation
Property, plant and equipment, depreciation
Total depreciation, amortisation and impairment
Depreciation, amortisation and impairment relate to:
Production costs
Sales and distribution costs
Administration costs
Total depreciation, amortisation and impairment
2017
2016
54
299
353
280
36
37
353
42
292
334
269
32
33
334
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.
9
0
Note 1.3 Other operating income and costs
Positive hedging effects
Other operating income and costs
consist of items outside the regular
course of dairy business activities. It
mainly includes items such as gains
and losses relating to divestments of
non-current assets, financial
instruments and compensation from
insurance contracts. Furthermore, it
includes income and costs related to
sales of surplus power from
condensation plants.
compared to EUR 62 million last year.
Gains on financial instruments used
for hedging of sales in 2017
amounted to EUR 29 million.
Net other operating income
amounted to EUR 32 million,
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
NOTE 2
NET WORKING
CAPITAL
Note 1 Operating profit
87 Note 1.1 Revenue
88 Note 1.2 Costs
90
Note 1.3 Other operating income and costs
Note 2 Net working capital
92 Note 2.1 Net working capital
Note 3 Capital employed
95 Note 3.1 Intangible assets
96 Note 3.2 Impairment tests
97 Note 3.3 Property, plant and equipment
99 Note 3.4 Joint ventures and associates
101 Note 3.5 Provisions
101 Note 3.6 Purchase and sale of business or activities
Note 4 Funding
104 Note 4.1 Financial items
105 Note 4.2 Net interest-bearing debt
110 Note 4.3 Financial risk
110 Note 4.3.1 Liquidity and Funding risk
112 Note 4.3.2 Currency risk
114 Note 4.3.3 Interest rate risk
115 Note 4.3.4 Commodity price risk
116 Note 4.3.5 Credit risk
117 Note 4.4 Derivative financial instruments
119 Note 4.5 Financial instruments disclosed
120 Note 4.6 Transfer of financial assets
120 Note 4.7 Pension obligations
Note 5 Other areas
125 Note 5.1 Tax
127 Note 5.2 Fees to auditors appointed by the Board of Representatives
127 Note 5.3 Management remuneration and transactions
128 Note 5.4 Contractual commitments and contingent liabilities
128 Note 5.5 Events after the balance sheet date
128 Note 5.6 General accounting policies
130 Note 5.7 Group chart
Note 2.1 Net working capital
Higher milk prices drove an increase in net working capital
The increases in market and sales
prices for milk increased the value of
Arla inventory and receivable positions
in 2017. Higher absolute valued
inventory and receivables increased
the net working capital position.
Despite multiple initiatives which
offset some of the increase. Net
working capital increased by 17 per
cent to EUR 970 million, compared to
EUR 831 million last year. Working
capital in days deteriorated slightly
compared to last year with improve-
ments in trade payables (DPO) and
trade receivables (DSO) as a result of a
continued focus on cash collection
and payment terms. These
improvements were more than offset
by the increased inventory levels (DIO)
due to slightly higher volumes on
hand.
Excluding payables relating to owner
milk, net working capital increased by
EUR 173 million.
Inventory
Inventory increased by EUR 176
million to EUR 1,126 million,
compared to EUR 950 million last
year. Excluding currency effects, the
inventory increased by EUR 217
million, attributable to the market milk
price developments and increased
volumes.
Trade receivables
Trade receivables increased to EUR
942 million, compared to EUR 876
million last year. The net movement,
excluding currency effects, was an
increase of EUR 100 million. The
increase was mainly attributed to the
significantly higher sales prices in 2017.
Exposure to credit risk on trade
receivables is guided by Group-wide
policies. Credit limits are set based on
the customer’s financial position and
current market conditions. Generally,
Arla does not hold collateral as
security for trade receivables. The
customer portfolio is diversified in
terms of geography, industry sector
and customer size. In 2017, the Group
was 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 2017. Trade
receivable balances overdue above
90 days amounted to 1.3 per cent,
compared to 1.5 per cent last year.
Trade payables
Trade payables increased by
EUR 103 million to EUR 1,098 million,
compared to EUR 995 million last
year. The movement in trade payables,
excluding owner milk and currency
effects, was an increase of EUR 90
million. The increase was driven by
Arla’s continuous effort to improve
payment terms. Payables related to
owner milk increased by EUR 34
million as a result of a 3 per cent
increase of member milk intake in
December 2017, compared to the
same month last year, as well as a
significantly higher milk prices,
representing an increase of
15 per cent.
Net working capital
(EURm)
9
2
Development in net working capital
(EURm)
1,150
1,100
1,050
1,000
950
900
850
800
750
700
650
600
1 January 2017
1,177
1,233
1,199
906
928
999
1,004
831
1,175
970
1,500
1,000
500
0
2013
2014
2015
2016
2017
Net working capital excluding owner milk
Net working capital
Table 2.1.a Net working capital
(EURm)
Inventory
Trade receivables
Trade payables
Net working capital
100
-90
217
-34
-54
970
831
Inventory
owner milk
Trade receivables
Trade payables excluding
Owner milk
31 December 2017
Currency
2017
1,126
942
-1,098
970
2016
950
876
-995
831
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 2.1.b Inventory
(EURm)
Inventory before the write-downs
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
2017
1,153
-27
1,126
264
366
496
1,126
2017
954
-12
942
2016
969
-19
950
257
292
401
950
2016
887
-11
876
Accounting policies
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.
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.
Uncertainties and
estimates
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.
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.
9
3
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.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
NOTE 3
CAPITAL
EMPLOYED
Note 1 Operating profit
87 Note 1.1 Revenue
88 Note 1.2 Costs
90
Note 1.3 Other operating income and costs
Note 2 Net working capital
92 Note 2.1 Net working capital
Note 3 Capital employed
95 Note 3.1 Intangible assets
96 Note 3.2 Impairment tests
97 Note 3.3 Property, plant and equipment
99 Note 3.4 Joint ventures and associates
101 Note 3.5 Provisions
101 Note 3.6 Purchase and sale of business or activities
Note 4 Funding
104 Note 4.1 Financial items
105 Note 4.2 Net interest-bearing debt
110 Note 4.3 Financial risk
110 Note 4.3.1 Liquidity and Funding risk
112 Note 4.3.2 Currency risk
114 Note 4.3.3 Interest rate risk
115 Note 4.3.4 Commodity price risk
116 Note 4.3.5 Credit risk
117 Note 4.4 Derivative financial instruments
119 Note 4.5 Financial instruments disclosed
120 Note 4.6 Transfer of financial assets
120 Note 4.7 Pension obligations
Note 5 Other areas
125 Note 5.1 Tax
127 Note 5.2 Fees to auditors appointed by the Board of Representatives
127 Note 5.3 Management remuneration and transactions
128 Note 5.4 Contractual commitments and contingent liabilities
128 Note 5.5 Events after the balance sheet date
128 Note 5.6 General accounting policies
130 Note 5.7 Group chart
Note 3.1 Intangible assets
Intangible asset reduction driven by currency
Intangible assets amounted to EUR
811 million, representing a decrease
of EUR 14 million compared to last
year related to effects of changes in
currencies.
to activities in the UK, compared to
EUR 488 million last year. This decrease
in goodwill was due to exchange rate
adjustments. Refer to Note 3.2 for
detail on the impairment test.
Goodwill
The carrying value of goodwill
amounted to EUR 596 million
compared to EUR 615 million last
year. EUR 470 million hereof related
Licences and trademarks
Licences and trademarks recognised
at a total carrying amount of EUR 26
million include Cocio®, Anchor® and
Hansano®. Other brands including the
strategic brands, Arla®, Lurpak®,
Castello® and Puck®, are internally
generated trademarks and are not
recognised with any attributed value.
IT and other development projects
The Group continued to invest in the
development of IT. During 2017, SAP
was implemented in the Netherlands
and in the UK at the Westbury dairy,
thereby completing the integration
into the Arla SAP platform. Further-
more, IT development projects in
2017 also included stregthened SAP
access controls, Arlagården Plus,
warehouse distribution and milk
allocation projects. Other capitalised
development costs relate to
innovation activities and to the
development of new products.
Table 3.1 Intangible assets
(EURm)
2017
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 and impairment for the year
Amortisation on disposals
Amortisation and impairment at 31 December
Carrying amount at 31 December
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 and impairment 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
615
-19
-
1
-
-
597
-
-
-1
-
-1
596
678
-63
-
-
-
615
-
-
-
-
-
615
100
-2
-
1
-
-
99
-70
2
-5
-
-73
26
102
1
-
-
-3
100
-65
-1
-6
2
-70
30
327
-2
50
-
7
-2
380
-147
2
-48
2
-191
189
281
-1
58
-1
-10
327
-123
2
-36
10
-147
180
9
5
Total
1,042
-23
50
2
7
-2
1,076
-217
4
-54
2
-265
811
1,061
-63
58
-1
-13
1,042
-188
1
-42
12
-217
825
Intangible assets
2017
Intangible assets
2016
23%
22%
3%
811
million EUR
4%
74%
825
million EUR
74%
Goodwill
Licences and trademarks
IT and other development projects
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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 impairment.
The carrying amount of goodwill is
allocated to the Group’s cash-generat-
ing 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 market development and Good Growth 2020
Goodwill in the UK originated from 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, goodwill arose in
connection with the purchase of
Ingman in 2007. The remaining
goodwill arose primarily from the
purchase of Tholstrup in 2006.
Goodwill is allocated to relevant
business units, primarily to our
activities in the UK and Finland within
the Europe commercial segment.
Impairment tests are performed at
business unit level, being the lowest
cash generating unit.
Basis for impairment test
and applied estimates
Impairment tests are performed
annually and based on expected
future cash flow derived from
forecasts 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
9
6
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.
Nevertheless, impairment testing
performed showed that expected
future cash flow can support the
carrying value of our net assets,
including goodwill.
Test results
Impairment testing showed that there
was no need for impairment in 2017.
In this regard, sensitivities to changes
in milk prices and discount rates were
calculated. The discount rate could
rise up to 3 percentage points,
compared to 4 percentage points last
year, before the goodwill in the UK
would be at risk of being impaired.
The market conditions were
challenging in Finland in 2017.
Table 3.2 Impairment tests
(EURm)
2017
UK
Finland
Sweden
Other
Total carrying amount at 31 December
2016
UK
Finland
Sweden
Other
Total carrying amount at 31 December
Carrying amount,
goodwill
470
40
23
63
596
Applied key assumptions
Discount rate,
net of tax
6.9%
6.3%
6.5%
6.4%
Discount rate,
before tax
8.4%
7.6%
8.3%
7.1%
488
40
23
64
615
7.1%
6.2%
6.4%
6.2%
8.9%
7.6%
8.3%
6.9%
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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 manage-
ment structure and the internal
financial reporting.
The cash-generating units are
reassessed each year.
Uncertainties and
estimates
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 allocated, 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 as a separate line item 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, i.e. 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.
9
7
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
2018-2020 within the 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
flow supporting the carrying value of
goodwill in the UK is inherently more
uncertain. This was reflected in our
impairment test. Read more about Brexit
on page 50.
Discounts rates
A discount rate, namely Weighted
Average Cost of Capital (WACC), is
applied for the specific business areas
based on assumptions regarding
interest rates, tax rates and risk
premiums. The WACC is recalculated to
a before-tax rate. Changes in the future
cash flow or discount rate estimates
used may result in materially different
values.
Note 3.3 Property, plant and equipment
Strategic capital expenditure supporting innovation
Main tangible assets are located in
Denmark, the UK, Germany and
Sweden. The carrying value decreased
by EUR 98 million to EUR 2,212
million in 2017, driven by higher
depreciation than capital expenditures
and changes in currencies.
Capital expenditure decreased 5.7 per
cent to EUR 248 million compared to
EUR 263 million last year. This reflects
our continued focus on the utilisation
of our production capacity. In 2017,
a higher CAPEX budget was approved,
however due to the timing of projects,
this approval has not yet materialised
in higher CAPEX expenditure.
Major investments in 2017 included a
general upgrade and expansion of
production facilities with a particular
focus on the child nutrition category,
as well expenditure on existing sites
and finalisation of the investment in
our new global Innovation Centre.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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
2017
Cost at 1 January
Exchange rate adjustments
Additions
Mergers and acquisitions
Transferred from assets in course of construction
Disposals
Reclassification
Cost at 31 December
Depreciation and impairments at 1 January
Exchange rate adjustments
Depreciation for the year
Depreciation on disposals
Reclassification
Depreciations and impairment at 31 December
Carrying amount at 31 December
Of which assets held under finance lease
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
9
8
1,430
-28
5
2
43
-36
26
1,442
-573
9
-46
30
-22
-602
840
34
1,466
-64
2
37
-11
1,430
-553
20
-43
3
-573
857
37
2,664
-41
30
4
142
-19
-14
2,766
-1,499
23
-209
13
14
-1,658
1,108
18
2,547
-84
41
227
-67
2,664
-1,402
45
-204
62
-1,499
1,165
13
500
-14
7
-
29
-13
-7
502
-376
10
-44
13
7
-390
112
2
519
-34
12
28
-25
500
-375
22
-45
22
-376
124
1
164
-2
206
2
-214
-
-4
152
-
-
-
-
-
-
152
-
255
-7
208
-292
-
164
-
-
-
-
-
164
-
Total
4,758
-85
248
8
-
-68
1
4,862
-2,448
42
-299
56
-1
-2,650
2,212
54
4,787
-189
263
-
-103
4,758
-2,330
87
-292
87
-2,448
2,310
51
Property, plant and equipment
by country 2017
Property, plant and equipment
by country 2016
Investments and depreciation property, plant and equipment
(EURm)
7%
8%
13%
26%
2,212
million EUR
42%
13%
27%
2,310
million EUR
40%
12%
12%
500
400
300
200
100
0
2013
2014
2015
2016
2017
Denmark
Sweden
UK
Germany
Other
Investments property, plant and equipment
Depreciation property, plant and equipment
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 Accounting policies
Property, plant and equipment are
measured at cost less accumulated
depreciation and impairment. Assets
under construction, land and
decommissioned plants are not
depreciated.
Cost
Cost comprises the acquisition price
as well as costs directly associated
with an asset until the asset is ready
for its intended use. For self-construct-
ed 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)
and depreciated separately. When
component parts are replaced, any
remaining carrying value of replaced
parts is removed from the balance
sheet and recognised as an
accelerated 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.
Depreciation
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. 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 estimated 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
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.
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 balance sheet date if
the asset was of the age and in the
condition expected 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.
9
9
Vigor Alimentos S.A., Brazil
In October, the Group sold the
investment in Vigor Alimentos S.A,
realising a gain on EUR 44 million.
Read more in Note 3.6.
Joint ventures
The carrying value of joint ventures
amounted to EUR 53 million at
year-end, compared to EUR 51 million
last year. The carrying value does not
include goodwill.
Note 3.4 Associates and joint ventures
Investments in associates and joint ventures
COFCO Dairy Holdings Limited
(COFCO) and China Mengniu Dairy
Company Limited (Mengniu)
The Group has a 30 per cent
investment in COFCO, which is
considered an associated company
based on a cooperation agreement
extending significant influence,
including the right of Board
representation. The cooperation
agreement with COFCO also entitles
Arla to representation on the Board of
Mengniu, a Hong Kong listed dairy
company in which COFCO is a
significant shareholder. It was agreed
that Arla and Mengniu cooperate in
relation to the exchange of technical
dairy knowledge and expertise, and
that Arla grants intellectual rights to
Mengniu. Based on the underlying
agreements, it is our assessment that
Arla has significant influence in
Mengniu.
The Group’s proportionate share of
the net asset value of COFCO
including the investment in Mengniu
is EUR 295 million, compared to EUR
309 million last year. The carrying
amount of the investment in COFCO
includes goodwill amounting to EUR
140 million, compared to EUR 160
million last year.
The fair value of the indirect share in
Mengniu equals EUR 519 million,
compared to EUR 383 million last
year.
The investment in COFCO is part of
the China business unit and is
currently managed in China, along
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.
Impairment risks 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 Mengniu. As the fair value exceeds
the carrying value of the investment,
there is a no indication of impairment.
Mengniu reported a group revenue of
EUR 7,317 million and a result of EUR
-111 million in 2016. Consolidated
figures are not available for the COFCO
group. See table 3.4.b for more details
on COFCO.
Lantbrukarnas Riksförbund,
Sweden (LRF)
Arla has an ownership interest of 24
per cent in LRF, which is a politically
independent professional organisation
for Swedish entrepreneurs 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, representation on the
Board of Directors. Owners of Arla
have represented the Swedish dairy
industry at the Board of Directors in
LRF and both Arla and our Swedish
owners are individual members of LRF.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Recognised value of associates
2017
Recognised value of associates
2016
Table 3.4.a Associates
26%
29%
401
million EUR
39%
434
million EUR
34%
Reconciliation of recognised
value of associates
(EURm)
Share of equity in COFCO/Mengniu
Goodwill in COFCO/Mengniu
Share of equity in non-material
associates
Recognised value
2017
2016
155
140
106
401
149
160
125
434
35%
37%
Share of equity in COFCO/Mengniu
Goodwill in COFCO/Mengniu
Share of equity in non-material associates
Table 3.4.b Material associates
Financial information for associates that are considered material to the Group*
(EURm)
Revenue
Results after tax
Non-current assets
1
0
0
Dividends received
Ownership share
Group share of result after tax
Recognised value
COFCO has no other significant assets or liabilitites
* Based on latest available financial reporting.
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 and other payables
COFCO Dairy
Holdings
Limited
COFCO Dairy
Holdings
Limited
2017
2016
12
12
656
2
30%
16
295
15
15
789
4
30%
-6
309
2017
2016
14
78
92
57
57
18
9
27
9
9
9
46
55
52
52
26
9
35
7
7
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Accounting policies
Investments in which Arla exercises
significant influence, but not control,
are classified as associates. Investments
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.
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 Arla’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 is
Note 3.5 Provisions
Provisions
Provisions amounted to EUR 23
million in 2017, compared to EUR 25
million last year. Provisions primarily
pertain to insurance provisions for
insurance incidents that occurred but
have not been settled.
Insurance provisions primarily relate to
occupational injuries. No major
occupational incidents occurred
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.
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 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).
during the year. A general provision for
occupational injuries of EUR 8 million
is recorded as a long-term provision.
Uncertainties and
estimates
Provisions are particularly associated
with estimates on insurance provisions.
The scope and size of onerous contracts
are also estimated. Insurance provisions
are assessed based on historical records
of, amongst other things, the number of
insurance events and related costs
considered.
1
0
1
Note 3.6 Purchase and sale of business or activities
Acquisitions and divestments
Gefleortens Dairy, Sweden
In December 2017, Arla acquired
Gefleortens Dairy in Sweden, whereby
59 new owners with 30 million kg of
milk joined Arla. The acquisition is in
line with Arla’s strategy on branded
local products. Net assets acquired
amounted to EUR 6 million.
Consideration paid was EUR 8 million
in cash and EUR 2 million was issued
out of common capital. Additionally,
EUR 4 million was received in cash as
part of the acquisition. No goodwill
was recognised as part of the
transaction.
In 2017, the revenue contribution
from the Gefleortens transaction was
EUR 2 million. The effect on profit was
insignificant.
Divestment of Vigor Alimentos S.A.,
Brazil
As a strategic choice to reduce our
involvement in the Brazilian market,
Arla divested its shares in the Brazilian
based associate, Vigor Alimentos S.A,
recognising a gain of EUR 44 million.
The investment was previously
classified as an associated company.
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.
Certain distribution activities in
Scandinavia continued until the end
of 2016 and in total revenue was
reduced by EUR 90 million compared
to last year.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 3.6a 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
2017
2016
74
-
74
-30
-
44
145
-7
138
-52
34
120
Table 3.6b Mergers and acquisitions
(EURm)
Company / Country
Gefleortens / Sweden
Income
statement
consolidated
from
1 December 2017
Holding
acquired
100 % of shares
Revenue
per year
35
No. of
employees
90
Accounting policies
Recognition date and considerations
Newly acquired companies are
recognised in the consolidated
financial statements at the date when
the Group obtains control. The
purchase consideration is generally
measured at fair value. If an
agreement relating to a business
combination requires that the
purchase consideration be adjusted in
connection with future events or the
performance of certain obligations
(contingent consideration), this
portion of the purchase consideration
is recognised at fair value at the date
of acquisition. Changes in estimates
relating to a contingent consideration
are recognised in the income
statement. Costs directly attributable
1
0
2
to the acquisition are recognised in
the income statement as incurred.
The acquired assets, liabilities and
contingent liabilities are generally
measured at their fair value at the date
of acquisition.
Goodwill arises when the aggregate of
the fair value of consideration
transferred, previously held interest
and the value assigned to non-con-
trolling interest holders exceeds the
fair value of the identifiable net assets
of the acquired company. Any
goodwill that arises, which is not
amortised, is tested annually for
impairment.
The methodology outlined above also
applies to mergers with other
cooperatives, where the owners of the
acquired company become owners of
Arla Foods amba. The purchase
consideration is calculated at the
acquisition date fair values of the
assets transferred and equity
instruments issued. Positive
differences between the consideration
and fair value are recognised as
goodwill.
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.
Divestment
Changes in the Group’s interest in a
subsidiary that do not result in a loss
of control are recognised as equity
transactions.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
NOTE 4
FUNDING
Note 1 Operating profit
87 Note 1.1 Revenue
88 Note 1.2 Costs
90
Note 1.3 Other operating income and costs
Note 2 Net working capital
92 Note 2.1 Net working capital
Note 3 Capital employed
95 Note 3.1 Intangible assets
96 Note 3.2 Impairment tests
97 Note 3.3 Property, plant and equipment
99 Note 3.4 Joint ventures and associates
101 Note 3.5 Provisions
101 Note 3.6 Purchase and sale of business or activities
Note 4 Funding
104 Note 4.1 Financial items
105 Note 4.2 Net interest-bearing debt
110 Note 4.3 Financial risk
110 Note 4.3.1 Liquidity and Funding risk
112 Note 4.3.2 Currency risk
114 Note 4.3.3 Interest rate risk
115 Note 4.3.4 Commodity price risk
116 Note 4.3.5 Credit risk
117 Note 4.4 Derivative financial instruments
119 Note 4.5 Financial instruments disclosed
120 Note 4.6 Transfer of financial assets
120 Note 4.7 Pension obligations
Note 5 Other areas
125 Note 5.1 Tax
127 Note 5.2 Fees to auditors appointed by the Board of Representatives
127 Note 5.3 Management remuneration and transactions
128 Note 5.4 Contractual commitments and contingent liabilities
128 Note 5.5 Events after the balance sheet date
128 Note 5.6 General accounting policies
130 Note 5.7 Group chart
Note 4.1 Financial items
Lower financial costs
Net financial cost decreased by EUR
43 million to EUR 64 million in 2017,
mainly due to currency adjustments.
Net interest cost amounted to EUR 57
million, representing a decrease of
EUR 6 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
2.6 per cent compared to 3.0 per cent
last year. Interest cover amounts to
12.9 compared to 13.3 last year.
Interest cover is the ratio between
EBITDA in 2017 of EUR 738 million
and the net interest cost of EUR 57
million.
Exchange rate losses were at a lower
level compared to last year mainly as a
result of the Nigerian devaluation in
2016 with a negative effect of EUR 28
million. The majority of exchange rate
losses relates to cost 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 transferred to property, plant and equipment
Fair value adjustments and other financial costs
Total financial costs
Net financial costs
1
0
4
Accounting policies
2017
2016
5
8
13
-53
-18
-9
6
-3
-77
-64
5
2
7
-60
-48
-8
7
-5
-114
-107
Financial 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 were
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 were therefore
not included in financial cost.
Capitalisation of interest was
performed by using an interest rate of
three per cent, matching the Group’s
average external interest rate in 2017.
Financial income and costs relating to
financial assets and financial liabilities
were recognised using the effective
interest method.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Note 4.2 Net interest-bearing debt
Lower pension liabilities resulting in reduced net-interest bearing debt
Net interest-bearing debt, excluding
pension liabilities were reduced to
EUR 1,636 million compared to EUR
1,648 million last year. A solid cash
flow from the underlying business was
partly offset by higher working capital
position, as well as capital expenditure
and the supplementary payment for
2016. Working capital increased due
to a higher inventory value from the
increase in milk prices to farmer
owners, and a higher trade receivables
balance, caused by higher sales prices.
The average maturity of the
interest-bearing borrowings
decreased by 0.2 years to 5.7 years.
The average maturity is impacted by
a lapse of time to maturity, refinancing
of committed facilities, and the level
of net interest-bearing debt.
The equity ratio measured 36 per cent,
compared to 34 per cent last year,
which gives Arla an adequate position
to support the investments for the
future growth.
The leverage ratio was 2.6, an increase
of 0.2 compared to last year. This
outperformed the Group’s long-term
target range of 2.8-3.4, underpinning
the Group’s strong financial position.
Last year’s leverage ratio was
significantly impacted by the Rynkeby
divestment. Leverage, excluding the
gain form the divestment of Vigor
was 2.8.
Pension liabilities decreased EUR 92
million to EUR 277 million mainly due
to lower expected salary increases,
contributions and currencies effects.
As a result, net interest-bearing debt,
including pension liabilities, amount to
EUR 1,913 million compared to EUR
2,017 million last year.
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. 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 a single creditor or a
single 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.
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 2017.
During 2017, 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 768 million,
increasing maturity by 1 year.
European Investment Bank: Arla
was able to obtain a new 7 year
credit facility from the European
Investment Bank
Commercial papers: the Group has
a commercial paper programme in
Sweden denominated in SEK and
EUR. The average utilization in
2017 was EUR 232 million. Arla
obtained 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.
Leverage,
2017
2.6
1
0
5
Net interest-bearing debt
(EURm)
3,000
2,500
2,000
1,500
1,000
500
0
3
4
8
,
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
2
7
7
,
1
6
3
6
2013
2014
2015
2016
2017
4
3
2
1
0
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
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 amounting to EUR 1,913
million and EBITDA amounting of EUR 738 million, 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
Pension liabilities
Net interest-bearing debt excluding pension liabilities
Target range leverage 2.8- 3.4
2017
-602
-8
1,206
1,040
1,636
277
1,913
2016
-588
-12
1,281
967
1,648
369
2,017
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 4.2.b Borrowings
(EURm)
Long-term borrowings:
Issued bonds
Mortgage credit institutions
Bank borrowings
Finance lease 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
2017
2016
254
790
160
2
1,206
152
213
9
728
11
27
1,040
2,246
419
798
52
12
1,281
-
115
1
815
16
20
967
2,248
Table 4.2.c Cash flow, net interest-bearing debt
(EURm)
Pension liabilities
Long-term borrowings
Short-term borrowings
Other interest-bearing liabilities
Total interest-bearing debt
1
0
6
Securities and other interest-bearing
receivables
Cash
Net interest-bearing debt
Cash flow
Included in
financing
activities Acquisitions
Non-cash changes
Foreign
exchange
movements
Reclasses
1 January
2017
Fair value
changes
31 December
2017
369
1,281
947
20
2,617
-516
-84
2,017
-39
-19
51
7
-
11
-12
-1
2
-
-
-
2
-
2
4
-1
-26
26
-
-1
-
-2
-3
-9
-18
-11
-
-38
3
5
-30
-45
-12
-
-
-57
-17
-
-74
277
1,206
1,013
27
2,523
-519
-91
1,913
Table 4.2.d Net interest-bearing debt excluding pension liabilities, maturity
(EURm)
December 31, 2017
DKK
SEK
EUR
GBP
Other
Total
December 31, 2016
DKK
SEK
EUR
GBP
Other
Total
Total
815
639
136
16
30
1,636
Total
872
558
175
37
6
1,648
2018
35
361
-3
5
30
428
2017
86
115
1
14
-9
207
2019
22
152
103
3
-
280
2018
12
181
134
12
15
354
2020
21
24
7
3
-
55
2019
20
157
7
3
-
187
2021
27
102
6
3
-
138
2020
20
-
7
3
-
30
2022
30
-
3
3
-
36
2021
32
105
6
3
-
146
2023
30
-
1
-1
-
30
2022
22
-
4
2
-
28
2024 2025-2027 After 2027
435
186
-
-
16
3
-
-
-
-
451
189
29
-
-
-
-
29
2023 2024-2026 After 2026
498
153
-
-
15
1
-
-
-
-
513
154
29
-
-
-
-
29
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Maturity of net interest-bearing debt excluding pension liabilities
at 31 December 2017
(EURm)
Maturity of net interest-bearing debt excluding pension liabilities
at 31 December 2016
(EURm)
700
600
500
400
300
200
100
0
700
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.e Interest rate risk at 31 December
(EURm)
Interest
rate
Average
interest rate
Fixed for
Carrying
amount
Interest
rate risk
2017
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:
Fixed-rate
Floating-rate
Total mortgage 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
Fixed
Floating
Fixed
Floating
Floating
Floating
3.25%
2.63%
1.88%
1.05%
0.52%
1.07%
0.03%
1.10%
1.15%
0.71%
0.73%
-0.04%
1.25%
0.42%
2.15%
2.27%
2.23%
0-1 years
1-2 years
3-4 years
0-1 years
0-1 years
0-1 years
0-1 years
2-3 years
0-1 years
0-1 years
0-1 years
0-1 years
0-1 years
51
82
51
101
71
50
213
619
44
755
799
506
282
788
13
27
40
1
0
7
Fair value
Fair value
Fair value
Cash flow
Cash flow
Cash flow
Fair value
Fair value
Cash flow
Fair value
Cash flow
Cash flow
Cash flow
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 4.2.e 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 500m maturing 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
Floating
Fixed
Floating
Floating
Floating
3.25%
2.63%
1.88%
1.08%
0.56%
1.09%
0.07%
1.32%
0.75%
0.75%
-0.30%
1.75%
0.57%
2.15%
2.87%
2.45%
1-2 years
2-3 years
4-5 years
0-1 years
0-1 years
0-1 years
0-1 years
0-1 years
0-1 years
0-1 years
0-1 years
0-1 years
52
84
53
105
73
52
115
534
799
799
497
370
867
28
20
48
Fair value
Fair value
Fair value
Cash flow
Cash flow
Cash flow
Fair value
Cash flow
Fair value
Cash flow
Cash flow
Cash flow
1
0
8
Interest profile for net interest-bearing debt excluding pension
Interest profile for net interest-bearing debt excluding pension
liabilities at 31 December 2017
liabilities at 31 December 2017
(EURm)
(EURm)
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)
D
D
B
B
N
N
I
I
2,000
2,000
1,500
1,500
1,000
1,000
500
500
0
0
D
D
B
B
N
N
I
I
2,000
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
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 4.2.f 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
2017
DKK
SEK
EUR
GBP
Other
Total
2016
DKK
SEK
EUR
GBP
Other
Total
815
639
136
16
30
1.636
872
558
175
37
6
1,648
-
-457
254
203
-
-
-
-470
261
209
-
-
After
swap
815
182
390
219
30
1.636
872
88
436
246
6
1,648
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.
1
0
9
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.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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
properly implemented financial risk
management 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
Strong liquidity reserves
The stable cash generation in 2017
positively influenced the liquidity
reserves by reducing the utilisation of
loan and credit facilities. Liquidity
reserves increased by EUR 101 million
to EUR 1,038 million.
Ensuring availability of sufficient
operating liquidity and credit facilities
for operations is the primary goal of
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.
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.
1
1
0
Liquidity reserves 2017
Liquidity reserves 2016
21%
9%
1%
19%
9%
1%
1,038
million EUR
937
million EUR
69%
71%
Cash and cash equivalents
Securities (free cash flow)
Unutilised committed loans facilities
Unutilised other loan facilities
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
2017
91
6
721
220
1,038
2016
84
7
666
180
937
Table 4.3.1.b Gross financial liabilities
(EURm)
2017
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
406
Total
406
2018
152
2019
152
2020
-
2021
102
2022
2023
-
2024
-
2025-
2027
-
After
2027
-
Non-discounted contractual cash flows
799
1,001
13
815
1,002
13
9
821
11
18
107
2
19
56
-
27
10
-
29
7
-
29
1
-
30
-
-
193
-
-
461
-
-
27
27
26
1
-
-
-
-
-
-
-
-
1,098
87
3,431
112
1,098
87
3,560
12
1,098
23
2,152
10
-
17
307
8
-
9
92
7
-
8
154
7
-
7
50
6
-
5
41
6
-
2
38
17
-
3
213
39
-
13
513
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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
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
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 were 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
2017
2016
Minimum
Maximum
Average maturity, gross debt
Maturity < 1 year, net debt
Maturity > 2 year, net debt
5.7 years
0%
97%
5.9 years
0%
94%
2 years
-
50%
-
25%
-
Policy
1
1
1
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
describes future funding opportunities
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 to control and optimise
its funding position. The Group aims
for 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.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Note 4.3.2 Currency risk
Significant currency fluctuations
Compared to last year, the average
rate of the GBP and USD weakened by
more than 7 per cent and 2 per cent
respectively. Our hedging strategies
helped to mitigate a large part of the
transactions impact from movement
in USD and GBP in 2017. The hedging
activities delivered a gain of EUR 29
million in 2017, compared to a gain of
EUR 35 million last year. 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 feasible, either due to
currency regulations or illiquid
financial markets. These markets are
mainly Nigeria, Ivory Coast, Senegal,
Egypt and Bangladesh. Access to
foreign currencies in Nigeria and Egypt
improved in 2017 but related
currency values were lower compared
to 2016.
Our 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 budget deficit and
uncertainty regarding the Saudi Arabia
economy, we monitor the currency
situation closely.
Revenue split by currency
in 2017
Revenue split by currency
in 2016
6%
2%
8%
6%
2%
8%
32%
30%
13%
10,338
million EUR
13%
9,567
million EUR
1
1
2
14%
15%
25%
26%
EUR
GBP
SEK
DKK
USD
SAR
Other
Table 4.3.2.a Exchange rates
EUR/GBP
EUR/SEK
EUR/DKK
EUR/USD
EUR/SAR
2017
0.8885
9.8476
7.4453
1.1943
4.4792
Closing rate
2016
Change
2017
Average rate
2016
Change
0.8554
9.5684
7.4333
1.0490
3.9367
-3,86%
-2.92%
-0.16%
-13.85%
-13.78%
0.8765
9.6317
7.4386
1.1277
4.2294
0.8176
9.4687
7.4452
1.1058
4.1473
-7.19%
-1.72%
0.09%
-1.98%
-1.98%
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 4.3.2.b Currency exposure
(EURm)
EUR/DKK
USD*/DKK
GBP/DKK
SEK/DKK
SAR/DKK
2017
External exposure:
Financial liabilities
Financial assets
Derivatives
Net external exposure
Internal exposure:
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
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
-155
164
-367
-358
268
47
315
-15
218
-398
-195
3
-
3
-212
123
-803
-892
522
192
714
-844
34
592
-218
8
210
218
-2
76
-153
-79
13
-
13
-43
-192
-178
-
-66
-
-43
-
1%
-
-
-235
-
43
5%
2
-12
-192
-
14
5%
1
-10
-
-
-
5%
-
-
-58
-8
-
5%
-
-3
-191
148
-362
-405
-24
303
-
279
-26
190
-593
-429
-
-
-
-
-35
204
-538
-369
-
257
-
257
-126
-429
-112
-
-126
-
1%
-1
-
-357
-72
-
5%
-4
-18
-152
-
40
5%
2
-8
-710
39
499
-172
-4
-
216
212
40
-
-
40
5%
2
-
1
1
3
-15
80
-198
-133
-
15
-
15
-118
-95
-23
-
5%
-1
-5
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 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 relation-
ships 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 is
based on historical currency
fluctuations.
Risk
Currency risk arises from the Group’s
export activities, investments and
financing activities. The Group
Note 4.3.3 Interest rate risk
1
1
4
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 from 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 the local funding
is obtained in local currencies.
Investments in subsidiaries are
normally not 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 activ-
ity 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.
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 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 does not
necessarily need to 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.
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.
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 decreased by
0.7 to 3.8. The duration is reduced due
to matured interest rate hedges and a
reduction in time to maturity on the
remaining hedges.
Even though interest rates were low in
2017, our hedging activity was limited
due to the decrease in net inter-
est-bearing debt.
Table 4.3.3 Sensitivity based on a 1 percentage point increase in interest rate
(EURm)
2017
Financial assets
Derivatives
Financial liabilities
Net interest-bearing debt excluding pension liabilities
2016
Financial assets
Derivatives
Financial liabilities
Net interest-bearing debt excluding pension liabilities
Carrying value
Sensitivity
-610
-
2,246
1,636
-600
-
2,248
1,648
1%
1%
1%
1%
1%
1%
Potential accounting impact
Income
statement
Other
comprehensive
income
4
7
-18
-7
-2
49
-
47
4
12
-22
-6
-2
63
-
61
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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. Table 4.3.3 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 adverse
effect.
Cash flow sensitivity
A change in interest rates will impact
interest rate payments on the Group’s
unhedged floating rate debt. Table
4.3.3 shows the one-year cash flow
sensitivity, depicting a 1 per cent
increase in interest rates on the
unhedged floating rate for instru-
ments recognised as at 31 December
2017. A decrease in the interest rate
would have the adverse effect.
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
2017
3.8
2016
Minimum
Maximum
4.5
1
7
Policy
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 indpendently
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 of
Directors 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.
1
1
5
Note 4.3.4 Commodity price risk
Limited hedging activities in accordance with strategy
The supply contracts are predomi-
nately related to a floating official
price index. The treasury department
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
UK. The total energy commodity
spend, excluding taxes and distribution
costs, amounts to approximately EUR
95 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 2017 approximate 30% of the
energy spend was hedged. End of
2017, 28 per cent of the energy spend
for 2018 was hedged. A 5 per cent
increase in commodity prices would
negatively impact profit by approxi-
mately EUR 3 million. Conversely,
other comprehensive income would
be positively impacted by EUR 1
million.
Table 4.3.4 Hedged commodities
(EURm)
2017
Diesel / natural gas
Electricity
2016
Diesel / natural gas
Electricity
Sensitivity
Contract value
Potential accounting impact
Income
statement
Other
comprehensive
income
5%
5%
5%
5%
1
-
-2
-1
1
-
2
1
-3
-1
1
-
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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.
1
1
6
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-
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 treasury policy the
forecasted consumption on electricity,
natural gas and diesel can be hedged for
up to 36 months for a limited proportion
increasing to 100 per cent for
consumption in the coming 18 months.
How we act and operate
Energy commodity price risks are
managed by the treasury department.
Commodity price risks are mainly
hedged by entering into financial
derivative contracts, independent of
the physical supplier contracts. Arla is
also exploring other commodities
relevant for financial risk manage-
ment.
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
used.
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. Energy risk is not entirely
separated from the commercial
markets but is a part of a holistic risk
approach.
The Group is gaining experience in
hedging price risk on selected milk
commodity products with an
insignificant value. The scope of
hedging is still limited by the evolving
but immature dairy derivative markets
in the EU and New Zealand. The dairy
derivative market is developing and
will over years play a role in relation to
managing fixed price commodity
contracts with customers.
Table 4.3.5 shows the counterparty
exposure for those agreements
covered by entering into netting
agreements that qualifies for netting
in case of default.
parties with a satisfying credit rating
do not operate, the Group deviated
from the rating requirement.
The maximum exposure to credit risk
is approximately equal to the carrying
amount.
Other counterparties, customers and
suppliers, are subject to continuous
monitoring of fulfilment of their
contractual obligations and 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 2.1.c.
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
To manage the financial counterparty
risk, the Group uses master netting
agreements when entering into
derivative contracts.
Table 4.3.5 External rating of financial
counterparties
(EURm)
Assets,
carrying amount
Qualifying
for netting
Net
assets
exposure
Liabilities,
carrying
amount
Qualifying
for netting
Net
liabilities
exposure
2017
AA-
A+
A
A-
Total
2016
AA-
A+
A
A-
Total
3
4
7
5
19
3
4
7
1
15
-
-
-
4
4
39
11
36
1
87
3
4
7
1
15
36
7
29
-
72
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
In addition, the Group has entered into sales and repurchase agreements on mortgage bonds, described in further details in Note 4.6.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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.
deviated in countries like Nigeria,
Ghana and Saudi Arabia.
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. In geographies, which
are not properly covered by our
relationship banks, Corporate Treasury
may deviate from counterparty
requirements. Corporate Treasury
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.
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
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
emerging markets.
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.
Note 4.4 Derivative financial instruments
Hedging of future cash flows
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
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.
1
1
7
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
2018
2019
2020
2021
2017
Currency contracts
Interest rate contracts
Commodity contracts
Hedging of future cash flow
4
-77
1
-72
4
-77
1
-72
4
-17
1
-12
-
-14
-
-14
-
-9
-
-9
-
-7
-
-7
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
Later than
2021
-
-30
-
-30
Later than
2020
-
-39
-
-39
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 4.4.b Value adjustment of hedging instruments
(EURm)
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
Total
2017
2016
11
29
11
-3
48
-23
-34
17
18
-22
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.
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
recognised under the same line item
as the hedged item (basic
adjustment).
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.
1
1
8
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Note 4.5 Financial instruments disclosed
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
2017
511
968
56
87
3,344
2016
504
911
50
168
3,243
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 vzalue hierarchy - carrying amount
(EURm)
Level 1
Level 2
Level 3
Total
2017
Financial assets:
Bonds
Shares
Derivatives
Total financial assets
Financial liabilities:
Issued bonds
Mortgage credit institutions
Derivatives
Total financial liabilities
2016
Financial assets:
Bonds
Shares
Derivatives
Total financial assets
Financial liabilities:
Issued bonds
Mortgage credit institutions
Derivatives
Total financial liabilities
Risk mitigation
511
12
523
19
19
-
799
799
406
87
493
-
511
12
19
542
406
799
87
1.292
1
1
9
504
13
-
517
-
798
-
798
-
-
31
31
419
-
168
587
-
-
-
-
-
-
-
-
504
13
31
548
419
798
168
1,385
Methods and assumptions applied
when measuring fair values of financial
instruments:
is determined as a termination price
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
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
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Note 4.6 Transfer of financial assets
Sale and repurchase agreements
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 comprehensive income.
The received proceeds create a
repurchase obligation which has been
recognised within short-term loans.
Table 4.6 Transfer of financial assets
(EURm)
Carrying
value
Notional
amount
Fair value
2017
Mortgage bonds
Repurchase liability
Net position
2016
Mortgage bonds
Repurchase liability
Net position
1
2
0
504
499
504
-498
-497
-498
6
2
6
496
508
496
-496
-507
-496
-
1
-
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.
Note 4.7 Pension liabilities
Reduced pension liabilities
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 were EUR 277 million, a
decrease of EUR 92 million compared
to last year. The carrying value of
defined benefit plans decreased
primarily in the UK due to actuarial
gains related to lower salary increase
expectation as well as higher inflation
expectation.
Pension plans in Sweden
The defined benefit plan in Sweden
does not currently require the Group
to make cash contributions. The
recognised net liability was EUR 200
million, an increase of EUR 15 million
compared to last year. An actuarial
loss of EUR 19 million, resulting from a
decrease in the discount rate, was
partly offset by currency translation.
These pension plans were 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 recognised net liability was EUR
47 million, representing a decrease of
EUR 103 million compared to last
year. The reduction is primarily related
to actuarial gains of EUR 77 million
due to lower salary increase
expectations. Additionally, payments
to the plans reduced the liability with
EUR 30 million.
The defined benefit plans in the UK
are administered by independent
pension funds that invest deposited
amounts to cover future pension
payments.
These pension plans are defined
benefit final salary schemes. The
schemes are closed to both new
entrants and future accrual.
Employer’s 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 sectionalized
pension schemes. The Group has
limited control over the operation of
the plans and their investments.
The trustees of the schemes set the
investment strategy and have
established a policy on asset
allocation to best match the assets to
the liabilities of the schemes. The
trustees appoint an independent
external advisor to the schemes who is
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Table 4.7.a Pension liabilities recognised on the balance sheet
(EURm)
Sweden
UK
Other
Total
2017
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
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
Table 4.7.b Development in pension liabilities
(EURm)
Present value of liability at 1 January
Reclassification
New pension liability from acquired companies
Paid in by employees
Current service cost
Interest cost
Actuarial gains and losses from changes in financial assumptions (OCI)
Benefits paid
Curtailments and settlements
Exchange rate adjustment
Present value of pension liability at 31 December
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 (OCI)
Contributions to plans
Benefits paid
Administration expenses
Exchange rate adjustments
Fair value of plan assets at 31 December
210
-11
199
1
200
1,336
-1,289
47
-
47
38
-20
18
12
30
210
1
211
1,336
-
1,336
38
12
50
196
-11
185
-
185
196
-
196
1,425
-1,275
150
-
150
1,425
-
1,425
45
-24
21
13
34
45
13
58
1,584
-1,320
264
13
277
1,584
13
1,597
1,666
-1,310
356
13
369
1,666
13
1,679
1
2
1
2017
2016
1,679
-3
2
1
3
42
-4
-60
-
-63
1,597
1,610
-
-
1
3
52
282
-59
-3
-207
1,679
2017
2016
1,310
-2
33
54
30
-50
-1
-54
1,320
1,316
-
44
150
34
-48
-2
-184
1,310
33
54
87
44
150
194
The Group expects to contribute EUR 35 million to the plan assets in 2018 and EUR 132 million in 2019-2022.
Actual return on plan assets:
Calculated interest income
Return excluding calculated interest
Actual return
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 Maturity of pension liability at 31 December 2017
(EURm)
Maturity of pension liability at 31 December 2016
(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
1,337
210
50
1,597
>1Y
43
10
9
62
1-5Y
177
35
7
219
5-10Y 10-20Y 20-30Y 30-40Y
132
19
6
157
430
61
10
501
278
40
9
327
231
38
5
274
>40Y
46
7
4
57
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
247
37
13
297
283
36
8
327
>40Y
61
6
1
68
Table 4.7.d Sensitivity of pension liabilities to key assumptions
(EURm)
2017
2017
2016
2016
Impact on pension liabilities at 31 December
Discount rate +/- 10bps
Expected salary increases +/- 10bps
Life expectancy +/- 1 year
Inflation +/- 10 bps
1
2
2
+
-19
2
64
17
-
20
-2
-64
-17
+
-25
2
66
18
Table 4.7.e Pension assets recognised
(EURm)
Diversified Growth Funds & Debt vehicles
Liability-Driven Investments
Absolute return Bonds
Equity instruments
Properties
Infrastructure
Bonds
Other assets
Total assets
2017
579
163
143
165
100
70
11
89
1,320
%
44%
12%
11%
12%
8%
5%
1%
7%
100%
2016
486
246
198
154
88
42
11
85
1,310
-
25
-2
-66
-18
%
37%
19%
15%
12%
7%
3%
1%
6%
100%
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 Table 4.7.f Recognised in the income statement for the year
(EURm)
2017
2016
Current service cost
Administration cost
Curtailments and settlements
Recognised as staff costs
Interest cost on pension liability
Interest income on plan assets
Recognised as financial cost
Total amount recognised in the income statement
Table 4.7.g Recognised in other comprehensive income
(EURm)
Accumulated actuarial losses at 1 January
Actuarial gains/(losses) for the year
Accumulated actuarial gains and losses at 31 December
Table 4.7.h Assumptions for the actuarial calculations
Discount rate, Sweden
Discount rate, UK
Expected payroll increase, Sweden
Expected payroll increase, UK
Inflation (CPI), Sweden
Inflation (CPI), UK
3
1
-
4
42
-33
9
13
2017
-287
58
-229
2017
2.5%
2.5%
2.3%
2.5%
1.9%
3.1%
4
2
-3
3
52
-44
8
11
2016
-155
-132
-287
2016
2.8%
2.7%
2.2%
4.5%
2.2%
1.7%
1
2
3
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 variables
compared to assumptions and any
changes in assumptions can have a
significant impact on the carrying
amount of the net liability.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
NOTE 5
OTHER AREAS
Note 1 Operating profit
87 Note 1.1 Revenue
88 Note 1.2 Costs
90
Note 1.3 Other operating income and costs
Note 2 Net working capital
92 Note 2.1 Net working capital
Note 3 Capital employed
95 Note 3.1 Intangible assets
96 Note 3.2 Impairment tests
97 Note 3.3 Property, plant and equipment
99 Note 3.4 Joint ventures and associates
101 Note 3.5 Provisions
101 Note 3.6 Purchase and sale of business or activities
Note 4 Funding
104 Note 4.1 Financial items
105 Note 4.2 Net interest-bearing debt
110 Note 4.3 Financial risk
110 Note 4.3.1 Liquidity and Funding risk
112 Note 4.3.2 Currency risk
114 Note 4.3.3 Interest rate risk
115 Note 4.3.4 Commodity price risk
116 Note 4.3.5 Credit risk
117 Note 4.4 Derivative financial instruments
119 Note 4.5 Financial instruments disclosed
120 Note 4.6 Transfer of financial assets
120 Note 4.7 Pension obligations
Note 5 Other areas
125 Note 5.1 Tax
127 Note 5.2 Fees to auditors appointed by the Board of Representatives
127 Note 5.3 Management remuneration and transactions
128 Note 5.4 Contractual commitments and contingent liabilities
128 Note 5.5 Events after the balance sheet date
128 Note 5.6 General accounting policies
130 Note 5.7 Group chart
Note 5.1 Tax
Current and deferred tax
Tax in the income statement
The tax cost was EUR 22 million,
compared to a tax cost of EUR 42
million last year. The reduction is
mainly due to deferred tax and
adjustments relating to previous years.
The current tax cost primarily consists
of EUR 7 million tax cost relating to
cooperative tax, and a EUR 19 million
tax cost relating to corporate income
tax. The equivalent tax costs last year
were EUR 10 million and EUR 16
million respectively.
Deferred tax
Net deferred tax liabilities amounted
to EUR 16 million, which represents an
increase of EUR 10 million compared
to last year.
Deferred tax assets of EUR 43 million
are primarily based on temporary
differences of property, plant and
equipment, tax losses carried forward,
and pension liabilities. Deferred tax
liabilities of EUR 59 million mainly
relate to temporary differences on
property, plant and equipment and
other temporary differences.
The increase in the net liability position
can be explained by a reduction in
deferred tax assets arising from actuarial
movements on pension liabilities.
A deferred tax asset of EUR 32 million
was not recognised, as the Group
does not expect to be able to use the
benefits arising from the associated
temporary differences in the
foreseeable future. Last year the
unrecognised deferred tax asset
amounted to EUR 154 million. The
change reflects an updated approach
in assessing historical unrecognised
temporary differences.
Table 5.1.a Tax in the income statement
(EURm)
Cooperative tax
Corporate income tax
Deferred tax
Adjustments regarding previous years, actual tax
Adjustments 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
Adjustments for cooperative tax
Net non-taxable income less non-tax-deductible costs
Change in tax percentage
Adjustments regarding previous years
Other adjustments
Effective tax rate
2017
2016
7
19
2
-3
-3
22
2017
22.0%
-4.7%
-18.8%
-2.6%
0.0%
-1.9%
12.9%
6.9%
10
16
8
3
5
42
1
2
5
2016
22.0%
-3.7%
-13.1%
-5.0%
0.1%
2.0%
8.2%
10.5%
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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
2017
Net deferred tax asset/liability at 1 January
Income/charge to the income statement
Income/charge to other comprehensive income
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
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
-2
-1
-
-
-
-3
-
-3
-1
-
-
-
-1
-
-2
-
-2
8
4
-
-
-3
9
35
-26
1
-2
-
-2
-3
14
8
39
-31
-3
-1
-
-
-
-4
-
-4
2
-5
-
-
-
-
-3
-
-3
-3
-
-
-
-
-3
-
-3
-3
-
-
-
-
-
-3
-
-3
27
-12
-10
-1
11
15
4
-11
26
-8
21
2
-3
-11
27
28
-1
1
2
6
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 based on
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,
except for 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
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 due to changes in the
tax rate are recognised in the
comprehensive income for the year.
1
-
-
-
-1
-
-
-
5
3
-4
-
-
-3
1
1
-
6
3
-
-
-1
8
8
-
10
-3
-
-
-1
-
6
6
-
-40
8
-1
-
-5
-38
4
-34
-41
2
-1
-
-
-
-40
-
-40
-6
1
-11
-1
1
-16
43
-59
-1
-13
16
-
-8
-
-6
74
-80
Uncertainties and
estimates
Deferred tax
Deferred tax reflects assessments of
future taxable income across all legal
entities. Actual future taxes may
deviate from these estimates due to
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.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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
2017
2016
1.4
-
1.3
0.7
3.4
1.3
0.1
1.4
1.4
4.2
Note 5.3 Management remuneration and transactions
Remuneration paid to management
The remuneration of the Executive
Board is annually proposed by the
Chairmanship and approved by the
Board of Directors and salary was
maintained on par with last year.
Remuneration for the Board of
Directors is annually approved by the
Board of Representatives. Principles
applied to management remuneration
are described on page 60.
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
1
2
7
2017
2016
1.3
1.3
2.2
0.2
0.1
0.6
0.2
3.3
2017
14.0
0.4
14.4
1.2
1.4
2.6
1.3
1.3
2.2
0.3
0.1
0.6
0.2
3.4
2016
10.7
0.3
11.0
0.6
2.1
2.7
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Note 5.4 Contractual commitments, contingent assets and liabilities
Contractual commitments
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
financial statements.
As security for mortgage debt based
on the Danish Mortgage Act with a
nominal value of EUR 815 million,
compared with EUR 817 million last
year, the Group provided security in
property.
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 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 2018.
Table 5.4 Contractual commitments and contingent liabilities
(EURm)
2017
2016
Guarantee commitments
0-1 years
1-5 years
Over 5 years
Operating rent and lease commitments
Commitments in relation to agreements on the purchase of property, plant and equipment
2
53
108
43
204
112
5
65
139
39
243
92
Uncertainties and
estimates
1
2
8
The Group 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 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. First of January 2019
IFRS 16 Leasing standard will be
applicable. Arla is currently preparing
for implementation of this standard.
For more details read note 5.6.
Note 5.5 Subsequent events after the balance sheet date
On 25 January 2018, the Board of
Directors decided to close Brabrand
Dairy in Denmark and move its
production to other sites. The restructure
is due to a lack of expansion options at
the site, which is necessary to meet an
increasing demand for yogurt products
in Europe. The closure will take place
mid-2019 and will affect 160
employees.
The decision has no effect on the
financial statements of 2017.
spreads and cheese under an
intellectual property license.
On 8 February 2018, Arla announced
the acquisition of Yeo Valley Dairies
Limited, a subsidiary of the Yeo Valley
Group Limited. The transaction will give
Arla the rights to use the Yeo Valley®
brand in the UK market for milk, butter,
On 9 February 2018, Arla Foods
Ingredients agreed to acquire the
remaining 50 per cent of the
Argentinian-based, Arla Foods
Ingredients S.A (AFISA), currently
owned by SanCor, to support the
company’s ambition for market
growth in South America. The
investment was previously classified as
a joint venture and will be recognised
as a fully owned subsidiary following
the acquisition.
No other subsequent events with a
material impact on the financial
statements occurred after the balance
sheet date.
Note 5.6 General accounting policies
Consolidated financial statements
The consolidated financial statements
included in this annual report are
prepared in accordance with
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 20 February 2018
and presented for approval by the Board
of Representatives on 28 February 2018.
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 and
liabilities, along with items included in
equity of subsidiaries are aggregated
and presented on a line-by-line basis.
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 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 a controlling influence, are
considered as associates. A significant
influence is typically obtained by
holding or having at the Group’s dispos-
al, directly or indirectly, more than 20
per cent, but less than 50 per cent, of
the voting rights in an entity.
Unrealised gains arising from
transactions with joint ventures and
associates, i.e. profits from sales to joint
ventures or associates and whereby the
customer pays with funds partly owned
by the Group, 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 manner, 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.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
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, for
example property, plant and equipment
which are measured based on historical
cost in a foreign currency, are
translated into the functional currency
upon 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.
On partial divestment of associates and
joint ventures, the relevant proportional
amount of the cumulative foreign
currency translation adjustment
reserve is transferred to the results for
the year, along with any gains or losses
related to the divestment. Any
repayment of outstanding balance
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 supplementary
information.
Adoption of new or amended IFRS
The Group implemented all new
standards and interpretations effective
in the EU from 2017. None of these
newly adopted standards and
interpretations had or are expected to
have an impact on the consolidated
financial statements of Arla. IASB issued
a number of new or amended and
revised accounting standards and
interpretations that have not yet come
into effect. Arla expects to incorporate
the new standards when they become
mandatory.
transferred to the customer, generally
on delivery of the goods.
IFRS 9 – Financial instruments
In November 2016, the EU endorsed
IFRS 9 “Financial Instruments”, which is
effective for annual periods beginning
on or after 1 January 2018. IFRS 9
replaces IAS 39 and changes the
classification and measurement of
financial assets and liabilities.
IFRS 9 introduces a logical classification
of financial assets based on the Group’s
business model and its underlying cash
flow. Furthermore, a new “expected
loss”-model is introduced, as opposed
to an incurred credit loss model under
IAS 39. The expected loss model
requires an entity to account for
expected credit losses and changes in
those expected credit losses at each
reporting date to reflect changes in
credit risk.
Furthermore, new requirements for
hedge accounting will be more closely
aligned to the Group’s business risk
management policies. An assessment
of the Group’s current hedging relation-
ships indicates that they will qualify as
continuing hedging relationships upon
application of IFRS 9.
An assessment was performed which
indicates that the new standard would
not have any material impact on the
classification of financial assets.
Analysis confirms that the expected
loss model for trade receivables, nor
the change in hedge accounting will
have a material impact on the
recognition or measurement in the
Group’s figures.
IFRS 15 – Revenue
IFRS 15 was issued in May 2014 and
amended in April 2016, and establishes
a five-step model to account for
revenue arising from contracts with
customers. Under IFRS 15, revenue is
recognised at an amount that reflects
the consideration which an entity
expects to be entitled to, in exchange
for transferring goods or services to a
customer.
The new revenue standard will
supersede all current revenue
recognition requirements under IFRS.
Either a full retrospective application or
a modified retrospective application is
required from 1 January 2018. Arla
decided to apply the modified
retrospective method.
Arla sells consumer dairy products,
ingredients and raw milk to customers.
The goods are sold based on the
respective contracts with customers.
Arla conducted the assessment on the
impact of IFRS 15. For contracts with
customers in which the sale of goods is
generally expected to be the only
performance obligation, adoption of
IFRS 15 is not expected to have an
impact on Arla’s revenue or profit and
loss. Arla expects the revenue
recognition to occur at a point in time
when control of the goods is
In preparing to adopt IFRS 15, Arla is
taking the variable considerations into
account. Some contracts with
customers provide trade discounts,
listing fees or volume rebates.
Currently, Arla recognises revenue from
the sale of goods measured at the fair
value of the consideration received or
receivable, net of returns and
allowances, trade discounts and
volume rebates. Such provisions give
rise to variable consideration under
IFRS 15, and will be required to be
estimated at contract inception and
updated thereafter.
IFRS 15 requires the estimated variable
consideration to be constrained to
prevent over-recognition of revenue.
Arla expects that application of the
constraint will have no significant
change on the revenue being deferred
compared to the current standard.
The presentation and disclosure
requirements in IFRS 15 are more
detailed compared to the current
standard, whereby several disclosure
requirements in IFRS 15 are new. Arla
expects that the notes to the financial
statements will be expanded due to the
disclosure of significant judgements
made.
In addition, as required by IFRS 15, Arla
will disaggregate revenue recognised
from contracts with customers into
different categories.
IFRS 16 Leases
IFRS 16 was issued in January 2016
and replaces IAS 17 Leases, IFRIC 4
Determining whether an Arrangement
contains a Lease, SIC-15 Operating
Leases-Incentives and SIC-27
Evaluating the Substance of
Transactions Involving the Legal Form
of a Lease. IFRS 16 sets out the
principles for the recognition,
measurement, presentation and
disclosure of leases and requires
lessees to account for all leases
on-balance, similar to the accounting
treatment for finance leases under IAS
17. The standard, which is effective on
1 January 2019 for Arla, will significantly
change the accounting treatment for
lease contracts that are currently
treated as operational leases to date.
The standard requires that all lease
contracts regardless of type, with some
exemptions, need to be capitalised on
the lessee’s balance sheet as an asset,
representing the right to use the under-
lying asset, with a matching lease
liability, representing the lease
payments. The standard includes two
recognition exemptions for lessees –
leases of ’low-value’ assets, for example
personal computers, and short-term
leases, i.e., leases with a lease term of
12 months or less.
The income statement will also be
impacted by the annual leasing costs.
Annual leasing costs will be divided into
two elements, depreciation and
interest costs, as opposed to the
current treatment whereby the annual
costs relating to operational lease
agreements are expensed solely as
operating costs. This will have a positive
impact on the Group’s EBITDA and to a
lesser extent on EBIT. Furthermore, it is
expected that the cash flow statement
will be impacted due to the current
operational lease payments.
Operational lease payments are
presently disclosed as cash flow from
operating activities, and will be
disclosed as financing activities as a
result of the new standard.
Arla will be required to remeasure the
lease liability upon the occurrence of
certain events, for example a change in
the lease term or a change in future
lease payments resulting from a
change in an index or rate used to
determine those payments. Arla will
generally recognise the amount
relating to the remeasurement of the
lease liability as an adjustment to the
right-of-use asset. IFRS 16 requires
more extensive disclosures than its
predecessor, IAS 17.
Arla assessed the impact of the
adoption of the new standard based on
a preliminary analysis. The preliminary
analysis indicates an increase in total
assets of approximately 5 per cent.
Arla’s 2019 income statement will
show a shift from operating expenses
to depreciation and interest. This will
have an expected increase of around
14 per cent on EBITDA and 20 per cent
on EBIT. It is expected that the net
result will not be significantly affected.
In accordance with IFRS 16, the
annual operational lease payment of
approximately EUR 100 million in 2017
needs to be presented as cash flow
from financing activities, as opposed to
the current treatment as cash flow
from operating activities. This change
in disclosure will improve the cash flow
from operating activities by approxi-
mately 25 per cent.
In 2018, Arla will continue to assess the
impact of IFRS 16 on its consolidated
financial statements.
IFRIC 22 – Foreign Currency
Transactions and Advance
Consideration
IFRIC 22 addresses how to account for
advance consideration in currencies
different from the functional currency.
IFRIC 22 is not expected to have a
material impact on the Group’s
consolidated financial statements
because the Group already accounts
for currency transactions and advance
consideration in way that is consistent
with the amendments.
Other new or revised accounting
standards and implementations are not
expected to have a material impact on
the consolidated financial statements
of the Group.
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9
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Note 5.7 Group companies
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.
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
1
3
0
Arla Foods GP Ltd.
Arla Foods Finance Ltd.
Arla Foods Holding Co. Ltd.
Arla Foods UK Services Ltd.
Arla Foods Nairn Ltd.
Arla Foods Ltd.
Arla Foods limited Partnership
Milk Link Holdings Ltd.
Milk Link Processing Ltd.
Milk Link (Crediton No 2) Ltd.
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.
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 (Under liquidation)
Arla Foods Ingredients (Deutschland) GmbH
Arla CoAr Holding GmbH
ArNoCo GmbH & Co. KG *
Arla Biolac Holding GmbH
Biolac GmbH & Co. KG *
Biolac Verwaltungs GmbH *
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.
Arla Foods Inc.
Arla Foods Ltd.
Arla Global Dairy Products Ltd.
TG Arla Dairy Products LFTZ Enterprise
TG Arla Dairy Products Ltd.
Country
Denmark
Denmark
Denmark
Japan
USA
Korea
China
Argentina
Singapore
Mexico
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
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
Kuwait
Lebanon
Qatar
Bahrain
Hong Kong
Malaysia
Panama
Philippines
Ghana
Nigeria
Nigeria
Nigeria
Group
Equity
interest (%)
Currency
DKK
DKK
DKK
JPY
USD
KRW
CNY
USD
SGD
MZN
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
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
KWD
USD
QAR
BHD
HKD
MYR
USD
PHP
GHS
NGN
NGN
NGN
100
100
100
100
100
100
50
100
100
100
100
50
100
100
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
100
100
100
100
50
100
50
50
49
50
40
25
100
100
100
100
100
100
50
100
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017
Arla Foods AB
Arla Gefleortens AB
Arla Oy
Massby Facility & Services Oy
Osuuskunta MS tuottajapalvelu **
Restaurang akademien Aktiebolag **
Vardagspuls AB
Arla Foods Russia Holding AB
Arla Foods LLC
Arla Foods Inc.
WNY Cheese Enterprise LLC **
Arla Foods Production LLC
Arla Foods Transport LLC
Arla Foods Deutschland GmbH
Arla Foods Verwaltungs GmbH
Arla Foods Agrar Service GmbH
Arla Foods Agrar Service Luxemburg GmbH
Arla Foods Agrar Service Belgien AG
Arla Foods LLC
Martin Sengele Produits Laitiers SAS
Team-Pack GmbH
Arla Foods France, S.a.r.l
Dofo Cheese Eksport K/S
Dofo Inc.
Aktieselskabet J. Hansen
J.P. Hansen USA Incorporated
AFI Partner ApS
Arju For Food Industries S.A.E.
Andelssmør A.m.b.a.
Arla Côte d'lvoire
Arla Foods AS
Arla Foods Bangladesh Ltd.
Arla Foods Dairy Products Technical Service (Beijing) Co. Ltd.
Arla Foods FZE
Arla Foods Hellas S.A.
Arla Foods Inc.
Arla Foods Logistics GmbH
Arla Foods Mayer Australia Pty, Ltd.
Arla Foods Mexico S.A. de C.V.
Arla Foods S.A.
Arla Foods S.a.r.l.
Arla Foods S.R.L.
Arla Foods SA
Arla Foods Srl
Arla Foods UK Farmers Joint Venture Co. Ltd.
Arla Global Financial Services Centre Sp. Z.o.o.
Arla Milk Link Limited
Arla National Foods Products LLC
Cocio Chokolademælk A/S
Hansa Verwaltungs und Vertriebs GmbH (Under liquidation)
Marygold Trading K/S
Mejeriforeningen
COFCO Dairy Holdings Limited **
Svensk Mjölk Ekonomisk förening **
Lantbrukarnas Riksförbund upa **
Country
Currency
Group
Equity
interest (%)
Sweden
Sweden
Finland
Finland
Finland
Sweden
Sweden
Sweden
Russia
USA
USA
USA
USA
Germany
Germany
Germany
Luxembourg
Belgium
Russia
France
Germany
France
Denmark
USA
Denmark
USA
Denmark
Egypt
Denmark
Ivory Coast
Norway
Bangladesh
China
UAE
Greece
Canada
Germany
Australia
Mexico
Spain
France
Dominican Republic
Poland
Italy
UK
Poland
UK
UAE
Denmark
Germany
Denmark
Denmark
British Virgin Irlands
Sweden
Sweden
SEK
SEK
EUR
EUR
EUR
SEK
SEK
SEK
RUB
USD
USD
USD
USD
EUR
EUR
EUR
EUR
EUR
RUB
EUR
EUR
EUR
DKK
USD
DKK
USD
DKK
EGP
DKK
XOF
NOK
BDT
CNY
AED
EUR
CAD
EUR
AUD
MXN
EUR
EUR
DOP
PLN
EUR
GBP
PLN
GBP
AED
DKK
EUR
DKK
DKK
HKD
SEK
SEK
1
3
1
100
100
100
60
37
50
100
100
80
100
20
100
100
100
100
100
100
100
20
100
100
100
100
100
100
100
100
49
98
51
100
51
100
100
100
100
100
51
100
100
100
100
100
100
100
100
100
40
50
100
100
91
30
75
24
* Joint ventures ** Associates
The Group also owns a number of entities without material commercial activities.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 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 2017, which
comprise income statement,
statement of comprehensive income,
balance sheet, statement of changes
in equity, cash flow statement and
notes, including accounting policies,
for the Group and 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
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 2017 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 2017 in
accordance with International
Financial Reporting Standards as
adopted by the EU and additional
requirements of the Danish Financial
Statements Act.
Basis for opinion
We conducted our audit in accordance
with International Standards on
Auditing (ISAs) and 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” (hereinafter collectively
referred to as “the financial
statements”) section of our report.
We believe that the audit evidence
we have obtained is sufficient and
appropriate to provide a basis for our
opinion.
Independence
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.
Statement on
the Management’s review
Management is responsible for the
Management’s review.
Our opinion on the 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
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 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
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 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 requirements of the Danish
Financial Statements Act and for such
internal control as Management
determines is necessary to enable the
preparation of financial statements
that are free from material misstate-
ment, whether due to fraud or error.
In preparing the 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
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 financial statements
Our objectives are to obtain
reasonable assurance as to whether
the 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
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
1
3
2
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 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.
could reasonably be expected to
influence the economic decisions of
users taken on the basis of the
financial statements.
As part of an audit conducted in
accordance with ISAs and additional
requirements applicable in Denmark,
we exercise professional judgement
and maintain professional scepticism
throughout the audit. We also:
Identify and assess the risks of
material misstatement of the
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, misrep-
resentations 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 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 financial statements or, if such
disclosures are inadequate, to
modify our opinion. Our conclusions
are 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
financial statements, including the
note disclosures, and whether the
financial statements represent the
underlying transactions and events
in a manner that gives a true and
fair view.
Aarhus, 20 February 2018
Ernst & Young
Godkendt Revisionspartnerselskab
CVR no. 30 70 02 28
Jesper Koefoed
State Authorised
Public Accountant
MNE no. 11689
Morten Friis
State Authorised
Public Accountant
MNE no. 32732
1
3
3
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 Glossary
1
3
4
BEPS refers to Base Erosion and Profit Shifting, an
initiative issued by the OECD which consists of 15
actions designed to equip governments with
domestic and international instruments to address
tax avoidance, ensuring that profits are taxed where
economic activities generating the profits are
performed and where value is created.
Brand share measures the revenue from strategic
brands as a proportion of total revenue, and is
defined as the ratio of revenue from strategic
branded products and total revenue.
BSM is an abbreviation of the product category
containing butter, spreads, and margarine.
CAPEX is an abbreviation of capital expenditure.
Capacity cost is defined as the cost for running
the general business, and includes staff cost,
maintenance, energy, cleaning, IT, travelling and
consultancy etc.
Conscious living means living by actively
evaluating one’s activities, decisions and options,
and making deliberate choices based on one’s
values.
FMCG is an acronym for fast-moving consumer
goods.
Free cash flow is defined as cash flow from
operating activities after deducting cash flow
from investing activities.
Innovation pipeline is defined as the net
incremental revenue generated from innovation
projects up to 36 months from their launch.
Interest cover is the ratio between EBITDA and net
interest costs.
International share of business is defined as the
revenue from the zone International as a percentage
of the revenue from the zones International and
Europe.
Leverage is the ratio between net interest- bearing
debt inclusive of pension liabilities and EBITDA. It
enables evaluation of the ability to support future
debt and obligations; the long-term target range for
leverage is between 2.8 and 3.4.
MENA is an acronym referring to the Middle East
and North Africa.
Conversion cost refers to the total cost of
production of finished and semi-finished goods,
excluding the cost for milk, divided by the product
volume. The conversion cost enables evaluation of
efficiency improvements in the conversion of raw
milk to production output over time.
CPI is an abbreviation of Consumer Price Index.
Milk volume is defined as total intake of raw milk in
kg from owners and contractors.
M&A is an abbreviation of mergers and acquisitions.
MYPC is an abbreviation for Arla’s largest product
category which contains’ milk, yoghurt, powder, and
cooking.
Digital engagement is defined as the number of
interactions consumers have across digital channels.
The interaction is measured in a number of different
ways, for example, by viewing a video on all media
channels for more than 10 seconds, visiting a
webpage, commenting, liking or sharing on our
social media channels.
EBIT is an abbreviation of earnings before interest
and tax, and a measure of earnings from operations.
EBITDA is an abbreviation of earnings before
interest, tax, depreciation and amortisation from
ordinary operations.
EBIT margin measures EBIT as a percentage of
total revenue.
Equity ratio is the ratio between equity excluding
minority interests and total assets, and is a measure
of the financial strength of Arla.
Flexitarian refers to a diet which is plant-based
with the occasional addition of meat. Flexitarians are
also known as flexible vegetarians, casual
vegetarians or vegivores.
Net interest-bearing debt is defined as current
and non-current interest-bearing liabilities less
securities, cash and cash equivalents, and other
interest-bearing assets.
Net interest-bearing debt inclusive of pension
liabilities is defined as current and non-current
interest-bearing liabilities less securities, cash and
cash equivalents, and other interest-bearing assets
plus pension liabilities.
OECD refers to the Organisation for Economic
Cooperation and Development.
Performance price for Arla Foods is defined as the
prepaid milk price plus net profit divided by total
member milk volume intake. It measures value
creation per kg of owner milk including retained
earnings and supplementary payments.
Prepaid milk price describes the cash payment
farmers receive per kg milk delivered during the
settlement period.
Private label refers to retail brands, which are
owned by retailers but produced by Arla based on
contract manufacturing agreements.
Profit share is defined as the ratio between profit
for the period allocated to owners of Arla Foods, and
total revenue.
Net working capital is the capital tied up in
inventories, receivables, and payables including
payables for owner milk.
Net working capital excluding owner milk is
defined as capital that is 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 measures the relative cost efficiency of
the business and is defined as the ratio between
retail and foodservice volume driven revenue
growth and growth in total capacity cost adjusted
for special items. The strategic ambition for
scalability is > 2.0.
Strategic brands are defined as products sold
under branded products such as Arla®, Lurpak®,
Castello® and Puck®.
Strategic branded volume driven revenue
growth is defined as revenue growth associated
with growth in volumes from strategic branded
products while keeping prices constant.
Trading share is a measure for the total milk
consumption for producing commodity products
relative to the total milk consumption, i.e. based on
volumes. Commodity products are sold with lower or
no value added, typically via business-to-business
sales for other companies to use in their production
as well as via industry sales of cheese, butter, or
milk powder.
UHT is an abbreviation for ultra-high temperature
(UHT) processing, which is a food processing
technology that sterilises liquid food, for example
milk, by heating it above 135 °C.
Value-added protein segment contains products
with special functionality
and compounds, compared to standard protein
concentrates with a protein content of
approximately 80 per cent.
Vegan refers to a diet which refrains from the
consumption of animal products, not only meat but
also eggs, dairy products and other animal-derived
substances.
Volume driven revenue growth is defined as
revenue growth associated with growth in volumes
while keeping prices constant.
CONSOLIDATED FINANCIAL STATEMENTSARLA FOODS ANNUAL REPORT 2017 Corporate calendar
Financial reports
and major events
28 February – 1 March 2018
Board of Representatives meeting in Sweden
2 March 2018*
Publication of consolidated annual report for 2017
24 August 2018
Publication of consolidated half-year report for 2018
10-11 October 2018
Board of Representatives meeting
*Subject to approval from the Board of Representatives.
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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