Arafura Resources Annual Report 2019

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FY2019 Annual Report · Arafura Resources

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CONSOLIDATED ANNUAL REPORT

2019

LEADING
THROUGH
SUSTAINABLE
BUSINESS
PERFORMANCE

OUR viSiON

CREATE THE FUTURE
OF DAiRy TO BRiNG
HEALTH AND
iNSPiRATiON TO THE
wORLD, NATURALLy.

TABLE OF CONTENTS

Management Review
03

2019 Performance at
a glance
Message from the Chairman
of the Board of Directors and
the Chief Executive Officer
Highlights
Five year overview
Essential business priorities
for 2019

07
09
10

Our Strategy
12
13
14

Who we are
Our business model
Our strategy to 2020
and beyond
Embracing change
Embracing change from
within – Calcium
Essential business priorities
for 2020

15
17

Our Brands and
Commercial Segments
21
23
25
27 Arla Foods Ingredients
28 Trading

Our brands
Europe
International

Our sustainability strategy
Our environmental ambition

Our Responsibility
30
31
32 Sustainable dairy farming
Inspiring sustainable diets
33

Our Governance
35
Governance framework
37 Diversity and inclusion
39 Our Board of Directors
Our Executive
42
Management Team

Management remuneration
44
Our tax affairs
45
Risk and compliance
46
50 Preparation for Brexit

Our Consolidated
Financial Statements
65
73

Primary financial statements
Notes

Our Performance Review
53
Market overview
Financial performance
55
Financial outlook
61

Our Consolidated
Environmental, Social and
Governance Data
121 Primary statements
123 Notes

134 Glossary
136 Corporate calendar

Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data

2019 PERFORMANCE
AT A GLANCE

FiNANCiAL PERFORMANCE

COST AND CASH

Revenue

Performance price

Milk volume

Profit share*

10.5

(BILLION EUR)

36.6

(EUR-CENT/KG)

13.7

(BILLION KG)

3.0%

(OF REVENUE)

110

(MILLION EUR)

Leverage

2.8

10.5
10.4
10.3

36.6
36.4
38.1

13.7
13.9
13.9

3.0%
2.8%
2.8%

110
114

2.8
2.4
2.6

Target 2019: 10.2 - 10.6 billion

Target 2019: 2.8-3.2%

Target 2019: 75-100 million

Target 2019: 2.8-3.4

QUALiTy OF BUSiNESS

CLiMATE iMPACT

Strategic branded
volume revenue growth

Brand share

International share**

Total CO₂e emission

CO₂e emissions reduction,
scope 1 and 2***

CO₂e emission reduction,
scope 3 per kg of milk***

5.1%

46.7%

21.9%

18,503

(MILLION KG)

15%

5.1%
3.1%
3.0%

46.7%
45.2%
44.6%

21.9%
19.6%
20.2%

18,503
18,834
19,028

Target 2019: 1.5-3.5%

Target 2019: ≥ 46%

Target 2019: ≥ 20%

Science-based target 2030: 30%

2019

2018

2017

3 ARLA FOODS ANNUAL REPORT 2019

*Based on profit allocated to owners of Arla Foods amba
** International share is based on retail and foodservice revenue, excluding revenue from third party manufacturing, Arla Foods Ingredients and trading activities.
***Baseline: 2015

LEADiNG THROUGH
SUSTAiNABLE
PERFORMANCE

MESSAGES FROM THE CHAiRMAN AND THE CEO

4 ARLA FOODS ANNUAL REPORT 2019

Looking ahead
With clear targets set for 2030 and 2050 on climate
and sustainability we will continue the constructive
collaboration in our democratic system around
these and other important agendas in 2020, as we
roll out the new Arlagården® and encourage all
members to complete a Climate Check.

Jan Toft Nørgaard
Chairman of the Board of Directors

LET’S EMBRACE

THE FUTURE AND
TAkE BOLD
DECiSiONS TO
STRENGTHEN OUR
BUSiNESS.

MESSAGE FROM THE CHAiRMAN

2019 was a significant year on many levels. The
climate and sustainability agenda changed the
world around us, and with it our working conditions
as dairy farmers. This year we also saw strong
performance and substantial progress in our
business, and an unprecedented stability in the
milk price.

As dairy farmers, we all have experienced increasing
challenges from the climate and sustainability
agenda in our everyday lives. We have worked with
sustainability for a long time and have come a long
way already, but we are continuously met with more
requirements and higher expectations from all
external stakeholders, who are scrutinising our
production methods and urge us to adapt further
and faster.

Taking lead in sustainability
In March, we announced our 2050 climate targets,
a clear demonstration that we, as dairy farmers and
owners of a global dairy cooperative are determined
to take a lead on sustainability, and ensure that
consumers maintain confidence in dairy as part of
a healthy and sustainable diet.

Our decision to reduce greenhouse gas emissions
with 30 per cent by 2030 is ambitious, and was well
received by customers, consumers, politicians and
organisations. By 2050 we will go even further and
will produce carbon net zero dairy.

We have a clearly defined plan for how we, as a
business together with all farmer owners, will reach
our targets. We worked intensively within our

5 ARLA FOODS ANNUAL REPORT 2019

democratic setup to align all owners concerning
two essential areas of action. Our farm management
programme Arlagården® is being updated to live up
to the requirements of customers and consumers,
and a new, globally aligned Climate Check
programme was launched in 2019. This will help
the farmers identify emissions on farms and provide
a clear picture of possible actions to reduce them
further.

With these programmes we will accumulate one of
the world’s largest sets of externally verified climate
data from dairy farming. This will be a solid
foundation for benchmarking, knowledge sharing
and research across the dairy industry.

A strengthened business
For two years in a row, our transformation and
efficiency programme, Calcium, has been our key
driver for developing our business for the future. It
guarantees our ability to invest in our Good Growth
2020 strategy and helps delivering a competitive
milk price. With a strong focus on costs, profitability
and digital transformation, Calcium exceeded
expectations in 2019. As a result we entered 2020
aligned and prepared to meet the challenges ahead.

Steady milk price all year
The stable performance price at the competitive
level of 36.6 EURcent/kg throughout 2019 is a
significant result of Calcium and the business that
provided stability for us as dairy farmers after years
of volatility. It is an especially positive achievement
considering what lies ahead of us with the
outcomes of Brexit still being unpredictable.

2019

2018

2017

Performance price

36.6

(EUR-CENT/KG)

36.6

36.4

38.1

Calcium in supply chain is a main internal challenge,
while externally the macroeconomic and political
outlook is gloomy, and the industry remains volatile.

We will continue to monitor the development of
plant-based products as well as introduce our own
plant-based products as a supplement to the core
portfolio. As sustainability continues to be a trend
influencing public debate and consumer choice,
we will launch new initiatives to build trust and
relevance for dairy.

Peder Tuborgh
CEO

wE FiNiSHED
THE yEAR BEATiNG
OUR ExPECTATiONS,
PERFORMiNG ABOvE
TARGETS iN ALL kEy
AREAS.

MESSAGE FROM THE CHiEF ExECUTivE OFFiCER

Leading through sustainable business
performance
A solid sustainable performance in 2019 was mainly
driven by increased branded growth across Europe,
double-digit revenue growth in our international
markets, and significant contributions from Calcium.

segment was our investment in the Kraft® cheese
business in the Middle East and North Africa, which
is off to a very good start. We expect the 12-year
license agreement to contribute significantly to the
value of our investments in the new production site
in Bahrain.

Arla is a stronger business today than we were a year
ago. We achieved the top range of our targets for all
key performance indicators and improved milk price
with a stable performance price at 36.6 EUR-cent/
kg throughout the year. Even with the extraordinary
payout of the full 2018 profit to our owners, we
maintained a healthy leverage and cash flow, as well
as record-high investments that lays strong
foundations for future growth.

Despite the slowdown in global growth and
declining milk consumption in some European
markets, we continued to increase our branded
share of volume led by Arla®, Lurpak® and Puck®.
Our branded volume growth increased 5.1 per cent
compared to last year due to successful innovation
and excellent market execution, supported by
a strengthened front-line focus in the whole
organisation. Not least in Europe, where we
continued to deliver branded volume growth,
2.9 per cent, resulting in market share gains in
the branded space across the region.

For the second year in a row, our international
commercial segment delivered double-digit
revenue growth with branded volume growth of
10.3 per cent. An important highlight in this

6 ARLA FOODS ANNUAL REPORT 2019

Calcium performed above target
During 2019, our transformation and efficiency
programme, Calcium was implemented firmly and
at the planned pace. The transformation played a
significant role in our overall performance and will
continue to influence positively as we change our
ways of working and deliver sustainable cost
savings. There is still some tough work ahead,
particularly in supply chain, before we will reach our
overall goal of EUR 400 million.

Sustainability was an overarching theme and we
took three big steps to reduce our impact on
climate. We launched our ambition to reduce
emissions by 30 per cent per kilo of milk by 2030
and become carbon net zero by 2050. We made
over one billion pieces of packaging across Europe
more environmentally friendly. Moreover, we
introduced a new Climate Check tool that enables
Arla farmers to take further action to reduce
emissions on their farm.

Building trust for dairy
Overall, Arla stands strong at the start of the new
decade. We expect 2020 to be another good year
where our branded growth will continue, though at
a slightly lower level than in 2019. Succeeding with

2019

2018

110

(MILLION EUR)

Target 2019 75-100

110

114

HiGHLiGHTS

2019 was all about sustainable business performance at Arla, embracing the concept from multiple angles on our way to fulfil our Good
Growth 2020 strategy. We launched our ambitious environmental strategy and had our emission targets approved by the Science Based
Targets initiative, while our transformation programme, Calcium ensured that we are changing for the better – sustainably.

Our ambition: Carbon net zero dairy 2050
Together with our 9,759 farmer owners Arla
launched our most ambitious climate targets
to date in March: to reduce greenhouse gas
emissions by 30 per cent per kilo of milk over
the next decade and to work on becoming
carbon net zero by 2050. Our 2030 target
was officially approved by the Science Based
Target initiative as aligned with climate
science. With this move, Arla joined the 27
most progressive companies in the food
and beverage industry, who also took a
forward-thinking stance on climate change.
A science-based greenhouse gas reduction
target is in line with keeping the global
temperature increase below 1.5°C compared
to pre-industrial levels, thereby avoiding severe
climate change consequences. To read more
about our carbon footprint go to page 123.

7 ARLA FOODS ANNUAL REPORT 2019

First in the world: Arla launched the first ever carbon net zero dairy products
Arla broke global ground in Sweden where we launched under the Arla Ko EKO brand the first ever
dairy product that fulfills the ISO standard for climate neutrality. This achievement was confirmed
by an external auditor. The move is a result of sustainability
initiatives both on and outside the organic farms. On farm, new
climate criteria aimed at reducing emissions are being intro-
duced, while for the remaining emissions linked to the products,
Arla is compensating by investing in three international
projects that reduce carbon emissions.
These include a tree planting
initiative in Uganda, forest
conservation in Indonesia and
generating biogas from manure in
Kenya, Tanzania and Uganda.

Arla takes over cheese business in MENA
Arla purchased a state-of-the art production
facility in Bahrain from Mondeléz International
and secured a long-term Kraft® brand licence
for their cheese business in MENA. This
strategically expands Arla’s position within key
cheese categories, while also expanding our
commercial and supply capabilities to deliver
substantial value for the company going
forward.

Calcium saving: Above expectations
Our transformation and efficiency programme, Calcium, delivered EUR 110 million in 2019, ahead of our
expectation of EUR 75-100 million. The savings were delivered approximately equally between product
optimisation, reduced marketing and indirect spend. Our ambition is to achieve EUR 400+ million bottom
line impact by 2021. With EUR 300+ million we will increase the competitiveness of our milk price, and we
plan to reinvest EUR 100+ million into growth areas. To read more about Calcium go to page 17.

HiGHLiGHTS (CONTiNUED)

Our Board got enhanced with first class
digital and marketing expertise
Two external advisors were appointed to our
Board of Directors in October, who bring global
digital, marketing and technology expertise to
compliment the strong commercial and
farming knowledge of our elected, active
farmer board members. The appointees are
Florence Rollet, a venture partner with
LuxuryTechFund in Paris and former board
member at French spirits company giant Remy
Cointreau and Nana Bule, CEO of Microsoft in
Denmark and board member at Energinet. To
read more about our board go to page 40.

DAiRy wiTH A

DiFFERENCE

Our Arla® brand significantly
increased its value
The Arla® brand is one of the fastest growing
FMCG brands in our European markets and our
ambition keeps expanding. To leap forward we
have a strong focus on pulling our broad
portfolio together in a unified consumer facing
brand that is trustworthy and emotionally
gripping. 2019 marked an important year for
the Arla® brand, as branding and communica-
tion teams in our European markets moved
closer than ever before. They strengthened the
brand by delivering key initiatives to drive
equity, thus scaling more assets across markets
too. Key accomplishments include creating a
distinctive visual Arla® brand identity to unify
our expression. Our identity has been
consistently implemented to drive speed of
recognition and saliency. Our teams have
meticulously crafted communication so we
now can celebrate high performance on brand
memorability and persuasion for all European
Arla® brand advertisements. Equally important,
all Arla® brand campaigns now build on, and
convey, our brand essence thereby providing
an emotional platform with which we can
connect with consumers. Our initiatives have
strengthened us as a first choice brand.

Florence Rollet

Nana Bule

Arla® Pro scored an innovation success
with McDonalds
In collaboration with the world’s largest
restaurant chain, McDonalds, Arla® Pro has
created Crispy Cheese, meeting the needs of an
ever-increasing number of consumers who
follow a flexitarian diet. The Crispy Cheese is a
new alternative on the burger menu, a unique
cheese patty with the taste experience in focus.
It was launched in November 2019 in more than
200 McDonald’s restaurants across Sweden.
The name comes from the crispy deep-fried
surface. The new Crispy Cheese burger was such
a success it sold out after a few days and
expectations are high for 2020. This marks a
great start for Arla® Pro’s flexitarian platform,
which is going to expand in the coming years.

Committed to developing a sustainable
dairy industry in Nigeria
Already active in existing development projects
within the Nigerian dairy industry, in
September Arla further engaged with Kaduna
State and the Nigerian government in a new
public-private partnership. While the state and
the government will offer 1,000 nomadic dairy
farmers permanent farm lands with access to
water, Arla will be the commercial partner that
will purchase, collect, process and bring the
local milk to market. This new partnership is
first of its size in Nigeria, and is part of Arla’s
business strategy to meet the ever growing
consumer demand in Nigeria.

8 ARLA FOODS ANNUAL REPORT 2019

FivE-yEAR OvERviEw

Financial key figures

2019

2018*

2017*

2016*

2015*

Financial key figures

2019

2018*

2017*

2016*

2015*

Performance price (EUR-cent)
EUR-cent/kg owner milk

Income statement (EURm)
Revenue
EBITDA
EBIT
Net financials
Profit for the year

Profit appropriation for the year (EURm)
Individual capital
Common capital
Supplementary payment

Balance sheet (EURm)
Total assets
Non-current assets
Current assets
Equity
Non-current liabilities
Current liabilities
Net interest-bearing debt including pension liabilities
Net working capital

Cash flows (EURm)
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

36.6

36.4

38.1

30.9

33.7

10,527
837
406
-59
323

10,425
767
404
-62
301

10,338
738
385
-64
299

61
123
127

7,106
4,243
2,863
2,494
2,304
2,308
2,362
823

773
-456
202
-136
-425
-168

0
0
290

6,635
3,697
2,938
2,519
1,694
2,422
1,867
894

649
-425
217
-191
-383
-51

38
120
127

6.442
3,550
2,871
2,369
1,554
2,499
1,913
970

386
-286
167
-155
-248
-7

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
-

10,262
754
400
-63
295

31
141
113

6,736
3,903
2,833
2,148
2,084
2,504
2,497
999

669
-402
267
-274
-348
-29

* Not restated following the implementation of IFRS 16 leasing standard.

9 ARLA FOODS ANNUAL REPORT 2019

Financial ratios
Profit share
EBIT margin
Leverage
Interest cover
Equity ratio

Inflow of raw milk (mkg)
Total inflow of raw milk
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 Netherlands, Belgium
and Luxembourg
Inflow from others

Number of owners
Total number of owners
Owners in Sweden
Owners in Denmark
Owners in Germany
Owners in the UK
Owners in Netherlands, Belgium and Luxembourg

Environmental, social and governance data
CO₂e scope 1 and 2 (million kg)
CO₂e scope 3 (million kg)
Average number of full-time employees
Gender diversity board

3.0%
3.9%
2.8
12.0
34%

13,705
4,940
3,230
1,788
1,700

724
1,323

9,759
2,497
2,436
1,731
2,190
905

745
17,758
19,174
20%**

2.8%
3.9%
2.4
14.9
37%

13,903
4,937
3,196
1,826
1,762

725
1,457

10,319
2,630
2,593
1,841
2,289
966

760
18,073
19,190
13%

2.8%
3.7%
2.6
12.9
36%

13,937
4,827
3,203
1,855
1,759

729
1,564

11,262
2,780
2,675
2,327
2,395
1,085

811
18,217
18,973
12%

3.6%
5.3%
2.4
13.3
34%

13,874
4,728
3,210
1,909
1,758

715
1,554

11,922
2,972
2,877
2,461
2,485
1,127

817
18,292
18,765
7%

2.8%
3.9%
3.3
13.2
31%

14,192
4,705
3,320
1,995
1,741

702
1,729

12,650
3,174
3,027
2,636
2,654
1,159

877
19,802
19,025
7%

** The ratio pertains to all members of the BoD (including employee representatives and external advisors). Gender ratio within the elected

members is 13 per cent female, 87 per cent male.

For in-depth info please refer to the Consolidated Financial Statements (from page 64, and the
Consolidated Environmental, Social and Governance Statements from page 121.). For calculations click on
the highlighted texts.

ESSENTiAL BUSiNESS
PRiORiTiES FOR 2019

Arla’s essential business priorities are the annual focal points on the Good Growth 2020 journey.
They are set by our Executive Management Team and approved by the Board of Directors. We
follow-up on our progress on these points monthly.

1. Continuous price & margin management

4. Drive strong branded volume

6. Take lead on sustainability

while driving volume growth

growth agenda

Strong price management

Take advantage of our diverse
milk pool

2. Deliver on Calcium to transform Arla

Deliver on Calcium savings

Anchor the transformation

3. Increase innovation output

Review and enhance innovation model

Increase innovation speed and rate

Secure a portfolio of higher-margin
and consumer oriented products

Execute global brand bets with new
launches and scaling of successful
products

Launch our new climate ambition

Support our branded volume growth
with sustainable moves, eg. switching
to sustainable packaging

7. Power-up Arla Foods Ingredients

Maintain strong, profitable presence in
key markets

Increase proportion of value-added
products

5. Win in focus markets

Secure the growth of our early life
nutrition business in China

Stay strong in European core markets

Deliver brand growth and/or higher
profit in key market segments such as
MENA, Bangladesh, China and Nigeria

Assessing the outcome and managing
the impact of Brexit

10 ARLA FOODS ANNUAL REPORT 2019

Target achieved

Trend on track

OUR
STRATEGy

We predict milk intake with artificial intelligence
Knowing how much raw milk we can transform into our nutritious products is crucial for our
strategic planning. In 2019 Arla developed a new tool based on artificial intelligence, which can
predict in just a few hours how much milk our 1.5 million cows will produce with 1.4 per cent
more accuracy. The improved milk intake forecast means that 200 million kilos of milk can be
utilised better each year.

Arla is the world’s fourth largest dairy company
based on milk intake, and the world’s largest organic
dairy producer. We are also the world’s oldest
cross-border dairy cooperative, and as such, our
farmer owners are at the core of our business model.
Our vision is to create the future of dairy to bring
health and inspiration to the world, naturally.
Our mission is to secure the highest value for our
famers’ milk while creating opportunities for
their growth.

12 ARLA FOODS ANNUAL REPORT 2019

OUR
BUSiNESS MODEL

OwNERS & COwS
We have 9,759 farmer owners, who are responsible

for over 1.5 million cows

Our farmers are among the best in the world in
innovating to make dairy farms more efficient
and sustainable
Animal welfare is key to our success: we provide digital
tools to our owners to constantly track the well-being
of their herd

MiLk COLLECTiON
We collect around 13.7 billion kg of raw
milk mainly from our owners in seven
countries each year
We are switching to fossil-free fuel in our
trucks. This is already the reality in our
Swedish business

MiLk PRODUCTiON, PACkAGiNG
& iNNOvATiON
We process milk at our 60 sites, where 33 per cent of the
energy use already comes from renewable sources
At our sites, we provide work employment opportunities

CONSUMERS & wASTE MANAGEMENT
We provide accessible nutrition to millions of people
Our products’ lifecycle of innovation doesn’t end at consumption, it is
important to us that our products have the least possible negative impact on
our environment. We reduced our landfilled waste by 78 per cent since 2005

CUSTOMERS
We produce 6.7 billion kilos of nutritious dairy products each year
We sell our products in 151 countries
We add value to our owners milk through innovation, branding and marketing,
and when the products are sold, the money goes back to our owners as part of
the milk price

To read more about our environmental and social performance, go to page 121.

13 ARLA FOODS ANNUAL REPORT 2019

OUR STRATEGy FOR 2020 AND BEyOND

In December 2015, we launched our Good Growth 2020 strategy. Four years into Good Growth, we are still confident that this is the right strategy for us.
However, the world is rapidly changing around us , with fierce competition, new demographic realities and fast-changing consumer trends. That’s why in
2018 we accelerated Good Growth with our transformation and efficiency programme, Calcium, and also why we launched our ambitious sustainability
strategy in 2019.

OUR STRATEGy

GOOD GROwTH 2020

Our vision: Create the future of dairy to bring health and inspiration to
the world, naturally.

Our mission: To secure the highest value for our famer’s milk while creating
opportunities for their growth.

Our points of focus:

Calcium is accelerating our strategy by transforming the way we work, spend and invest.

BEyOND 2020

Excel in eight
categories
Matching global trends to
our own strengths, we
identified eight product
categories that are the core
focus for our efforts to win
the dairy market. Our key
categories are milk and
powder; milk-based
beverages, spreadable
cheese, yoghurt, butter and
spreads, specialty cheeses,
mozzarella and ingredients.

Focus on
six regions
Six regions represent the
markets in which we
believe Arla has the
biggest potential to grow
a long-term profitable
business: Northern
Europe, Middle East and
North Africa, China, South
East Asia and West Africa,
North America and Russia.

14 ARLA FOODS ANNUAL REPORT 2019

OUR SUSTAiNABiLiTy APPROACH

Win as ONE Arla
Arla’s ambition is that all
our 19,174 employees
work from ONE strong
common platform.
This means more aligned
performance management
and planning, but also
a commons vision for
Arla’s future.

Arla can’t win without addressing the most pressing issues of our times, therefore
we launched our sustainability approach, which aims to significantly reduce our negative
impact on the world around us, while increasing our positive impact.

Our sustainability strategy is built on two elements:

Stronger people
The ever growing population of the world
needs to be nourished, and our healthy
and nutritious products play an important
role in creating sustainable diets.

Stronger planet
We at Arla believe that dairy can be the
part of the solution when it comes to fight
climate change. We aim to produce carbon
net zero dairy by 2050.

In 2021 we are
entering into a new
strategic period, which
will be defined by our
enhanced strategy.
As a logical next step
following Good
Growth 2020, it will
guide us through the
next period of value
generation.

EMBRACiNG CHANGE

We believe that our strategy must constantly evolve to incorporate changing market conditions and consumer trends.
Here we highlight the major trends and our corresponding responses to ensure the delivery of our strategy.

D
N
E
R
T

E
S
N
O
P
S
E
R

ECONOMiC SLOwDOwN
AND DECLiNiNG DAiRy
CONSUMPTiON

POLiTiCAL vOLATiLiTy
iN EUROPE AND BEyOND

The outcomes of Brexit are still uncertain
New EU leadership and political shifts in core EU countries

cause uncertainty around future policies
US-China and other trade wars continue, increasing cost of
doing business internationally
Conflicts in the MENA regions are escalating

Global economic growth is

slowing down, a trend driven by
declining growth in developed
markets, with less than 2 per cent
GDP growth in both North
America and Europe

In our core European markets,
dairy consumption is flat or in
decline in certain categories, while
it is growing in developing
countries, however at a slower
pace than previously seen

GROwiNG DEMAND iN
DEvELOPiNG COUNTRiES

Emerging markets generate

approximately 85 per cent of dairy
consumption growth

There’s a push for building-up

local value chains and self-suffi-
cient local production in certain
markets

In our core European markets, we are combating consumption
decline by building strong brands and constantly innovating our
products. In 2019 we launched products targeting the growing
number of flexitarian consumers, we expanded our lactose free
products, and launched the world’s first climate - neutral dairy
products in Sweden. Our strong commercial execution in
the markets ensures that we build scale behind these
successes. In our key MENA market we increased our
capacity to serve the growing demand by acquiring a
production site and the Kraft® brand cheese license from
Mondeléz International.

15 ARLA FOODS ANNUAL REPORT 2019

As trade and other negotiations following Brexit progress, we are
continuously and thoroughly preparing for various possible
outcomes, while also keep delivering arguments for the free
movement of people and goods to politicians. To read more on
our Brexit strategy refer to page 50. Concerning trade wars, we
will utilise our global presence and agility to assure that we take
advantage of the possibilities new agreements give us, just as we
will absorb the challenges that the current system presents to
us.

We have a wide presence in emerging markets. Our international
segment delivered strong growth rates since 2015. We expect this
trend to continue in 2020 and beyond. In 2019 we further
strengthened our position and secured local production capacity in
the Middle East, our biggest strategic growth market by launching
production in our newly acquired production site
in Bahrain. In China, we work in partnership with a
local dairy giant, Mengniu to satisfy the growing
demand, and the sales of our organic early life
nutrition products doubled in 2019.

EMBRACiNG CHANGE (CONTiNUED)

DEMAND FOR
A SUSTAiNABLE DiET

FAST CHANGiNG
CONSUMER PREFERENCES

DiGiTALizATiON iS CHANGiNG
THE GAME

The majority of consumers are concerned about what they can
personally do to help protect the environment, including eating
more conciously (62 per cent in Europe, 59 per cent in the US)

Rushed lifestyles create a strong

need for convenience and
on-the-go meals

A growing number of consumers are willing to pay more for

The population in the developed

products that do less harm to the environment
Plant-based alternatives to dairy are on the rise, projected to
grow by 13% in the next two years

world is aging and obesity
is growing
Healthy choices are the fastest
growing in the food and beverages
industry

E-commerce is the fastest growing area of sales, projected to
grow by 47% in the next four years (but still likely to be small
within grocery)

Automatic reordering is expected to be the new norm in the

FMCG industry in the next 5 years
58 per cent of average global consumers say they are on the
internet constantly

At Arla we are aware of our footprint as a dairy company, and
work very hard to reduce our negative environmental impact.
In 2019 we introduced an industry-leading move in recyclable

packaging, and we also launched out climate
ambition of becoming carbon neutral by 2050. We
already produce carbon net zero dairy products in
Sweden under the Arla® EKO brand. To read more
about our sustainability agenda turn to page 30.

True to our vision to bring health to the word and inspire healthy
food choices, our ambition is to bring the goodness of dairy to
the global market. With our ambitious sustainability agenda, we
are reclaiming dairy’s place in a healthy and sustainable diet,

while our innovation pipeline is full of
affordable, convenient, nutritious and healthy
products, such as our Arla&More line or our
Arla® Explorers, offering sugar-free, nutritious
products to the youngest. To read more about
how we inspire healthy food choices, go to
page 33.

Our social media engagement reached 500 million in 2019, and we
launched an array of digital marketing initiatives lead by our in-house
creative agency, the Barn. We also launched an e-commerce
platform for our customers in Denmark, where they can purchase
products near to their expiry date, and plan to expand it to new
markets in the near future..

16 ARLA FOODS ANNUAL REPORT 2019

D
N
E
R
T

E
S
N
O
P
S
E
R

EMBRACiNG CHANGE
FROM wiTHiN

Changing fat and protein prices and major
shifts in currencies in countries where we
operate have impacted Arla’s competitive
position in 2016 and 2017. Therefore in
2018 we launched our transformation
and efficiency programme, Calcium to
accelerate our strategy by transforming
the way we work, spend and invest.
Calcium strengthens our bones, creates
efficiencies and releases money to reinvest
in our growth.

17 ARLA FOODS ANNUAL REPORT 2019

110

Million EUR saved in 2019
Target 2019: 75-100 Million EUR

400
Million EUR
(Full programme target)

2021
December

224
Million Eur

2019
December

114
Million Eur

2018
December

EMBRACiNG CHANGE
FROM wiTHiN

A new level of transparency by deep diving to the smallest details of
our spend enables us to spend where it matters. We are significantly
reducing costs that do not directly contribute to our products.

We have reduced air travel mileage by 18* per cent, saving cost
and CO₂e emissions

We are creating profound change at every site and in every role. We
are shifting our focus to the efficiency of the individual production
line and to overall equipment efficiency to ensure that no part of raw
milk is lost. We are also reducing complexity and share more products
across markets.

By reducing material losses we have saved EUR 65* million
– and decreased our waste

With the help of increased
transparency into logistics data,
we are optimising the distribution
to the customers – route by route
– creating value for us and our
customers.

We have saved over EUR 22*
million – and reduced carbon
emissions

Better service
and more
sustainable
products for
our consumers

OwNER/FARMER

PRODUCTiON

SUPPLiER

ADMiNiSTRATiON/
SALES AND
MARkETiNG

OUTBOUND
LOGiSTiCS

CUSTOMERS AND
CONSUMERS

Savings and
efficiencies
used to improve
milk price

* Figures on this page relate to savings accumulated since the start of Calcium in 2018.

18 ARLA FOODS ANNUAL REPORT 2019

We are signficantly
reducing the number of
suppliers and increasing
compliance with
ordering policies.

We have saved
EUR 30* million
on better packaging
contracts alone

We are spending less on developing campaigns and more on
reaching consumers. Our content is now developed cheaper, faster
and better in our in-house digital studios, the Barn. With the help of
data we are also optimising our focused trade investments to enable
our key account managers to make informed decisions.

We have reduced cost per reach by 50* per cent with
our in-house agency

ESSENTiAL BUSiNESS
PRiORiTiES FOR 2020

Deliver Calcium transformation

Excite our people about the future
direction of Arla

Take lead and execute
sustainability agenda

Maintain momentum of ongoing projects

Keep delivering supply chain savings

Anchor the transformation beyond 2021

Succeed with commercial priorities

Maintain growth momentum in markets
such as China, Nigeria, SEA and MENA

Strengthen our European market and
brand positions

Minimise any negative impacts of Brexit

Improve employee engagement

Excite employees about our strategy
beyond 2020

Drive core brands and boost
innovation

Improve innovation impact

Deliver big bets for our strategic brands

Launch plant-based concept in Europe

Build strong customer partnership
and grow

Deliver improved service levels

Over-proportionately grow branded
volumes with our top customers

Accelerate climate performance on
farm level with Climate Check programme

Support branded growth with
health and packaging innovations

Grow Arla Foods Ingredients

Secure the growth of early life
nutrition products in China

Grow value-added segment

19 ARLA FOODS ANNUAL REPORT 2019

OUR
BRANDS AND
COMMERCiAL
SEGMENTS

Bringing organic child nutrition to China
China was our fastest growing market in 2019 and represents a focus market within the
international commercial segment. Arla is well-positioned in the country with our early life
nutrition products, experiencing double digit growth both in volume and revenue, while
bringing the goodness of organic nutrition to millions of Chinese babies.

OUR BRANDS

Our philosophy of producing natural, healthy and high quality dairy products dates back to the 1880s when the first dairies in Denmark and
Sweden were founded. The world turned around many times since, and our dairy products became branded, but one thing didn’t change:
we provide the world with healthy, nutritious food, naturally. Our brands are at the heart of our business and they drive the majority of Arla’s
profitability, therefore it is imperative to our success to constantly innovate and use the most effective digital tools to reach our consumers.

Puck® is breaking into a new category
Our strongest brand in the Middle East, Puck®,
made the bold move of expanding to one of
the largest and fastest growing dairy
categories in the region, by launching Puck®
Cream Cheese Squares in February. With this
move Puck® conquered the rest of the
breakfast table, where we already have a
strong presence with the popular Puck®
cream cheese in a jar. Blind consumer testing
showed that Squares are well-liked by
consumers, which was confirmed by the EUR
2.8 million in revenue in the first 12 months.

10 years of steep growth for StarbucksTM
Over the last decade, Arla and StarbucksTM
have successfully partnered via a license
agreement, giving Arla the right to manufacture,
distribute and market StarbucksTM-branded
premium ready-to-drink (RTD) coffee
beverages in the EMEA region. The partnership
continues to blossom
with yet another year
of double digits. Our
StarbucksTM’s RTD
products are
currently sold in 43
countries, Italy being
the latest addition to
the club, already
exceeding our
expectations with the
sales levels. We also
readily follow the
ever-changing

consumer habits: a new plant-based range
was introduced early 2019 to address the
growing group of vegans and flexitarian diet
adopters. StarbucksTM Chilled Classics Almond
Iced Coffee with an almond base was the first
to be introduced in this line and will be
followed with two exciting additions in 2020.

Lurpak® pulled off the biggest innovation
in butter packaging in 60 years
Butter has been wrapped in foil since 1957, and a huge
number of consumers found it impractical to use probably
ever since then. Consumer research revealed 45% of
shoppers agreed block butter packaging was
“messy to use”. Our relentless packaging innovation
team cracked this problem by inventing a
re-closable, mess-free box for our beloved Lurpak®
butter, which was launched in the UK in September.
The box addresses the consumer barriers and
frustrations with block butter in foil, and gives
consumers a reason to trade up. The product was
well received in the UK and has been selected by 10.000
UK consumers as the ‘Product of the year’ in the dairy category.

Arla® Pro tapping into the flexitarian trend
Being flexitarian means having the freedom to choose between meat-based and vegetarian dishes. Arla®
Pro has launched a brand new flexitarian product called Arla® Pro Grilling Cheese across five European
markets. This innovative solution has been developed together with customer chefs, targeting
restaurants with burgers on the menu. Highly versatile, this cheese can be cut into tasty and perfect

sized cheese patties for burgers – but can
also be cut into cubes or sticks for wraps,
appetizers and hot dishes. Arla® Pro
Grilling Cheese comes in two delicious
variants.

21 ARLA FOODS ANNUAL REPORT 2019

OUR BRANDS (CONTiNUED)

New digital campaign helps Castello®
race past 10 million engagement
In collaboration with our internal creative
agency, The Barn, Castello® launched its first
digital creative work in support of our white
mould cheese, Creamy White in spring 2019.
After going live in the UK, Sweden and
Denmark, engagement levels grew six times
higher than last years’ benchmark, with over
3 million consumers viewing the content
through digital channels such as Facebook
and YouTube. As well as smashing historical
engagement levels, the Creamy White
content which was first off the production line
for the new global campaign ‘Feed Your
Senses’, and has helped trigger sales above
forecast and create a positive momentum in
our white mould business.

22 ARLA FOODS ANNUAL REPORT 2019

What three YouTube influencers do on a dairy farm?
The influencer generation is often associated with glamourous urban lifestyle and superficial values.
However, at Arla, our Swedish marketing department, together with an external creative agency decided
to go against these preconceptions, and sent three of Sweden’s most popular YouTubers to an Arla farm,
to participate in a YouTube reality show, with a competition very much out of their comfort zone: they
did tractor racing, farmhouse treasure hunting, and of course shared a lot of content with their followers
about Arla® and the goodnesss of dairy. The five episodes of the show reached 889,000 viewers on
YouTube, significantly above expectations, and all episodes had above-average audience retention rates
(compared to the creative agency’s benchmark).

Our brands hit 500 million digital engagements in 2019
In an effort to build trust and passion among consumers in a world
with rapidly changing media consumption habits, our marketing
organization managed to increase digital engagements more than
five times in only three years. From a baseline of 82 million engage-
ments in 2016 we reached 500 million engagements in 2019. This
amazing result was driven by a mindset change within the brand
teams, and also by our recently established internal creative agency,
The Barn. Insourcing media buying and know-how significantly
lowered the cost per reach, and increased media strategy sharing
across markets.

500M

Cocio® helped
make Denmark
happy again!
Denmark was
known as the
happiest country in
the world for years,

and when other Scandinavian nations took
over the leading spot Cocio® decided to do
something about it. Our beloved chocolate
milk’s mission was twofold: besides making
Danes happy, they also wanted to increase
Cocio®’s saliency and consumption frequency.
In the Make Denmark Happy Again campaign
we launched a mission video and the single
biggest sample activity in the brand’s history,
with over 44,000 samples given away in 4
weeks. Our video was loved by the audience:
we achieved triple the impressions expected,
it generated a lot of viral content, and the
average viewer watched it almost 3 times.
On top of that, our cost per view was 5 times
cheaper than our internal benchmark.

EUROPE

Our European commercial segment delivered strong performance with branded volumes growing of 2.9 per cent and record profitability for
the region. This was driven by growth in the Arla brand, particularly in the ArlaProTM Foodservice and Lactofree sub-brands. Our milk-based
branded beverages, including StarbucksTM also grew at double-digit rates. We also took big steps towards reducing our carbon footprint, by
improving packaging materials and launching carbon net zero dairy products in Sweden. The Calcium transformation journey is strengthen-
ing our competitiveness in Europe and is enabling us to retain a number of highly competitive retail contracts.

Revenue,
million EUR

Strategic branded volume
driven revenue growth

Brand share

Revenue split by country,
2019

6,353

2018: 6,507

2.9%

2018: 2.5%

53%

2018: 50.5%

Strategic branded volume driven revenue growth by country

8.8%

2018: 4.1%

Germany

2.6%

2018: 6.5%

Denmark

0.4%

2018: 4.7%

UK
Sweden
Germany
Denmark
Netherlands,
Belgium and France
Finland

2019 2018
36% 35%
21% 21%
17% 18%
16% 16%

5%
5%

Sweden

0.7%

2018: 0.6%

Netherlands, Belgium and France

Finland

5.2%

2018: 12.9%

3.2%

2018: 0.0%

23 ARLA FOODS ANNUAL REPORT 2019

“OUR EUROPEAN
COMMERCiAL SEGMENT
HAD ANOTHER GREAT
yEAR wiTH STRONG
BRANDED GROwTH AND
MARkET SHARE GAiNS iN
THE COMPETiTivE
EUROPEAN MARkETPLACE.
wE SHOwED MOMENTUM
iN ALL MARkETS –
PARTiCULARLy iN THE
Uk AND SCANDiNAviA.
AND OUR STRATEGy TO
BUiLD SCALE BEHiND
OUR BiG BRANDS AND
iNNOvATiONS iS
CONTiNUiNG TO PAy OFF.”

Peter Giørtz-Carlsen,
Member of the Executive Board, and
Chief Commercial Officer, Europe

EUROPE (CONTiNUED)

UK
Our UK market had a stellar year of near double-digit branded growth
amidst a backdrop of challenging industry dynamics, particularly within
the liquid milk category. Revenue in the UK was EUR 2,283 million. The
Arla®, Lurpak®, Castello® & StarbucksTM brands grew and consolidated
their number one positions. Anchor® grew to become the UK’s second
preferred spreadable brand, following category leader Lurpak®. Our
customers chose Arla as the best dairy supplier, and the fourth best
supplier in Food and Drink. We
continue to develop robust plans to
deal with the potential outcome of
the Brexit negotiations. Refer to page
50 for more detail.

Germany
Germany successfully continued to improve the portfolio mix,
strengthened the collaboration with retailers, and increased branded
share. Revenue in the market was EUR 1,063 million. Germany fully
embarked on our sustainability journey by growing organic sales with
sustainable packaging solutions, lowering obsolescence cost, and
joining the too-good-to-go initiative to combat food waste. The
construction of a new powder tower in
Pronsfeld marks the largest investment
in German production sites in several
years.

Denmark
Arla’s branded business continued to grow. in a
market where dairy consumption is declining.
Revenue in Denmark was EUR 1,000 million.
Organic consumption continued to increase, with
Arla building value into the category. We launched
a new white milk concept ‘Cows on Grass’, and
kicked-off Arla’s sustainability strategy. As part of
our Calcium transformation programme we
invested in new yoghurt and skyr production
capacity to serve the increasing demand in
Denmark for organic products..

Sweden
In 2019, against a backdrop of category decline, Arla Sweden delivered
strong branded volume growth. Revenue in Sweden was EUR 1,348
million. Arla’s focus on the sustainability agenda, spearheaded with the
launch of the world first climate neutral milk, was acknowledged in the

Sustainable Brand index with a ranking of 9 out of
more than 300 companies in Sweden. Milk
category decline has decelerated further due to

Netherlands, Belgium and France
On our Dutch market Arla had the largest value growth within fresh
dairy, with some key brands including StarbucksTM, Arla® Lactofree and

Melkunie® Protein driving double digit growth.
The strong branded growth also continues in
Belgium, following the successful launch of
Arla® Skyr in 2018. Revenue in the region was
EUR 319 million.

the ongoing success of our
“only milk tastes milk”
campaign.

Finland
Focus on innovation delivered strong branded growth in Finland, and a
revenue of EUR 322 million. Growth was delivered across most of our
main brands, but in particular with Arla® Lempi and Luonto+, with new
sustainable packaging. Using artificial intelligence and blockchain in
our digital solution “Arla Iris”, we gave
consumers opportunity to view varied
and up-to-date information on the
welfare of cows and the origin of milk
Our foodservice business in Finland
delivered strong branded volume growth
with the Arla® Pro brand.

24 ARLA FOODS ANNUAL REPORT 2019

INTERNATiONAL

Our international commercial segment delivered very strong results in 2019, with a branded volume growth of 10.3 per cent and increased
profitability in nearly all markets. We significantly strengthened our position in the Middle East and North Africa with the integration of a
Kraft®-licence business and a production site in Bahrain to our value chain, enabling further expansion in the region. Our various early life
nutrition products, such as Arla® Baby&Me and Arla® PureGrow performed remarkably across markets from China to Indonesia, as did our
family nutrition milk powders in Bangladesh and Nigeria, which outperformed the markets.

Revenue,
million EUR

Strategic branded volume
driven revenue growth

Brand share

Revenue split by country,
2019

1,802

2018: 1,576

10.3%

2018: 4.6%

82.7%

2018: 85.0%

Strategic branded volume driven revenue growth by region

Middle East and North Africa

West Africa

China

7.0%

2018: 7.1%

22.6%

2018: 6.5%

61.9%

2018: -8.0%

Southeast Asia

24.2%

2018: 26.0%

North America

-4.1%

2018: 6.7%

Rest of the world

6.1%

2018: 0.7%

25 ARLA FOODS ANNUAL REPORT 2019

Middle East and
North Africa
Rest of the world
North America
South East Asia
China
West Africa

2019 2018

35% 36%
26% 23%
14% 20%
9%
9%
6%
9%
6%
7%

“2019 wAS ANOTHER
STRONG yEAR iN
iNTERNATiONAL
MARkETS, wiTH
DOUBLE-DiGiT BRANDED
vOLUME GROwTH.
BUiLDiNG ON THE
MOMENTUM CREATED iN
2019 wE ARE CONTiNUiNG
TO GROw iN 2020.”

Tim Ørting Jørgensen,
Executive Vice President, International

INTERNATiONAL (CONTiNUED)

Middle East and North Africa
Our strategic agenda in the Middle East and North Africa progressed
ahead of targets in 2019, despite political and economic instability, and
strong price pressure in the region. Our branded volumes grew 7.0 per
cent and profitability increased significantly. Revenue was EUR 637
million. The growth was mainly driven by our core
brands in the region, Puck® and Lurpak®, and the
Saudi Arabian market performing far above our
expectations. We acquired and successfully integrated
the Kraft®-licence business from Mondeléz Interna-
tional in 2019, already delivering results above the
original business case. Going forward, our new
production site in Bahrain will be a strong foundation
for expanding our opportunities in MENA.

West Africa
In 2019 we delivered strong growth for our strategic brands in the
region at 22.6 per cent, mainly driven by our biggest market, Nigeria.
Here we also started a cooperation with local farmers to help them
increase their production. We also rapidly expanded
our business in Ghana and Senegal with launches
in the flavoured milk, cheese and spreadable
segments. Revenue in the region was EUR 123
million.

China
China delivered remarkable branded volume growth and profitability in
2019. Branded volume growth was an extraordinary 61.9 per cent.
Revenue was EUR 152 million. Our milk segment grew above market,
and our organic early life nutrition brand, Arla® Baby&Me delivered
double digit growth both in volume and revenue.
We received the authorization to sell two other
types of early life nutrition, Arla® Blue Dawn and
Arla® Milex, which were also well received by
consumers. Furthermore, we finalised a sales
joint venture set up that enables us to capture
the potential of the Chinese cheese market.

North America
For our US market 2019 was about shifting our strategic direction to
ensure a more stable growth course. As a result, branded volumes in
the region declined by 4.1 per cent, despite a 3.1 volume growth in
Canada. Revenue was EUR 254 million in the region. In line with our
transformation and efficiency programme, Calcium, our supply chain is
also showing increased efficiency,

Rest of World
We also delivered strong results in the rest of the countries where our
products are sold. Branded volume grew 6.1 per cent, and revenue was
EUR 465 million.. The growth was driven mainly by the success of
StarbucksTM, which also gained traction in new Central European

markets, and by Lurpak® in Australia and
our distributor markets. Our Russian sales
performed ahead of expectations.

South East Asia
South East Asia has delivered another year of strong growth in 2019.
Revenue amounted to EUR 171 million. We saw market share
increases in the key branded positions, most notably in Bangladesh

where the Dano brand delivered 9.9 per cent
branded volume growth. In the food service channel
Arla® Pro delivered solid growth by offering new
solutions for selected channels and key customers.
Organic is a key focus in SEA; in 2019 we launched
the first organic early life nutrition brand – Arla®
PureGrow – in Indonesia. The consumer and
customer response has been very positive so far.

26 ARLA FOODS ANNUAL REPORT 2019

ARLA FOODS
INGREDiENTS

Arla Foods Ingredients’ (AFI) mission is to discover and deliver all the wonders whey can bring to people’s life. AFI is a
global leader in whey-based ingredients used in a wide range of categories from infant, clinical and sport nutrition to
bakery, beverages and dairy. In addition, we manufacture child nutrition products for third parties.

AFI highlights in 2019
In 2019, we started operations in our new infant
milk formula (IMF) plant at Arinco, and this will
ensure supply for our rapidly growing organic
infant milk formula business.
We launched a unique new product, Lacprodan®
ISO.Water, a 100 per cent whey protein ingredient
that helps clear protein waters taste good, and
does not leave a dry mouthfeel.

Our alpha-lactalbumin product used in infant
formula, Lacprodan® ALPHA-10 was approved by
the US Food & Drug Administration. This enables
AFI to supply the US market with alpha-lactalbumin
enriched infant formula, which emulates human
milk more closely and has a wide range of health
benefits.

Construction of our new Innovation Centre in Nr.
Vium has been started, and once completed it will
become a world-leading centre of whey research.
It will operate in close cooperation with our key
production site, Danmark Protein. Construction
will be completed by 2021.
We have also made progress on several important
projects to increase our raw material supply, most
of which are expected to continue into 2020.
However, we were forced to pause our projects in
the US with Foremost Farms.

AFI has a history of delivering solid growth, and
2019 was no different with double digit sales growth
and improved profitability. Our performance was
strong, although the ongoing trade war between
China and the US negatively impacted our results,
especially within the child nutrition manufacturing
business.

Product differentiation is key
AFI’s core customers request even more product
differentiation than before. We bring unique protein
and lactose solutions with considerable added value
to our customers. Our products provide proteins for
clear beverages in sport nutrition, protein fractions
and lactose for infant formula getting even closer to
mimicking human milk, and solutions for food
applications with unique functional properties.

In 2019 all of our business units within the
ingredients segment – pediatric, health & performance
and food – continued to increase sales. Our child
nutrition business however experienced lower
revenue due to repercussions from the major
changes in Chinese infant formula regulations,
which kept our products off the market for over a
year. Nevertheless, we continued with our strategy
aiming to continously grow our child nutrition
products, which included investing in significant
capacity increases to supply the strong global
demand for organic child nutrition.

27 ARLA FOODS ANNUAL REPORT 2019

In 2019, we initiated a strategy to further improve
our quality and food safety. The objective is to
position AFI as the leading force in quality and
food safety and to support a close and committed
relationship with our customers based on these
qualities.

2019 was an eventful year in AFI, and looking into
2020, growth remains at the top of our agenda with
large investments set to be completed, and a
considerable increase in whey supply is also
expected.

Revenue split by
segments

Development of value
added sales volumes (MT)

23%

30%

17%

25%

Food
Pediatric nutrition
Health and performance
Child nutrition manufacturing
Other

30.9

28.2

25.0

23.2

20.9

2015

2016

2017

2018

2019

Revenue,
million EUR

710

2018: 652

Growth of value add
products

9.4%

2018: 12.8%

Value add share

68.5%

2018: 65.7%

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. We refer to these activities as trading, 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 variability
in milk intake, ensuring that we are able to process
and sell all the milk our members deliver, whilst
maintaining the availability of the milk that our
branded, retail and foodservice businesses require.

Our strategic decision to increase trading capacities
in higher value commodities, such as mozzarella
and fat-filled milk powder, which came on line
towards the end of the year, strengthens our
business. It gives us more options in managing our
milk pool and helping to reduce our exposure to
low-margin private label contracts.

The share of overall milk volumes sold through the
trading business decreased to 25.0 per cent from
26.5 per cent compared to last year.

Revenue from trading* slightly decreased to EUR
1,662 million compared to EUR 1,690 million last
year, representing 15.2 per cent of total revenue for
Arla in 2019.

The major shift in commodity markets in the year
has been the increase in protein prices in the second
half of the year as global demand increased. This,
coupled with continued weakening in fat prices has
meant that fat and protein values are returning to
their long term historical relationship. For most of
the year, the increasing protein prices offset the
reducing fat prices, meaning commodity milk prices
held relatively stable. Towards the end of the year
we also saw prices strengthening, especially in the
cheese and powders segments.

Fat and protein prices 2018-2019 (EUR/Tonne)

Fat
Protein

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

Q1
2018

Q2
2018

Q3
2018

Q4
2018

Q1
2019

Q2
2019

Q3
2019

Q4
2019

Revenue split by product categories,
2019

Revenue split by product categories,
2018

34%

21%

1,662

MILLION EUR

22%

1,690

MILLION EUR

35%

32%

*For reporting purposes revenue from trading also includes revenue from other sales activities, such as the sales of school milk
through the Danish Dairy Board. The addition is virtually immaterial.

Raw milk

Powder

Cheese

Butter

Other

28 ARLA FOODS ANNUAL REPORT 2019

OUR
RESPONSiBiLiTy

Arla farmers are using big data to combat climate change
Arla was the first dairy company in Europe to introduce a comprehensive Climate Check
programme across seven countries that will triple the speed of CO₂e reductions on farms and
accumulate one of the world’s largest sets of externally verified climate data from dairy farming.
Climate assessments will help farmers identify emissions on farms and provide a clear picture of
the actions farmers can take to reduce emissions further. The programme includes a digital
reporting tool, in which all farmers will submit their climate data. The data is verified by an
external advisor who will visit the farm to provide advice on action plans.

OUR SUSTAiNABiLiTy
STRATEGy

The biggest challenge for the food industry is how to feed a growing world population, sustainably. At Arla we believe that
dairy is part of the solution. Our healthy products satisfy a range of nutritional needs across generations and continents with
constantly reduced environmental impact. We are guided by our comprehensive sustainability strategy inspired by the
United Nations Sustainable Development Goals, and we are committed to make both the planet and people stronger.

STRONGER
PLANET

Sustainable
farming
Increase feed
and resource
efficiency
Enhance and
track animal
welfare
Conduct carbon
assessments on
all Arla farms
Step-up carbon
sequestration

Support research
and innovations
into sustainable
dairy farming

Carbon net zero
operations
Switching to
renewable
energy sources
at sites and in
offices
Switching to

fossil free fuels in
transportation of
raw material and
products
Increase energy

efficiency

Increase the use
of biogas
Support

innovation to
achieve our goals

Minimising
food waste
Strengthen

collaboration
with value chain
to minimise
waste in
production
Campaigns for
food waste
reduction
targeting
consumers

Sustainable
packaging
Upgrade product
packaging to
be renewable,
recyclable or
reusable
Constant

innovation in
packaging
Stronger

collaboration
within the value
chain to reduce
packaging waste

Protecting
nature
Increase

biodiversity and
access to nature
Initiatives to

support clean air
and water
Source

responsibly

STRONGER
PEOPLE

Health and
nutrition
Follow our
Nutrition
Criteria to bring
healthy foods to
consumers

Invest in

research on how
to improve
nutritional value
without
compromising
on quality and
taste
Develop new

products based
on research
findings

Food
inspiration
Organise open
farm days to
connect
consumers
and farmers
Educate

consumers
about healthy
diets
Organise food
festivals and
camps to
educate
consumers on
how to eat more
sustainably

Supporting
communities
Develop local
dairy value
chains
Inspire innovative
partnerships with
local customers
and consumers
Reach consumers
in regions where
access to good
nutrition is
challenged

Caring
for people
Live by the
Arla values

Keep our

colleagues safe
and healthy
Provide a diverse
and inclusive
workplace with
equal chances
for all
Engage our

colleagues to be
interested in the
future of Arla and
dairy

30 ARLA FOODS ANNUAL REPORT 2019

For in-depth information about our sustainability strategy, read our CSR report.

OUR ENviRONMENTAL
AMBiTiON

Together with our 9,759 farmer owners we launched our ambitious climate targets in March 2019. These targets are part of our
broader environmental ambition to create a stronger planet by accelerating the transition to more sustainable dairy production,
with intensified focus on decreasing emissions on farms. Our main target is to reduce greenhouse gas emissions by 30 per cent
per kilo of milk over the next decade, and to work towards becoming carbon net zero by 2050.

OUR AMBiTiON COvERS THREE THEMES

TO REACH OUR GOALS wE wiLL FOCUS ON THREE AREAS

Better climate

Clean air & water

More nature

Farms

Production

Packaging and food waste

Nitrogen and phosphorus
cycles in balance

Increase biodiversity
and access to nature

Optimized feed for the cows to
decrease methane emissions
Improved manure efficiency
Improved carbon capture in
the soil on farms

Increased fossil free
transportation
Increased use of energy-
efficiency technologies
Increased use of renewable
energy in supply chain

Improved sustainability

of packaging

Decreased food waste
through several initiatives
Increased use of recyclable
materials

wHERE DO OUR EMiSSiONS COME FROM?

Scope 1
3%

Farms

Transport

Production and offices

Transport

Waste management

Scope 3
96%

Scope 2
1%

31 ARLA FOODS ANNUAL REPORT 2019

Scope 1 emissions relate to the activities under our direct control.
They include transport with Arla’s vehicles, and emissions from Arla’s
production facilities. We have reduced our CO₂ emission from
production, packaging and transport by 25 per cent since 2005.

Scope 2 emissions are the indirect emissions caused by the energy
that Arla purchases, i.e. electricity, steam, heating or cooling. We are
working towards reducing our impact by increasing the use of
renewable energy. In 2019 33 per cent of our overall energy
consumption came from renewable sources.

Scope 3 emissions are the indirect emissions from purchased goods and
services (e.g raw milk from our owners, packaging and external transport)),
but also from waste handling (eg. recycling) at our sites. Since 1990 we
reduced our CO₂ footprint per kilo of milk by 23 per cent.

Read more about our efforts to reduce our carbon footprint
on page 123.

SUSTAiNABLE
DAiRy FARMiNG

Our farmer owners produce around 13 billion kilo of milk each year. Arla milk is
already some of the most climate efficient in the world, with a CO₂e emissions
intensity approximately half of the global average. As we understand more about
climate change and how to fight it, we must evolve even further, and with
even greater urgency. Our on-farm Climate Action Plan is being implemented to
improve on the effective programmes we already have in place.

Evolving Arlagården®
Arlagården initially focused on milk quality, food
standards and tracking animal welfare, but since
2019 we strengthened it even further. Our revised
standards drive improvements and bring greater
transparency in critical areas, while incorporating
the environmental and animal welfare priorities
of today’s consumers and governments.
Self-assessment of herd management and
documentation practices as well as facilities and
procedures are being completed every 3 months,
and farms receive an external audit at least every
3 years. Risk audits to address suspected
problems and 48-hours notice random spot
checks were also introduced.

Climate checks on all farms
Our previous Climate Check model has already
helped many farmers. In support of our
sustainability targets, from 2020 our Climate

Check programme will be further strengthened,
globally aligned and offered to all Arla farmer
owners, who will receive an incentive of
1 eurocent per kilo of milk to have their farms
checked. With our new, state-of-the-art digital
farm management platform farmers will gather
data across key emissions areas, including feed
type, energy use, fertilizer use, and manure
storage and application. When farmers submit
their data to the system, they receive a detailed
picture of their farm’s carbon footprint, and an
advisory visit from an external emissions specialist
to provide guidance on how to reduce emissions.

A new digital farm management platform
To streamline the updated Arlagården® and the
Climate Check processes a new digital platform
was developed in a close collaboration with famer
owners. Secure and easy to use, the platform
gathers robust information that evidences our

32 ARLA FOODS ANNUAL REPORT 2019

standards and achievements as well as providing
insight that can be used by farmer owners, the
wider business and advisors supporting the
farmers to make informed change. Gathering
detailed, high-quality data from 9,759 owners

across 7 different countries also means we are
creating one of the richest sources of dairy
industry data, that can be utilized by researchers
to fight climate change.

“wE’RE ExTREMELy PRiviLEGED TO BE CUSTODiANS
OF OUR ENviRONMENT AND wE SHOULD FiGHT TO
PROTECT iT. TOGETHER wE HAvE THE RESPONSiBiLiTy
TO ENSURE THAT wE MiNiMiSE THE iMPACT OF
FARMiNG TO ENSURE FUTURE GENERATiONS CAN
CONTiNUE TO FARM THE LAND. AS AN ARLA FARMER I
wANT TO LOOk AFTER THE ENviRONMENT wHiLE
PRODUCiNG A FANTASTiC AND NUTRiTiOUS PRODUCT
iN THE MOST EFFiCiENT wAy I CAN.”

Patrick Morris-Eyton, UK farmer owner

INSPiRiNG
SUSTAiNABLE DiETS

We believe that dairy products play a positive role in a sustainable diet, balancing the environmental impact of
production with the nutritional value of the food. Our commitment to promote and offer nutritious and affordable
dairy products around the world is a core element of our new sustainability strategy. To support better food
choices and make people stronger, we constantly improve our product portfolio with healthier variants.
Here we present some examples launched in 2019.

Let’s start with the youngest ones ...
Healthy diets start with conscious parents choosing the best, most
natural products for their babies. We aim to provide parents with
the right choices everywhere. Following a global trend, modern
Indonesian millennial parents are seeking more organic options for
their children. We were first in the market to help them in their quest by
launching our organic baby formula under the Arla® Baby&Me brand,
and a growing-up milk
for toddlers aged 1 to 3.
Both products are
fortified with vitamins
and minerals, and
contain no added sugar.

… then continue as they grow
We also have an ambition to get kids to intuitively choose better food,
and to do this, we decided to not only make healthier great tasting
products but also make the product experience more fun so that kids
would want to try them. In 2019 the Arla® brand expanded its
youghurt portfolio with the launch of Arla® Explorers in Denmark and

the UK. Made using only
natural ingredients and real
fruit, it features a range of
yoghurt variants, all containing
at least 30 per cent less sugar
than a standard flavoured
yoghurt. The new range is in
line with our philosophy
around empowering the next
generation to have a better
relationship with food whilst
also addressing growing
consumer concerns around
sugar and use of artificial
ingredients.

… and feed the busy adults as well!
Modern active lifestyles also mean changing eating patterns, where
consumers more often are having several small meals and snacks
rather than only three big meals per day. Our new ready-to-eat
products support this habit, by turning snacking into something
healthy. New skyr products with fruit and seeds were launched in
Germany, the Netherlands, Sweden and Finland in 2019. High in
protein, reduced sugar, fat free and simply delicious, each small pot is
layered with a thick and creamy skyr yogurt mixed with buckwheat,
sunflower and poppy seeds over a fruit puree.

33 ARLA FOODS ANNUAL REPORT 2019

OUR
GOvERNANCE

Skills and expertise of our Board of Directors
Our Board of Directors initiated and executed a thorough investigation into their skills and
expertise before the election period in May 2019. The process, in which the BoD defined the
necessary skills to be qualified leaders for Arla, was supported by external experts in executive
evaluation.

GOvERNANCE
FRAMEwORk

Arla is a cooperative owned by 9,759 dairy farmers in seven countries. Ensuring that all of our owners’ voices are
heard and represented is essential for success and trusting relations. Our owners elect members to the Board of
Representatives, which in turn elects the Board of Directors. The company’s governance is shared between
these elected bodies and the Executive Management Team.

OwNERS (FARMERS)

Denmark

Sweden

Belgium

The Netherlands

United Kingdom

OwNER NATiONALiTiES
OwNER NATiONALiTiES

Luxembourg

Germany

DiSTRiCTS

REGiONS

COOPERATivE
GOvERNANCE

LOCAL
REPRESENTATivES

BOARD OF REPRESENTATivES
175 (+12 employee repr.)

77 DK members

50 SE members

23 CE members

25 UK members

OUR BOARDS
AND COUNCiLS

Area council

BOARD OF DiRECTORS
15 (+3 employee repr.
+ 2 external advisors)

ExECUTivE BOARD
CEO + CCO

ExECUTivE MANAGEMENT TEAM
Executive board + 5 officers

19,174 EMPLOyEES

COOPERATivE
GOvERNANCE

35 ARLA FOODS ANNUAL REPORT 2019

GOvERNANCE
FRAMEwORk (CONTiNUED)

COOPERATivE GOvERNANCE
Arla’s democratic structure gives decision-making authority to the Board of Directors (BoD) and
to the Board of Representatives (BoR). Their primary tasks are to develop the ownership base,
safeguard the cooperative democracy, embed decisions and develop leadership competencies
amongst farmer owners, and set the overall strategic direction for Arla.

CORPORATE GOvERNANCE
Corporate governance in Arla is shared between the Executive Board and the
Board of Directors (BoD). Together they define and ensure adherence to the
company’s strategic direction, organise and manage the company, supervise
management and ensure compliance.

Owners
In 2019, 9,759 milk producers in
Sweden, Denmark, Germany, the UK,
Belgium, Netherlands and Luxemburg
were the joint owners of Arla. Last year,
the cooperative had 10,319 joint
owners. The decline in the number of
farmers is partly due to farmers who
stopped producing milk, or had their
business acquired by another member,
and to a lesser extent due to famers
resigning to supply another dairy
company. This decline is in line with
the trend seen in the whole dairy
sector over a number of years. All
cooperative owners have the opportu-
nity to influence significant decisions.

District councils
Each year, cooperative owners
convene for a local annual assembly
in their respective countries to ensure
democratic influence of the cooperative
owners in the owner countries. The
members in the district council elect
members to represent their
district on the BoR.

Board of Representatives
The BoR is the supreme decision
making body comprising 187 members,
of whom 175 are cooperative owners,
and 12 are employee representatives.
Owner representatives are elected
every other year in odd years. The last
election took place in May 2019, when
55 new members were elected to
the BoR. The BoR makes decisions
including appropriation of profit for the
year and elects the BoD. The BoR meets
at least twice a year.

among others. The BoD consists of
15 elected farmer owners, three
employee representatives and two
external advisors. In the 2019 election
cycle four new elected members
joined the BoD, and two external
members were also appointed to
ensure that the BoD’s skill set covers
all important areas for leading an
international business. The composition
of the elected memembers of the BoD
reflects Arla’s ownership structure
across the countries.

Board of Directors
Appointed by the BoR, the BoD is
responsible for strategic direction
setting, monitoring the company’s
activities and asset management,
maintaining the accounts satisfactorily
and appointing the Executive Board.
The BoD is also responsible for
ensuring that Arla is managed in the
best interest of the farmer owners and
making decisions concerning the
ownership structure. They also take
care of other stakeholders’ interests in
the company: lenders, investors in
bond instruments and employees,

Area councils
Arla has four area councils that are
sub-committees of the BoD and
consists of members of the BoD, as
well as members of the BoR. 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.

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.
The Executive Board is usually
comprised of the CEO and another
member of the Executive Management
Team. From 1st February 2019, Chief
Commercial Officer for Europe, Peter
Giørtz-Carlsen was appointed to enter
the Executive Board.

Executive Management Team
The Executive Management Team
(EMT) is appointed by the Executive
Board. The EMT is responsible for
Arla’s day-to-day business operations,
preparing strategies and planning the

future operating structure. The EMT
consists of the Executive Board plus
four functional experts and one
commercial leader. The functional
experts cover the management areas
of Finance, IT and Legal (CFO),
Marketing and Innovation (CMO),
Human Resources (CHRO), and
Supply Chain (COO); while the
commercial leader is responsible for
our international commercial
segment. The members of the EMT
keep each other informed on all
significant developments in their
business area and align on all
cross-functional measures.

Employees
Arla has 19,174 full time equivalents
(FTE) globally, compared to 19,190
last year. Our employees are
represented by three members in the
BoD and 12 members in the BoR.

36 ARLA FOODS ANNUAL REPORT 2019

DivERSiTy
AND iNCLUSiON

At Arla we are committed to creating a place where our people can bring their authentic selves to work every day. Diversity and
inclusion are imperative to the success of our business and we know that a diverse and inclusive workforce generates innovation
and stronger results. We define diversity broadly as differences between people with a diverse range of backgrounds, while
inclusion is about valuing differences among individuals.

Our principles

To secure a stronger leadership pipeline and
improve opportunities for all to advance, we aim
for no more than 70% of the same gender in any
given team.
To better represent our global consumers and
the global nature of our company, we aim for no
more than 70% of the same nationality in any
given team.
We welcome multiple generations in our
workforce with attractive working conditions for
both young and old. We aim for no more than
70% of the same age group in any given team.
We recognise that within some lines of work,
especially within our blue-collar workforce, we
often face a less-diverse supply of labour, which
makes it difficult to reach our aim.

Here are our strategic priorities for achieving a more
diverse workforce and creating an inclusive
environment, where colleagues are included and
treated with openness and mutual respect,
recognising and harvesting the benefits of diversity.

Competency development
We offer training to our people managers and talent
acquisition partners regarding unconscious bias
awareness, to promote unbiased selection and
people assessment.

37 ARLA FOODS ANNUAL REPORT 2019

Recruitment
Hiring managers and talent acquisition partners
must adhere to the systems, structures and
processes defined in our Global Recruitment Policy
to select the best candidate based on merit. We
require all executives to be recruited from a pool of
candidates which includes both genders and more
than one nationality. To support a fair and unbiased
hiring process, the talent acquisition partners are
there to ensure compliance with the recruitment
process and policy.

People review and fair pay
We strive to offer a fair and competitive remuneration
at market level and in line with local legislation, and
have a structured approach to remuneration
ensuring that salaries are unbiased towards gender,
age, seniority, tenure or nationality.

Talent programs
Our high potential talents are identified, developed
and retained based on merit. We proactively ensure
a balanced gender and nationality distribution in our
talent programs when selecting candidates to fuel
a diverse leadership pipeline.

Building internal communities
In 2017 employees dedicated to creating a more
diverse and inclusive workplace launched a global
employee resource group, the Arla Diversity &
Inclusion Network.

The Network is endorsed and supported by the
management, and had many activities in 2019,
including:

A discussion panel with external speakers
live-streamed globally to understand how we can
drive more inclusion & diversity globally also in
terms of LGBT+ representation
Establishment of an internal forum for all people
to come and ask questions, offer support or help
with any activities regarding D&I
Organised an event to support and inspire
working mums, where working mums in more
senior roles talked about their experience

Launched an interview series with internal role
models and D&I ambassadors so that others can
be inspired and encouraged to be out and proud
in the workplace

Monitoring
We are committed to report on our progress
towards our long-term diversity and inclusion goals
to our Executive Management Team and externally
on a regular basis. The diversity of our workforce is
reported annually and published as part of our
annual report.

“ARLA RUNS A GLOBAL BUSiNESS, AND wE
BELiEvE THAT DivERSE TEAMS COMBiNiNG
iNHERENT DivERSiTy – SUCH AS GENDER,
AGE, NATiONALiTy, ACQUiRED kNOwLEDGE
AND SkiLLS – ARE kEy FOR US, iN ORDER TO
UNDERSTAND AND MEET THE NEEDS OF OUR
CONSUMERS AND CUSTOMERS.”

Ola Arvidson, Chief Human Resources Officer

DivERSiTy
AND iNCLUSiON (CONTiNUED)

As part of our commitment to accelerating diversity and inclusion, each year we publish the demographics of our workforce
by gender, age and nationality. Transparency is critical to achieving our goal of becoming an inclusive and diverse company.
While we have made good progress in this direction, we know there is more work to do.

Gender distribution*

Gender distribution in management

Total number of nationalities

Female

Male

42%

2018: 42%

58%

2018: 58%

Female

Male

2019

2018

2019

2018

29%

20%

16%

26%

29%

13%

23%

71%

80%

84%

74%

71%

87%

77%

EMT

BoD**

BoR

Director+ level

* This is the gender ratio in the white collar workforce. Gender ratio in blue
collar workforce: female: 18%; male: 82% ; and in Arla in total: female: 27%;
male: 73%.

** The presented ratio pertains to all the members of the BoD (20), including employee

representatives and external advisors. Gender ratio among members elected by the general
assembly is 13 per cent female, 87 per cent male, unchanged from last year.

Age distribution

17%

25%

Diversity in
teams, Age*

85%

Age distribution on the director+ level

47%

35%

26%

12%

0.3%

108

Split between nationalities

Nationalities in the EMT

19%

16%

38%

18%

Nationality distribution
on the director+ level

57%

Other

Diversity in
teams,
nationality*

30%

13%

8% 6%

16%

<30

30-39

40-49

50-59

>60

* Percentage of teams that have members from at least two age categories.

* Percentage of teams that have member from at least two nationalities.

38 ARLA FOODS ANNUAL REPORT 2019

OUR BOARD OF DiRECTORS

Our Board of Directors has a wealth of knowledge, consisting of 15 elected farmer owners, three employee representatives and
two external advisors. 2019 was an election year, hence we welcomed 4 newly elected members to the BoD: René Lund Hansen,
Marcel Goffinet, Jørn Kjær Madsen, and Walter Lausen. For the first time in the history of our Board, two external advisors also
joined the board: Florence Rollet, a venture partner with LuxuryTechFund in Paris, and Nana Bule, CEO of Microsoft in Denmark.

From left to right: Harry Shaw, Manfred Graff, Jørn Kjær Madsen, Marcel Goffinet, Steen Nørgaard Madsen, Håkan Gillström, Simon Simonsen, Heléne Gunnarson, Arthur Richard Fearnall, Jan Toft Nørgaard, Johnnie Russell,
Janne Hansson, Florence Rollet, Jonas Carlgren, René Lund Hansen, Inger-Lise Sjöström, Bjørn Jepsen, Walter Lausen, Nana Bule

39 ARLA FOODS ANNUAL REPORT 2019

OUR BOARD OF DiRECTORS (CONTiNUED)

Our board’s diverse range of skills and experiences supports the effective governance and robust decision-making of Arla. In 2019
a new process for a thorough competency evaluation of the members was introduced, which ensures that the BoD has the right
skills to conduct good global governance. As a result of the process, two external advisors joined the board, who bring digital,
marketing and technology expertise to compliment the strong commercial and farming knowledge of its elected board members.

COMPETENCiES OF THE BOARD
The competency evaluation was facilitated by external executive assessment experts.
The members of the board defined the necessary skills for leading Arla, and then Evaluation
Committees constituting of farmer owners evaluated all candidates across those dimensions.
The process was transparent and approved by the Board of Representatives.

Diversity in the board*

Tenure

80% 20%

0-3 years, 50%
4-7 years, 25%
8-19 years, 25%

*The ratio pertains to all members of the BoD (including employee representatives and external advisors). Gender ratio within
the elected members is 13 per cent female, 87 per cent male. In accordance with section 99b of the Danish Financial
Statements Act, in 2019 Arla has set a 4-year target to achieve a female representation in the general assembly members of the
Board of Directors of at least 13 per cent, reflecting the gender ratio of our Board of representatives.

40 ARLA FOODS ANNUAL REPORT 2019

JAN TOFT NøRGAARD (1960)
Member since: 1998
Nationality: Danish
Profession: Dairy farmer
Internal positions: Chairman of the Board
Learning and Development Committee
Remuneration Committee
External positions: Comp. Board of the Danish
Agriculture and Food Council 2009 -

HELéNE GUNNARSON (1969)
Member since: 2008
Nationality: Swedish
Profession: Dairy farmer
Internal positions: Vice chairman of the Board
Global Training Committee, Learning and
Development Committee, Remuneration Committee
External positions: Member of the Swedish Dairy
Association 2014 -, Member of the Board of
Varbergs Sparbank

NANA BULE (1978)
Member since: 2019
Nationality: Danish
Profession: CEO of Microsoft Denmark & Iceland
External positions: Member of the Board of
Energinet 2018 -, Member of the Board of
Confederation of the Danish Industry 2019 -

JONAS CARLGREN (1968)
Member since: 2011
Nationality: Swedish
Profession: Dairy farmer
Internal positions: Global Appeals Committee,
Remuneration Committee
External positions: Chairman of the Board of the
Swedish Dairy Association 2013 -, Member of the
Board of the Swedish Farmers’ Foundation for
Agricultural Research 2016 -, Dairy Ambassador for
UN High Level Political Forum

ARTHUR FEARNALL (1963)
Member since: 2018
Nationality: British
Profession: Dairy farmer
Internal positions: Chairman of the Arla UK Area
Council, Global Appeals Committee

OUR BOARD OF DiRECTORS (CONTiNUED)

HåkAN GiLLSTRöM (1953)
Member since: 2015
Nationality: Swedish
Profession: Dairy worker
External positions: Member of the Swedish
worker’s union

MARCEL GOFFiNET (1988)
Member since: 2019
Nationality: Belgian
Profession: Dairy farmer
Internal positions: Global Appeals Committee
External positions: Chairman of the Board of Agra
Ost Agriculture Research, member of the municipal
government of St.Vith

MANFRED GRAFF (1959)
Member since: 2012
Nationality: German
Profession: Dairy farmer
Internal positions: Chairman of the Arla Germany
Area Council, Learning and Development Committee
Remuneration Committee
External positions: Member of Board of the
German Milch NRW 2007 -, Member of Board of the
German Federation of Cooperatives 2015 -

RENé LUND HANSEN (1967)
Member since: 2019
Nationality: Danish
Profession: Dairy farmer
External positions: Member of the cattle section
and the Comp. Board of the Danish Agriculture and
Food Council 2019 -, Member of the Board of Agri
Nord 2012 -

41 ARLA FOODS ANNUAL REPORT 2019

JAN ERik (JANNE) HANSSON (1963)
Member since: 2018
Nationality: Swedish
Profession: Dairy farmer
Internal positions: Chairman of the Global
Organic Committee
External positions: Member of the Board of the
Swedish Dairy Association

BJøRN JEPSEN (1963)
Member since: 2011
Nationality: Danish
Profession: Dairy farmer
Internal positions: Global Organic Committee
External positions: Member of the cattle section
of the Danish Agriculture and Food Council 2009 -,
Member of the Board of the Danish Cattle Levy Fund
2009 -, Member of the Board of the Danish Milk
Levy Fund 2019 -, Vice Chairman of Skjern Bank
2012 -, Vice Chairman of the Danish Dairy Board
2019 -,

wALTER LAUSEN (1959)
Member since: 2019
Nationality: German
Profession: Dairy farmer
Internal positions: Global Organic Committee

JøRN kJæR MADSEN (1967)
Member since: 2019
Nationality: Danish
Profession: Dairy farmer
Internal positions: Global Appeals Committee

STEEN NøRGAARD MADSEN (1956)
Member since: 2005
Nationality: Danish
Profession: Dairy farmer
Internal positions: Arla Denmark Area Council
Chairman Learning and Development Committee
External positions: Deputy Chairman of the
Comp. Board of the Danish Agriculture and Food
Council 2014 -, Chairman of the Agro Food Park
steering committee 2016 -, Chairman of the Danish
Milk Levy Fund 2012 -, Chairman of the Danish Dairy
Board 2012 -

IB BJERGLUND NiELSEN (1960)
Member since: 2013
Nationality: Danish
Profession: Dairy production worker
External positions of trust: Member of the
Danish worker’s union

FLORENCE ROLLET (1966)
Member since: 2019
Nationality: French
Profession: Senior advisor to Luxury Tech Funds
External positions: Member of the Global
Advisory Board of the EMLyon Business School
2018 -

JOHNNiE RUSSELL (1950)
Member since: 2012
Nationality: British
Profession: Dairy farmer, chartered accountant
Internal positions: Learning and Development
Committee, Remuneration Committee
External positions: Chairman of the ING Bank UK
Pension Fund and two other companies

HARRy SHAw (1952)
Member since: 2013
Nationality: British
Profession: Despatch operator
External positions: Member of the British
worker’s union

SiMON SiMONSEN (1970)
Member since: 2017
Nationality: Danish
Profession: Dairy farmer
Internal positions: Remuneration Committee
External positions: Dairy Ambassador for
UN High Level Political Forum

INGER-LiSE SJöSTRöM (1973)
Member since: 2017
Nationality: Swedish
Profession: Dairy farmer
Internal positions: Chairman of Arla Area Council
Learning and Development Committee
External positions: Member of the Board of the
Swedish Dairy Association 2017 -

ExECUTivE MANAGEMENT TEAM

The Executive Management Team consists of the CEO plus four functional experts and two commercial leaders, one for the European
and one for the international commercial segments. With a range of different backgrounds and expertise, the Executive Management Team
is responsible for Arla’s day-to-day business operations, and developing Group strategies. The members of the Executive Management Team
are also individually responsible for managing their respective business areas.

From left to right: Hanne Søndergaard, Sami Naffakh, Ola Arvidsson, Peder Tuborgh, Peter Giørtz-Carlsen, Natalie Knight, Tim Ørting Jørgensen

42 ARLA FOODS ANNUAL REPORT 2019

ExECUTivE MANAGEMENT TEAM (CONTiNUED)

HANNE SøNDERGAARD (1965)
CMO, Executive Vice President, Marketing,
Innovation, Communications and Sustainability
Nationality: Danish
Hanne has been with Arla for 30 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 various brands and categories before taking on
her current role. She holds business degrees from
Aarhus University’s School of Business and Harvard
Business School.
Hanne is also:
– Member of the Board of Arla Fonden and of Danish

Technical University

OLA ARviDSSON (1968)
CHRO, Executive Vice President, HR and C
orporate Affairs
Nationality: Swedish
Ola joined Arla in 2006 as Corporate HR director,
and has been the Chief HR officer of Arla since 2007.
He came to Arla 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. He holds a master’s degree in HR
management from Lund University.
Ola is also:
– Member of the Board of AP Pension,
– Central Board Member of the Danish Industry

SAMi NAFFAkH (1970)
COO, Executive Vice President, Supply Chain
Nationality: French
Sami joined Arla in January 2018. He has 25 years of
experience in supply chain and operations from
across several industries, and he worked in seven
countries before joining Arla. His most recent
position was SVP Global Supply Chain EMEA at the
Estée Lauder Companies, but he also has thorough
knowledge of the dairy industry, as he held multiple
senior executive positions at Danone Early Life
Nutrition. He holds a master’s degree in engineering
from the School of High Studies in Engineering in
Lille, and a post-graduate business certification from
IMD Business School.

PEDER TUBORGH (1963)
CEO, member of the Executive Board
Head of Milk, Members and Trading
CEO of Arla Foods Ingredients
Nationality: Danish
Peder has been with Arla for 31 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. Peder holds a
master’s degree in economics and business
administration from the University of Odense.
Peder is also:
– Member of the Global Dairy Platform

43 ARLA FOODS ANNUAL REPORT 2019

PETER GiøRTz-CARLSEN (1973)
Member of the Executive Board, Chief Commercial
Officer, Europe
Nationality: Danish
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.
Peter holds a master’s degree in business
administration, organisation and management from
Aarhus University’s School of Business.
Peter is also:
– Vice Chairman of AIM, the European Brands

Association

– Sits on the Policy and Issues Council (PIC) of the

UK’s Institute of Grocery Distribution (IGD)
– An executive advisor for FSN Capital Partners

NATALiE kNiGHT (1970)
CFO, Executive Vice President, Finance,
Legal and IT
Nationality: American
Natalie joined Arla 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. She has also worked in five countries before
joining Arla. Natalie holds a master’s degree in
economics from the Freie University of Berlin.
Natalie is also:
– Member of the Board and chairman of the

Audit Committee of Grundfos
– Member of the Board of Biomar

TiM øRTiNG JøRGENSEN (1964)
Executive Vice President, International
Nationality: Danish
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
the international commercial segment. Tim has
been part of the international team since 2007.
Tim holds a master’s degree in Commerce from
Copenhagen Business School.
Tim is also:
– Member of the Board of Mengiu, Arla’s joint

venture in China

MANAGEMENT REMUNERATiON

Arla’s executive remuneration policy is designed to encourage high performance and support value creation. The policy ensures
alignment of the Group’s strategic direction with 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
Remuneration packages are constructed to ensure
attraction, engagement and retention of the best
senior leaders, and at the same time should drive
strong performance in both short and long-term
business results. Our remuneration package levels
are reviewed annually by external advisors using
market data sources. Although the majority of
remuneration is fixed, in line with Scandinavian
practice, an increasing portion in recent years has
become variable to ensure that total remuneration
is also dependent on achievement of Arla’s short
and long-term financial targets. 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. The
Board of Representatives (BoR) is regularly updated
on remuneration of the Board of Directors (BoD) and
the development in variable pay for executives and
senior management.

Our performance measures
Board of Directors (BoD)
The remuneration of the BoD comprises a fixed fee
and is not incentive-based. We believe this ensures
that the Board is primarily focused on the cooperative’s
long-term interests. The Chairman and the Vice
Chairman (together: Chairmanship) receive a fee

that is three times and two times the base fee
respectively, and other Board members receive
equal compensation. Beyond a minimal travel per
diem, no additional compensation is paid for
meeting attendance or committee service. The
BoD’s remuneration is assessed and adjusted on a
bi-annual basis and approved by the Board of
Representatives (BoR). The most recent adjustment
made was in 2019. For more details on specific
amounts please refer to page 113.

Executive Board and
Executive Management Team
The compensation elements and approach for the
Executive Board and the Executive Management
Team (together: executives) is identical, however
levels vary.

Remuneration paid to the Executive Board is assessed
annually by the BoD, based on recommendations
from the Chairmanship. For 2019, the fixed pay was
maintained on par with last year. For more details on
specific amount go to page 113. Remuneration paid
to the Executive Management Team is reviewed
annually by the CEO.

The remuneration package for the executives is
based on external benchmarks against European
and international FMCG companies, providing a

44 ARLA FOODS ANNUAL REPORT 2019

competitive and sustainable mix of fixed and
variable pay. A pension contribution and
non-monetary benefits such as company car,
telephone etc. are also part of the package.

Levels of fixed remuneration are set based on
individual experience, contribution and function,
while variable pay reflects performance against
annual business targets.

The variable pay component consists of an annual
short term incentive (STI) plan, and a long-term
(three-year) incentive (LTI) plan. The STI is
composed of the same elements for the executives,
with weights on each element varying across
individuals and years. The main components of the
LTI are branded volume growth and the group’s
performance versus a peer group index (see graphs).
The LTI programme started in 2018 also included a
component related to our transformation and
efficiency programme, Calcium.

Short-term components

Branded volume
growth

Calcium

Profit

Leadership

Long-term components

Branded
volume
growth

Performance
vs.
Peer Group

OUR TAx AFFAiRS

In recent years, multinationals have experienced a growing interest from media, non-governmental organisations and
the public on tax matters. As a globally operating group, Arla acknowledges the key role of taxes in the countries where
we operate. Our approach to tax conforms with Arla’s global Code of Conduct and is founded on a set of key tax principles
approved by our Board of Directors.

The OECD’s project against base erosion
and profit shifting (BEPS), meaning to
shift profits from high-tax jurisdictions to
law-tax ones) led to the development of
new tax principles and documentation
requirements for multinationals in recent
years. Arla is fully committed to meeting
all requirements on tax reporting and
transparency. We strive for an open
dialogue with tax authorities around the
world regarding our business and our
tax reporting.

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
reporting tax in a responsible way. The
cornerstones for all tax-related matters
in Arla are our key tax principles:
We aim to report the right and proper
amount of tax according to where the
value is created
We are committed to paying taxes
legally due and to ensuring compliance
with legislative requirements in all
jurisdictions in which our business
operates

We do not use tax havens to reduce
the group’s tax liabilities
We do not set up tax structures which
have no commercial substance and do
not meet the spirit of the law to avoid
taxes
We are transparent about our
approach to tax and our tax position.
Disclosures are made in accordance
with relevant regulations and
applicable reporting standards such
as International Financial Reporting
Standards (IFRS)
We develop good relationships
with tax authorities and trust that
transparency, collaboration and a
proactive attitude minimises the
occurrence and extent of tax disputes.

Accountability and governance
The complexity of our business requires
a significant focus on tax management.
Our global tax function is organised to
ensure that we have the right policies,
people and procedures in place to
adhere to our key tax principles and to
ensure strong and transparent tax
management.

45 ARLA FOODS ANNUAL REPORT 2019

We continuously work to improve the
internal standards and controls required
to adhere to our key tax principles.
Accountability for tax processes, with
a few exceptions, lies with the global
tax function.

are also our suppliers, and earnings do
not accrue in the company but go back
to the owners in the form of the highest
possible milk price. The earnings of the
Arla group can therefore be viewed as
the owners’ personal income.

Operating under a cooperative
tax scheme
As a cooperative based in Denmark, Arla
Foods amba is governed by the Danish
tax rules for cooperatives. Arla’s owners

The owners of Arla will pay income tax
on the amount received for their milk in
accordance with the tax laws of their
respective countries. Danish cooperative
tax rules reflect the fact that the

cooperative acts as its members’
extended arm, and as such, Arla Foods
amba pays income tax in Denmark
based on its equity.

Arla group owns several subsidiaries
globally. Our subsidiaries are typically
limited liability and private limited
companies subject to regular corporate
taxation.

wHAT iS THE MAiN DiFFERENCE BETwEEN A LiSTED COMPANy AND A COOPERATivE

Listed company

Cooperative

Profits

Minimum
payment for
commodity

Shareholder

Supplier

Maximum
payment for
commodity

Owner/supplier

COMPANy iNTEGRiTy MANAGEMENT
- POLiCiES, CONTROLS AND COMPLiANCE

Acting responsibly is at the core of our character. We are committed to conducting business in a lawful,
fair and ethical way, and expect the same from our business partners.

Our compliance cycle
We operate a structured compliance framework
to drive a risk aware dialogue across the business.
It comprises: risk identification, policies and controls,
education and awareness, investigations and reporting.

Risk identification
We identify compliance risks through several
processes, including: monitoring of regulatory
developments, investigations upon alleged
misconduct reports, compliance trainings, internal
compliance reviews, and CSR due diligence. To read
about our overall risk management go to page 48.

Policies and controls
Our Code of Conduct is available in 12 languages
and, together with a set of global policies, determines
the principles for our activities and expresses our
expectations towards our employees and business
partners. We have zero tolerance towards the
violation of these principles and secure this through
a coherent system of internal controls, which are
regularly assessed for effectiveness and adequacy.
We continue to develop our internal control
environment with system-embedded controls and
segregation of duty monitoring. As a part of the
control scheme, we work on data privacy control
points, subjected to regular monitoring and review.

In 2019 we continued building a compliant culture
and have increased our focus on operationalizing

46 ARLA FOODS ANNUAL REPORT 2019

our risk management to mitigate risks across the
core business processes. We completed a risk and
control assessment for Order to Cash and Source to
Pay processes, to determine the residual risk level
and assess it versus our risk appetite. Based on this,
we determined necessary improvements. We also
began utilizing analytics and robotic process
automation to strengthen compliance.

In 2019, we investigated 12 reported fraud
allegations, compared to 35 in 2018. They resulted
in no material financial losses to the group but did
provide valuable inputs on the condition of our
control environment. The observations related to
purchasing and information security which continue
to be core elements of our efforts to strengthen
compliance and raise awareness.

Reporting
Our compliance reporting sequence is arranged in
an annual cycle at various organisational levels. In
2019 we introduced compliance scores into the
executive management team’s monthly performance
dashboard, and country reporting is shared with
relevant middle management. Compliance
concerns are also reported quarterly at business
board meetings, with the final observations from all
compliance activities and investigations in the year
reported in the Annual Compliance Report to the
Board of Directors. Overall, compliance was further
strengthened in 2019 and we are fully committed
to continue this journey into 2020 and beyond.

You can find our Code of Conduct on our webpage.

Education and awareness
Our Code of Conduct and internal policies are
communicated to employees with a range of
activities, combining mandatory training programs
and awareness announcements. All internal principles
for business conduct are gathered in a central Policy
Portal on Arla’s intranet and are available to employees,
also on mobile devices. We operate a combined
scheme of training – including e-learnings on major
compliance matters (e.g. competition law, information
security) and classroom training as appropriate.

Investigations
Openness and trust are among our core values, and
incorporated into our Code of Conduct. If employees
believe that the Code of Conduct has been violated,
we encourage them to report these violations.
Concerns can be raised by reporting to relevant
management, HR or Risk Controls and Compliance.
We also offer anonymous reporting possibility
through our whistleblower system, applying strict
principles of confidentiality and non-retaliation.

ESTABLISH
Corporate policies,
processes and
guidelines

EMBED
Leadership
Communication
& training
Objectives &
initiatives

ENFORCE
Auditing & review
Monitoring & reporting
Complaints handling &
remediation

OUR RiSk MANAGEMENT

At Arla, we recognise risk management as a means of mitigating adverse consequences of internal or external factors,
and capturing opportunities for the business to maximise value creation. We take measures to identify, understand,
assess and deal with risks effectively. Our focus is on risks that may threat the realization of our strategy in the mid-term,
and we also look at short-term risks inherent in the business processes of the company.

TyPE OF RiSk

STRATEGiC
Risks arising from external or internal trends or events that may have material impact on the realisation of our strategic objectives

OPERATiONAL
Risks that may compromise execution of business functions

FiNANCiAL
Risks that may cause unexpected volatility in milk price, net sales, margins or market shares

LEGAL AND REGULATORy
Risks related to legal or regulatory developments that may have material impact on our realisation of business objectives

IMPACT

We differentiate risks within each major category by
their potential impact. Impact indicates the level of
monetary and/or reputational loss. In this report we
focus on critical and major risks, however in our
internal risk management we also track and mitigate
risks below these materiality levels.

Major: Long term impairment of market position
and/or national media coverage resulting in damage
to brands/image and/or monetary loss 10-50 mEUR.

Critical: Permanent reduction of brand value

and/or extensive international media coverage
damaging the image of Arla and/or monetary loss in
excess of 50 mEUR.

Likelihood: When we talk about the
movement of risk, we refer to change in likelihood
of the risk materialising, considering the mitigation
activities and controls lowering that likelihood.

47 ARLA FOODS ANNUAL REPORT 2019

OUR RiSk MANAGEMENT (CONTiNUED)

Strategic risks

Negative consequence of Brexit
UK is a significant market for Arla accounting for 25
per cent of sales, hence adverse effects from limiting
the free movement of goods, as well as the
devaluation of the GBP could have critical impact on
Arla in short and long term.

: Peter Giørtz-Carlsen, member of the Executive

Board, and Executive Vice President for Europe

: We have detailed scenario planning and

mitigating action plans in place and are continually
mapping potential impacts of various potential
outcomes of Brexit negotiations. Hedging plans are
in place to mitigate the short-term negative impacts
on GBP. To read more go to page 50.
2019 movement:
Impact:

Transformation of consumer preferences
Consumers increasingly explore plant-based
alternatives to dairy, and question dairy’s place
in a healthy and sustainable diet. Sales of plant
based alternatives to dairy are expected to increase
at double digit rates in the coming years.

: Hanne Søndergaard, Chief Marketing Officer,

Executive Vice President for Marketing,
Innovations, Communications and Sustainability

: Our innovation pipeline is focused on responding

to consumer trends, with increasing options for
flexitarian and carbon footprint-conscious consumers.
In 2019 we launched a ready-to-drink StarbucksTM
coffee with an almond base, and in cooperation with
McDonalds we launched a grilled cheese burger for
flexitarians. We constantly share information about
the health and nutritional benefits of dairy. To read

48 ARLA FOODS ANNUAL REPORT 2019

more about our innovative products, go to page 22.
To read more about our sustainability efforts go to
page 30.
Impact:

2019 movement:

Insufficient response to the societal push for
sustainable production and/or non-compli-
ance with climate regulations
Our operations have a negative environmental
impact that needs to be managed and offset in
compliance with local and global regulations, but
with our sustainability strategy we aim to exceed
existing regulatory requirements.

: Hanne Søndergaard, Chief Marketing Officer,

Executive Vice President for Marketing,
Innovations, Communications and Sustainability
: Our sustainability strategy is led by a dedicated

sustainability board anchored at the executive
management level. In 2019 we launched ambitious
mid- and long-term environmental targets, approved
by the Science Based Targets Initiative. Activities
across our value chain are being done to fulfil our
commitments. For example, we launched the first
ever dairy products that fulfil the climate neutrality
ISO standard, and 1 billion yoghurt and milk cartons
were upgraded to make them more environmentally
friendly. To read more go to page 31.
2019 movement:
Impact:

Disruptive pace of change due to e-commerce
and new shopping habits
Development of new digital commercial channels
enable consumers to order groceries, food kits and
ready-made meals home more often. At the same
time, sales in discounters and convenience stores
are increasing, consequently lowering margins and
pushing for new customer and distributor contracts.

: Peter Giørtz-Carlsen, member of the Executive

: Ola Arvidsson, Chief HR Officer, Executive Vice

Board, and Executive Vice President for Europe

President for HR and Corporate Affairs

: We innovate in our commercial channels and

: We attract talent through employer branding

push the digital dialogue with consumers to
e-commerce platforms. We increased focus on our
foodservice business, and have plans in place to dial
up focus in other growth channels. On our popular
recipe sites we provide consumers the possibility to
shop ingredients directly on retailers e-commerce
platforms, to enhance adoption of new habits.
Impact:

2019 movement:

and an efficient recruitment process, and retain
talent by providing sufficient internal growth
opportunities, taking employee’s opinions into
consideration through pulse checks three times a
year, and a focus on continuously improving our
working environment. To read more go to page 37.
2019 movement:
Impact:

Operational risks

Milk price and volume volatility
Dairy production is inherently exposed to volatility
of volumes and prices with potential adverse impact
on sales and returns. 2019 showed unprecedented
stability in milk prices, with significant swings in the
relative prices of fat and protein. The overall
volatility of milk markets may return in 2020.

: Peder Tuborgh, Chief Executive Officer
: We manage our prices and portfolio actively,
based on detailed market insights, with decision
making anchored with the CEO. Our performance
management is strongly linked to our peer group
insights and group-wide EBIT targets.
2019 movement:
Impact:

Loss of key personnel in strategic positions
People are the key element of our organisation as
we rely on their talents and engagement to execute
our strategic objectives as well as daily business
operations. Our ability to recruit and retain skilled
employees is one of our key risk factors.

Information security and cyber attack
We are an increasingly digital company, and the
integration level of our IT systems exposes us to
cyber security risks, such as non-availability or
unauthorised access. This has the potential to result
in disruption of business processes or adverse
impact on our market position and reputation.

: Natalie Knight, Chief Financial Officer,

Executive Vice President for Finance, Legal and IT
: We continuously educate employees through
cyber risk awareness campaigns, including our 2019
relaunch of information security principles in the IT
Code of Practice. We assess the risks related to
IT platforms (including data privacy issues), and
conduct system maintenance focusing on
vulnerability scanning and systematically address
identified weaknesses. We monitor access control
processes centrally and improve the segregation of
duties, which was recognized positively by our
external auditors.
Impact:

2019 movement:

Risk Owner

Mitigation

OUR RiSk MANAGEMENT (CONTiNUED)

Delivery of our Calcium efficiency and
transformation programme
Our transformation and efficiency programme,
Calcium was launched in 2018 to accelerate our
Good Growth strategy and deliver EUR 400 million
savings. We recognise the risk arising from significant,
organisation - wide changes. We aim to create an
organisation able to embrace change to capture
opportunities for the future.

: Peder Tuborgh, Chief Executive Officer
: In 2018 we set up a central transformation
office dedicated to coordination and delivery of
programme targets in close collaboration with
business units. Decision making remains anchored
at the executive management level. The programme
is organised across 9 workstreams, with rigorous
follow-up and firm performance and change
management.
Impact:

2019 movement: Stable

Financial risks

Currency fluctuation
As 57 per cent of Arla’s revenue is generated in
currencies other than EUR or DKK, our key financial
risk relates to the fluctuation of currencies in our
global markets.

: Natalie Knight, Chief Financial Officer,

Executive Vice President for Finance, Legal and IT
: We have centralized foreign currency exposure
management in place, and reduce our short-term
transactional exposure through hedging activities in
our main currencies.
Impact:

2019 movement: Stable

Tax risk
As a global cooperative, Arla is confronted with the
continuously growing demand for transparency
about our tax position and policies. In recent
years this has led to a significant increase in the
compliance requirements for multinationals like
Arla, and increased the (automatic) information
exchange between tax authorities. Tax authorities
around the world also increased the number of tax
audits. The above developments lead to more
uncertainties and a higher workload on tax
reporting.

: Natalie Knight, Chief Financial Officer,

Executive Vice President for Finance, Legal and IT

: We continuously monitor group

transactions to ensure alignment with local tax
requirements, and a transparent dialogue with tax
authorities. We monitor tax risks and ensure that
these are sufficiently covered by provisions. Where
possible, Arla enters enhanced relationships with tax
authorities. We do not enter into aggressive tax
planning and ensure that tax follows the business,
not the reverse. To read more go to page 45.
Impact:

2019 movement:

Legal and regulatory risks

Major product quality and/or safety issues
resulting in product recall
Food safety and compliance with health and safety
regulations is a top priority across our supply chain
and commercial business. It is also part of our social
responsibility commitments stated in our Code
of Conduct.

49 ARLA FOODS ANNUAL REPORT 2019

: Sami Naffakh, Chief Operations Officer
: We constantly improve and extend our quality

assurance programme for farmers,
Arlagården. We have quality and food safety
management programmes in place driven from
a central QEHS department and monitor our core
production performance indicators monthly. As part of
our transformation programme, Calcium we
transform our supply chain to be more efficient and
safer. To read more about recalls go to page 131.
Impact:

2019 movement: Stable

Legal non-compliance, corruption, fraud
and unethical business conduct
Any instance of corruption or unethical business
conduct raises risk of fines, criminal prosecution and
reputational damage. Across all core business
processes an inherent risk of misconduct exists and
needs mitigation.

Data privacy
We need to ensure the privacy of our employees’,
customers’ and other business partners’ personal
data in line with GDPR. Actual or perceived
violations of GDPR or other data privacy and system
security regulations could raise a risk of signficant
regulatory fines and reputation damage.

: Natalie Knight, Chief Financial Officer,

Executive Vice President for Finance, Legal and IT

: We review our business processes and IT
systems and strengthen our internal policies and
procedures annually. We implemented a control
framework, which is supported by continuous
education of employees and audits of relevant
business partners. We have also improved our HR
processes, policies and procedures to ensure data
privacy of employees.
Impact:

2019 movement: Stable

: Natalie Knight, Chief Financial Officer,

Executive Vice President for Finance, Legal and IT
: We have zero tolerance for conduct which may
compromise our reputation or corporate integrity.
We constantly educate our employees on the
principles of our Code of Conduct and internal
policies (e.g: anti-bribery, fraud, third party
entertainment policy). We monitor any misconduct
through a system of internal controls in all business
processes, and identify irregularities through
reporting structures, including a group-wide
whistleblower programme.
Impact:

2019 movement: Stable

Risk Owner

Mitigation

PREPARiNG FOR BRExiT

Potential consequences from Brexit continue to be the biggest risk Arla faces. Although the UK decided to
leave the EU at the end of January 2020, the future trading relationship between the EU and the UK remains
uncertain, and we need to continue to prepare handling all possible outcomes. As negotiations on the future
trading relationship continue, Arla will keep on making our position clear to decision makers, as a company in
favour of the free movement of goods and people.

It is important for Arla that our
products and employees can move
freely from and to the UK, also after
the transition period is over.
Successful brands in the UK market,
including Lurpak®, Arla® Skyr and
Lactofree, are imported to the UK,
while others, like Castello® are
exported from the UK. Changes to
the EU-UK trade relationship may
significantly challenge this business.

Throughout Arla’s Brexit Task Force,
compiled of senior leaders from
affected business units, continued
to monitor and assess various
scenarios, considering possible
impacts and mitigating actions.
Our Executive Management Team
and Board of Directors have been
updated monthly, and relevant
updates were shared with our
owners.

At the time of finalising the annual
report, our priorities in preparing for
Brexit remain:

Ensuring we maintain business

continuity and supporting our EU
employees in the UK, and UK
employees in the EU

Maintaining confidence with key
stakeholders, including customers

We want the final trade deal
between the UK and EU to be free
from tariff and non-tariff barriers on
milk and dairy. We are collaborating
with partners in the dairy industry
and the wider food and farming
community to build a united
position across Europe. To ensure
our position is heard at the highest
level, we are engaged with both the
UK government and the EU.

Significant risks relate to negotiations
on the regulatory alignment
between EU and UK, extra costs in
the form of customs duties and
customs clearance being imposed
on EU and UK exports that could
negatively affect demand, as well as
increased administrative burdens.

Another key risk relates to the
Group’s GBP/EUR-exposure, through
transaction risk on export business
and translation effect on value
added by local UK business. To
mitigate this uncertainty on a
short-term basis, we have applied
hedging instruments in 2019 to a
larger extent than normal.

The uncertainty surrounding future
implications have been incorporated
when assessing asset values, e.g. on
goodwill where EUR 489 million is
allocated to UK (out of EUR 700
million goodwill in total). Following
the Brexit process, expected cash
flow supporting the carrying value of
goodwill in the UK is inherently more
uncertain. This was reflected in the
risk-adjusted cash flow used for the
impairment test. Read more about
the details on impairment tests
performed in note 3.1.1.

50 ARLA FOODS ANNUAL REPORT 2019

ARLA iN THE Uk
Revenue, billion EUR
2.7

Total assets, billion EUR
1.3

Share from the inflow of raw milk
from owners

26%

Number of farmers in the UK
2,190

Number of employees in the UK
3,407

Number of production and
packaging facilities
10

Key brands
Arla®, Lurpak®, Aanchor®,
Cravandale®, Yeo Valley®

OUR
PERFORMANCE
REviEw

Delivering stable milk price
Our strategy paves our way to ensure our mission: to secure the highest value for our owner’s
milk. In 2019 we experienced unparalleled milk price stability.

OUR PERFORMANCE REviEw

Arla successfully delivered a stable and competitive milk price to our farmer owners, with our
performance price reaching 36.6 EURcent/kg of milk. Moreover, with respect to quality of sales,
cost efficiency and cash conversion, we achieved the top range of our targets for all key
performance indicators. Branded volume growth increased above expectations, by 5.1 per cent,
while volumes of lower margin products were reduced, which together with positive currency and
M&A effects drove Arla’s revenue increase of 1 per cent, to EUR 10.5 billion. Our transformation
and efficiency programme, Calcium, delivered EUR 110 million in savings,
which was EUR 10 million above the high-end of our target range. Efficiencies
enabled by Calcium, as well as higher volumes in branded products led to a net
profit of 3.0 per cent, ahead of the previous two years’ results. Our leverage and
cash flow also ended at healthy levels, despite the payout of our full 2018 profit
to our farmer owners and record-high investments of EUR 704 million. These
results show that our Good Growth 2020 strategy is working.

Natalie Knight
Chief Financial Officer

52 ARLA FOODS ANNUAL REPORT 2019

MARkET OvERviEw

In 2019, the global macroeconomic environment
was characterised by lower GDP rates compared to
the last year in most markets, continued uncertainty
around the potential consequences of Brexit, a
global trade conflict between the US and China, and
intensifying tensions in the Middle East.

According to the IMF, global economic growth in
2019 was 3 per cent compared to 3.6 per cent last
year, the slowest pace since the 2008 economic
crisis. The trend was primarily driven by emerging
markets and developing economies, which grew by

3.9 per cent, but still at a slower rate than last year
(4.5 per cent). Meanwhile advanced economies
grew by 1.7 per cent, compared to 2.3 per cent in
2018.

Arla’s core currencies developed in an advantageous
direction, or were mostly stable during 2019. The
British Pound (GBP) and US Dollar (USD) improved
modestly in their relative strength to Euro (EUR),
while the Swedish Krona (SEK) devaluated slightly.

Gross domestic product growth rate
(per cent)*

Average exchange rates,
2018-2019

Currency

2018

2019

Change
vs.2018

EUR/USD

EUR/GBP

EUR/SEK

1.180

1.119

5.1%

0.885

0.877

0.9%

10.253 10.587

-3.3%

4.5

3.9

3.6

3.0

2.3

1.7

World

Advanced
economies

Emerging markets
and developing
economies

2018

2019

* Source: IMF

53 ARLA FOODS ANNUAL REPORT 2019

Fat and protein prices 2018-2019
(EUR/Tonne)

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

Q1
2018

Q2
2018

Q3
2018

Q4
2018

Q1
2019

Q2
2019

Q3
2019

Q4
2019

Protein

Fat

Unprecedented stability in milk prices and
milk production across Europe
Global and European milk prices showed unprece-
dented stability in 2019. This is the longest period of
prepaid milk price stability in Europe since 2015,
when production quotas were lifted.

However, this stability disguised an underlying shift
in the basis of milk values. In the previous two years
we experienced a significant shift between fat and
protein values towards fat being the higher value
milk solid. In 2019 we started to see this reverse,
restoring the traditional picture of protein having a
higher value than fat.

Fat prices continued to fall through the first half of
2019 before settling at a price level in line with
historical averages, before the 2017-18 increases.

On the other hand, with the clearing out of final
intervention stocks of skimmed milk powder (SMP)
during the early part of 2019, demand for SMP
outstripped supply, resulting in a significant price
rise through the year. By the end of the year SMP
prices in Europe were higher than they had been
since mid-2014.

These massive shifts in the fat and protein prices
changed the pricing dynamics hence changed the
profitability by product category.

MARkET OvERviEw (CONTiNUED)

Demand and consumption growth
The latest available global dairy consumption numbers show a significant drop in the per capita
consumption growth of Western markets, from 2.5 per cent in 2017 to 0.5 per cent in 2018.
Dairy consumption growth in emerging markets also slowed down from 4.4 per cent in 2017 to 3.3 per
cent in 2018. In absolute numbers, approximately 85 per cent of dairy consumption growth was driven
by emerging markets.

From a category perspective, cheese consumption increased by 0.8 per cent in the European markets,
while milk and butter slightly decreased, with 0.4 and 0.2 per cent respectively. Volumes for ready-to-drink
coffee and mozzarella grew across all major European markets.

Dairy consumption growth in major markets (per capita)*

Change in per capita consumption by category*

Milk

-0.4%

Butter

Cheese

-0.2%

0.8%

Strong push for sustainability
In 2019, discourse about climate change and sustainability dominated the public sphere. School
strikes for climate grew to be a global phenomenon with tens of thousands of students attending
demonstrations across the globe. Governments and inter-governmental organizations made
commitments and tangible plans for decreasing carbon emissions most notably the Green New Deal
by the EU.

USA
-0.2%

EU
1.7%

Brazil
0.01%

Global companies were also hugely affected by this
trend, and more companies are actively integrating
sustainability into their business model. They are doing
so by pursuing goals that go far beyond earlier
concerns for reputation management – for example,
saving energy, developing sustainable products,
changing to sustainable sourcing and increasing focus
on diversity in the workforce. Dairy companies are no
exceptions. We have seen our peers launching inspiring
environmental targets in 2019, while we at Arla
continued and accelerated our already ongoing
journey towards becoming more sustainable, and
announced our ambition to become carbon neutral by
2050.

China
0.02%

Philip-
pines
0.1%

Australia
1.5%

* Source: Dairy Economic Consultancy (clal.it), based on data from 2018. Category data pertain to Europe.

54 ARLA FOODS ANNUAL REPORT 2019

FiNANCiAL PERFORMANCE

In 2019 Arla delivered at the high end or above our target range for all our key financial performance indicators, despite significant
swings in the relative prices of fat and protein, which created volatility in profitability across product categories. We improved milk price
performance and kept the prepaid milk price stable throughout the year. This was driven by strong sales in the international growth
markets and an increase in the branded volumes in Europe, as well as a successful second year of our transformation and efficiency
programme, Calcium.

transformation and efficiency programme, Calcium,
enabling us to pay a competitive milk price for our
farmer owners.

and efficiency programme, Calcium, as well as our
strategy are improving Arla’s competitiveness in the
European dairy market.

Stable owner milk price
throughout 2019
As a cooperative, Arla exists for the benefit of our
farmer owners. Our mission is to secure the highest
value for our farmers’ milk while creating opportuni-
ties for their growth. Our commitment to maximise
both short- and long-term value for our owners
requires strong commercial execution at all levels of
the business through active price management,
delivering branded growth as well as firm cost
control. In 2019 we delivered firm branded volume
growth and significant cost savings due to our

Performance price is the most important KPI for Arla,
measuring the value Arla creates per kilo of owner
milk. During 2019, Arla’s performance price
improved to 36.6 EUR-cent/kg, compared to 36.4
EUR-cent in 2018 (0.5 per cent increase). We
delivered this improvement despite increased
competition in the core European markets. This
achievement is a key indicator that our transformation

A key component of our performance price is the
prepaid milk price, which represents the on-account
average payment farmer owners receive per
kilogram of milk delivered during the settlement
period. The prepaid milk price paid to our farmer
owners was virtually unchanged throughout the
year, with only minor technical changes from
February to December. Overall the average prepaid
standard milk price was 34.1 EUR-cent/kg,
unchanged compared to last year.

Arla owner milk intake decreased by 0.1 per cent
compared to last year. However there were
significant variances across core geographies. Milk
intake from Danish and UK farmers remained
virtually unchanged compared to last year, at 4.9
and 3.2 billion kilos respectively. Milk intake from
farmers in Sweden and Central Europe decreased
slightly.

The main driver for the decrease in milk intake in
Central Europe was the mandatory transition of all
owners in Arla Central Europe to non-GMO feed,
following which a number of farmers decided to

leave the cooperative. In Sweden milk intake has
been declining for years, and in 2019 the decline
was slightly accelerated by the impact of the 2018
drought, and in some regions, a drought in 2019.

Milk intake from sources other than our owners
decreased at a higher pace, by 134 million kilos,
from 1.5 billion kilos to 1.3 billion kg (9.2 per cent
decrease), due to the divestments of our activities
in Allgäu, Germany and therefore the elimination of
contract milk from the region.

Performance price
(EURc/kg)

38.1

36.4

36.6

33.7

30.9

2015

2016

2017

2018

2019

Standard prepaid milk price and owner milk volumes
(EURc/KG; tonnes)

Q1
2018

Q2
2018

Q3
2018

Q4
2018

Q1
2019

Q2
2019

Q3
2019

Q4
2019

Million kg

1,200

1,000

800

600

400

200

Prepaid price

Farmer milk volume

55 ARLA FOODS ANNUAL REPORT 2019

FiNANCiAL PERFORMANCE (CONTiNUED)

Arla revenue at upper end of target
In 2019, Arla revenue increased by EUR 102 million
to EUR 10.5 billion, compared to EUR 10.4 billion
last year (1 per cent increase), which is at the upper
end of our target range (EUR 10.2-10.6 billion). At
Arla, there are four main components of revenue
development: volume and product mix, sales prices,
exchange rates, as well as changes due to acquisitions
and/or divestments. In 2019, positive developments
from M&A and currencies had the largest effect on
the revenue development. Impact from increasing
volumes, and a better product mix were largely
offset by decreasing prices.

Volumes in our higher margin segments, such as
the sales of our branded products increased, while
volumes in our less profitable private label sales
decreased, adding up to a slight total increase. In
total, the price effect was slighltly negative in 2019,
with varied price development across markets and
segments. Prices strengthened in trading and our
AFI whey business, which was offset by marginal
price decline in selected core markets both in our
European and international commercial segment.

Revenues generated from new acquisitions and
full year effects from acquisitions completed in
2018 positively impacted revenue by EUR 61
million in 2019 compared to EUR 89 million last
year. The primary driver of this development was
our acquisition of the Kraft® cheese business and
production site from Modeneléz International in the
Middle East. Other contributors are the full-year
effect of the Yeo Valley Dairies Ltd. licencing
agreement in the UK, and the acquisition of the
remaining 50 per cent shares in Arla Foods
Ingredients SA in Argentina in 2018. This was

56 ARLA FOODS ANNUAL REPORT 2019

Revenue split by
commercial segment

on growing our branded share of volume and
increasing our investments in product innovation.

In 2019, our branded volume grew 5.1 per cent,
compared to 3.1 per cent last year. This result is
significantly above our target range of 1.5-3.5 per
cent and comes despite reductions in marketing
spend compared to previous years. Initiatives
inspired by our transformation and efficiency
programme, Calcium led us to increase marketing
spend efficiency. As an example, we created our own
in-house creative agency, The Barn, which helped to
reduce cost per reach by 50 per cent.

Branded growth was mainly driven by the Arla®
brand, where branded volumes grew 5.1 per cent in
2019. Sub-brands focused on inspiring a sustainable
diet performed especially well (For example,
Arla&More products, aimed to provide nutritious
choices to those with busy schedules grew

Branded revenue,
split by brands

46 per cent, while Arla® Explorers with children’s
offerings grew volumes at 22.8 per cent. Lurpak®
and Puck® also delivered strong branded volume
growth of 4.3 and 4.8 per cent respectively. To learn
more about our brands go to page 21, for more
information about dairy’s place in a sustainable diet
go to page 33.

Our European commercial segment, which
represents 60.3 per cent of the Arla business,
delivered 2.9 per cent branded volume growth,
compared to 2.5 per cent last year. All markets
contributed positively, with our biggest market, the
UK, growing at 8.8 per cent. Revenue in Europe
declined by EUR 154 million due to planned
reductions in the low margin private label business
and negative currency impacts. To learn more about
performance in our European business segment go
to page 23.

In our international commercial segment, which
represents 17.1 per cent of Arla’s business, revenue
grew by EUR 226 million, driven primarily by higher
branded volume growth, which increased to 10.3
per cent compared to 4.6 per cent last year. To learn
more about performance in our international
business segment go to page 25.

Branded volume growth development

Arla® 63%
Castello® 4%
Lurpak® 12%

Puck® 7%
Milk based beverages 4%
Other supported brands 10%

2019

2018

2017

5.1%

3.1%

3.0%

Europe 60%
International 17%
Arla Foods Ingredients 7%
Trading and other sales 16%

partially offset by the final divestment of our
specialty cheese activities in Allgäu, Germany.

Currency fluctuations positively impacted revenue
by EUR 57 million, mainly as a result of higher US
dollar rates in some international markets. This
compares to a negative effect of EUR 210 million in
2018. For more details on revenue development
refer to Note 1.1.

Branded growth at historically high levels
Our brands are at the heart of our business and drive
about two thirds of Arla’s profitability. Increasing
branded volume growth is critical for us to achieve
stronger relative profitability on a medium- and
long-term basis. We also know that branded revenue
and profitability is less volatile, and brands drive a
strong connection with consumers. In line with our
strategy Good Growth 2020, Arla continues to focus

FiNANCiAL PERFORMANCE (CONTiNUED)

Our commercial segments

Europe:
Revenue in Europe decreased by EUR 154 million to
EUR 6,353 million, compared to EUR 6,507 last year.
Increased branded volume growth and a positive
impact from the acquisition of Yeo Valley Ltd. in 2018
was offset by decreasing private label volumes, a
negative price effect and the depreciation of the
SEK. Decreasing private label volumes resulted from
our strategic decision to step out from selected
unprofitable contracts, primarily in our German market.

The Europe segment continued to push the sales of
our higher margin, branded products, which resulted in
a strong branded volume growth of 2.9 per cent. All of
our European markets increased their branded
volumes. The branded growth was particularly strong
in the UK, the Netherlands and Finland, as well as our
foodservice segment. Within product categories the
main drivers were Arla® Lactofree, Skyr, cheese and
milk based beverages under the Arla® and StarbucksTM
brands.

For further details on the development in each of our
strategic European markets, please refer to page 23.

International:
Revenue in international increased by EUR 226 million,
to EUR 1,802 million, compared to EUR 1,576 last year,
the highest increase in the past 3 years. All regions but
North America contributed positively to the revenue
increase, driven by branded volume growth, the
positive development of the USD and the acquisition of
the Kraft® branded cheese business in MENA.

AFI:
Revenue in AFI increased by EUR 58 million to EUR
710 million compared to EUR 652 million last year.
This was driven by the increased sales of value-add
products within the ingredients segment, higher
prices and the full-year effect from the acquisition of
the remaining 50 per cent share of Arla Foods
Ingredients S.A. Argentina in 2018.

Branded volumes grew 10.3 per cent, compared to
4.6 per cent last year. Successful introduction of new
products in several markets, and a very strong
performance of our biggest international market, MENA
also contributed to the growth.

Sales and branded volume both declined in North
America, where we shifted our strategic direction to
a ensure a more stable growth course.

To read more about our international segment go
to page 25.

All business units within the ingredients segment
– paediatric, health & performance and food –
contributed to the positive revenue development,
while the child nutrition business experienced lower
revenue due to repercussions from major changes
in Chinese infant formula regulations.

The sale of value added products grew by 9.4 per
cent, driven by value-added protein segments such
as alpha-lactalbumin used in infant formula to
mimic human milk better, and whey protein
hydrolysates used in clear protein waters in sports
nutrition.

To read more about AFI’s performance go to
page 27.

Trading:
Revenue in our trading business decreased slightly,
by EUR 28 million to EUR 1,662 million compared to
EUR 1,690 last year. A drop in trading sales volumes
was offset by increasing protein prices. The increase
of protein prices meant a major shift in commodity
markets in 2019, coupled with continued weaken-
ing in fat prices. This indicates that fat and protein
values are returning to their long term historical
relationship. For most of the year, the increasing
protein prices offset the reducing fat prices,
meaning commodity milk prices held relatively
stable, with a slight overall increase towards the end
of the year..

To read more about our trading segment go to
page 28.

Strategic branded volume driven
revenue growth

Growth in value-added products

Trading share

2.9%

2018: 2.5%

10.3%

2018: 4.6%

9.4%

2018: 12.8%

25.0%

2018: 26.5%

57 ARLA FOODS ANNUAL REPORT 2019

FiNANCiAL PERFORMANCE (CONTiNUED)

Our brands

Arla@
The Arla® brand is central to our global business, and the key driver
of our branded growth. In 2019 Arla®’s revenue grew to EUR 3,084
million compared to EUR 2,923 million last year, driven by the
successfully re-launched Lactofree sub-brand, as well as the rapid
growth of Skyr in our core European markets.

Branded
volume growth

5.1%

2018: 1.8%

Revenue (EUR million)

3,033

2018: 2,875

Lurpak@
In 2019, for the first time in decades our leading butter brand,
Lurpak® sold over 100,000 tons of butter. The 4.3 per cent
branded volume increase drove Lurpak®’s revenue to increase
to EUR 588 million, compared to EUR 561 million last year.

Branded

volume growth 4.3%

2018: 2.7%

Revenue

(EUR million) 588

2018: 561

Castello@
Sales of our Castello® specialty remained on
pair with last year at EUR 179 million, due to
challenging competitive environment across
Europe and selected international markets.

Branded
volume growth

-2.1%

2018: 3.8%

Revenue (EUR million)

179

2018: 179

Milk based beverage brands
Our milk based beverages segment includes strong
brands such as Cocio®, Matilde®, and most importantly,
the licensed StarbucksTM brand. In 2019 sales of our
branded milk based beverages to EUR 207 million,
compared to EUR 187 million last year. Growth was
mainly driven by StarbucksTM, which successfully
rolled out to new markets, and launched the first
plant-based coffee.

Puck@
Despite challenging macroeconomic conditions, our leading
brand in MENA, Puck®, grew revenue to EUR 363 million,
compared to EUR 352 million last year. Growth was driven by
a firm volume growth in the processed and cream cheese
business.

Branded
volume growth

13.7%

2018: 22.4%

Revenue
(EUR million)

207

2018: 187

Branded
volume growth

4.8%

2018: 8.9%

Revenue
(EUR million)

363

2018: 352

58 ARLA FOODS ANNUAL REPORT 2019

FiNANCiAL PERFORMANCE (CONTiNUED)

“OUR FiNANCiAL
POSiTiON iS vERy
STRONG AND wiTHiN
OUR TARGETED
RANGE. IT GivES US
FiNANCiAL STRENGTH
TO iNvEST iN
DELivERiNG OUR
STRATEGy, GOOD
GROwTH 2020 AND TO
CREATE THE FUTURE
OF DAiRy”

In 2019 leverage increased to 2.8 compared to 2.4
last year, as a result of the extraordinary payout of
the full 2018 profit to our farmer owners and record
high investment levels, offset by solid development
in earnings from the normal course of operations.

Net interest-bearing debt including pension
liabilities increased by EUR 495 million to EUR 2,362
million compared to EUR 1,867 million last year (
26 per cent increase). The increase is primarily due
to the adoption of the IFRS 16 related to leases, high
investment level including acquisitions, and pay-out
of full profit related to 2018. EBITDA increased by
EUR 70 million to EUR 837 million, compared to
EUR 767 million last year (9.1 per cent increase),
which was also impacted by the IFRS 16 standard.

Despite these developments, our financial position
is very strong and within our targeted range. Our
financial position is a critical lever for success. It
provides Arla with the financial strength to invest in
delivering our strategy, Good Growth 2020, and
pursue our vision to create the future of dairy. Arla is
considered a robust investment grade company, and
we continually strive to uphold this status.

Calcium savings above expectations
In early 2018 we launched our comprehensive
transformation and efficiency programme, Calcium,
as our response to challenging external develop-
ments, and to increase efficiency across the
business. More than halfway into Calcium, we can
see that it contributes to a more competitive milk
price to our owners, while also enabling us to invest
in future growth markets and categories.

Calcium delivered strong results during 2019,
with savings of EUR 110 million. This exceeded the
high-end of our full year EUR 75-100 million savings
target. As a result, we have achieved EUR 224
million in accumulated yearly Calcium savings since
we initiated the program in 2018, and we are more
than halfway towards our 2021 ambition of EUR
400 million.

Calcium savings
(EUR million)

110

Target: 75-100

The savings were primarily achieved through
improved supply chain productivity, as well as
decreased marketing and indirect spend savings.
For more on Calcium, please go to page 17.

Net profit improves
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 actively balance the retained capital for future
investments and provide supplementary payment
to our farmer owners while continuing to pay out
the largest possible share of our profit via the
prepaid milk price on an ongoing basis.

In 2019, Arla achieved a net profit of EUR 311
million, or 3.0 per cent of revenue. This was 0.2
percentage points ahead of last year’s level and the
first time we reached 3.0 per cent since 2016. This
was driven primarily by lower costs, due to our
transformation and effciency programme, Calcium,
offset by a negative effect from other income
cost related to one-offs in 2018. The net profit
improvement is particularly strong when seen in
combination with our competitive prepaid milk price
during 2019.

Leverage at the low end of our target range
Financial leverage is calculated as the ratio of net
interest-bearing debt including pension liabilities to
operating profit, 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 a long-term target range of 2.8 to 3.4.

Financial perFormance (continued)

Cash flow
Cash flow from operating activities improved by
19 per cent to EUR 773 million compared with EUR
649 million last year due to increased EBITDA and
improved net working capital position. After
operating investing activities which increased as a
result of higher Capex and IT investments, free
operating cash flow ended at EUR 317 million
compared to EUR 224 million last year.

Net working capital
Net working capital position decreased by EUR 79
million to EUR 823 million, compared to EUR 894
million last year. The decrease was primarily a result
of lower value of trade receivables. Arla has
improved the net working capital position continuously
and 2019 was the third consecutive year of

improvement. Increased working capital requirements
primarily related to our international business was
offset by the effect from utilisation of receivables
and supply chain finance programmes and
improved internal processes. Turnover days
improved by 1.8 days in 2019 compared to 2018.

Continuously strong investment level
Our investments level has been increasing since
2018, reaching the highest level since 2014 this
year. Our Capex investments, including right of use
assets totalled at EUR 506 million in 2019.

Key Capex projects included the start of a capacity
increase in mozzarella production at our site in
Branderup, Denmark, and increased activities in the
development of our powder tower in Pronsfeld,
Germany. Both projects will continue into 2020, with
increased investment levels compared to this year.

On top of our Capex investment, we acquired a
cheese production site in Bahrain from Mondeléz
International and subsequently entered into a
long-term Kraft license agreement.

Investments in property, plant and equipment
including right of use assets
(EUR million)

In 2019 we also initiated embedding the carbon
footprint of Capex and M&A investments into our
investment approval and prioritization process and
creating a sustainability adjusted payback indicator
for use in future business case evaluation.

423

506

383

263

248

2015

2016

2017

2018

2019

60 ARLA FOODS ANNUAL REPORT 2019

FiNANCiAL OUTLOOk

In 2020, we will build on the momentum created in 2019, and further strengthen our position versus our peers with
focus on branded growth, our transformation and efficiency programme, Calcium and our sustainability agenda. By the
end of 2020 we will reach the end of our Good Growth 2020 strategic period, and we are confident that we will meet all
the financial targets set at the launch of the strategy in 2015.

The macroeconomic and political outlook is
challenging, but the outlook for dairy industry
remains stable. However, with strong commercial
execution, an accelerated innovation agenda and
the dedication of Arla and our farmers to become
more sustainable, we will again take big steps
towards creating the future of dairy.

Signs of global economy recovery,
but growth remains modest
We enter 2020 with early signs of stabilisation of the
global economy, nevertheless risks still remain
prominent. The current geopolitical tensions, trade
conflict escalation, risk of further slowdown in China
due to the coronavirus outbreak, and Brexit cause
uncertainty around global trading and investment
flows. However, the recent more positive news the
on US-China trade discussions, and eased fears of
Brexit without deal led to more positive outlook for
2020 versus 2019. IMF Global economic outlook
projects global growth at 3.3 per cent (3.0 per cent

in 2019); emerging and developing economies at
4.4 per cent (3.7 per cent in 2019) and advanced
economies at 1.6 per cent (1.7 per cent in 2019).

Stable market milk price and
production outlook
Global dairy demand is expected to be fairly stable in
2020, but changes of general economic situation
may work against stability. As global supply and
demand are anticipated to continue remaining fairly
balanced, the expectation for dairy price outlook is
stable. Change in trade agreements and other
disruptions may have a negative impact on the dairy
industry once materialized.

The main consumer trend we expect to impact dairy
sales in 2020, especially in the Western markets will
be the growing consumer demand for sustainably
sourced foods, and for nutritious products fitting
into increasingly busy and fragmented schedules,
combined with a higher demand for transparency
and accountability.

Targets, achievements, outlook

Revenue
(Billion EUR)

Profit share
(of revenue)

Calcium
(Million EUR)

Leverage

Strategic branded volume
driven revenue growth

Brand share

International share

Target 2019

Result 2019

Expectations 2020

10.2-10.6

10.5

10.4-10.8

2.8-3.2%

3.0%

2.8-3.2%

75-100

2.8-3.4

1.5-3.5%

≥ 46.0%

≥ 20.0%

110

2.8

5.1%

46.7%

21.9%

75-100

2.8-3.4

2-4%

≥ 48.0%

≥ 23.0%

61 ARLA FOODS ANNUAL REPORT 2019

FiNANCiAL OUTLOOk (CONTiNUED)

Further improving the quality of our business
through strategic branded growth
We expect to further strengthen our branded
volume growth in 2020, although at a more modest
rate than in 2019. We expect to grow branded
volumes in the range of 2-4 per cent and hence
further improve the quality of our revenue and the
competitiveness of our business portfolio. The 2020
branded growth target is expected to move our
strategic branded share of revenue to 48 per cent,
and our international share to 23 per cent, with
another important move towards realising the
ambitions set out in our Good Growth 2020
strategy. The continued strategic branded growth in
2020 is expected to be driven by strong development
in our strategic brands across both in our European
and international commercial segments.

Cost improvements driven by Calcium
We expect to further strengthen Arla’s competitiveness,
driven by our transformation and efficiency
programme, Calcium where our ambition for 2020 is
to again achieve savings of EUR 75-100 million. In
2020, Calcium savings are expected to be largely
driven by lower costs in our production, logistics
and procurement activities. We expect saving
accumulation to somewhat slow down as the
programme matures, and as we execute efficiency
transformations showing tangible financial effects in
the long run. By the end of 2020, we expect total
Calcium savings of at least EUR 300 million.
Moreover, we expect to have put all initiatives in

motion to ensure that we can deliver of our 2021
target of EUR 400+ million run-rate savings.

Net profit of at least 2.8 per cent expected
As we always focus on paying out the largest
possible share of our profit via the prepaid milk price
to our farmer owners, we continue to target a net
profit share for 2020 in the range of 2.8 to 3.2 per
cent. Our net profit target range is a full year target,
and results at half-year 2020 are expected to be
below the annual target range due to seasonality in
our profit creation.

Significant investments planned
We expect 2020 to be another big investment year,
with a Capex outlook of EUR 619 million driven by
structural investments and Calcium efficiency
initiatives. Our main project will be to work on our
powder tower in Pronsfeld, Germany, to continue
the mozzarella capacity increase project in
Branderup, Denmark, and upgrade our recently
acquired production site in Bahrain, as well as
significant investments into capacity increase for
AFI. Our strong balance sheet allows us to
increasingly invest in the capacities and technologies
required to succeed in the future, with an increasing
focus on energy efficiency, such as combined
heat-and-power facilities at our plants, and a range
of Calcium initiatives driving line efficiency.

strategic KPIs. These include expanding our branded
anfd international sales to increase the absolute and
relative of the high-margin business for our farmer
owners. We will also maintain a strong financial
position, as evidenced by our financial leverage.
We expect that the successful delivery on Good
Growth 2020 will put Arla in a strong position to
embark on our next strategic horizon beyond 2020.

Leverage expected within target range
The availability of sufficient financial manoeuvring
room is a priority at Arla Foods, as it enables us to
strategically position ourselves for future growth.
Based on our ambitious investment plans for 2020,
we expect leverage to increase slightly versus the
2019 level. However, continued improvement of our
working capital position and a strong operational
cash flow will allow us to stay firmly within our
target range of 2.8 to 3.4.

Strong delivery expected on our
Good Growth 2020 strategic ambitions
We are now moving into the final year of the Good
Growth 2020 Strategy. With the financial outlook for
2020 we expect to meet all the group financial and

Good Growth 2020 ambitions and our 2020 outlook

Starting point in 2014

Strategic ambition

2020 Outlook

Step up branded growth
(i.e. SB VDRG)

Boost Strategic Brands
(i.e. Brand share of business)

Grow International sales
(i.e. International share)

Leverage

1-2%
annual growth

42.1%

16.9%

3.3

45.0%

~ 23.0%

2.8-3.4

3.5%
(accumulated
2014-2020 SBVDRG)

≥ 48.0%

≥ 23.0%

2.8-3.4

The forward-looking statements in this annual report reflect our current expectations for future events and financial results. Such statements are inherently subject to uncertainty, and actual results may therefore differ
from expectations. Factors which may cause the actual results to deviate from expectations include general economic developments and developments in the financial markets, changes or amendments to legislation
and regulation in our markets, changes in demand for products, competition and the prices of raw materials. See also the section on risk (from page 47).

62 ARLA FOODS ANNUAL REPORT 2019

OUR
CONSOLiDATED
FiNANCiAL
STATEMENTS

Advanced digital tools in finance save us time and money
With the help of our advanced analytical tools, we are optimising our liquidity management to
save a significant amount of time and several hundred thousand EUR annually. The analytical
tool we are currently testing suggests how to allocate cash between banks and currency, taking
into consideration conditions for credit lines, interest rates, credit margins and transaction costs
as well as near term income and payments due. It works faster and analyses more factors
simultanously than a human user possibly could.

TABLE OF CONTENTS

PRiMARy STATEMENTS

NOTES

Income statement
65
65 Comprehensive income
66 Profit appropriation
67 Balance sheet
68 Equity
71 Cash flow

Introduction to notes

Note 1 Revenue and cost
Note 1.1 Revenue
74
Note 1.2 Operational costs
76
Note 1.3 Other operating income and costs
78
Note 1.4 Performance price
78

Note 2 Net working capital
79

Note 2.1 Net working capital,
other receivables and current liabilities

Note 3 Capital employed
82
85
88
89
90

Note 3.1 Intangible assets
Note 3.2 Property, plant and equipment
Note 3.3 Associates and Joint ventures
Note 3.4 Provisions
Note 3.5 Purchase and sale of business
or activities

Note 4 Funding
Note 4.1 Financial items
91
Note 4.2 Net interest-bearing debt
92
Note 4.3 Financial risks
97
Note 4.3.1 Liquidity risk
97
99
Note 4.3.2 Currency risk
101 Note 4.3.3 Interest rate risk
102 Note 4.3.4 Commodity price risk
103 Note 4.3.5 Credit risk
104 Note 4.4 Derivative financial instruments
105 Note 4.5 Financial instruments disclosed
106 Note 4.6 Sale and repurchase agreements
107 Note 4.7 Pension liabilities

Note 5 Other areas
111 Note 5.1 Tax
112 Note 5.2 Fees to auditors appointed by

the Board of Representatives

113 Note 5.3 Management remuneration

and transactions

113 Note 5.4 Contractual commitments,
contingent assets and liabilities

113 Note 5.5 Subsequent events after the balance

sheet date

114 Note 5.6 General accounting policies
116 Note 5.7 Group chart

118 Statement by the Board of Directors and

the Executive Board

119 Independent auditor’s report

64 ARLA FOODS ANNUAL REPORT 2019

COMPREHENSivE
iNCOME

Note

2019

2018* Develop-
ment

(EURm)

Profit for the year

Note

2019

2018*

323

301

1.1
1.2

1.2
1.2
1.3
1.3
3.4

1.2

4.1
4.1

5.1

10,527
-8,325
2,202

10,425
-8,341
2,084

-1,416
-389
-64
39
34
406

-1,362
-422
-43
118
29
404

837
-431
406

10
-69
347

-24
323

-12
311

767
-363
404

2
-64
342

-41
301

-11
290

1%
0%
6%

4%
-8%
49%
-67%
17%
0%

9%
19%
0%

400%
8%
1%

-41%
7%

9%
7%

Other comprehensive income
Items that will not be reclassified to the income statement:
Re-measurements of defined benefit schemes
Tax on remeasurements of defined benefit schemes

Items that may be reclassified subsequently to the income statement:
Value adjustments of hedging instruments
Fair value adjustments of certain financial assets
Adjustments related to foreign currency translation
Tax on items that may be reclassified to the income statement
Other comprehensive income, net of tax

4.7

4.4

Total comprehensive income

Allocated as follows:
Owners of Arla Foods amba
Non-controlling interests
Total

-50
11

-22
-2
42
-1
-22

25
-6

3
-3
-10
-1
8

301

309

289
12
301

297
12
309

INCOME
STATEMENT

(EURm)

Revenue
Production costs
Gross profit

Sales and distribution costs
Administration costs
Other operating costs
Other operating income
Share of results after tax in joint ventures and associates
Earnings before interest and tax (EBIT)

Specification:
EBITDA
Depreciation, amortisation and impairment losses
Earnings before interest and tax (EBIT)

Financial income
Financial costs
Profit before tax

Tax
Profit for the year

Non-controlling interests
Arla Foods amba's share of profit for the year

* Not restated following implementation of IFRS 16. See more details in note 5.6.

65 ARLA FOODS ANNUAL REPORT 2019

PROFiT
APPROPRiATiON

(EURm)

2019

2018

Proﬁt appropriation for 2019

Profit for the year
Non-controlling interests
Arla Foods amba's share of net profit for the year

Profit appropriation:
Supplementary payment for milk
Interest on contributed individual capital
Total supplementary payment

Transferred to equity:
Reserve for special purposes
Contributed individual capital
Total transferred to equity
Appropriated profit

323
-12
311

124
3
127

123
61
184
311

301
-11
290

287
3
290

-
-
-
290

Performance price
36.6

EUR-cent/kg

Standard prepaid
milk price
34.1 EUR-cent/kg

Proﬁt for the year
311*
EURm
2.5 EUR-cent/kg

Supplementary payment:
1 EUR-cent/kg owner milk

Consolidation principles:
Common capital 2/3
Individual capital 1/3

Supplementary
payment
124 EURm
3**
EURm
127

EURm

Consolidation
123 EURm
61 EURm
EURm

184

Common capital
123 EURm

Individual capital
61 EURm

* Based on proﬁt allocated to owners of Arla Foods amba
** Interest on contributed individual capital: 0.02 EUR-cent/kg owner milk based on proﬁt allocated to owners of Arla Foods amba

Profit appropriation

The proposed supplementary payment for 2019 is
EUR 127 million, including interest, corresponding to
1 EUR-cent/kg owner milk. Interest on the carrying
value of contributed individual capital amounted to
EUR 3 million. Contributed individual capital carried
an interest of 1.44 per cent in 2019.

In addition, EUR 184 million is transferred to equity and
split into 1/3 to individual capital (contributed individual
capital), amounting to EUR 61 million, and 2/3 to
common capital (reserve for special purposes), amounting
to EUR 123 million.

66 ARLA FOODS ANNUAL REPORT 2019

BALANCE
SHEET

(EURm)

Note

2019

2018* Develop-
ment

(EURm)

Note

2019

2018* Develop-
ment

Assets
Non-current assets
Intangible assets and goodwill
Property, plant, equipment and right of use assets
Investments in associates and joint ventures
Deferred tax
Pension assets
Other non-current assets
Total non-current assets

Current assets
Inventory
Trade receivables
Derivatives
Other receivables
Securities
Cash and cash equivalents
Total current assets

Total assets

3.1
3.2
3.3
5.1
4.7

2.1
2.1
4.5
2.1
4.6

982
2,710
468
43
16
24
4,243

1,092
889
20
240
435
187
2,863

887
2,308
439
30
4
29
3,697

1,074
989
37
254
465
119
2,938

11%
17%
7%
43%
300%
-17%
15%

2%
-10%
-46%
-6%
-6%
57%
-3%

7,106

6,635

Equity and liabilities
Equity
Common capital
Individual capital
Other equity accounts
Proposed supplementary payment to owners
Equity attributable to the owners of Arla Foods amba
Non-controlling interests
Total equity

Liabilities
Non-current liabilities
Pension liabilities
Provisions
Deferred tax
Loans
Total non-current liabilities

Current liabilities
Loans
Trade and other payables
Provisions
Derivatives
Current tax
Other current liabilities
Total current liabilities

Total liabilities

Total equity and liabilities

1,894
498
-72
127
2,447
47
2,494

249
23
81
1,951
2,304

776
1,158
9
86
5
274
2,308

1,814
456
-89
290
2,471
48
2,519

224
17
84
1,369
1,694

860
1,169
11
85
5
292
2,422

4%
9%
-19%
-56%
-1%
-2%
-1%

11%
35%
-4%
43%
36%

-10%
-1%
-18%
1%
0%
-13%
-6%

4,612

4,116

12%

7,106

6,635

4.7
3.4
5.1
4.2

4.2
2.1
3.4
4.5

* Not restated following implementation of IFRS 16. See more details in note 5.6.

67 ARLA FOODS ANNUAL REPORT 2019

EQUiTy

(EURm)

Equity at 1 January 2019
Supplementary payment for milk
Interest on contributed individual capital
Reserve for special purposes
Contributed individual capital
Non-controlling interests
Profit for the year
Other comprehensive income
Total comprehensive income
Payments to owners
Dividend to non-controlling interests
Supplementary payment related to 2018
Foreign exchange adjustments
Total transactions with owners
Equity at 31 December 2019

Equity at 1 January 2018
Supplementary payment for milk
Interest on contributed individual capital
Non-controlling interests
Profit for the year
Other comprehensive income
Total comprehensive income
Payments to owners
Dividend to non-controlling interests
Acquisition of non-controlling interests
Supplementary payment related to 2017
Foreign exchange adjustments
Total transactions with owners
Equity at 31 December 2018

68 ARLA FOODS ANNUAL REPORT 2019

Common capital

Individual capital

Other equity accounts

t
n
u
o
c
c
a

a
t
i
p
a
C

928
-
-
-
-
-
-
-39
-39
-
-
-
-4
-4
885

895
-
-
-
-
19
19
-
-
-
-
14
14
928

s
e
s
o
p
r
u
p

a
c
e
p
s

r
o
f
e
v
r
e
s
e
R

886
-
-
123
-
-
123
-
123
-
-
-
-
-
1,009

886
-
-
-
-
-
-
-
-
-
-
-
-
886

d
e
s
a
b
-
y
r
e
v
i
l

e
D

s
e
t
a
c
fi
i
t
r
e
c

r
e
n
w
o

d
e
t
c
e
n

a
t
i
p
a
c

d
e
t
u
b
i
r
t
n
o
C

a
u
d
v
d
n

a
t
i
p
a
c

222
-
-
-
61
-
61
-
61
-11
-
-
-1
-12
271

243
-
-
-
-
-
-
-17
-
-
-
-4
-21
222

72
-
-
-
-
-
-
-
-
-4
-
-
-
-4
68

79
-
-
-
-
-
-
-6
-
-
-
-1
-7
72

162
-
-
-
-
-
-
-
-
-9
-
-
6
-3
159

180
-
-
-
-
-
-
-15
-
-
-
-3
-18
162

t
n
e
m

t
s
u
d
a
e
u
a
v

r
o
f
e
v
r
e
s
e
R

y
r
a
t
n
e
m
e
p
p
u
S

t
n
e
m
y
a
p

290
124
3
-
-
-
127
-
127
-
-
-289
-1
-290
127

127
287
3
-
290
-
290
-
-
-
-121
-6
-127
290

g
n
g
d
e
h

f
o

s
t
n
e
m
u
r
t
s
n

-72
-
-
-
-
-
-
-22
-22
-
-
-
-
-
-94

-75
-
-
-
-
3
3
-
-
-
-
-
-
-72

r
i
a
f

r
o
f
e
v
r
e
s
e
R

h
g
u
o
r
h
t
e
u
a
v

C
O

r
o
f
e
v
r
e
s
e
R

e
g
n
a
h
c
x
e

n
g
e
r
o
f

s
t
n
e
m

t
s
u
d
a

14
-
-
-
-
-
-
-2
-2
-
-
-
-
-
12

17
-
-
-
-
-3
-3
-
-
-
-
-
-
14

-31
-
-
-
-
-
-
41
41
-
-
-
-
-
10

-19
-
-
-
-
-12
-12
-
-
-
-
-
-
-31

g
n

i
l
l

o
r
t
n
o
c
-
n
o
n

e
r
o
f
e
b

a
t
o
T

s
t
s
e
r
e
t
n

2,471
124
3
123
61
-
311
-22
289
-24
-
-289
-
-313
2,447

2,333
287
3
-
290
7
297
-38
-
-
-121
-
-159
2,471

g
n

i
l
l

o
r
t
n
o
c
-
n
o
N

s
t
s
e
r
e
t
n

48
-
-
-
-
12
12
-
12
-
-15
-
2
-13
47

36
-
-
11
11
1
12
-
-12
12

-
-
48

r
e
ft
a
y
t
i
u
q
E

a
t
o
T

g
n

i
l
l

o
r
t
n
o
c
-
n
o
n

s
t
s
e
r
e
t
n

2,519
124
3
123
61
12
323
-22
301
-24
-15
-289
2
-326
2,494

2,369
287
3
11
301
8
309
-38
-12
12
-121
-
-159
2,519

EQUiTy (CONTiNUED)

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 below.

Non-controlling interests
Non-controlling interests include the share of group
equity attributable to holders of non-controlling
interests in group companies.

Equity share 34 per cent

During 2019, equity decreased by EUR 25 million
compared to last year.

Other comprehensive income explained
Other comprehensive income includes revenue,
expenses, as well as gains and losses that are excluded
from the income statement. Typically, they have not yet
been realised. Other comprehensive income amounted
to a net cost of EUR 22 million, which was attributable
to actuarial losses on pension liabilities, negative value
adjustments on hedging instruments as well as positive
value adjustments on net assets measured in foreign
currencies.

Payments to and from owners
An extraordinary supplementary payment relating to
2018 totalling EUR 289 million was paid out in March
2019. Additionally, EUR 24 million was paid out to
owners resigning or retiring from the cooperative.

The Board of Directors proposes to pay-out EUR 127
million in March 2020 as supplementary payment for
2019. Furthermore, it is expected that EUR 19 million
will be paid out in 2020 to owners resigning or retiring.
Owner development is discussed further on page 36.

Common capital

Common capital is by nature un-allocated to individual
members 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 70, ensures that the account cannot be used for
payments 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 recognised in this account.

Individual capital

Individual capital is capital allocated to each owner
based on their delivered milk volume. Individual capital
consists of contributed individual capital, delivery-based
owner certificates and injected individual 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 contributed individual capital as part of the
annual profit appropriation are interest-bearing. The
account for proposed supplementary payment that will
be paid out following the approval of the annual report
is also classified as individual capital.

Other equity accounts

Other equity accounts include accounts prescribed
by IFRS. These include reserves for value adjustments
of hedging instruments, the reserve for fair value
adjustments of certain financial assets and the reserve
for foreign exchange adjustments.

69 ARLA FOODS ANNUAL REPORT 2019

Development in equity
(EURm)

2,900

2,800

2,700

2,600

2,500

2,400

2,300

2,200

323

-289

2,519

-24

-35

2,494

Equity including non-controlling
interests 1 January 2019

Proﬁt for the year

Supplementary payment
related to 2018

Other payments to owners

Other equity adjustments

Equity including non-controlling
interests 31 December 2019

EQUiTy (CONTiNUED)

Regulations according to Articles of Association and IFRS

Common capital
Recognised within the capital account are technical
items such as actuarial gains or losses on defined benefit
pension schemes, effects from disposals and acquisitions
of non-controlling interests in subsidiaries and exchange
rate differences in the equity instruments issued to
owners. Furthermore, the capital account is impacted by
agreed contributions from new owners of the coopera-
tive.

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 20.1(iii) of the articles of
association.

Equity instruments issued as contributed individual
capital relate to amounts transferred as part of the annual
profit appropriation. The individual balances carry interest
at CIBOR 12 months + 1.5 per cent that are approved and
paid out together with the supplementary payment in
connection with the annual profit appropriation.

Delivery-based owner certificates are equity instruments
issued to the original Danish and Swedish owners. Issue of
these instruments ceased in 2010.

Injected individual capital are equity instruments issued
in connection with cooperative mergers and when new
owners enter the company.

Balances on delivery-based owner certificates and
injected individual capital instruments carry no interest.

Individual capital
Individual capital instruments are regulated in article
20 of the articles of association and the general
membership terms.

Balances on contributed individual capital, delivery- based
owners certificates and on injected individual capital can
be paid out over three years upon termination of
membership to Arla Foods amba in accordance with
the articles of association, subject to the Board of
Representatives’ approval. Balances are denominated in
the currency relevant to the country in which owners are
registered. Foreign currency translation adjustments are
calculated annually; the effect 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.

Other equity accounts
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 where the hedged
transaction has not yet been realised.

Reserve for fair value adjustments through OCI
comprise of the fair value adjustments of mortgage
credit bonds classified as financial assets
measured at fair value though other comprehensive
income.

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 securing the group’s net
investment.

Non-impairment clause
Under the articles of association, no payment may be
made by Arla Foods amba to owners that impair the sum
of the capital account and equity accounts prescribed by
law and IFRS. The non-impairment clause is assessed on
the basis of the most recent annual report presented
under IFRS. Individual capital accounts and reserve for
special purposes are not covered by the non-impairment
clause.

Non-controlling interests
Subsidiaries are fully recognised in the consolidated
financial statements. Non-controlling interests’ share of
the results for the year and of the equity in subsidiaries
that are not wholly owned are recognised as part of the
consolidated results and equity, respectively, but are
listed separately.

On initial recognition, non-controlling 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 non-controlling interests
is selected on a transactional basis.

70 ARLA FOODS ANNUAL REPORT 2019

CASH FLOw

(EURm)

Note

2019

2018*

(EURm)

Note

2019

2018*

EBITDA
Reversal of share of results in joint ventures and associates
Change in net working capital
Change in other receivables and other current liabilities
Reversal of other operating items without cash impact
Dividends received, joint ventures and associates
Interest paid
Interest received
Taxes 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

Sale of financial assets
Acquisition of enterprises
Sale of enterprises
Financial investing activities

3.3
2.1

5.1

3.1
3.2
3.2

3.5
3.5

837
-34
79
-37
16
8
-69
3
-30
773

-52
-425
21
-456

37
-168
16
-115

767
-29
90
-73
-43
11
-46
1
-29
649

-55
-383
13
-425

44
-51
-
-7

Cash flow from investing activities

-571

-432

Financing
Supplementary payment regarding the previous financial year
Paid in and out from equity regarding individual capital instruments
Paid out to non-controlling interests
Loans obtained, net
Payment of lease debt
Payment to pension plans
Cash flow from financing activities

Net cash flow

Cash and cash equivalents at 1 January
Exchange rate adjustment of cash funds
Cash and cash equivalents at 31 December

Free operating cash flow
Cash flow from operating activities
Operating investing activities
Free operating cash flow

Free cash flow
Cash flow from operating activities
Cash flow from investing activities
Free cash flow

4.2.c
4.2.c
4.2.c

-289
-24
-15
295
-66
-37
-136

-121
-38
-
5
-
-37
-191

119
2
187

773
-456
317

773
-571
202

91
2
119

649
-425
224

649
-432
217

* Not restated following implementation of IFRS 16. See more details in note 5.6.

71 ARLA FOODS ANNUAL REPORT 2019

CASH FLOw (CONTiNUED)

Strong operational cash flow and increased investments

Development in cash ﬂow
(EURm)

Free operating cash flow is a measure of the amount of
cash generated by normal business operations. Cash
flow from operating activities improved by 19 per cent
to EUR 773 million compared with EUR 649 million last
year. Improved net working capital contributed with a
positive net cash release of EUR 79 million. In addition,
following transition to the new lease accounting
standard, IFRS 16, cash flow from operating activities
has increased EUR 66 million, which is due to the
reclassification of lease payments into depreciation and
interest. See note 5.6.

After operating investments of EUR 456 million, due to
higher CAPEX investments, compared with EUR 425
million last year, the free operating cash flow ended at
EUR 317 million.

Free cash flow is a measure of the amount of cash
generated after investing activities. As a result of our
investing activities, primarily related to the acquisition
of the cheese business in MENA from Mondelez
International, the free cash flow amounted to EUR
202 million.

Cash flow from financing activities was EUR -136
million. An extraordinary high supplementary payment
of EUR 289 million was made in relation to the 2018
profit allocation and further payments, representing
EUR 24 million in individual capital, was paid out to
owners who resigned or retired.

Combined cash and cash equivalents as at
31 December 2019 were EUR 187 million, compared
to EUR 119 million last year.

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,
changes in working capital items and other items
without cash impact.

1,200

1,000

800

600

400

200

72 ARLA FOODS ANNUAL REPORT 2019

-571

837

-313

192

-156

119

Cash 1 January 2019

EBITDA

Net working capital

Investing activities

Loans obtained including pensions
Supplementary payment related to 2018 and
payment related to individual capital instruments

187

Other

Cash 31 December 2019

INTRODUCTiON TO NOTES

The following sections provide additional disclosures supplementing the primary financial statements.

Basis for preparation
The annual report is based on the group’s
monthly reporting procedures. group entities
are required to report using standard
accounting principles in accordance with
the International Financial Reporting Standards
as adopted by EU (IFRS).

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, refer to note 5.6.

Alternative performance measures
The group discloses a number of key
performance indicators (KPIs) supplementing
the financial figures calculated and presented
in accordance with IFRS. Some of these are
classified as alternative performance measures
most importantly the performance price.

Refer to note 1.4 and the Glossary page
135-136 for more details on alternative
performance measures.

Applying materiality
When preparing the annual report, our focus is
on presenting information that is considered of
material importance for our stakeholders.

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, however, is not applied for items
where disclosures are required for control
purposes.

Currency exposure
The group’s financial position 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. Refer to Note 4.3.2
for more detail.

Significant accounting estimates
and assessments
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 estimates and judgements are performed
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. Refer to Note 1.1 for more detail.

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 goodwill
is allocated to activities in the UK. Given the
continued uncertainty of potential consequences
of Brexit, expected cash flows supporting the
carrying value of goodwill is inherently more
uncertain. Refer to Note 3.1.1 for more detail.

Assessing the level of influence
and classification of investments
The group have significant influence through
representation in COFCO Dairy Holdings Limited
and China Mengniu dairy company Limited.
Based on this, the investment is classified as an
associated company. Refer to Note 3.3 for more
detail.

Valuation of inventory
Estimates are applied in assessing net realisable
inventory values. 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. Refer to Note 2.1 for
more detail.

Valuation of pension plans
Judgements are applied when setting actuarial
assumptions such as the 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 ensure that they are set
consistently on an annual basis and in
compliance with best practice. Refer to Note 4.7
for more detail.

73 ARLA FOODS ANNUAL REPORT 2019

NOTE 1.1 REvENUE

Stronger sales in international growth markets and improved brand positions

Development in revenue
(EURm)

The revenue in international was positively affected
by acquisition of the cheese business in MENA from
Mondelez International and currency, primarily due to
the development in the USD.

Arla Foods Ingredients comprised 7.1 per cent of the total
revenue, compared to 6.3 percent last year. Revenue
increased due to more sales of value-added products
within the ingredients segment, higher prices and the
full-year effect from the acquisition of the remaining 50
per cent share of Arla Foods Ingredients S.A., Argentina
in 2018.

The trading and other segment represented 15.8 per
cent of the total revenue and decreased by 1.7 per cent
to EUR 1.662 million versus EUR 1,690 million last year.

M&A activities including purchase of the Kraft branded
cheese business in MENA and the divestment of the
remaining Allgäu-activities in Germany, both in 2019
combined with the full year effects from acquisitions
in 2018, contributed to a revenue increase of EUR 61
million.

Total revenue was positively affected by exchange rate
developments of EUR 57 million, driven primarily by USD.

Revenue increased by 1.0 per cent to EUR 10,527 million,
compared to EUR 10,425 million last year primarily due
to currencies and M&A activities. The underlying stable
revenue reflects stronger sales in the international
growth markets and more sales of branded products in
Europe offset by lower volumes in less profitable private
label business. Arla Foods Ingredients sales also grew at
near double-digit rates.

Revenue related to strategic branded volume grew by
5.1 per cent, compared to 3.1 per cent last year,
driven by Arla®, Lurpak®, Puck® and other supported
brands. Price levels decreased by 0.3 per cent for the
full year.

Europe is Arla’s largest commercial segment, comprising
60.3 per cent of total revenue, compared to 62.4 per
cent last year. The strategic branded revenue in Europe
grew 2.9 per cent with increases coming from all mar-
kets. Branded volumes grew to 53.0 per cent of revenue
compared to 50.4 per cent last year. Despite higher
branded volumes revenue in Europe decreased by EUR
154 million, driven by negative effects from lower pri-
vate lable volumes, and to a lesser extent by prices and
currencies. This development was partially offset by the
full year effect from acquisition of Yeo Valley Dairies Ltd,
UK, in 2018 and divestment of the remaining Allgäu-ac-
tivities in Germany.

The international segment accounted for 17.1 per cent
of total revenue, compared to 15.1 per cent last year.
The strategic branded revenue in international repre-
sented 82.7 per cent of revenue compared to 85.0 per
cent last year. The revenue in international increased by
EUR 226 million, driven primarily by higher volumes.

11,000

10,750

10,500

10,250

10,000

9,750

9,500

10,425

-26

10,527

2018

Sales prices

Volume/mix

M&A

Currency

2019

Revenue split by commercial segment,
2019

Revenue split by commercial segment,
2018

10,527

MILLION EUR

10,425

MILLION EUR

Europe 60%
International 17%
Arla Foods Ingredients 7%
Trading and other sales 16%

Europe 62%
International 15%
Arla Foods Ingredients 6%
Trading and other sales 17%

74 ARLA FOODS ANNUAL REPORT 2019

NOTE 1.1 REvENUE (CONTiNUED)

Table 1.1.a Revenue split by country
(EURm)

2019

2018

Share of revenue in 2019

Accounting policies

Uncertainties and estimates

United Kingdom
Sweden
Germany
Denmark
Netherlands
China
Finland
Saudi Arabia
Belgium
USA
Other*
Total

2,716
1,464
1,343
1,054
507
331
324
282
211
176
2,119
10,527

2,725
1,481
1,447
1,094
507
276
320
244
240
171
1,920
10,425

3%
3%
3%
2%
2%

26%

14%

13%

10%

19%

*Other countries include, amongst others, Oman, Canada, UAE, Spain, France, Australia

Table 1.1.a 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
23 to 28.

2019

2018

3,033
588
363
179
207
452
710
4,995
10,527

2,875
561
352
179
187
437
652
5,182
10,425

Table 1.1.b Revenue split by brand
(EURm)

Arla®**
Lurpak®**
Puck®**
Castello®**
Milk based beverage brands**
Other supported brands
Arla Foods Ingredients
Non-strategic brands and other
Total

**Included in strategic branded revenue

75 ARLA FOODS ANNUAL REPORT 2019

Revenue, net of rebates, is recognised when goods
are transferred to customers. Estimates are applied
when measuring accruals for rebates and other sales
incentives. The majority of rebates are calculated based
on terms agreed with the customer. For some customer
relationships, the final settlement of the rebate depends
on future sales volumes and prices, as well as other
incentives. Thus, there is an element of uncertainty in
estimating the exact value.

Since Arla’s main line of business is the sale of fresh
dairy products, returns of goods rarely occur and
therefore do not require specific accounting disclosure.

Based on current milk price, Arla contractually
secured approximately EUR 219 million revenue related
to raw milk sales for 2020 and approximately EUR 119
million for 2021 and later.

All revenue is derived from contracts with customers
through the production and transfer of dairy products
across various product categories and within several
geographical regions. Revenue per commercial
segment or market is based on the group’s internal
financial reporting practices.

Revenue is recognised in the income statement when
the performance obligation is satisfied, and when all
obligations stated in the contract are fulfilled. This
is defined as the point in time when control of the
products has been transferred to the buyer, the amount
of revenue can be measured reliably and collection is
probable. The transfer of control to customers takes
place according to trade agreement terms, i.e. the
Incoterms and can vary depending on the customer or
specific trade.

Revenue comprises invoiced sales for the year less
customer-specific payments, such as sales rebates,
cash discounts, listing fees, promotions, VAT and duties.
Contracts with customers can contain various types
of discounts. Historical experience is used to estimate
discounts, in order to correctly recognise revenue.

Furthermore, revenue is only recognised when it is highly
probable that a material reversal in the amount of
revenue will not occur. This is generally the case when
the control of the product is transferred to the customer
also taking into consideration the level of rebates.

The vast majority of all contracts have short payment
terms with an average of 35 days. Therefore, an
adjustment of the transaction price with regards to a
financing component in the contracts with customers
is not required.

Development in operational costs
(EURm)

10,500

10,250

10,000

9,750

9,500

10,125

-130

10,130

2018

Milk cost

Calcium and other changes
Volume mix/
in operational costs
Inventory revaluation

M&A

Currency

2019

NOTE 1.2 OPERATiONAL COSTS

Calcium deliver cost savings

Operational costs were EUR 10,130 million which is
broadly the same level as prior year.

Production costs decreased by 0.2 per cent to EUR
8,325 million from EUR 8,341 million last year.
Excluding costs relating to raw milk, production costs
decreased to EUR 3,499 million compared to EUR
3,534 million last year. Despite an increased focus on
sales of branded products, resulting in a volume/mix
effect of EUR 57 million in additonal cost, Calcium
initiatives led to savings within production. Refer to
pages 17-18 for more on Calcium. Due to increasing
milk prices, inventory increased by EUR 11 million
compared to last year. Finally production cost increased
by EUR 30 million due to M&A activities.

Sales and distribution costs increased 4.0 per cent to
EUR 1,416 million compared to EUR 1,362 million last
year, mainly due to higher transportation and salary
costs partly offset by lower marketing costs. Research
and development cost amounted to EUR 66 million,
compared to EUR 47 million last year. In addition EUR
13 million related to capitalised development activities.

Administration costs decreased 7.8 per cent to EUR 389
million compared to EUR 422 million last year, primarily
due to cost control and non-recurring one-offs in 2018.

Cost of raw milk
The cost of raw milk increased to EUR 4,826 million
compared to EUR 4,807 million. The increase was a
result of higher average pre-paid milk prices to owners
offset by lower volumes on other purchased milk.

Owner milk
Costs related to owner milk increased by EUR 32
million. Average pre-paid milk price increased costs by
EUR 54 million while slightly lower volumes decreased
costs by EUR 22 million.

Other milk
Costs of other milk decreased by EUR 13 million due to
lower volumes. Other milk consists of speciality milk
and other contract milk acquired to meet local market
demands.

Staff costs and FTE
Staff costs increased 2.4 per cent to EUR 1,276 million
compared to EUR 1,246 million last year. Staff costs
increased due to additional FTE’s from the acquisition of
new entities, insourcing of transportation activities,
inflation and due to new principles for vacation
allowance in Denmark.

Staff cost within production and sales and distribution
increased 2.7 per cent and 7.3 per cent respectively,
while staff cost in administration decreased by 6.1 per
cent. The total number of FTE’s decreased to 19,174
despite significant expansion and acquisitions in
International and Arla Foods Ingredients.

Marketing spend
Marketing spend decreased 4.9 per cent to EUR 250
million compared to EUR 263 million last year.
Continued focus on efficiency improvements enabled by
the Calcium transformation and efficiency programme
including insourcing and upscaling of “The Barn” our
in-house content studio, allowed us to reduce spend.
Major marketing achievements included the continued
vitalisation of the Arla brand through “Inner strength”,
the launch of Lurpak® Butterbox in the UK and reaching
the 500 million on digital engagement milestone one
year ahead of plan. Refer to page 22 for more detail.

Depreciation, amortisation and impairment
Depreciation, amortisation and impairment increased
18.7 per cent to EUR 431 million compared to EUR 363
million last year. This was primarily due to implementation
of the new lease accounting standard, IFRS 16, and
higher levels of CAPEX.

76 ARLA FOODS ANNUAL REPORT 2019

NOTE 1.2 OPERATiONAL COSTS (CONTiNUED)

Table 1.2.a Operational costs split by function and type
(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

2019

2018*

Table 1.2.b Weighed-in raw milk

2019

2018

8,325
1,416
389
10,130

8,341
1,362
422
10,125

Owner milk
Other milk
Total

4,826
1,911
1,276
570
250
431
866
10,130

4,807
1,945
1,246
560
263
363
941
10,125

Table 1.2.c Staff costs
(EURm)

Wages, salaries and remuneration
Pensions - defined contribution plans
Pensions - defined benefit plans
Other social security costs
Total staff costs

Weighed in
mkg
12,382
1,323
13,705

EURm

4,318
508
4,826

Weighed in
mkg
12,446
1,457
13,903

EURm

4,286
521
4,807

2019

2018

1,089
79
3
105
1,276

722
355
199
1,276

1,055
74
11
106
1,246

703
331
212
1,246

**Other production materials includes packaging, additives, consumables and changes in inventory
***Other costs mainly includes maintenance, utilities and IT

Cost split by type,
2019

Cost split by type,
2018

Staff costs relate to:
Production costs
Sales and distribution costs
Administration costs
Total staff costs

Average number of full-time employees

19,174

19,190

10,130

MILLION EUR

10,125

MILLION EUR

Table 1.2.d Depreciation, amortisation and impairment
(EURm)

Intangible assets, amortisation
Property, plant and equipment including right of use assets, depreciation
Total depreciation, amortisation and impairment

Weighed-in raw milk 48%
Other production materials* 19%
Staff costs 13%
Transportation costs 6%
Marketing costs 2%
Depreciation, amortisation and impairment 4%
Other costs** 8%

Weighed-in raw milk 47%
Other production materials* 20%
Staff costs 12%
Transportation costs 5%
Marketing costs 3%
Depreciation, amortisation and impairment 4%
Other costs** 9%

Depreciation, amortisation and impairment relate to:
Production costs
Sales and distribution costs
Administration costs
Total depreciation, amortisation and impairment

77 ARLA FOODS ANNUAL REPORT 2019

* Not restated following implementation of IFRS 16. See more details in note 5.6.

2019

2018*

64
367
431

310
74
47
431

57
306
363

277
40
46
363

NOTE 1.2 OPERATiONAL COSTS (CONTiNUED)

Accounting policies

Production costs
Production costs include direct and indirect costs
related to production including movements in volumes
on inventory and related inventory revaluation. Direct
costs comprise purchase of milk from owners, inbound
transportation costs, packaging, additives, consumables,
energy and variable salaries directly related to the
production. Indirect costs comprise other costs related
to the production of goods including depreciation
and impairment losses on production-related material
and other supply chain related costs. 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 relating to sales staff, the write-down of
receivables, sponsorship, research and development,
depreciation and impairment losses, are recognised as
sales and distribution costs. Sales and distribution costs
include marketing expenses relating to investment in
the group’s brands and comprise the development
of marketing campaigns, advertisement, exhibits,
sponsorships and others.

Administration costs
Administration costs relate to management and
administration, including administrative staff, office
premises and office costs, as well as depreciation
and impairment.

Table 1.3 Other operating income, net
(EURm)

Other operating income
Other operating costs

Specification:
Settlement of legal disputes
Revaluation gain from step acquisition of entities
Effect from hedging activities, net
Other items, net
Total other operating income, net

NOTE 1.4 PERFORMANCE PRiCE

2019

2018

39
-64
-25

-
-
-30
5
-25

118
-43
75

47
29
-5
4
75

NOTE 1.3 OTHER OPERATiNG iNCOME AND COSTS

Positive development in currencies
resulted in a negative hedging impact

Accounting policies

Net other operating costs amounted to EUR 25 million,
compared to a net other operating income of EUR 75
million last year. The decrease is attributable to negative
effects from hedging activities due to positive currency
developments, primarily in USD. In 2018 settlement of
disputes and recognition of a revaluation gain from step
acquisition of entities had a positive effect of EUR 76
million. Other items include the net result from the sale
of surplus energy and effects from other items not part
of the regular dairy activities.

Other operating income and costs consist of items
outside the regular course of dairy business activities. It
includes items such as gains and losses relating to the
settlement of disputes, revaluation gains from step
acquisition of entities, the net result from financial
hedging activities and the net result from the produc-
tion and sale of energy from our biogas plants. Further-
more, it includes gains and losses from the disposal of
fixed assets no longer used within our dairy operations.

78 ARLA FOODS ANNUAL REPORT 2019

Competitive performance price supported by Calcium savings

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

the milk volume weighed-in in 2019. The performance
price was 36.6 EUR-cent/kg owner milk, compared to
36.4 EUR-cent/kg owner milk last year.

Table 1.4 Performance price

EURm

2019
Volume
in mio. kg

EUR-cent/
kg

EURm

2018
Volume
in mio. kg

EUR-cent/
kg

Owner milk
Adjustment to standard milk
(4.2% fat, 3.4% protein)
Arla Foods amba's share of profit for the
year
Total

4,318

12,382

34.9

4,286

12,446

34.4

311

-0.8
2.5

290

-0.3
2.3

12,382

36.6

12,446

36.4

NOTE 2.1 NET wORkiNG CAPiTAL

Net working capital position improved

Net working capital decreased by EUR 71 million to
EUR 823 million, which represents an improvement of
7.9 per cent compared to last year. Adjusted for M&A
and currency effects the cash release from net working
capital was EUR 109 million. This positive development
was a result of Arla's continuous efforts towards
optimising net working capital, including initiatives such
as increased use of global procurement agreements,
improved payments terms, as well as utilization of
finance programmes with our customers and suppliers.
Overall the net working capital, measured in days on a
trailing 3-months basis, improved 1,8 days compared to
last year.

Excluding payables relating to owner milk, net working
capital decreased by EUR 103 million.

Inventory
Inventory increased by EUR 18 million to EUR 1,092
million, compared to EUR 1,074 million last year.
Excluding currency and M&A effects, inventory
decreased by EUR 13 million. A combination of
inventory management across the business and stable
milk prices resulted in inventory levels broadly in line
with last year.

Trade receivables
Trade receivables decreased by EUR 100 million to EUR
889 million, compared to EUR 989 million last year.
Excluding currency and M&A effects, trade receivables
decreased EUR 115 million. The decrease was driven by
utilization of customers offering of supply chain finance
programmes and customer factoring programs on
selected customers. The group utilised these
programmes to manage liquidity and to reduce the
credit risk on trade receivables.

Managing credit risk exposure on trade receivables is
guided by group-wide policies. Credit limits are set
based on the customer's financial position and current
market conditions. The customer portfolio is diversified

in terms of geography, industry sector and customer
size. In 2019, the group was not extraordinarily exposed
to credit risk related to significant individual customers,
but to the general credit risk in the retail sector. Read
more about credit risk in note 4.3.5.

Historically, amounts written off as irrecoverable were
relatively low, which was also the case in 2019. EUR 6
million was recognized in the income statement as a
loss arising on bad debt compared to EUR 2 million
last year.

Trade and other payables
Trade and other payables amounted to EUR 1,158
million, compared to EUR 1,169 million last year.
Continued utilisation of global contracts, focus on
payment terms and use of supply chain finance
programmes resulted in trade and other payables being
in line with last year.

A number of Arla’s strategic suppliers participates in
supply chain finance programmes, where the supply
chain finance provider and related financial institutions
act as a funding partner. When suppliers participate in
these programmes, the supplier has the option, at their
own discretion and flexibility, to receive early payment
from the funding partner based on invoices sent to Arla.
There is also a requirement that Arla has recognised
and approved delivery of the goods or services and
irrevocably accepted to pay the invoice at maturity date
via the funding partner. The arrangement of early
payment is an exclusive transaction between the
supplier and the supply chain finance provider.

The liability for Arla, represented by the invoice, is
recognised within trade and other payables until
maturity. The programme is one of many components
in the overall relationship between strategic suppliers
and Arla to improve the cash position for both parties.
Extended payment terms are not embedded in the
programmes themselves but agreed with vendors

79 ARLA FOODS ANNUAL REPORT 2019

directly. The liquidity risk for Arla by termination of
programmes is limited. The payment terms for suppliers
participating in the programmes are no more than 180
days. Utilisation of the supply chain finance pro-
grammes was at the same level as last year and had no
significant impact on the net working capital level
compared to last year.

Other receivables and other current liabilities
Other receivables decreased EUR 14 million to EUR 240
million compared to EUR 254 million last year. Other
receivables include, but are not limited to, VAT
receivables, deposits and subsidies.

Other current liabilities decreased EUR 38 million to
EUR 254 million compared to EUR 292 million last year.
Other current liabilities include HR related payables of
EUR 174 million.

Development in net working capital
(EURm)

950

900

850

800

750

700

894

-13

-115

823

-12

1 January 2019

Inventory

Trade receivables
Trade and other payables
excluding owner milk

Owner milk

M&A

Currency

31 December 2019

NOTE 2.1 NET wORkiNG CAPiTAL (CONTiNUED)

Net working capital
(EURm)

1,199

999

1,175

970

1,004

831

1,103

894

1,000

823

1,500

1,000

500

Table 2.1.b Inventory
(EURm)

Inventory before write-downs
Write-downs
Total inventory

Raw materials and consumables
Work in progress
Finished goods and goods for resale
Total inventory

2015

2016

2017

2018

2019

Table 2.1.c Trade receivables
(EURm)

Net working capital excluding payables related to owner milk
Net working capital

Trade receivables before provision for expected losses
Provision for expected losses
Total trade receivables

Table 2.1.d Trade receivables age profile
(EURm)

Table 2.1.a Net working capital
(EURm)

Inventory
Trade receivables
Trade and other payables
Net working capital

2019

2018

1.092
889
-1.158
823

1,074
989
-1,169
894

Not overdue
Overdue less than 30 days
Overdue between 30 & 89 days
Overdue more than 90 days
Total trade receivables

2019

2018

1.112
-20
1.092

279
339
474
1.092

1,099
-25
1,074

260
332
482
1,074

2019

2018

904
-15
889

1,000
-11
989

2019

2018

Gross
carrying
amount

Expected
loss rate

Gross
carrying
amount

Expected
loss rate

703
130
39
32
904

0%
0%
5%
41%

808
131
33
28
1,000

0%
0%
3%
29%

Historically, experienced loss rates on balances not due or less than 30 days are below 1 per cent.

80 ARLA FOODS ANNUAL REPORT 2019

NOTE 2.1 NET wORkiNG CAPiTAL (CONTiNUED)

Accounting policies

Uncertainties and estimates

Inventory
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 inventory marketability and an 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 expected losses in accordance with
the simplified approach for amounts considered

irrecoverable (amortised cost). Expected losses are
measured as the difference between the carrying
amount and the present value of anticipated cash flow.

Expected losses are assessed on major individual
receivables or in groups at a portfolio level, based on
the receivables' age and maturity profile as well as
historical records of losses. Calculated expected losses
are adjusted for specific significant negative
developments in geographical areas.

Trade and other payables
Trade payables are measured at amortised cost,
which usually corresponds to the invoiced amounts.

Other receivables and other current liabilities
Other receivables and other current liabilities are
measured at amortized cost usually corresponding
to the nominal amount.

Inventory
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 on European or global
commodity markets.

Receivables
Calculation of expected losses are based on a
mathematical computation, including several
parameters, for example, number of days overdue
adjusted for significant negative developments in
certain geographical areas.

The financial uncertainty associated with provision for
expected losses is usually considered to be limited.
However, if a customer’s ability to pay were to
deteriorate 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.

81 ARLA FOODS ANNUAL REPORT 2019

NOTE 3.1 INTANGiBLE ASSETS AND GOODwiLL

Intangible asset and goodwill increased due to acquisitions

Intangible assets and goodwill amounted to EUR 982
million, representing an increase of EUR 95 million
compared to last year.

Goodwill
The carrying value of goodwill amounted to EUR 700
million, compared to EUR 597 million last year. Goodwill
increased by EUR 80 million at aquistion date due to
the acquisition of the cheese business in MENA from
Mondelez International. Of the total carrying value of
goodwill, EUR 489 million related to activities in the UK,
compared to EUR 463 million last year. This increase in
goodwill was due to exchange rate adjustments. Refer
to Note 3.1.1 for more detail.

Licenses and trademarks
The carrying value of licences and trademarks
recognised amounted to EUR 90 million, compared
to EUR 96 million last year. The decrease was due to
amortisation of trademarks. Major brands include
Yeo Valley®, Anchor® and Hansano®..

The strategic brands, Arla®, Lurpak®, Castello® and
Puck®, are internally generated trademarks and
consequently no carrying value is recognised for these.
Arla has the license to manufacture, distribute, and
market StarbucksTM premium ready-to-drink coffee
beverage under a long-term strategic license agreement
which is not capitalised. After the acquisition from
Mondelez, Arla signed a long term license agreement to
manufacture, distribute and market Kraft branded
cheese products in the MENA region. No value was
recognised following this licensing agreement.

IT and other development projects
The carrying value of IT and other development
projects was EUR 192 million, compared to EUR 194
million last year. The group continued to invest in the
development of IT. In 2019 IT investments related to
support of promotion planning and a freight cost
management solution. Other capitalised development
costs include innovation activities and the development
of new products.

Intangible assets,
2019

Intangible assets,
2018

982

MILLION EUR

887

MILLION EUR

Goodwill 71%
Licences and trademarks 9%
IT and other development projects 20%

Goodwill 67%
Licences and trademarks 11%
IT and other development projects 22%

82 ARLA FOODS ANNUAL REPORT 2019

Table 3.1.a Intangible assets and goodwill
(EURm)

Goodwill

Licenses and
trademarks

IT and other
development
projects

2019
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

2018
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

598
25
-
80
-
-2
700
-1
-
-1
2
-
700

597
-8
-
9
-
-
598
-1
-
-
-
-1
597

170
3
-
-
-
-
173
-74
-1

-8
-83
90

99
-2
-
74
-1
-
170
-73
4
-5
-
-74
96

431
-
52
-
1
-12
472
-237
-
-55
12
-280
192

380
-2
55
-
4
-6
431
-191
-
-52
6
-237
194

Total

1.199
28
52
80
1
-14
1.345
-312
-1
-64
14
-363
982

1,076
-12
55
83
3
-6
1,199
-265
4
-57
6
-312
887

NOTE 3.1 INTANGiBLE ASSETS AND GOODwiLL (CONTiNUED)

Accounting policies

Note 3.1.1 Impairment test of goodwill

Goodwill supported by positive market development despite Brexit

Goodwill
Goodwill represents the premium paid by Arla 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-generating
units that follow the management structure and internal
financial reporting. Cash-generating units are the smallest
group of assets which can 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 or exploration phase
in carrying out general assessments of requirements 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.

Goodwill is allocated to relevant cash-generating units
primarily to our activities in the UK within the commer-
cial segment Europe.

Basis for impairment test and applied estimates
Impairment tests are based on expected future cash
flow derived from forecasts and targets supporting the
Good Growth strategy 2020. Revenue growth rates are
projected for individual markets, based on expected
developments as well as past experience. The impair-
ment tests do not include revenue growth in the
terminal value. A new strategy is expected to be
launched in early 2021, it is however not expected to
have any adverse impact on basis for the impairment
test.

Table 3.1.b Goodwill split by commercial segment and country
(EURm)

2019

2018

Procedure for impairment tests
Impairment tests of goodwill are based on an assess-
ment of their value in use. Milk costs are recognised at

Europe

Europe total
International

International total
Arla Foods Ingredients
Arla Foods Ingredients total
Total

UK
Finland
Sweden
Europe other

MENA
Russia

Agentina

489
40
21
59
609
80
2
82
9
9
700

463
40
23
60
586
-
2
2
9
9
597

Table 3.1.1 Impairment tests
(EURm)

2019
UK
Finland
Sweden
Europe other*
Arla Foods ingredients

2018
UK
Finland
Sweden
Europe other*

a milk price that corresponds to the price at the time
the test is performed. In the applied forecasts, the key
operational assumption is future profitability based on a
combination of the impact from moving milk intake into
value added products and more profitable markets.

Test results
Impairment testing showed that there was no need
for impairment in 2019. In this regard, sensitivities to
changes in milk prices and discount rates were calcu-
lated.

Continued uncertainties relating to potential conse-
quences of Brexit were reflected as risk adjusted cash
flow in the impairment test. The discount rate could rise
up to 4 percentage points, before goodwill in the UK
would be at risk of being impaired. Goodwill allocated to
other markets was tested applying similar assumptions.

Applied key assumptions

Discount rate,
net of tax

Discount rate,
before tax

7.0%
6.0%
6.3%
5.9%
7.0%

7.1%
6.3%
6.4%
6.3%

7.8%
6.7%
7.0%
6.6%
7.8%

8.7%
7.8%
8.2%
7.1%

83 ARLA FOODS ANNUAL REPORT 2019

*Europe other includes an immaterial amount of goodwill related to Russia

NOTE 3.1 INTANGiBLE ASSETS AND GOODwiLL (CONTiNUED)

Accounting policies

Uncertainties and estimates

Impairment occurs 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-gen-
erating unit) that are largely independent of the cash
inflows of other assets or cash-generating units. For
goodwill which does not generate largely independent
cash inflows, impairment tests are prepared at the level
where cash flows are considered to be generated
largely independently.

The group of cash-generating units is determined based
on the management structure and internal financial
reporting. Cash-generating units and their groupings are
reassessed each year. The carrying amount of goodwill
is tested for impairment together with 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 group of cash-generating units
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 impairment test of goodwill is performed for the
group of cash-generating units to which goodwill is
allocated. The group of cash-generating units is defined
based on the management structure for commercial
segments and is linked to individual markets. The
structure and groups of cash-generating units are
assessed on a yearly basis.

The recoverable amount of other non-current assets is
the higher value of the asset’s value-in-use and its
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 group of cash-generating units to 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 recognised can only be
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.

The impairment test of goodwill is performed at least
annually for each group of cash-generating units to
which goodwill is allocated.

To determine the value in use, the expected cash flow
approach is applied. 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 for 2020. To reflect
uncertainties following Brexit, the budget period for UK
has been prolonged to 2023. These are determined at
cash-generating units level in the forecast and target
planning process, and are based on external sources of
information and industry-relevant observations such as
macroeconomic and market conditions. All applied
assumptions are challenged through the forecast and
target planning process based on management’s best

estimates and expectations, which are judgmental by
nature. They include expectations during the strategy
period regarding revenue growth, EBIT margins and
capital expenditures. The assumptions include 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 and
assumes no nominal growth.

Following the Brexit process, expected cash flow
supporting the carrying value of goodwill in the UK is
inherently more uncertain. This was reflected in the
risk-adjusted cash flow used for the impairment test.
Refer to page 50 for more on Brexit.

Discounts rates
A discount rate, namely weighted average cost of
capital (WACC), is applied for 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.

84 ARLA FOODS ANNUAL REPORT 2019

NOTE 3.2 PROPERTy, PLANT, EQUiPMENT AND RiGHT OF USE ASSETS

Significant investments

Arla’s main tangible assets are located in Denmark, the
UK, Germany and Sweden. The carrying value increased
to EUR 2,710 million compared to EUR 2,308 million
last year. Adjusted for the effect of implementation of
IFRS 16, the increase amounted to EUR 203 million
driven by increased CAPEX investment levels and
acquisition of a cheese production facility in Bahrain
from Mondelez International.

CAPEX investments excluding new leases and extension
of existing leases increased 11.0 per cent to EUR 425
million compared to EUR 383 million last year. This
reflects significantly increased CAPEX investment levels
compared to previous years. Major investments in 2019
included an expansion of production facilities with a
particular focus on our ingredients business, investments
in powder capacity expansion as well as optimising
production capacity within the yoghurt and nutrition
categories..

Property, plant and equipment
by country, 2019

Property, plant and equipment
by country, 2018

2,710

MILLION EUR

2,308

MILLION EUR

Denmark 44%
Sweden 11%
UK 21%
Germany 13%
Other 11%

Denmark 44 %
Sweden 12%
UK 23%
Germany 12%
Other 9%

85 ARLA FOODS ANNUAL REPORT 2019

Table 3.2.a Property, plant and equipment
(EURm)

2019
Cost at 1 January
Change in accounting policies
Adjusted cost at 1 January
Exchange rate adjustments
Additions
Mergers and acquisitions
Transferred from assets in course of construction
Disposals
Cost at 31 December
Depreciation and impairments at 1 January
Exchange rate adjustments
Depreciation and impairments for the year
Depreciation on disposals
Reclassification
Depreciations and impairment at 31 December
Carrying amount at 31 December
Right of use assets included in the carrying amount

2018*
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 and impairments for the year
Depreciation on disposals
Depreciations and impairment at 31 December
Carrying amount at 31 December

Land
and
building

Plant
and
machinery

Fixture
and
fitting,
tools and
equipment

Asset in
course
of con-
struction

1,461
95
1,556
18
47
23
36
-14
1,666
-645
-4
-70
8
6
-705
961
109

1,442
-15
13
9
21
-9
-
1,461
-602
7
-53
3
-645
816

2,907
27
2,934
15
78
23
162
-60
3,152
-1,841
-7
-223
56
-6
-2,021
1,131
21

2,766
-29
73
-
103
-13
7
2,907
-1,658
17
-212
12
-1,841
1,066

552
77
629
10
45
2
22
-23
685
-415
-7
-74
22
-
-474
211
78

502
-1
8
34
20
-10
-1
552
-390
7
-41
9
-415
137

289
-
289
2
336
-
-220
-
407
-
-
-
-
-
-
407

152
-2
289
1
-144
-1
-6
289
-
-
-
-
-
289

Total

5,209
199
5,408
45
506
48
-
-97
5,910
-2,901
-18
-367
86
-
-3,200
2,710
208

4,862
-47
383
44
-
-33
-
5,209
-2,650
31
-306
24
-2,901
2,308

NOTE 3.2 PROPERTy, PLANT, EQUiPMENT AND RiGHT OF USE ASSETS (CONTiNUED)

Investments and depreciation property, plant and equipment and right of use assets
(EURm)

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-constructed assets, cost
comprises direct and indirect costs relating to materials,
components, payroll and the borrowing costs from
specific and general borrowing that directly concerns
the construction of assets. If significant parts of an item
of property, plant and equipment have different useful
lives, they are recognised as separate items (major com-
ponents) 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 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 accounting estimates, the effect
of which is adjusted only in current and future periods.
Depreciation is recognised in the income statement
within production costs, sales and distribution costs or
administration costs.

Uncertainties and estimates

Estimates are made in assessing the useful lives of items
of property, plant and equipment that determine the
period over which the depreciable amount of the asset
is expensed to the income statement. The depreciable
amount of an item of property, plant and equipment is a
function of the asset’s cost or carrying amount and its
residual value. Estimates are made in assessing the
amount that the group can recover at the end of the
useful life of an asset. An annual review is made with
respect to the appropriateness of the depreciation
method, useful life and residual values of items of
property, plant and equipment.

600

400

200

348

320

292

263

298

248

383

306

506

425

367
70

297

2015

2016

2017

2018

2019

Right of use assets
Depreciation property, plant and equipment
Investments property, plant and equipment

Table 3.2.b Estimated useful life in years
(EURm)

Office buildings
Production buildings
Technical facilities
Other fixtures and fittings, tools and equipment

86 ARLA FOODS ANNUAL REPORT 2019

2019

2018

50
20-30
5-20
3-7

NOTE 3.2 PROPERTy, PLANT, EQUiPMENT AND RiGHT OF USE ASSETS (CONTiNUED)

Note 3.2.1 Right of use assets

Accounting policies

Implementation of IFRS 16 leases

From 1 January 2019 all leases are recognised as right of
use assets with corresponding lease liabilities. Central
processes for capturing and handling leases have been
established and anchored across the group.

Arla leases various offices, warehouses, equipment, trucks
and cars. Lease contracts are typically agreed for a fixed
duration but may have an option to extend at a future
date. Significant right of use assets are office buildings
and warehouses in Denmark, Germany, Sweden and UK
with remaining useful lives between 10 and 20 years.
Filling machinery and other technical facilities represent
another major right of use asset category. Filling
machines typically have useful lives of 7 years, whereas
other technical facilities are depreciated between 1 to
7 years. Cars and trucks have on average useful lives of
4 and 5 years respectively. In total the group has
approximately 4,000 lease contracts.

Additions on right of use assets during the year
amounted to EUR 81 million. Extension of the lease
period for an office building in Viby, Denmark and a new
office lease in Stockholm, Sweden were the main drivers.
The total carrying amount of right of use assets was EUR
208 million as specified in table 3.2.1.a. Lease liabilities
are specified in note 4.3.

Total cash outflow from right of use assets amounted to
EUR 116 million. This comprised, lease debt payments of
EUR 66 million, non-capitalised short-term and low value
lease costs of EUR 43 million and interest expenses on
lease liabilities of EUR 7 million.

Table 3.2.1.a Right of use assets
(EURm)

2019
Change of accounting policy
Additions
Depreciation and impairment for the year
Carrying amount at 31 December

Land and
building

Plant and
machinery

Fixture
and fitting,
tools and
equipment

Total

95
38
-22
109

27
7
-13
21

77 199
36 81
-35 -70
78 208

Lease contracts are typically agreed for a fixed duration,
but may have an option to extend at a future date.

The corresponding right of use asset is measured at
cost comprising the following:

Until 2018, leases of property, plant and equipment
were classified as either finance or operating leases.
Payments made under operating leases (net of any
incentives received from the lessor) were charged to
profit or loss on a straight-line basis over the period of
the lease. From 1 January 2019, all leases are recognised
as a right of use asset and a corresponding liability at
the date at which the leased asset is available for use
by the group.

A lease liability is initially measured on a present value
basis, which comprises the net present value of the
following:

fixed lease payments (including in-substance fixed
payments), less any lease incentives receivable
variable lease payment based on an index or a rate
amounts expected to be payable by the group under
residual value guarantees
the exercise price of a purchase option if the group is
reasonably certain to exercise that option, and
payments of penalties for terminating the lease, if the
group is reasonably certain to exercise that exit option

The lease payments are discounted using an incremental
borrowing rate, being the rate that the Group would
have to pay to borrow the funds necessary to obtain an
asset of similar value in a similar economic environment
with similar terms and conditions.

the amount of the initial measurement of the lease
liability
any lease payments made at or before the com-
mencement date less any lease incentives received
any initial direct costs, and
restoration costs

The right of use asset is subsequently depreciated over
the shorter of the asset's useful life and the lease term
on a straight-line basis. In addition, the value of the right
of use asset is adjusted for certain remeasurements of
the lease liability.

Each lease payment comprises a reduction of the lease
liability and a finance cost. The finance cost is charged
to profit or loss over the lease period to produce a
constant periodic rate of interest on the remaining
balance of the liability for each period.

Short-term leases and leases of low-value assets are
recognised as an expense in the income statement.
Short-term leases are those with a lease term of less
than 1 year. Leases of low-value assets are those with
an underlying asset value less than EUR 5 thousand.

Uncertainties and estimates

The group has applied estimates and judgements with
impact on the recognition and measurement of right of
use assets and lease liabilities. This includes assessment
of the incremental borrowing rate, service components
and facts and circumstances that could create an
economic incentive to utilise extension options of lease
arrangements.

87 ARLA FOODS ANNUAL REPORT 2019

NOTE 3.3 JOiNT vENTURES AND ASSOCiATES

Financial comments

The share of result in joint ventures and associates
increased 17 per cent to EUR 34 million compared to
EUR 29 million last year, mainly recognised results from
our investments in Mengniu and Lantbrukarnas
Riksförbund (LRF).

COFCO Dairy Holdings Limited (COFCO) and China
Mengniu Dairy company Limited (Mengniu)
The group’s proportionate share of the net asset value
of COFCO including the investment in Mengniu is EUR
340 million, compared to EUR 311 million last year. The
carrying amount of the investment in COFCO includes
goodwill amounting to EUR 151 million, compared to
EUR 146 million last year driven by the development in
USD and CNY.

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, the 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 no indication
of impairment.

Mengniu reported a group revenue of EUR 8,832
million and a result of EUR 410 million in 2018.
Consolidated figures are not available for the COFCO
group. See table 3.3.b for more details on COFCO.

The fair value of the indirect share in Mengniu equals EUR
755 million, compared to EUR 567 million last year based
on the official listed share price at 31 December 2019.

The investment in COFCO is part of the China business
unit and is currently managed in China, along with sales

Joint ventures
The carrying value of joint ventures increased to EUR
38 million compared to EUR 32 million last year. The
value primarily relate to the German joint ventures
Biolac and ArNoCo. The carrying value does not include
goodwill.

Recognised value of associates and
joint ventures, 2019

Recognised value of associates and
joint ventures, 2018

468

MILLION EUR

439

MILLION EUR

Share of equity in COFCO/Mengniu 41%
Goodwill in COFCO/Mengniu 32%
Share of equity in immaterial associates 19%
Share of equity in immaterial joint ventures 8%

Share of equity in COFCO/Mengniu 38%
Goodwill in COFCO/Mengniu 33%
Share of equity in immaterial associates 22%
Share of equity in immaterial joint ventures 7%

88 ARLA FOODS ANNUAL REPORT 2019

Table 3.3.a Associates and Joint ventures
Value of associates and joint ventures
(EURm)

Share of equity in COFCO/Mengniu
Goodwill in COFCO/Mengniu
Share of equity in other associates
Recognised value of associates

Share of equity in other joint ventures
Recognised value of associates and joint ventures

Table 3.3.b Material associates
Financial information for associates that are considered material to the Group*
(EURm)

Revenue
Results after tax
Non-current assets
Dividends received
Ownership share
Group share of result after tax
Recognised value

COFCO has no other significant assets or liabilities *Based on latest available financial reporting

Table 3.3.c Transactions with associates and joint ventures
(EURm)

Sale of goods to associates and joint ventures
Purchase of goods from joint ventures and associates
Trade receivables associates and joint ventures*
Trade payables associates and joint ventures*

* Included in other receivables and other payables

2019

2018

189
151
90
430

38
468

165
146
96
407

32
439

COFCO
Dairy
Holdings
Limited

2019

2018

11
11
683
5
30%
28
340

5
5
683
3
30%
19
311

2019

2018

55
65
10
-10

41
62
12
-2

NOTE 3.3 JOiNT vENTURES AND ASSOCiATES (CONTiNUED)

Accounting policies

Investments where 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 deducted. Dividends
received from associates and joint ventures reduce the
value of the investment.

For investments held in listed companies, computation
of Arla'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 zero.
If Arla 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.

89 ARLA FOODS ANNUAL REPORT 2019

Where the equity-accounted investment is considered
to be an integral part of a cash generating unit (CGU),
the impairment test is performed at the CGU level, using
expected future net cash flow of the CGU. An impairment
loss is recognised when the recoverable amount of the
equity-accounted investment (or CGU) becomes lower
than the carrying amount. The recoverable amount is
defined as the higher of value in use, and fair value less
costs to sell, of the equity-accounted investment (or
CGU).

Uncertainties and estimates

Significant influence is defined as the power to
participate in 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.

COFCO and 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 these
underlying agreements, it is our assessment that Arla
has significant influence in Mengniu.

Lantbrukarnas Riksforbund, 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,
owner representation on the Board of Directors.
Furthermore, 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.

NOTE 3.4 PROviSiONS

Provisions

Uncertainties and estimates

Provisions amounted to EUR 32 million in 2019,
compared to EUR 28 million last year. Provisions
primarily relate 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
during the year. The general provision for occupational
injuries of EUR 9 million is recorded as a long-term
provision.

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.

NOTE 3.5 PURCHASE AND SALE OF BUSiNESS OR ACTiviTiES

Acquisitions and divestments

Accounting policies

Acquisitions during 2019
In May 2019 Arla acquired the operations of the cheese
business in MENA from Mondeléz International
including production facilities in Bahrain and related
working capital items. The acquisition was in line with
the strategy to expand branded cheese production in
the MENA region and to improve overall efficiency in
the group's supply chain.

The fair value of the net assets acquired was EUR 66
million and consisted of production facilities and
inventories. Goodwill totalled EUR 80 million and
presents the benefit of access to production facilities in
Bahrain, a location well-positioned to support our
strategic ambition in MENA and the posibility to further
optimise Arla's supply chain structure.

In 2019 the revenue contribution from the Mondeléz
acquisition was EUR 51 million.

Divestments during 2019
In March 2019 Arla divested both its minority interests
in NGF Nature Energy Videbæk A/S, Denmark and
Martin Sengele Produits Laitiers SAS, France (the Allgäu
business), for total proceeds of EUR 16 million.

Acquisitions during 2018
In 2018 Arla acquired the remaining 50 per cent of the
shares in the joint venture, Arla Foods Ingredients S.A.,
Argentina, 100 per cent of the shares in Yeo Valley
Dairies Ltd, UK, and gained control in Swedish Mjölk
Ekonomisk förening.

The total purchase price for these transactions was EUR
127 million, of which EUR 51 million was paid in 2018
and another EUR 22 million was paid in 2019. Net
assets acquired amounted to EUR 118 million, resulting
in additions to goodwill of EUR 9 million.

Table 3.5.a Mergers and acquisitions
(EURm)

Intangible assets
Property, plant and equipment
Inventory
Other assets
Liabilities
Total net assets acquired
Goodwill
Purchase price, net
Cash in acquired company
Fair value of previous held investments
Fair value of non-controlling interests
Deferred payment
Cash payment during the year

90 ARLA FOODS ANNUAL REPORT 2019

2019

2018

0
48
18
0
0
66
80
146
0
0
0
22
168

74
44
12
36
-48
118
9
127
16
-57
-13
-22
51

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
considerations 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 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.

In a business combination achieved in stages (step
acquisition), the shareholding held immediately before
the step acquisition where control is gained is
remeasured at fair value at the acquisition date. Any
gains or losses arising from such remeasurement are
recognised in the income statement. The total fair value
of the shareholding held immediately after the step
acquisition is estimated and recognised as the cost of
the total shareholding in the company.

Goodwill arises when the aggregate of the fair value of
consideration transferred, previously held interest and
the value assigned to non-controlling interest holders
exceeds the fair value of the identifiable net assets of
the acquired company. Any identified goodwill is not
subject to amortization, but 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 when fair values of
the assets are transferred and equity instruments are
issued. Positive differences between the consideration
and fair value are recognised as goodwill.

Divestment
Changes in the group’s interest in a subsidiary that do
not result in a loss of control are recognised as equity
transactions.

Enterprises divested are recognised in the consolidated
income statement up to the date of disposal. Compara-
tive figures are not restated to reflect disposals. Gains 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.

Uncertainties and estimates

To determine the classification of investments, an
assessment of the level of influence is required.
Judgement is necessary to determine whether the
group actually has control of a company, and then
timing considerations are needed as from when this
should be effective.

For acquisitions where the group acquires control of the
company in question, the purchase method is applied.
However, there can be uncertainty regarding the
identification of assets, liabilities and contingent
liabilities, as well as measuring the fair value of the
company at the time of acquisition.

NOTE 4.1 FiNANCiAL iTEMS

Net interest bearing debt development increased interest cost

Accounting policies

Capitalisation of interest was performed by using an
interest rate, matching the group's average external
interest rate in 2019. Financial income and costs
relating to financial assets and financial liabilities were
recognised using the effective interest method.

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 are included. Borrowing costs from general
borrowing, or loans that directly relate to the acquisi-
tion, construction or development of qualified assets
are attributed to the cost of such assets and are
therefore not included in financial cost.

Net financial costs decreased by EUR 3 million, to EUR
59 million mainly due to fair value adjustments, which
were partly offset by higher interest cost.

Net interest costs amounted to EUR 70 million,
representing an increase of EUR 8 million compared
to last year due to a higher average level of net
interest- bearing debt driven by the implementation of

new lease accounting standard IFRS 16 and investments.
The average interest cost, excluding pension liabilities,
was 3.0 per cent compared to 2.6 per cent last year.
Interest cover decreased to 12.0 per cent compared to
14.8 per cent last year.

Exchange rate losses were at the same level as last year.

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, net
Total financial costs

Net financial costs

2019

2018*

3
7
10

-69
-3
-4
8
-1
-69

-59

1
1
2

-57
-3
-6
6
-4
-64

-62

* Not restated following implementation of IFRS 16. See more details in note 5.6.

91 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.2 NET iNTEREST-BEARiNG DEBT

Increased net interest-bearing debt

Net interest-bearing debt
(EURm)

Net interest-bearing debt, excluding pension liabilities,
increased to EUR 2,113 million compared to EUR
1,647 million last year. The increase was driven by the
implementation of IFRS 16 (EUR 213 million), historical
high capital expenditure, acquisitions and the
extraordinary supplementary payment to farmer
owners of EUR 289 million related to 2018. Cash flow
from operating activities improved in 2019.

maturities to secure broad access to funding and to
ensure that the group is independent of one single
funding partner or one single market. All funding
opportunities are benchmarked 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
individual loans.

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 2019.

During 2019 the group raised the following mix of
funding:

A new five-year bond issue totaling SEK 1.5 billion
(EUR 143 million), to refinance a SEK 1.5 billion bond
issue that matured in 2019
A EUR 160 million mortgage loan
A EUR 100 million term loan
Arla has a commercial paper program in Sweden
denominated in SEK and EUR. The average utilization
in 2019 was EUR 209 million
During the year, Arla entered into sale and repur-
chase arrangements based on its holdings in listed
AAA-rated Danish mortgage bonds. Refer to Note 4.6
for more detail.

Pension liabilities increased by EUR 29 million to EUR
249 million mainly due to lower interest rate levels and
currency effects. As a result, net interest-bearing debt,
including pension liabilities, amount to EUR 2,362
million compared to EUR 1,867 million last year. The UK
pension scheme net asset was EUR 16 million at the
end of 2019. This asset was not included in the
calculation of net interest-bearing debt and leverage.

Arla's leverage ratio was 2.8, an increase of 0.4
compared to last year. This was solidly within the
long-term target range of 2.8 to 3.4, underpinning a
strong financial position.

The average maturity of interest-bearing borrowings
decreased by 0.4 years to 5.2 years. Average maturity is
impacted by a lapse of time to maturity, refinancing or
obtaining new committed facilities including bond
issues, and the level of net interest- bearing debt.

The equity ratio decreased to 34 per cent, compared to
37 per cent last year.

Funding
The group applies a diversified funding strategy 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

92 ARLA FOODS ANNUAL REPORT 2019

Net interest-bearing debt consists of current and
non-current liabilities, less interest-bearing assets.
The definition of leverage is the ratio between net
interest-bearing debt including pension liabilities
and EBITDA, and expresses the group's capacity to
service the debt. The group's long-term target
range for leverage is between 2.8 and 3.4. Leverage
in 2016 was extraordinarily affected by the
divestment of Rynkeby. Adjusted for this leverage
would have been 2.8.

Leverage

2.8

2018: 2.4

3,000

2,500

2,000

1,500

1,000

500

2
9
4

2
4
9

3
6
9

2
7
7

2
2
0

2
2
0
3

2015

1
6
4
8

2016

1
6
3
6

2017

1
6
4
7

2018

2
1
1
3

2019

Leverage
Pension liabilities
Net interest-bearing debt excluding pension liabilities
Target range leverage 2.8 - 3.4

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

* Not restated following implementation of IFRS 16. See more details in note 5.6.

2019

2018*

-622
-5
1,951
789
2,113
249
2,362

-584
-10
1,369
872
1,647
220
1,867

NOTE 4.2 NET iNTEREST-BEARiNG DEBT (CONTiNUED)

Table 4.2.b Borrowings
(EURm)

Long-term borrowings:
Issued bonds
Mortgage credit institutions
Bank borrowings
Lease liabilities
Total long-term borrowings

Short-term borrowings:
Issued bonds
Commercial papers
Bank borrowings
Lease liabilities
Other current interest-bearing liabilities
Total short-term borrowings

Total interest-bearing borrowings

* Not restated following implementation of IFRS 16. See more details in note 5.6.

93 ARLA FOODS ANNUAL REPORT 2019

2019

2018*

Table 4.2.c Cash flow, net interest-bearing debt
(EURm)

382
957
458
154
1,951

244
796
329
-
1,369

-
192
525
59
13
789

146
112
600
2
12
872

2,740

2,241

Cash flow

Non-cash changes

Included in
financing
activities

1 January

Acqui-
sitions and

additions Reclasses

Foreign
exchange
move-
ments

Fair value
changes

31
December

2019
Pension liabilities
Long-term borrowings
Short-term borrowings
Total interest-bearing debt

UK pension assets
Securities and other
Interest-bearing assets
Cash
Net interest-bearing debt

224
1,510
930
2,664

-4

-475
-119
2,066

-10
408
-179
219

-27

37
-66
163

-
57
-
57

-
-
57

-1
-38
38
-1

-3
-
12

-5
-8
-
-13

-2

1
-2
-16

41
22
-
63

-
-
80

249
1,951
789
2,989

-440
-187
2,362

Long- and short-term borrowing payments totalling EUR 229 million (EUR 408 million and EUR -179 million respectively)
equals net impact of cash flow received from new loans, EUR 295 million, and cash payments related to lease arrangements
EUR -66 million.

2018*
Pension liabilities
Long-term borrowings
Short-term borrowings
Total interest-bearing debt

Pension assets
Securities and other
Interest-bearing assets
Cash
Net interest-bearing debt

277
1,206
1,040
2,523

-519
-91
1,913

-37
247*
-242*
-32

42
-26
-16

1
6
-
7

-
-22
-15

-1
-78
77
-2

-4

1
22
17

-7
3
-3
-7

1
-2
-8

-9
-15
-
-24

-
-
-24

224
1,369
872
2,465

-4

-475
-119
1,867

Long- and short-term borrowings payments totalling EUR 5 million (EUR 247 million and EUR -242 million respectively)
can be reconciled to the cash flow statement, Loans obtained, net EUR 5 million.

NOTE 4.2 NET iNTEREST-BEARiNG DEBT (CONTiNUED)

Maturity of net interest-bearing debt excluding
pension liabilities at December 2019
(EURm)

Maturity of net interest-bearing debt excluding
pension liabilities at December 2018
(EURm)

Interest proﬁle for net interest-bearing debt
excluding pension liabilities at 31 December 2019
(EURm)

Interest proﬁle for net interest-bearing debt
excluding pension liabilities at 31 December 2018
(EURm)

600

500

400

300

200

100

600

500

400

300

200

100

2,400

1,800

1,200

600

2,400

1,800

1,200

600

0-1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y 7-10Y >10Y

10Y

Unused committed facilities

Debt

Floating

Fixed via swap

Fixed debt

Table 4.2.d Net interest-bearing debt excluding pension liabilities and the effect of hedging, maturity
(EURm)

2019
DKK
SEK
EUR
GBP
Other
Total

2018
DKK
SEK
EUR
GBP
Other
Total

Total
809
612
451
158
83
2,113

Total
769
525
271
9
73
1,647

2020
-27
200
19
10
-43
159

2019
-12
277
53
1
-41
278

2021
22
102
29
10
5
168

2020
2
4
90
3
3
102

2022
21
6
12
124
4
167

2021
18
98
6
2
3
127

2023
19
148
106
3
3
279

2022
21
-
3
3
-
27

2024
17
147
103
2
113
382

2023
20
146
100
-
-
266

2025
89
1
2
2
1
95

2024
20
-
-
-
108
128

2027-
2029
183
4
6
2
-
195

2026-
2028
185
-
4
-
-
189

2026
52
1
1
2
-
56

2025
25
-
-
-
-
25

After
2029
433
3
173
3
-
612

After
2028
490
-
15
-
-
505

94 ARLA FOODS ANNUAL REPORT 2019

Table 4.2.e Currency profile of net interest-bearing debt excluding pension liabilities
(EURm)
Disclosed before and after the effect of derivative financial instruments

2019
DKK
SEK
EUR
GBP
Other
Total

2018
DKK
SEK
EUR
GBP
Other
Total

Original
principal
809
612
451
158
83
2,113

Effect
of swap
-
-566
334
232
-
-

769
525
271
9
73
1,647

-
-487
341
146
-
-

After
swap
809
46
785
390
83
2,113

769
38
612
155
73
1,647

NOTE 4.2 NET iNTEREST-BEARiNG DEBT (CONTiNUED)

Table 4.2.f Interest rate risk excluding effect of hedging
(EURm)

Interest
rate

Average
interest
rate

Fixed
for

Carrying
amount

Interest
rate risk

Interest
rate

Average
interest
rate

Fixed
for

Carrying
amount

Interest
rate risk

2019
Issued bonds:
SEK 500m maturing 31.05.2021
SEK 750m maturing 03.07.2023
SEK 750m maturing 03.04.2024
SEK 500m maturing 31.05.2021
SEK 750m maturing 03.07.2023
SEK 750m maturing 03.04.2024
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:
Lease liabilities
Other borrowings
Total other borrowings

Fixed
Fixed
Fixed
Floating
Floating
Floating
Fixed

Fixed
Floating

1.88%
1.51%
1.58%
1.76%
1.11%
0.88%
0.32%
1.04%

0.82%
0.56%
0.58%

1-2 years
3-4 years
4-5 years
0-1 years
0-1 years
0-1 years
0-1 years

1-2 years
0-1 years

Fixed
Floating

-0.39%
0.79%
0.27%

0-1 years
0-1 years

Fixed
Floating

3.16% 0-20 years
3.59%
0-1 years
3.18%

Fair value
Fair value
Fair value
Cash flow
Cash flow
Cash flow
Fair value

Fair value
Cash flow

Cash flow
Cash flow

48
72
71
48
71
72
192
574

78
879
957

431
552
983

213
13
226

2018*
Issued bonds:
SEK 800m maturing 28.05.2019
SEK 500m maturing 31.05.2021
SEK 750m maturing 03.07.2023
SEK 700m maturing 28.05.2019
SEK 500m maturing 31.05.2021
SEK 750m maturing 03.07.2023
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

Floating
Floating

2.63%
1.88%
1.51%
0.74%
1.31%
0.51%
-0.08%
1.09%

1,15%
0.65%
0.68%

-0.44%
1.25%
0.41%

2.15%
3.39%
3.21%

0-1 years
2-3 years
4-5 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

Fair value
Fair value
Fair value
Cash flow
Cash flow
Cash flow
Fair value

Fair value
Cash flow

Cash flow
Cash flow

78
49
74
68
48
73
112
502

44
752
796

460
469
929

2
12
14

* Not restated following implementation of IFRS 16. See more details in note 5.6.

95 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.2 NET iNTEREST-BEARiNG DEBT (CONTiNUED)

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.

The classification of financial assets at initial recognition
depends on the financial asset's contractual cash flow
characteristics and how these are managed.

Financial assets where the group intends to collect the
contractual cashflow are classified and measured at
amortised cost.

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.

Financial assets that are part of liquidity management are
classified and measured at fair value through other
comprehensive income. All other financial assets are
classified and measured at fair value through the income
statement.

Financial assets
Financial assets are classified at initial recognition and
subsequently measured at: amortised cost, fair value
through other comprehensive income or fair value
through the income statement.

Financial assets measured at amortised cost
Financial assets measured at amortised cost 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 an insignificant risk
of change in value and can be readily converted to cash
or cash equivalents.

Financial assets measured at fair value
through other comprehensive income
Financial assets measured at fair value through other
comprehensive income consist of mortgage credit
bonds, which correspond in part to raised mortgage debt.

They are measured on first-time recognition at fair value
plus transaction costs. The financial assets are subse-
quently measured at fair value with adjustments made in
other comprehensive income and accumulated in the
fair value reserve in equity.

Interest income, impairment and foreign currency
translation adjustments of debt instruments are
recognised in the income statement on a continuous
basis, under financial income and financial costs. In
connection with the sale of financial assets classified at
fair value through other comprehensive income,
accumulated gains or losses, previously recognised in
the fair value reserve, are recycled to financial income
and financial costs.

Financial assets measured at fair value
through profit or loss
Securities classified at fair value through the income
statement, consist primarily of listed securities, which are
monitored, measured and reported continuously, in
accordance with the group's treasury and funding policy.
Changes in fair value are recognised in the income
statement under financial income and financial costs.

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 loan proceeds and the
nominal value recognised in the income statement over
the expected life of the loan.

Capitalised residual lease obligations related to lease
agreements are recognised under liabilities, measured at
amortised cost. Other financial liabilities are measured at
amortised cost. For details on pension liabilities, refer to
Note 4.7.

96 ARLA FOODS ANNUAL REPORT 2019

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 an appropriate financial risk manage-
ment approach in place 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 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.

The Board of Directors receives a report on the group's
financial risk exposure on a monthly basis. Hedging the
volatility of milk prices is not within the scope of financial
risk management, but is an inherent component of the
group's business model.

Note 4.3.1 Liquidity risk

Adequate liquidity reserves

Liquidity reserves remained at the samel level as last
year. Ensuring availability of sufficient operating liquidity
and credit facilities for operations is the primary goal of
managing liquidity risk. Inspired by the liquidity models
suggested by the rating agencies, Arla's liquidity reserves
have been assessed as adequate for the coming 12
months.

Supply chain finance programmes and factoring
relating to customers form part of the group's liquidity
management.

Selected suppliers have access to the group's supply
chain finance facilities, which allows those suppliers to
benefit from the group's credit profile.

More than 95 per cent of the day-to-day liquidity flow of
the group is managed by the treasury department and
the internal bank, via cash pooling arrangements. This
secures a scalable and efficient operating model. As a
result, the group has been able to achieve a cost-efficient
utilisation of credit facilities.

Table 4.3.1.a Liquidity reserves
(EURm)

Cash and cash equivalents
Securities (free cash flow)
Unutilised committed loan facilities
Unutilised other loan facilities
Total

2019

2018

187
6
355
97
645

119
7
434
86
646

Liquidity reserves,
2019

Liquidity reserves,
2018

645

MILLION EUR

646

MILLION EUR

Cash and cash equivalents 29%
Securities (free cash flow) 1%
Unutilised committed loan facilities 55%
Unutilised other loan facilities 15%

Cash and cash equivalents 19 %
Securities (free cash flow) 1%
Unutilised committed loan facilities 67%
Unutilised other loan facilities 13%

97 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.3 FiNANCiAL RiSkS (CONTiNUED)

Table 4.3.1.b Contractual expected non-discounted cashflow on gross financial liabilities
(EURm)

2019
Issued bonds
Mortgage credit institutions
Credit institutions
Lease liabilities
Other non-current liabilities
Interest expense - interest bearing debt
Trade and other payables
Derivative instruments
Total

2018*
Issued bonds
Mortgage credit institutions
Credit institutions
Finance lease liabilities
Other non-current liabilities
Interest expense - interest bearing debt
Trade and other payables
Derivative instruments
Total

Carrying
amount

382
957
1,175
213
13
-
1,158
86
3,984

Carrying
amount

390
796
1,041
3
13
-
1,169
85
3,497

Non-discounted contractual cash flow

Total

2020

2021

2022

2023

2024

2025

2026

2027-2029

After 2029

382
976
1,176
213
13
110
1,158
86
4,114

-
1
717
62
13
13
1,158
40
2,004

96
9
21
42
-
11
-
12
191

-
12
125
31
-
10
-
10
188

143
12
101
23
-
9
-
9
297

143
12
212
15
-
6
-
3
391

-
87
-
8
-
5
-
1
101

-
50
-
6
-
5
-
1
62

-
183
-
13
-
15
-
2
213

-
610
-
13
-
36
-
8
667

Non-discounted contractual cash flow

Total

2019

2020

2021

2022

2023

2024

2025

2026-2028

After 2028

390
808
1,042
3
13
107
1,169
85
3,617

146
-
715
2
13
11
1,169
32
2,088

-
1
99
1
-
10
-
11
122

98
17
13
-
-
9
-
9
146

-
20
7
-
-
8
-
8
43

146
20
100
-
-
7
-
6
279

-
20
108
-
-
5
-
2
135

-
51
-
-
-
5
-
1
57

-
167
-
-
-
15
-
4
186

-
512
-
-
-
37
-
12
561

Contractual 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.

* Not restated following implementation of IFRS 16. See more details in note 5.6.

98 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.3 FiNANCiAL RiSkS (CONTiNUED)

Risk mitigation

Risk
Liquidity and funding are vital for the group to be able
to pay its financial liabilities as they become due. It also
impacts our ability to attract new funding in the longer
term and is crucial to fulfilling 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

Average maturity, gross debt
Maturity < 1 year, net debt
Maturity > 2 year, net debt

2019

2018

Minimum

Maximum

Policy

5.2 years
0%
93%

5.6 years
-
92%

2 years
-
50%

-
25%
-

How we act and operate
In addition to the treasury and funding policy, the
Board of Directors have approved a long-term financing
strategy, which defines the direction for financing of the
Group. This includes 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.

reporting in currencies other than EUR. The group is mainly
exposed to translation of entities reporting in GBP, DKK,
SEK, CNY and USD. Due to translation effects, revenue
increased by EUR 25 million compared to the revenue
reported last year. Correspondingly, costs were increased by
EUR 26 million compared to last year’s reported cost. The
group's financial position is similarly exposed, impacting the
value of assets and liabilities reported in currencies other
than EUR. The translation effect on net assets is recognised
within other comprehensive income as foreign exchange
adjustments. In 2019 a net increase of EUR 42 million was
recognised in other comprehensive income compared to a
net loss of EUR 10 million last year.

Indirectly the prepaid milk price absorbs both transaction
and translation effects and the net result therefore has
limited exposure to currency risks. The prepaid milk is set
based on achieving an annual profit of 2.8 to 3.2 per cent.
The prepaid price is initially measured and paid out based
on a EUR amount and consequently exposed to EUR
fluctuations against GBP, SEK and DKK.

Compared to last year, the average rate of the USD
strengthened by 5 per cent, the GBP strengthened
1 per cent and the SEK weakened by 3 per cent.

25 per cent of the group’s revenue is in GBP. Due to
potential consequences related to Brexit and the forth
coming trade negotiations Arla has continuously
hedged a significant proportion of the 2020 export to
the UK.

The group is increasingly involved in emerging markets
where efficient hedging is often not feasible due to
currency regulations, illiquid financial markets or
expensive hedging costs. These markets are mainly
Nigeria, the Dominican Republic, Bangladesh, Lebanon,
the Ivory Coast, Senegal and Egypt. These seven
countries represented 2 per cent of the group's revenue
in 2019.

Our business in Saudi Arabia is a large part of the
group’s export to MENA. the SAR has been pegged to
the USD since 1986. However, given the current
uncertainty regarding the Saudi Arabia economy and
geopolitical situation, Arla monitors the currency
situation closely and is hedged a longer period of
time to mitigate the higher perceived risk of large
fluctuations.

Note 4.3.2 Currency risk

Currency impact on revenue, costs and financial position

The group is exposed to both transaction and translation
effects from currencies.

Transaction effects relate to sales in currencies other
than the functional currencies of the individual entities.
The group is mainly exposed to USD and USD pegged
currencies as well as GBP. Revenue increased by EUR 32
million compared to last year due to positive transaction
effects. Part of this exposure was hedged by costs in the
same currency. Financial instruments such as trade
receivables, trade payables and other items denominated
in currencies other than the individual entities’ functional
currencies are also exposed to currency risks. The net

effect from the revaluation of these financial instruments
is recognised within financial income or financial costs.
A net loss of EUR 3 million was recognised in financial
costs which was at a same level compared as last year. To
manage short term volatility from currency fluctuations,
derivatives are used to hedge currency exposure. When
settling the hedging instrument, a positive or negative
amount is recognised within other income or other costs
respectively. A net loss of EUR 24 million was recognised
within other cost compared to a loss of EUR 14 million
last year. A loss from hedges will be expected in years
where export currencies strengthen during the year.
The group is exposed to translation effects from entities

99 ARLA FOODS ANNUAL REPORT 2019

Revenue split by currency,
2019

Revenue split by currency,
2018

10,527

MILLION EUR

10,425

MILLION EUR

EUR 31%
USD 9%

GBP 25%
SAR 3%

SEK 13%
Other 7%

DKK 12%

EUR 32%
USD 9%

GBP 26%
SAR 2%

SEK 13%
Other 6%

DKK 12%

NOTE 4.3 FiNANCiAL RiSkS (CONTiNUED)

Closing rate
2018

Change

2019

Average rate
2018

Change

Risk mitigation

Table 4.3.2.a Exchange rates

EUR/GBP
EUR/SEK
EUR/DKK
EUR/USD
EUR/SAR

2019

0.854
10.470
7.472
1.120
4.201

0.901
10.261
7.467
1.145
4.293

5.2%
-2.0%
-0.1%
2.2%
2.1%

0.877
10.587
7.466
1.119
4.199

0.885
10.253
7.453
1.180
4.426

0.9%
-3.3%
-0.2%
5.1%
5.1%

Table 4.3.2.b Currency exposure

Balance sheet exposure

Sensitivity

Open
positions

Hedge of
future
cash flow

External
exposure

Applied
sensitivity

Income
statement

Other
compre-
hensive
income

2019
EUR/DKK
USD/DKK*
GBP/DKK
SEK/DKK
SAR/DKK

2018
EUR/DKK
USD/DKK*
GBP/DKK
SEK/DKK
SAR/DKK

*Incl. AED

-346
219
39
-24
-165

-458
157
61
33
-152

0
-276
-311
0
-24

0
-379
-279
0
0

-346
-56
-273
-24
-189

-458
-222
-218
33
-152

1%
5%
5%
5%
5%

-3
11
2
-1
-8

-5
8
3
2
-8

0
-14
-16
0
-1

0
-19
-14
0
0

100 ARLA FOODS ANNUAL REPORT 2019

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 do 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.

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.

The group’s 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 also applies to the group’s net
internal exposure. The aggregate of the group’s external
and internal currency exposure, represents the net
exposure, which is outlined in Table 4.3.2.b.

Net foreign currency investments in subsidiaries, as well
as instruments hedging those investments, are
excluded.

Assumptions for sensitivity analysis

Risk
The group operates in many different countries and has
significant investments in operations outside of
Denmark, of which the UK, Germany and Sweden,
represent the largest part of the business by net
revenue, profit and assets. A major part of the currency
risk from net revenue denominated in foreign
currencies is offset by sourcing in the same currency.

Policy
According to the treasury and funding policy, the
treasury department may hedge:

Up to 15 months of the net forecasted cash receipts
and payables
Up to 100 per cent of net recognised trade
receivables and trade payables

NOTE 4.3 FiNANCiAL RiSkS (CONTiNUED)

Note 4.3.3 Interest rate risk

Limited hedging activities

The average duration of the group’s interest on
interest-bearing debt, including derivatives but excluding
pension liabilities, has decreased by 0.8 to 2.4. The
duration is reduced due to matured interest rate hedges,
a reduction in time to maturity on the remaining hedges
and an increased in net interest-bearing debt predomi-
nately funded by floating interest rate.

Even though interest rates were low in 2019, our hedging
activity was limited.

Table 4.3.3 Sensitivity based on a 1 percentage point increase in interest rate
(EURm)

2019
Financial assets
Derivatives

Financial liabilities
Net interest-bearing debt
excluding pension liabilities

2018
Financial assets
Derivatives
Financial liabilities
Net interest-bearing debt
excluding pension liabilities

Carrying value

Sensitivity

Potential
accounting impact

Income
statement

Other
comprehen-
sive income

-627
-

2,740

2,113

-594
-
2,241

1,647

1%
1%

1%
1%
1%

5
4

-23

-14

4
7
-18

-7

-2
31

-2
38
-

101 ARLA FOODS ANNUAL REPORT 2019

Risk mitigation

Risk
The group is exposed to interest rate risk on interest-
bearing borrowings, pension liabilities, interest-bearing
assets and on the value of non-current assets where an
impairment test is performed. 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 the
potential impairment of non-current 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 instruments recognised as at
31 December 2019. A decrease in the interest rate
would have the opposite 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.

2019

2018

Minimum

Maximum

Policy

Duration

2.4

3.2

How we act and operate
The purpose of interest rate hedging is to mitigate risk
and secure relatively stable and predictable financing
costs. 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 independently

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. To date,
the group has not traded in any options contracts.

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.

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 25 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, of which 100 per cent
can be hedged for the first 18 months, with a limited
proportion thereafter.

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 management.

Arla’s energy exposure and hedging are 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.

Dairy derivative market in EU and New Zealand remain
small but are evolving quickly and the group has
engaged in insignificant hedging price risk on selected
commodity products. As the dairy derivative market
develops, we expect this to play a role in managing fixed
price contracts with customers, in the coming years.

NOTE 4.3 FiNANCiAL RiSkS (CONTiNUED)

Note 4.3.4 Commodity price risk

Limited hedging activities

Supply contracts are predominately related to a floating
official price index. The treasury department uses
financial derivatives hedge commodity price risk. This
secures full flexibility to change suppliers without having
to take future hedging into consideration.

Hedging activities concentrate on the most significant
risks, including electricity, natural gas and diesel. The total
energy commodity spend, excluding taxes and
distribution costs, amounted to approximately EUR 85
million.

The purpose of hedging is to reduce volatility in costs
related to energy. In 2019, hedging activities have
resulted in loss of EUR 6 million vs a gain on EUR 9
million last year. The result of hedging activities, classified
as hedge accounting, is recognised in other income and
costs.

At the end of 2019, 35 per cent of the energy spend for
2020 was hedged. A 25 per cent increase in commodity
prices would negatively impact profit by approximately
EUR 14 million. Conversely, other comprehensive income
would be positively impacted by EUR 10 million.

Table 4.3.4 Hedged commodities
(EURm)

2019
Diesel / natural gas
Electricity

2018
Diesel / natural gas
Electricity

Potential
accounting impact

Sensitivity

Contract
value

Income
statement

Other
compre hen-
sive income

25%
25%

-4
-1
-5

-3
4
1

-8
-6
-14

-8
-8
-16

6
4
10

12
6
18

102 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.3 FiNANCiAL RiSkS (CONTiNUED)

Note 4.3.5 Credit risk

Limited losses

External rating of financial counterparties,
2019

External rating of financial counterparties,
2018

In 2019 the group continued to experience very limited
losses from defaulting counterparties such as custom-
ers, suppliers and financial counterparties.

All major financial counterparties had satisfactory credit
ratings at year-end. 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. In a
small number of geographical locations which are not
serviced by our relationship banks and where financial
counterparties with a satisfying credit rating do not
operate, the group deviated from the rating requirement.

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 maximum exposure to credit risk is approximately
equal to the carrying amount.

The group has, like in previous years, continuously
worked with credit exposure and experienced a very low
level of losses arising from customers.

Netting of credit risk
To manage the financial counterparty risk, the group uses
master netting agreements when entering into derivative
contracts.

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.

AAA 69%
BBB+ 1%

626

MILLION EUR

612

MILLION EUR

AA- 6%
Below investment grade 6%

A+ 14%

A 4%

AAA 76%
BBB+ 2%

AA- 4%
Below investment grade 5%

A+ 7%

A 6%

Table 4.3.5 External rating of financial counterparties
(EURm)

Counterparty rating

2019
Securities
Cash
Derivatives
Total

2018
Securities
Cash
Derivatives
Total

AAA

435
-
-
435

465
-
-
465

AA-

-
30
7
37

-
16
8
24

A+

-
78
7
85

-
37
4
41

Below
investment
grade

BBB+

-
7
-
7

-
11
5
16

-
37
1
38

-
30
-
30

-
19
5
24

-
16
20
36

Total

435
171
20
626

465
110
37
612

Risk mitigation

Risk
Credit risks arise from operating activities and
engagement with financial counterparties. 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.

Policy
Financial counterparties must be approved by the
Executive Director 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 for the financial counterparty to have a liability
towards Arla. A credit assessment is performed of all
new customers, and existing customers are subject to
ongoing monitoring of their credit worthiness. The
same process is applied to important suppliers, both for
ongoing supply and capital expenditures.

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
given levels of investment in 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.

103 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.4 DERivATivE FiNANCiAL iNSTRUMENTS

Hedging of future cash flows
The group uses forward currency to hedge currency
risks on 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.

Table 4.4.b Value adjustment of hedging instruments
(EURm)

Deferred gains and losses on cash flow hedges arising during the year
Value adjustments of hedging instruments reclassified to other operating income and costs
Value adjustments of hedging instruments reclassified to financial items
Total value adjustment of hedging instruments recognised in
other comprehensive income during the year

2019

2018

-21
-22
21

-22

-7
-5
15

Table 4.4.a Hedging of future cash flow from highly probable forecast transactions
(EURm)

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.

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 in other comprehensive income
as a 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 basic adjustment for the hedged item. 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.
For derivative financial instruments that do not meet
the criteria for classification as hedging instruments,
changes in fair value are recognised on a continuous
basis in the income statement, under financial income
and costs.

Expected recognition
in income statement

Fair value
recognised
in other
comprehensive
income

2020

2021

2022

2023

-14
-71
-4
-89

-14
-13
-4
-31

-
-12
-
-12

-
-11
-
-11

-
-9
-
-9

Expected recognition
in income statement

Fair value
recognised
in other
comprehensive
income

2019

2020

2021

2022

-3
-67
1
-69

-3
-15
1
-17

-
-10
-
-10

-
-9
-
-9

-
-8
-
-8

After
2023

-
-26
-
-26

After
2022

-
-25
-
-25

Carrying
value

-14
-71
-4
-89

Carrying
value

-3
-67
1
-69

2019
Currency contracts
Interest rate contracts
Commodity contracts
Hedging of future cash flow

2018
Currency contracts
Interest rate contracts
Commodity contracts
Hedging of future cash flow

104 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.5 FiNANCiAL iNSTRUMENTS

Table 4.5.a Categories of financial instruments
(EURm)

2019

2018

Table 4.5.b Fair value hierarchy - carrying amount
(EURm)

Level 1

Level 2

Level 3

Total

Derivatives
Shares
Financial assets measured at fair value through the income statement

Securities
Financial assets measured at fair value through other comprehensive income

Currency instruments
Interest rate instruments
Commodity instruments
Derivative assets used as hedging instruments

Trade receivables
Other receivable
Financial assets measured at amortised cost

Derivatives
Financial liabilities measured at fair value through the income statement

Currency instruments
Interest rate instruments
Commodity instruments
Derivative liabilities used as hedging instruments

Long term borrowings
Short term borrowings
Trade payables and other payables
Financial liabilities measured at amortised cost

18
9
27

435
435

1
-
1
2

28
10
38

465
465

4
-
5
9

889
240
1,129

989
254
1,243

22
22

15
44
5
64

7
7

7
67
4
78

1,951
789
1,158
3,898

1,369
872
1,169
3,410

2019
Financial assets:
Bonds
Shares
Derivatives
Total financial assets

Financial liabilities:
Derivatives
Total financial liabilities

2018
Financial assets:
Bonds
Shares
Derivatives
Total financial assets

Financial liabilities:
Derivatives
Total financial liabilities

435
9

444

-
-

466
10
-
476

-
-

-
-
20
20

86
86

-
-
37
37

85
85

-
-
-
-

-
-

-
-
-
-

-
-

435
9
20
464

86
86

466
10
37
513

85
85

105 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.5 FiNANCiAL iNSTRUMENTS (CONTiNUED)

NOTE 4.6 SALE AND REPURCHASE AGREEMENTS

Risk mitigation

Attractive funding arrangement

Methods and assumptions applied when measuring fair
values of financial instruments:

Bonds and shares
The fair value is determined using the quoted prices in
an active market.

Non-option derivatives
The fair value is calculated using discounted cash flow
models and observable market data. The fair value is
determined as a termination price and consequently,
the value is not adjusted for credit risks.

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

The group has invested in listed Danish 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, compared with current
market interest rates on mortgage debt, by entering
into a sale and repurchase agreement on the mortgage
bonds. The aforementioned mortgage bonds have been
classified as fair value through other comprehensive
income.

The receipt of proceeds from these bonds create a
repurchase obligation which has been recognised
within short-term loans.

In addition to mortgage bonds, the group holds other
securities with a carrying value of EUR 5 million.

Table 4.6 Transfer of financial assets
(EURm)

2019
Mortgage bonds
Repurchase liabilities
Net position

2018
Mortgage bonds
Repurchase liabilities
Net position

Carrying
value

Notional
amount

430
-429
1

461
-461
-

425
-424
1

455
-454
1

Fair
value

430
-429
1

461
-461
-

106 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.7 PENSiON LiABiLiTiES

Net pension liabilities on same level as last year

Arla's pension liabilities consist 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 233 million,
which represent an increase of EUR 13 million
compared to last year. Remeasurements of pensions
plans in the group totalling a net loss of EUR 50 million,
consisted of an actuarial loss of 180 mEUR offset by a
remeasurement gain on pension assets of EUR 130
million.

Pension plans in Sweden
The defined benefit plan in Sweden does not currently
require the group to make further cash contributions.
The recognised net liability was EUR 223 million, an
increase of EUR 24 million compared to last year. An
actuarial loss of EUR 29 million was recognised due to a
lower discount rate.

These pension plans are contribution-based plans,
guaranteeing a defined benefit pension at retirement.
Contributions have been 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 investments.

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 pension asset in the UK was EUR 16
million, representing an improvement of EUR 12 million
compared to last year. The improvement was primarily
related to a positive movement in the value of plan
assets by EUR 122 million offset by actuarial losses of
EUR 139 million, due to a applied lower discount rate.

The defined benefit plans in the UK are administered by
an independent pension trust that invests deposited
amounts to cover future pension payments. The assets
under management amounted to EUR 1.420 million at
end of 2019 compared to EUR 1.231 million last year.

These pension plans are defined benefit final salary
schemes. The schemes are closed to both new entrants
and future accrual. Defined contribution schemes are in
place for other employees. Employer contributions are
determined with the advice of independent qualified
actuaries on the basis of tri-annual valuations. The
schemes do not provide any insured disability benefits.

The schemes are legally structured as trust-based
statutory sectionalized pension schemes. The group
has limited control over the operation of the plans and
their investments. The trustees of the schemes (of
which Arla appoints the majority) 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 responsible for
advising on the investment strategy and investing the
assets. The scheme is managed under a risk-controlled
investment strategy, which includes a liability-driven
investment approach that seeks to match, where
appropriate, the profile of the liabilities. By the end of
2019 the level of interest hedging against the liabilities
was 65 per cent compared to 57 per cent last year
while the inflation hedging was 65 per cent compared
to 61 per cent last year. This hedging reduces the
overall level of risk within the scheme.

The pension plans do not include a risk-sharing element
between the group and the plan participants.

Table 4.7.a Pension liabilities recognised on the balance sheet
(EURm)

2019
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

Presented as:
Pension assets
Pension liabilities
Net pension liabilities

2018
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

Presented as:
Pension assets
Pension liabilities
Net pension liabilities

Sweden

Other

Total

232
-12
220
3
223

232
3
235

-
223
223

208
-12
196
3
199

208
3
211

-
199
199

1,420
-1,436
-16
-
-16

1,420
-
1,420

-16
-
-16

1,231
-1,235
-4
-
-4

1,231
-
1,231

-4
-
-4

46
-27
19
7
26

46
7
53

-
26
26

36
-18
18
7
25

36
7
43

-
25
25

1,698
-1,475
223
10
233

1,698
10
1,708

-16
249
233

1,475
-1,265
210
10
220

1,475
10
1,485

-4
224
220

107 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.7 PENSiON LiABiLiTiES (CONTiNUED)

Table 4.7.b Development in pension liabilities
(EURm)

2019

2018

Maturity of pension liability, at 31 December 2019
(EURm)

Maturity of pension liability, at 31 December 2018
(EURm)

Present value of liability at 1 January
Reclassification
New pension liability from acquired companies
Current service cost
Interest cost
Actuarial gains and losses from changes in financial assumptions (OCI)
Actuarial gains and losses from changes in demographic assumptions (OCI)
Benefits paid
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
Interest income
Return on plan assets, excluding amounts included in net interest
on the net defined benefit liability
Contributions to plans
Benefits paid
Administration expenses
Exchange rate adjustments
Fair value of plan assets at 31 December

The Group expects to contribute EUR 26 million to the plan assets in 2020
and EUR 96 million in 2021-2024.

Actual return on plan assets:
Calculated interest income
Return excluding calculated interest
Actual return

108 ARLA FOODS ANNUAL REPORT 2019

600

500

400

300

200

100

600

500

400

300

200

100

0-1Y

1-5Y

5-10Y 10-20Y 20-30Y 30-40Y >40Y

0-1Y

1-5Y

5-10Y 10-20Y 20-30Y 30-40Y >40Y

Sweden

Other

Table 4.7.d Sensitivity of pension liabilities to key assumptions
(EURm)

Impact on pension liabilities at 31 December
Discount rate +/- 10bps
Expected salary increases +/- 10bps
Life expectancy +/- 1 year
Inflation +/- 10 bps

2019
+
-27
3
77
18

2019
-
27
-3
-77
-17

2018
+
-22
2
59
15

2018
-
-20
-2
-58
-14

1,485
-
-
3
40
177
3
-70
70
1,708

1,597
-6
1
10
38
-69
4
-65
-25
1,485

2019

2018

1,265
36

130
27
-60
-
77
1,475

1,320
32

-40
27
-55
-1
-18
1,265

36
130
166

32
-40
-8

NOTE 4.7 PENSiON LiABiLiTiES (CONTiNUED)

Table 4.7.e Pension assets recognised
(EURm)

2019

2018

Table 4.7.g Recognised in other comprehensive income
(EURm)

Liability hedge portfolio
Debt vehicles
Bonds
Equity instruments
Properties
Infrastructure
Other assets
Total assets

296
412
239
214
138
80
96
1,475

20%
28%
16%
15%
9%
5%
7%
100%

364
274
200
166
117
59
85
1,265

29%
21%
16%
13%
9%
5%
7%
100%

Actuarial gains and losses on liabilities from changes in financial assumptions (OCI)
Actuarial gains and losses on liabilities from changes
in demographic assumptions (OCI)
Return on plan assets, excluding amounts included in net interest
on the net defined benefit liability
Re-measurements of defined benefit schemes

2019

2018

-177

-3

130
-50

-4

-40
25

Table 4.7.f Recognised in the income statement for the year
(EURm)

2019

2018

Current service cost
Administration cost
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

3
-
3

40
-36
4

10
1
11

38
-32
6

Table 4.7.h Assumptions for the actuarial calculations

2019

2018

Discount rate, Sweden
Discount rate, UK
Expected payroll increase, Sweden
Expected payroll increase, UK
Inflation (CPI), Sweden
Inflation (CPI), UK

1.5%
2.1%
2.3%
2.3%
1.8%
1.8%

2.4%
2.9%
2.3%
2.5%
1.9%
3.1%

109 ARLA FOODS ANNUAL REPORT 2019

NOTE 4.7 PENSiON LiABiLiTiES (CONTiNUED)

Accounting policies

Uncertainties and estimates

The carrying amount related to defined benefit pension
plans is 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.

Pension liabilities and similar non-current liabilities
The group has entered post-employment pension plan
agreements with a significant number of current and
former employees. The post-employment pension plan
agreements take the form of defined benefit plans and
defined contribution plans.

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 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 characterised by the group's
obligation to make specific payments from the date the
plan member is retired, 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’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.

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 remeasurement, 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 in other comprehen-
sive 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 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.

110 ARLA FOODS ANNUAL REPORT 2019

NOTE 5.1 TAx

Current and deferred tax

Tax in the income statement
Tax costs decreased to EUR 24 million, compared to
EUR 41 million last year primarily due to changes of the
deferred tax positions.

Current income tax
Cost related to current income taxes increased to EUR
28 million compared to EUR 22 million last year
primarily due to higher profits. Prepaid current income
tax and payments related to current tax previous years
totaled EUR 30 million, which was very similar to last year.

Deferred tax
Net deferred tax liabilities amounted to EUR 38 million,
which represents a decrease of EUR 16 million
compared to last year. This was driven by recognition of
tax assets due to a higher profit outlook and by changes
in temporary differences compared to last year. Net
deferred tax liabilities consisted of gross deferred tax
liabilities of EUR 81 million and related to temporary
differences on intangible fixed assets, property, plant
and equipment and other items. These were offset by
deferred tax assets of EUR 43 million relating to
property, plant and equipment, tax losses carried
forward and pension liabilities.

For more information on tax governance, please refer
to page 45.

Table 5.1.a Tax recognised in the income statement
(EURm)

2019

2018

Current income tax
Current income tax on result for the year relating to:
Cooperative tax
Corporate income tax
Adjustment for current tax of previous years
Total current income tax costs

Deferred tax
Change in deferred tax for the year
Adjustment for deferred tax of previous years
Impact of changes in tax rates and laws
Total deferred tax costs/income

Total tax costs in the income statement

111 ARLA FOODS ANNUAL REPORT 2019

8
19
1
28

-6
2
-
-4

7
17
-2
22

20
1
-2
19

Table 5.1.b Calculation of effective tax rate
(EURm)

2019

2018

Profit before tax
Tax applying the statutory Danish corporate income tax rate
Effect of tax rates in other jurisdictions
Effect of companies subject to Cooperative taxation
Tax-exempt income, less non-deductible expenses
Impact of changes in tax rates and laws
Adjustment for tax cost of previous years
Other adjustments
Total

22.0%
-0.9%
-9.2%
-1.4%
0.0%
0.9%
-4.4%
6.9%

347
76
-3
-32
-5
-
3
-15
24

22.0%
-2.7%
-15.5%
-2.4%
-0.6%
-0.3%
11.3%
11.8%

348
76
-9
-54
-8
-2
-1
39
41

Table 5.1.c. Deferred tax
(EURm)

Net deferred tax asset/(liability) at 1 January
Deferred tax recognised in income statement
Deferred tax recognised in other comprehensive income
Acquisitions in connection with business combinations
Impact of change in tax rates
Exchange rate adjustments
Net deferred tax asset/(liability) at 31 December

Deferred tax, by gross temporary difference
Intangible assets
Property, plant & equipment
Provisions, pension liabilities and other assets
Tax losses carried forward
Other
Total deferred tax, by gross temporary difference

Recognised in the balance sheet as:
Deferred tax assets
Deferred tax liabilities
Total

2019

2018

-54
4
10
-
-
2
-38

-8
25
-12
12
-55
-38

43
-81
-38

-16
-21
-7
-12
2
0
-54

-10
3
-7
8
-48
-54

30
-84
-54

NOTE 5.1 TAx (CONTiNUED)

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)

2019

2018

Statutory audit
Other assurance engagements
Tax assistance
Other services
Total fees to auditors

1.5
0.1
0.7
0.9
3.2

1.4
0.1
0.8
0.5
2.8

The group recognises deferred tax assets, including the
value of tax losses carried forward, where Management
assesses that the tax assets may be utilised in the
foreseeable future by offset against taxable income. The
assessment is performed on an annual basis and is based
on the budgets and business plans for future years.

The group has recognised deferred tax assets in respect
of tax losses carried forward totaling EUR 12 million.
Temporary differences on which deferred tax assets have
not been recognised totaled EUR 27 million, all related to
tax losses carried forward.

Accounting policies

Tax in the income statement
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 (income or costs)
recognised directly in other comprehensive income.

Current tax
Current tax is assessed based on tax legislation for entities
in the group subject to cooperative or corporate income
taxation. Cooperative taxation is based on the capital of
the cooperative, while corporate income tax is assessed
based on the company’s taxable income for the year.
Current tax liabilities comprises the expected tax payable/
receivable on the taxable income or loss for the year, any
adjustment to the tax payable or receivable in respect of
previous years, and for tax paid on account.

Deferred tax
Deferred tax is measured in accordance with the balance
sheet liability method for all temporary differences
between the tax base of assets and liabilities and their
carrying amounts in the consolidated financial
statements. However, deferred tax is not recognised on
temporary differences on initial recognition of goodwill,
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 M&A
activities.

Deferred tax is determined applying tax rates (and laws)
that have been enacted or substantially enacted by the
end of the reporting period and are expected to apply
when the related deferred tax asset is realised or deferred
tax liability is settled. Changes in deferred tax assets and

112 ARLA FOODS ANNUAL REPORT 2019

liabilities due to changes in the tax rate are recognised
in the income statement except for items recognised in
other comprehensive income.

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 assets and liabilities are offset when there is
a legally enforceable right to offset current tax assets and
liabilities and when the deferred tax balances relate to the
same taxation authority. Current tax assets and tax
liabilities are offset where the entity has a legally
enforceable right to offset and intends either to settle on
a net basis, or to realise the asset and settle the liability
simultaneously.

Uncertainties and estimates

Deferred tax
Deferred tax reflects assessments of actual future tax due
on items in the financial statements, considering timing
and probability. These estimates also reflect expectations
about future taxable profits and the group’s tax planning.
Actual future taxes may deviate from these estimates 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.

NOTE 5.3 MANAGEMENT REMUNERATiON
AND TRANSACTiONS

Remuneration paid to management

The remuneration to the 18 registered members of
the Board of Directors (BoD) is assessed and adjusted
on a bi-annual basis and approved by the Board of
Representatives. The BoD’s remuneration was latest
adjusted in 2019. Principles applied to the remuneration
of the BoD are described on page 44. Members of the
Board are paid for milk supplies to Arla Foods amba, in
accordance with the terms for the other owners.
Similarly, individual capital instruments are issued to
the BoD on the same terms as to other owners.

In 2019 the Executive Board was expanded by
appointing chief commercial officer, Europe, Peter
Giørtz-Carlsen to the board. In 2018, Executive Board
compensation reflected remuneration for only chief
executive officer (CEO), Peder Tuborgh. Principles
applied for the remuneration of the Executive Board
are described on page 44.

Table 5.3.b Transactions with the Board of Directors
(EURm)

Purchase of raw milk
Supplementary payment regarding previous years
Total

Unsettled milk deliveries in trade and other payables
Individual capital instruments
Total

2019

2018

26.0
2.1
28.1

1.5
2.9
4.4

14.9
0.5
15.4

0.7
1.8
2.5

Table 5.3.a Management remuneration
(EURm)

Board of Directors
Wages, salaries and remuneration
Total

Executive Board (only CEO in 2018)
Fixed compensation
Pension
Short-term variable incentives
Long-term variable incentives
Total

2019

2018

NOTE 5.4 CONTRACTUAL COMMiTMENTS,
CONTiNGENT ASSETS AND LiABiLiTiES

1.3
1.3

2.3
0.3
0.5
0.4
3.5

1.3
1.3

1.5
0.2
0.1
0.3
2.1

Contractual obligations and commitments

Arla's contractual obligations and commitments
amounted to EUR 254 million compared to EUR 345
million last year. The decrease was primarily due to
adoption of IFRS 16. Refer to Note 5.6 for further details.

As security for mortgage debt based on the Danish
Mortgage Act with a nominal value of EUR 966 million,
compared to EUR 800 million last year, the group
provided security in property.

Contractual commitments consisted of IT licenses, short
term and low value lease contracts and agreements to
purchase property, plant and equipment. Guarantee
commitments amounted to EUR 1 million compared to
EUR 2 million last year.

The group is party to a small number of lawsuits,
disputes and other claims. Management believes that
the outcome of these will not have a material impact on
the Group's financial position beyond what is already
recognised in the financial statements.

The above table includes amount paid during the respective reporting period. The Executive Board remuneration
package includes incentive plans as described on page 44. For 2019 the accrued amount was EUR 3.5 million
(EUR 1.9 million last year). The amount was based on reported key figures together with estimates on performance
compared to peers and consequently the final future payout may differ.

NOTE 5.5 SUBSEQUENT EvENTS AFTER
THE BALANCE SHEET DATE

No subsequent events with a material impact on the
financial statements occurred after the balance sheet
date.

113 ARLA FOODS ANNUAL REPORT 2019

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 require-
ments 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 18 February 2020 and presented
for approval by the Board of Representatives on 26
February 2020.

The consolidated financial statements are prepared as a
compilation of the parent company’s and the individual
subsidiaries’ financial statements, in line with 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 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 disposal, 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. Some reclassifications have
been carried out compared to previously. These,
however, have no impact on the net profit or the equity.

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 comprehen-
sive 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.

Adoption of new or amended IFRS
The group implemented all new standards and
interpretations effective in the EU from 2019. The
implementation of IFRS 16 had siginificant impact on the
consolidated financial statements as described below.
IASB issued a number of new or amended and revised
accounting standards and interpretations that have not
yet come into effect. Arla will incorporate these new
standards when they become mandatory.

IFRS 16 Leases
IFRS 16 was issued in January 2016 and replaced IAS 17
Leases, IFRIC 4 determining whether an arrangement
contains a lease, SIC-15 operating lease-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 the balance sheet, in
line with accounting treatment for finance leases under
IAS 17. The implementation of IFRS 16 changed the
accounting treatment for lease contracts previously
treated as operating leases. The group adopted IFRS 16
prospectively from 1 January 2019 and did not restate
comparatives for the 2018 reporting period.

The standard requires that each lease contract
regardless of type, with some exemptions, needs to
be capitalised on the balance sheet as an asset,
representing the right to use the underlying asset, with
a corresponding lease liability, representing the lease
payments.

For leases previously classified as finance leases, the
group recognised the carrying amount of the lease asset
and lease liability immediately before transition as the
carrying amount of the right of use asset and the lease
liability at the date of initial application. The measure-
ment principles of IFRS 16 were only applied after that
date.

Right of use assets were measured at an amount equal
to the lease liability, adjusted by the amount of any
prepaid or accrued lease payments relating to the lease
recognised in the balance sheet as at 31 December
2018.

114 ARLA FOODS ANNUAL REPORT 2019

NOTE 5.6 GENERAL ACCOUNTiNG POLiCiES (CONTiNUED)

In applying IFRS 16 for the first time, the group used the
following practical expedients permitted by the
standard:

The use of a single discount rate to a portfolio of
leases with reasonably similar characteristics.
The accounting for operating leases with a remaining
lease term of less than 12 months as at 1 January
2019 as short-term leases
The exclusion of initial direct costs for the measure-
ment of the right of use asset at the date of initial
application, and
The use of hindsight in determining the lease term
where the contract contains options to extend or
terminate the lease.

Further, Arla has elected not to apply IFRS 16 to
contracts that were not identified as containing a lease
under IAS 17 and IFRIC 4 determining whether an
arrangement contains a lease. For a description on the
applied accounting policies on the right of use assets
refer to note 3.2.1

The capitalised right of use assets on the balance sheet
at 1 January 2019 amounted to EUR 200 million as
specified below.

Contingent liabilities related to lease contracts at
31 December 2018 were discounted by the groups
incremental discount rate between 1,75 per cent and
7,50 per cent. Correspondingly net interest-bearing
debt increased by EUR 200 million at 1 January 2019.

Leverage was not significantly affected. The impact on
the cash flow statement was an increase in cash flow
from operating activities of EUR 66 million and a
corresponding change in cash flow from financing
activities.

Consequently, the adoption of IFRS 16 had no effect on
equity at 1 January 2019.

The impact on the income statement from adoption of
IFRS 16 was a reduction in operating costs of EUR 77
million and a corresponding increase in depreciations of
EUR 70 million and interests of EUR 7 million. The
impact on EBITDA was an increase of 9 per cent, while
EBIT and net profit was virtually unchanged.

IFRIC 23 Uncertainty over income tax treatments
IFRIC 23 was issued in May 2017 and clarifies how to
apply the recognition and measurement requirements
in IAS 12 Income taxes. Arla adhere to the interpretation
when assessing disclosures on current and deferred
tax positions. The interpretation was effective from
1 January 2019.

Table 5.6.a Impact on balance sheet and contingent liabilities 1 January 2019
(EURm)

Operating lease commitments disclosed as contingent liabilities 31 December 2018 (discounted)
Financial lease liabilities recognised on balance sheet 31 December 2018
Other adjustments
Right of use assets on balance sheet 1 January 2019

197
2
1
200

115 ARLA FOODS ANNUAL REPORT 2019

NOTE 5.7 GROUP CHART

Arla Foods amba

Arla Foods Ingredients Group P/S

Arla Foods Ingredients Energy A/S
Arla Foods Ingredients Japan 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 Comércio de Produtos
Alimentícios Ltda.

Arla Foods Ingredients Singapore Pte. Ltd.
Arla Foods Ingredients S.A. de C.V.

Arla Foods Holding A/S
Arla Foods S.P.C.
Arla Oy

Massby Facility & Services Oy
Osuuskunta MS tuottajapalvelu **

Arla Foods Distribution A/S

Cocio Chokolademælk A/S

Arla Foods International A/S

Arla Foods UK Holding Ltd.
Arla Foods UK plc

Arla Foods 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.
Yeo Valley Dairies limited
Arla Foods (Westbury) Ltd.
Arla Foods Cheese Company Ltd.
Arla Foods Ingredients UK Ltd.
MV Ingredients Ltd. *

116 ARLA FOODS ANNUAL REPORT 2019

Country

Currency

Group
Equity
interest
(%)

Country

Currency

Group
Equity
interest
(%)

Denmark
Denmark
Denmark
Japan
USA
Korea
China
Argentina

Brazil
Singapore
Mexico
Denmark
Bahrain
Finland
Finland
Finland
Denmark
Denmark
Denmark
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK

DKK
DKK
DKK
JPY
USD
KRW
CNY
USD

BRL
SGD
MZN
DKK
BHD
EUR
EUR
EUR
DKK
DKK
DKK
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP

100
100
100
100
100
100
100

100
100
100
100
100
100
60
37
100
50
100
100
100
100
33
100
100
100
100
100
100
100
100
100
100
50

Arla Foods amba

Arla Foods UK Property Co. Ltd.

Arla Foods B.V.
Arla Foods Comércio, Importacâo e Exportacão de
Productos Alimenticios 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 (In 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.

Aishichenxi Dairy Products Import & Export Co. Ltd. **

Arla Foods Sdn. Bhd.
Arla Foods Panama S.A. (In liquidation)

Denmark
UK
Netherlands

Brazil
Kingdom of
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
China
Malaysia
Panama

DKK
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
CNY
MYR
USD

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
51
100
50
100
100

NOTE 5.7 GROUP CHART (CONTiNUED)

Country

Currency

Group
Equity
interest
(%)

Country

Currency

Group
Equity
interest
(%)

Arla Foods amba

Arla Foods Corporation
Arla Foods Ltd.
Arla Global Dairy Products Ltd.
TG Arla Dairy Products LFTZ Enterprise

TG Arla Dairy Products Ltd.

Arla Foods AB

Arla Fastighets AB
Arla Gefleortens AB
Årets Kock
Vardagspuls AB
Arla Foods Russia Holding AB

Arla Foods LLC

Arla Foods Inc.

Arla Foods Production LLC
Arla Foods Transport LLC
Arla Foods Deutschland GmbH

Arla Foods Verwaltungs GmbH
Arla Foods Agrar Service GmbH

Denmark
Philippines
Ghana
Nigeria
Nigeria
Nigeria
Sweden
Sweden
Sweden
Sweden
Sweden
Sweden
Russia
USA
USA
USA
Germany
Germany
Germany

Arla Foods Agrar Service Luxemburg GmbH (In liquidation) Luxembourg

Arla Foods Agrar Service Belgien AG (In liquidation)

Arla Foods LLC
Team-Pack Vertriebs-Gesellschaft für Verpackungen mbH
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.

Belgium
Russia
Germany
France
Denmark
USA
Denmark
USA
Denmark
Egypt
Denmark

DKK
PHP
GHS
NGN
NGN
NGN
SEK
SEK
SEK
SEK
SEK
SEK
RUB
USD
USD
USD
EUR
EUR
EUR
EUR
EUR
RUB
EUR
EUR
DKK
USD
DKK
USD
DKK
EGP
DKK

Arla Foods amba

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
Hansa Verwaltungs und Vertriebs GmbH (In liquidation)
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 Shared Services Sp. Z.o.o.
Arla Milk Link Limited
Arla National Foods Products LLC
Cocio Chokolademælk A/S
Marygold Trading K/S °
Mejeriforeningen
PT. Arla Indofood Makmur Dairy Import PMA.

PT. Arla Indofood Suksus Dairy Manufactoring PMA.

COFCO Dairy Holdings Limited **
Svensk Mjölk Ekonomisk förening
Lantbrukarnas Riksförbund upa **
Jörd International A/S

DKK
Denmark
XOF
Ivory Coast
NOK
Norway
BDT
Bangladesh
CNY
China
AED
UAE
EUR
Greece
CAD
Canada
EUR
Germany
EUR
Germany
AUD
Australia
MXN
Mexico
EUR
Spain
France
EUR
Dominican Republic DOP
PLN
Poland
EUR
Italy
GBP
UK
PLN
Poland
GBP
UK
AED
UAE
DKK
Denmark
DKK
Denmark
DKK
Denmark
IDR
Indonesia
Indonesia
IDR
British Virgin Irlands HKD
SEK
Sweden
SEK
Sweden
DKK
Denmark

100
100
100
50
100
100
100
100
67
100
100
80
100
100
100
100
100
100
100
100
20
100
100
100
100
100
100
100
49
98

51
100
51
100
100
100
100
100
100
51
100
100
100
100
100
100
100
100
100
40
50
100
91
50
100
30
75
24
100

* Joint ventures ** Associates
° According to Danish Act §5 the company does not make a statutory report
The Group also owns a number of entities without material commercial activities.

117 ARLA FOODS ANNUAL REPORT 2019

STATEMENT By THE BOARD OF DiRECTORS
AND THE ExECUTivE BOARD

Peder Tuborgh
CEO

Peter Giørtz-Carlsen
Executive Board Member

Jan Toft Nørgaard
Chairman

Heléne Gunnarson
Vice Chairman

René Lund Hansen

Jonas Carlgren

Arthur Fearnall

Manfred Graff

Jan-Erik Hansson

Walter Laursen

Bjørn Jepsen

Steen Nørgaard Madsen

Jørn Kjær Madsen

Johnnie Russell

Marcel Goffinet

Simon Simonsen

Inger-Lise Sjöstrom

Håkan Gillström
Employee representative

Ib Bjerglund Nielsen
Employee representative

Harry Shaw
Employee representative

Today, the Board of Directors and the Executive Director
discussed and approved the annual report of Arla Foods
amba for the financial year 2019. 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, the parent company financial statements
and the environmental, social and governance data give
a true and fair view of the group’s and the parent
company’s financial position as at 31 December 2019
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 2019.

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 uncertainties that may affect the
group and the parent company.

We hereby recommend the annual report for adoption
by the Board of Representatives.

Aarhus, 18 February 2020

118 ARLA FOODS ANNUAL REPORT 2019

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 2019,
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 2019 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 2019 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.

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 misstatement,
whether due to fraud or error.

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.

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 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, misrepresentations or the override of
internal control.
Obtain an understanding of internal control relevant
to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness
of the Group’s and the Parent Company’s internal control.
Evaluate the appropriateness of accounting policies
used and the reasonableness of accounting estimates
and related disclosures made by Management.

Conclude on the appropriateness of Management’s
use of the going concern basis of accounting in
preparing the 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.
Obtain sufficient appropriate audit evidence regarding
the financial information of the entities or business
activities within the Group to express an opinion on the
consolidated financial statements. We are responsible
for the direction, supervision and performance of
the group audit. We remain solely responsible for our
audit opinion.

We communicate with those charged with governance
regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including
any significant deficiencies in internal control that we
identify during our audit.

Aarhus, 18 February 2020
ERNST & YOUNG
Godkendt Revisionspartnerselskab
CVR no. 30 70 02 28

Henrik Kronborg Iversen
State Authorised
Public Accountant
MNE no. 24687

Jens Weiersøe Jakobsen
State Authorised
Public Accountant
MNE no. 30152

119 ARLA FOODS ANNUAL REPORT 2019

OUR
CONSOLiDATED
ENviRONMENTAL,
SOCiAL AND
GOvERNANCE
DATA

Creating circular systems on farm
On our way to produce carbon net zero dairy in 2050 our farmers in Sweden are exploring new
ways of utilizing cow manure. By turning manure into biogas, farmers in Sweden are now able to
power milk trucks. Biogas is also an extra source of income for them, and makes the fertilizer
made of manure more nutritious and odourless.

TABLE OF CONTENTS

PRiMARy STATEMENTS

NOTES

122 Consolidated environmental, social

and governance data

ESG Note 1 Environmental figures
123 ESG Note 1.1 Greenhouse gas emissions (CO₂e)
125 ESG Note 1.2 Renewable energy share
126 ESG Note 1.3 Solid waste

ESG Note 2 Social
127 ESG Note 2.1 Full time equivalents
128 ESG Note 2.2 Gender diversity and inclusion
129 ESG Note 2.3 Gender pay ratio
129 ESG Note 2.4 Employee turnover
130 ESG note 2.5 Food safety - Number of

product recalls

130 ESG Note 2.6 Accidents

ESG Note 3 Governance data
131 ESG Note 3.1 Gender diversity

- Board of Directors

131 ESG Note 3.2 Board meeting attendance
132 ESG note 3.5

133 Independent auditor’s limited assurance report

121 ARLA FOODS ANNUAL REPORT 2019

CONSOLiDATED ENviRONMENTAL,
SOCiAL AND GOvERNANCE DATA

Sustainability at Arla
Sustainability is a cornerstone of Arla's strategy. Arla
aims at delivering healthy and nutritional dairy products
to consumers globally and the company is committed
to do so with a constantly reduced environmental im-
pact. Arla understands that achieving its mission to se-
cure the highest value for the farmer owner’s milk while
creating opportunities for their growth also requires
delivering on its environmental and social performance.
Arla’s recently launched sustainability strategy ensures
this. To signify commitment to the company’s sustainability
agenda, and to increase accountability towards the
goals Arla set, the company in 2019 decided to report
on figures describing the Arla’s environmental, social
and governance performance to the Annual Report.

ESG figures in the following section were chosen
according to their materiality, and following the most
recent reporting guidelines published by the Danish
Finance Society/CFA Society Denmark, FSR – Danish
Auditors, and Nasdaq. With the chosen figures
Arla aimed at providing a complete picture of the
company’s impact on the environment, how
employees are treated and how the quality of products
is safeguarded. Maturity and quality of data was also
taken into consideration when selecting the figures
presented in this section.

Arla’s biggest environmental impact relates to the
indirect, scope 3 CO₂e emissions, more precisely to
milk production on farm (86 per cent of total CO₂e
emissions). Most of the largest companies in the world
now account and report on the emissions from their
direct operations (scopes 1 and 2), however Arla wanted
to take a step further in accountability and started to
report on scope 3 emissions in 2005. From 2020 Arla

is going to enhance scope 3 reporting by accelerating
data collection on farms through the company’s new
global Climate Check programme. For more information
go to page 32.

In 2019 Arla's emissions targets were officially approved by
the Science Based Target initiative as aligned with climate
science.

Our science-based targets:

Reduce greenhouse gas emissions with 30 per cent for
scope 1 and scope 2 in absolute terms from 2015 to
2030
Reduce greenhouse gas emissions with 30 per cent
for scope 3 per kg of raw milk from 2015 to 2030

Beyond the science-based targets, in 2019 Arla also
announced the ambition to produce carbon net zero
dairy by 2050.

The methodology used for calculating emissions on
farm level is constantly evolving. For example currently
carbon sequestration on farms is not included in the
method and thus the figure presented here is a con-
servative estimate. Developments in methodology will
also be reflected in restatements of baseline.

Arla also annually publishes a CSR report, where the
company presents in-depth analyses on the progress
towards environmental, social and governance targets.
A sub-set of the figures presented in this report can
be also found there. Find the CSR report and further
information about Arla's sustainability efforts on the
company's webpage.

Five-year ESG overview

ESG note

2019

2018

2017

2016

2015

Environmental data
CO₂e scope 1 (Mio. kg)
CO₂e scope 2 (Mio. kg)
CO₂e scope 3 (Mio. kg)
Total CO₂e (Mio. kg)

Progress towards 2030 CO₂e reduction
target (scope 1 and scope 2)
Progress towards 2030 CO₂e reduction
target (scope 3 per kg milk and whey)
Renewable energy share (%)
Solid waste in production (Tonnes)

Social data
Full time equivalents (average)
Gender diversity for all employees
(% of females)
Gender diversity in management
(% of females)
Gender diversity in top management
(% of females)
Gender pay ratio, white collar
(male to female)
Employee turnover (%)
Food safety - Number of recalls
Accident frequency
(Per 1 Mio. working hours)

Governance data
Gender diversity Board of Directors (%)*
Board meeting attendance (%)

470
275
17,758
18,503

497
263
18,073
18,834

498
313
18,217
19,028

483
334
18,292
19,110

535
342
19,802
20,679

-15%

-13%

-8%

-7%

-7%
33%
33,713

-7%
27%
34,600

-6%
24%
32,608

-6%
21%
32,192

-
19%
33,106

19,174

19,190

18,973

18,765

19,025

27%

26%

29%

1.05
12%
4

13%
96%

27%

23%

29%

1.06
12%
2

13%
99%

26%

22%

29%

-
11%
10

12%
99%

26%

22%

29%

-
14%
6

7%
98%

27%

21%

13%

-
-
7

7%
97%

1.1

1.2
1.3

2.1

2.2

2.3

2.3
2.4
2.5

2.6

3.1
3.2

* Including all board members, those elected by the general assembly, employee representatives and external advisors, the share of females
was 20 per cent as of 31 December 2019

122 ARLA FOODS ANNUAL REPORT 2019

ESG NOTE 1 ENviRONMENTAL FiGURES

ESG Note 1.1 Greenhouse gas emissions (CO₂e)

Total C0₂e emissions decreased

To follow up on Arla’s contribution to climate change,
and the progress towards the company’s emissions
targets, the total greenhouse gas emissions (expressed as
CO₂ equivalents, CO₂e) are calculated annually. CO₂e are
categorized into three scopes, according to the
methodology of the Greenhouse Gas Protocol. The three
scopes cover nearly all of the company's activities.

Total C0₂e emmissions decreased to 18,503 million kilos
compared to 18,834 million kilos last year. The decrease is
explained by multiple factors. Arla farmers are becoming
more and efficient, the overall milk intake decreased, as
well as increased use of biogas in the production of Arla
Food Ingredients all contributed to the improvement.

Since 2015 scope 1 and scope 2 CO2e emissions
decreased by 15 per cent, which means that in 2019 we
are already halfway to reach our 2030 science-based
target to reduce emissions by 30 per cent.

Scope 3 emisssions per kilo of milk were reduced by 7
per cent since 2015 due to several progressive activities
on Arla farms, and more specific methods to measure
and estimate farm level emissions. This means that Arla
is well on its way to achieve the 2030 target to reduce
scope 3 emissions per kilo of milk by 30 per cent.

ESG Table 1.1 Greenhouse gas emmissions*
(Mio. kg)

2019

2018

2017

2016

2015

CO₂e scope 1
Production
Transport
Total CO₂e scope 1

Total CO₂e scope 2

CO₂e scope 3
Emmissions from farms:

373
97
470

275

407
90
497

263

414
84
498

313

394
89
483

334

422
113
535

342

Emmissions related to milk production and
operations on farm

15,949

16,119

16,393

16,289

17,865

Emmissions from purchased goods and services:
Whey
Packaging
Transport
Operations
Total CO₂e scope 3

1,032
375
294
108
17,758

1,162
371
308
113
18,073

1,002
372
325
125
18,217

1,117
418
338
130
18,292

1,119
390
302
126
19,802

Total CO₂e

18,503

18,834

19,028

19,110

20,679

123 ARLA FOODS ANNUAL REPORT 2019

CO₂e emmision 2019
(Mio. kg)

CO₂e emmision 2018
(Mio. kg)

18,503

MIO. KG

18,834

MIO. KG

Scope 3 from farms, 86%
Scope 3 from purchased goods and services, 10%
CO₂e scope 2, 1%
CO₂e scope 1, 3%

Scope 3 from farms, 86%
Scope 3 from purchased goods and services, 10%
CO₂e scope 2, 2%
CO₂e scope 1, 3%

Accounting policies

Greenhouse gas emissions are measured in CO₂
equivalents and are categorized into three scopes.

(based on IPCC* Fifth Assessment Report, Climate
Change 2013):

Calculating CO₂ equivalents
Greehouses gases are gases that contribute to the
warming of the climate by absorbing infrared radiation.
Besides the widely-known carbon dioxide (CO₂), there
are two other major greenhouse gases associated with
dairy production: nitrous oxide (N₂O) and methane
(CH₄). In order to calculate the total greenhouse gas
emissions (the carbon footprint) of the company,
different greenhouse gas emissions are converted into
carbon dioxide equivalents (CO₂e). The conversion of
different gases reflect their global warming potential.
The potency of the different gases are taken into
consideration according to the following calculations

1 kg carbon dioxide (CO₂ )= 1 kg CO₂e
1 kg methane (CH₄) = 28 kg CO₂e
1 kg nitrous oxide (N₂O) = 265 kg CO₂e

The majority of Arla's emissions are methane (e.g.:
created from the digestion of cows) and nitrous oxide
(e.g.: from fertilizer use on farms, or manure storage).

Greenhouse gas emissions are categorized into three
scopes according to where do they appear across the
value chain, and what control the company has over
them.

* The IPCC (Intergovernmental Panel on Climate Change) is the United Nations body for assessing the science related to climate change.
** Following the methodology of the Greenhouse Gas Protocol, historical numbers for greenhouse gas emissions are restated each year due

to acquisitions and divestments. Restatement has only immaterial effect on the figures.

ESG NOTE 1 ENviRONMENTAL FiGURES (CONTiNUED)

Accounting policies (continued)

Uncertainties and estimates

Scope 1 – All direct emissions
Scope 1 emissions relate to the activities under the
group’s control. This includes transport with Arla’s
vehicles, and direct emissions from Arla’s production
facilities. Scope 1 emissions are calculated in accord-
ance with the methodology set out in the Greenhouse
Gas Protocol Corporate Standard, by applying global
warming potentials and emissions factors to Arla
specific activity data.

Scope 2 – Indirect emissions
Scope 2 emissions relate to the indirect emissions caused
by energy Arla purchases, i.e.: electricity or heating. Scope
2 emissions are calculated in accordance with the
methodology set out in the Greenhouse Gas Protocol
Corporate Standard, by applying global warming potentials
and emissions factors to the company specific activity
data. The method used for scope 2 reporting is location-
based reporting, which reflects emissions due to electricity
consumption from a conventional power grid, using an
average emissions factor of the country's energy mix.

Scope 3 – All other indirect emissions
Scope 3 emissions relate to emissions from sources that
Arla does not directly own or control. It covers
emissions from purchased goods and services (e.g.: raw
milk purchased from farmer owners packaging and,
transportation purchased from suppliers), but also
end-of-life processing waste (e.g.: recycling or incinerating).

Scope 3 emissions for raw milk are calculated in
accordance with the International Dairy Federation's
guideline for carbon footprint of dairy products (IDF
2015). Emissions related to raw milk include, amongst
numerous factors, emissions related to the production
and transportation of feed, fertilizer usage, the cow’s
digestion, and manure management. On farm
calculations are made by external emission experts
using Arla’s carbon assessment tool. Scope 3 emissions
from waste at sites, packaging, third party transportation
and extraction of fuels are calculated by applying global
warming potential and emissions factors to Arla
specific-activity data.

124 ARLA FOODS ANNUAL REPORT 2019

According to the latest quantification of Arla’s total
climate impact, scope 1 and 2 emissions accounted for
3 and 1 per cent of total emissions, respectively. Scope
3 emissions accounted for 96 per cent of Arla’s total
climate impact. Milk production on farm (including,
amongst many factors, methane emitted by cows, and
emissions related to feed and transportation of feed)
accounted for 90 per cent of the scope 3 emissions. For
transportation, operations and packaging emission
factors are obtained from Sphera, an industry-leading
consultancy firm. Farm level emission factors are
obtained from 2.0 LCA Consultants, a Danish consultancy
firm formed from academics.

Currently total farm level emissions disclosed in ESG
table 1.1 are estimated based on over 5000 voluntary
climate checks, conducted since 2010. Farmers have
been provided the opportunity to have the greenhouse
gas emission of their farms assessed by independent
third-party climate experts at no charge, and received
recommendations on how to decrease emissions. In an
effort to significantly increase the number of farms
assessed, farmers from 2020 will be offered an incentive
of 1 eurocent per kg of milk to have climate checks on
their farms.

Methodology to measure emissions on farm is
developing over time. Currently, factors that potentially
lower total emissions, such as carbon sequestration of
farm are not included. Changes in methodology will be
also reflected the restatement of the baseline.

Another uncertainty relates to data collection regarding
packaging and transportation from our suppliers. Each
year, we send our suppliers detailed requests to provide
the necessary data, accompanied with a manual on
how to complete the related documentation. A rigorous
two-step internal validation process is in place to
minimize the chance of reporting incorrectly.

Where do our emission come from?

CO₂ N₂O

N₂O

CH₄

CO₂

CO₂
N₂O

Scope 1
3%

CO₂

Feed production

Farms

Transport

Production and offices

Transport

Waste management

Scope 3
96%

Purchased energy

Scope 2
1%

ESG NOTE 1 ENviRONMENTAL FiGURES (CONTiNUED)

ESG Note 1.2 Renewable energy share

Share of renewable energy increased

The use of energy - inclduing heating and electricity
- at Arla's sites contributes to climate change, depletion
of non-renewable resources and pollution. As a result
shifting from fossil to renewable energy is an important
lever to fulfil Arla’s climate ambition and decrease carbon
footprint from scope 2 emmissions.

In 2019 the share of renewable energy increased to 33
per cent compared to 27 per cent last year, primarily due
to the increased use of biogas in Arla Food Ingredient's
production.

Energy consumption
(Thousand Mwh)

In 2010 Arla announced a target to increase the use of
renewable energy to 50 per cent by 2020.

Arla no longer expects to achieve this goal by 2020 due
to the company's capacity increase and expansion in the
international segment, where renewable energy sources
are less accessible .In line with our long-term environmental
startegy, new targets and initiatives are being developed
to change the future energy mix.

4,000

3,000

2,000

1,000

3,329

3,300

3,495

3,501

3,356

639

2015

699

2016

835

2017

941

2018

1,117

2019

ESG Table 1.2 Energy use*
(Thousand MWh)

Heating oil
Natural gas
Grid electricity
Renewable energy sources**
District heating

2019

2018

2017

2016

2015

138
1,632
927
654
6

123
1,942
944
449
43

117
1,975
950
410
43

114
1,868
965
312
41

129
1,959
962
238
41

Total

3,356

3,501

3,495

3,300

3,329

Of which renewable energy relate to:
Biogas
Biomass
District heating based on renewable sources
Renewable electricity
Total

434
127
92
463
1,117

234
121
94
492
941

201
120
89
425
835

111
119
82
387
699

44
142
52
401
639

Renewable energy share

33%

27%

24%

21%

19%

* Historical numbers for energy use are restated each year due to acquisitions and divestments. Restatement has only immaterial effect on

the figures. ** Renewable energy sources refer to energy from biogas, biomass and district heating based on renewable sources.

125 ARLA FOODS ANNUAL REPORT 2019

Energy use
Renewable energy

Accounting policies

Uncertainties and estimates

Energy usage at sites consist of renewable and
fossil-based fuels and electricity. Renewable energy is
energy based on renewable resources, which can be
naturally replenished, such as sun, wind, water, biomass,
and geothermal heat. Electricity, on the other hand, is a
mix of both electricity from renewable and non-renewable
sources. The renewable electricity purchased from
national sources is assessed annually using methodology
from Sphera, an industry-leading consultancy
collecting, assessing and analysing emissions data
based on the latest scientific evidence. To calculate the
share of renewables the total renewable energy use is
divided by the group's total energy use

The data presented in ESG table 1.2 is collected
annually from our sites and offices. Data for energy
consumption is based on meter readings at each site,
and therefore there is very little uncertainty attached to
these figures.

In relation to the specification of renewable energy,
there are some cases where it is not possible to discover
how district heating is produced and therefore what
relates to renewable and non-renewable sources. Using
conservative assumptions, when the split is not
possible, the heating is reported as conventional.

ESG NOTE 1 ENviRONMENTAL FiGURES (CONTiNUED)

ESG Note 1.3 Solid waste

Solid waste decreased

Waste that cannot be recovered by recycling, reusing or
composting puts a burden on the environment. Arla’s
goal is to generate zero waste that needs to be
depositied at a waste disposal site (landfill) by 2020. To
achieve this goal, Arla is increasing production efficiency
at sites, reducing waste throughout the manufacturing
and transportaion process, as well as collaborating with
waste management suppliers to reduce waste and
improve waste handling.

Solid waste,
2019

Solid waste,
2018

In 2019 solid waste decreased to 33,713 tonnes
compared to 34,600 tonnes last year, the first decrease
since 2016. Waste to landfill increased to 988 tonnes
compared to 933 tonnes last year, due to expansions into
international markets and capacity increase related to
these expansions.

33,713

TONNES

34,600

TONNES

ESG Table 1.3 Solid waste*
(Tonnes)

2019

2018

2017

2016

2015

Recyled waste
Waste for incineration with energy recovery
Waste for landfilling
Hazardous waste
Total

21,651
10,011
988
1,063
33,713

20,233
12,546
933
888
34,600

19,699
11,088
897
924
32,608

18,997
11,264
1,015
916
32,192

20,283
10,833
991
999
33,106

Recyclable waste 64%
Waste for incineration 30%
Waste for landfilling 3%
Hazardous waste 3%

Recyclable waste 58%
Waste for incineration 36%
Waste for landfilling 3%
Hazardous waste 3%

Accounting policies

Uncertainties and estimates

Solid waste includes materials no longer intended for
their original use that are required to be recovered
(e.g.: recycled, reused, composted) or not recovered
(e.g.: landfilled) – this includes packaging waste,
hazardous and other non-hazardous waste. To follow up
on the goal of zero waste to landfill Arla collects data
annually from all sites where we have control.

Currently Arla discloses only solid waste in ESG table 1.3,
due to lack in methodology on how to account for food
waste and measure milk solids content in product losses.
Solid waste is only a small part of Arla’s total waste. Other
waste types are product waste and waste water. Arla
plans to report total waste figures from 2020. Our
ambition is to reduce our total waste by 50 per cent
by 2030.

* Historical numbers for solid waste are restated each year due to acquisitions and divestments. Restatement has only immaterial effect on

the figures.

126 ARLA FOODS ANNUAL REPORT 2019

ESG NOTE 2 SOCiAL FiGURES

ESG Note 2.1 Full time equivalents

Full time equivalent split by employee type,
2019

Full time equivalent split by employee type,
2018

FTEs decreased despite expansion and acquisitions in international markets
and Arla Foods Ingredients

People are the most important asset to Arla, thus it's
imperative to know how the company deploys these
resources across geographies and time. Number of
employees is measured in full time equivalents (FTE).
The total number of FTEs decreased slightly compared
to last year despite further expansion in international
markets including the acquisition of the cheese
business in the Middle East from Mondeléz International,
contributing an additional 70 FTEs. Expansion in Arla
Foods Ingredients explains the increase in FTEs in
Denmark, while the insourcing of several IT services to
the global shared

service centre in Gdansk increased FTEs in Poland by
48. Insourcing, however, reduced the overall cost
related to IT services. These increases were offset by
a reduction in FTEs in most core markets including
Germany, Finland and Sweden.

Over the last five years the FTE level has been relatively
stable, but shows a shift of FTEs from core European
countries to international markets, especially to MENA,
supporting Arla's strategic plan to expand the share of
business outside Europe, where the prespective for
growth is more promising.

19,174

19,190

Blue collar employees 64%
White collar employees 36%

Blue collar employees 65%
White collar employees 35%

ESG Table 2.1 Full time equvalents

2019

2018

2017

2016

2015

Accounting policies

Denmark
UK
Sweden
Germany
Saudi Arabia
North America
Poland
Netherlands
Finland
Other countries
Full time equivalents

7,258
3,407
2,977
1,681
952
477
511
339
319
1,253
19,174

7,264
3,387
3,001
1,759
965
502
463
327
325
1,197
19,190

7,069
3,477
3,029
1,809
1,009
496
433
320
325
1,006
18,973

6,956
3,532
3,175
1,780
895
477
425
313
321
891
18,765

7,086
3,593
3,305
1,828
863
476
429
317
323
805
19,025

FTEs are defined as the contractual working hours for
an employee compared to a full time contract in the
same position and country. The full time equivalent
figure is used to measure the active workforce counted
in full time positions. An FTE of 1.0 is equivalent to a
full-time worker, while an of FTE of 0.5 equals half of the
full workload.

The average FTE figure reported in Note 1.2 in the
consolidated financial statements, and in the ESG note
2.1 is calculated as the average number for each legal
entity during the year based on quarterly measure-
ments taken at the end of each quarter.

All employees are included in the FTE figure, including
both people who are on permanent and temporary
contracts. People on long term leave eg. maternity
leave or long term sick leave are excluded.

The majority of employees in production and logistics
are classified as blue collar employees, while employees
within sales and administrative functions are classified
as white collar employees. The ratio between white and
blue collar employees is calculated based on
FTEs at 31 December.

Uncertainties and estimates

Employee data are handled centrally, in accordance
with GDPR. The FTE figure is reported internally on a
monthly basis. To improve data quality, data is validated
by each legal entity on a quarterly basis through the
financial consolidation system.

127 ARLA FOODS ANNUAL REPORT 2019

ESG NOTE 2 SOCiAL FiGURES (CONTiNUED)

ESG Note 2.2 Gender diversity and inclusion

Share of females in management increased

At Arla, we believe gender diversity is key to the success
of the business. Arla's policies do not differentiate
between men and women when it comes to promotion
opportunities or remuneration, however women are
underrepresented in the blue collar workforce of Arla,
and to a lesser extent in the white collar workforce as
well.

colleagues and Arla. Gender diversity for the Board of
Directors is disclosed in ESG note 3.1.

Gender diversity (all employees)
In 2019 the female share of FTEs was 27 per cent,
unchanged from last year. Read more about how we
work with diversity on page 37.

Arla strives to create a workplace with a diverse
workforce, characterised by mutual respect and trust,
promoting equal opportunities and allowing colleagues
to live up to their full potential. Policies on diversity,
inclusion and anti-harassment are in place to handle
related issues in a structured manner. Work councils, at
both local and global levels, also help secure that
workplace decisions are made in the best interests of all

Gender diversity (management)
In 2019 26 per cent of director and above positions
were held by women, compared to 23 per cent in 2018.

Gender diversity (management)
In 2019 29 per cent of the executive management
team members were women. The gender composition
is unchanged since 2016.

Gender diversity for all employees,
2019

Gender diversity for all employees,
2018

27%

Female 27%
Male 73%

ESG Table 2.2.a Gender diversity for all employees
(all employees)

2019

2018

2017

2016

2015

Accounting policies

Total share of female

27%

26%

27%

ESG Table 2.2.b Gender diversity in management
(diversity in management)

2019

2018

2017

2016

2015

Share of female at director level or above

26%

23%

22%

21%

ESG Table 2.2.c Gender diversity in top management

2019

2018

2017

2016

2015

Share of female in executive management team (EMT)

29%

13%

Gender diversity (all employees)
Gender diversity is defined as the share of female FTEs
compared to total FTEs. Gender diversity is not based on
average FTEs, described in ESG note 2.1, but FTEs at 31
December 2019. It covers all white and blue collar
employees.

Gender diversity (in management)
Arla gender diversity in management is defined as
the share of female FTEs in director positions and above
compared to total FTEs positions at director level and
above.

Gender diversity (in top management)
Gender diversity in top management is defined as the
share of females represented within the executive
management team (EMT).

Uncertainties and estimates

Gender diversity in management has previously been
reported externally. The number, however, was based
on number of employees and not FTEs. In accordance
with the ESG reporting guidelines of the Danish Finance
Society (FSR) and Nasdaq, the figures presented here
are based on FTEs. Comparison figures related to
2015-2018 have been restated to reflect the changed
calculation method and therefore are not comparable
with numbers in prior publications.

128 ARLA FOODS ANNUAL REPORT 2019

ESG NOTE 2 SOCiAL FiGURES (CONTiNUED)

ESG Note 2.3 Gender pay ratio

ESG Note 2.4 Employee turnover

Gap between male and female salary decreased

Employee turnover was stable

Paying equal salaries for the same job regardless of
gender is a basic requirement for an ethical and
responsbile company. At Arla men and women doing
the same or equivalent jobs are paid the same salary
level. This is secured through well-defined and fixed
salary bands across all job categories.

The primary aim of the gender pay ratio is to ensure
equitable treatment between genders and show where
women are represented in the company hierarchy. In
Arla, in 2019 the median male salary was 5 per cent
higher than the median female salary, compared to 6
per cent last year. The improvement is primarily
explained by increased number of women in senior
leadership position (director and above).

Attracting and retaining the right people are imperative
to the success of Arla's business. Employee turnover
shows the fluctuation in the workforce. Turnover is
broken down to voluntary (i.e: employee quits the
company) and involuntary (i.e: employee is dismissed).
With such differentiation, turnover is an indicator for
talent retainment in Arla and also signals the effciency
of operations.

Employee turnover in 2019 was 12 per cent,
unchanged from last year. It is considered to be a
normalized level. Voluntary turnover remained very
stable in recent years, despite signficant organizational
changes. It acccounted for 8 per cent of turnover in
2019.

ESG Table 2.3 Gender pay ratio

Gender pay ratio

2019

2018

1.05

1.06

Voluntary turnover
Involuntary turnover
Total turnover

8%
4%
12%

8%
3%
11%

9%
5%
14%

-
-
-

ESG Table 2.4 Employee turnover

2019

2018

2017

2016

2015

Accounting policies

Ucertainties and estimates

Accounting policies

Uncertainties and estimates

The gender pay ratio is defined as median male salary
divided by median female salary. The salary used in the
calculation includes contractual base salaries while
pension and other benefits are not included.

In ESG reporting guidelines by the Danish Financial
Association and Nasdaq, it is recommended to include
the total workforce into the equation. However, due to
data limitations we only disclose gender pay ratio in the
white collar workforce. It is estimated that including
blue collar employees would make the gap smaller, as
males are overrepresented in the blue collar workforce.

Employee turnover is calculated as the ratio between
total employees leaving compared to the total number
of employees in the same period. The number refers to
number of employees and not to FTE.

From 2016 turnover data was registered according to
standard methodologies and in a central system. To
ensure comparable and high quality data, only
2016-2019 turnover figures are disclosed.

Turnover is calculated for all employees on a permanent
contract and includes several reasons for leaving such
as retirements, dismissals and resignations. The leaving
is only included in the calculation from the month
where remuneration is no longer paid (e.g: for some
tenured employees renumeration may be paid for a few
months after they have been dismissed).

129 ARLA FOODS ANNUAL REPORT 2019

ESG NOTE 2 SOCiAL FiGURES (CONTiNUED)

ESG note 2.5 Food safety - Number of product recalls

ESG Note 2.6 Accidents

Number of product recalls increased, but still on a very low level

Accidents decreased

As a global food company, food safety is key to Arla. A
core responsibility for Arla is to ensure that products are
safe for consumers to eat and drink, and that the
content of the product is clearly and appropriately
labelled on the packaging. Food safety is also one of our
most important indicators towards consumers, singaling
that Arla's products are produced and labelled
according to the highest quality standards.

in 2019 the number for prodcut recalls increased to 4
compared to 2 last year. Arla is dedicated to ensure that
products are safe to consume and works continously
across the value chain, including at farm level, to reduce
the number of recalls to as close to zero as possible. All
product incidents must be dealt with in a timely manner
to ensure the safety of our consumers as well as legality,
quality of product and brand protection (Arla or private
label). The handling of all public recall incidents follows
a detailed and standardized process. An annual test of
product incident management is also conducted.

The company has a complex and long value chain and
offers a large variety of jobs across geographies.
Colleagues are key to the success of Arla, and it is our
ambition to provide all colleagues with safe and healthy
working conditions. Arla is committed to preventing
accidents, injuries and work-related illnesses. A
systematic approach to target-setting and tracking is
applied to mitigate risks and reduce problems, in an

ongoing close collaboration with employees across the
organization.

Accidents resulting in injuries can be lost time accidents
(LTA) as well as non-lost time accidents (minor). The
number of LTA per 1 million working hours is reported
below.

ESG Table 2.5 Recalls

2019

2018

2017

2016

2015

Accident frequency

Number of recalls

ESG Table 2.6 Accidents
(per 1 Mio. working hours)

2019

2018

2017

2016

2015

Accounting policies

In accordance with ESG reporting standards, product
recalls are defined as public recalls. A public recall is the
action taken when products pose a material food safety,
legal or brand integrity risk. Public recall is only relevant
if products are available for the consumers in the
marketplace. Public recall covers two types of recalls,
that are trigerred when a public recall occurs, and are
used and reported internally: delivery stop (prior to
market release) and withdrawal.

Public recalls are reported as soon as they happen, and
an incident report has to be completed about each
incident within two week days from the first notice of
the problem. The total number of public recalls is
reported externally on a yearly basis.

130 ARLA FOODS ANNUAL REPORT 2019

Accounting policies

Accidents are defined as any sudden and unplanned
event that results in personal injury, ill health, or
damage to or loss of property, plant, materials or the
environment, or a loss of business opportunity.

An LTA is a work place injury sustained by an employee
whilst completing work activities that results in the loss
of 1 or more days from work on scheduled working days
/shifts. An accident is considered a lost time accident
only when the employee is unable to perform the
regular duties of the job, takes time off for recovery, or is
assigned modified work duties for the recovery period.

All colleagues sustaining injury or illness related to the
work place are required to report to their team leader/
manager as soon as reasonably practical, regardless of
severity. Workers at all sites have access to a mobile
application where they can quickly and easily report any
accidents. Notification must be done prior to the injured

party leaving work. Accidents reported after the end of
the individuals working day may not be accepted as a
workplace accident. However, there could be accidents
not reported. The number of accidents is reported to
the board of directors and executive management team
monthly.

Ucertainties and estimates

In 2019 Arla offered extensive training for employees to
ensure they report accidents in a correct and timely
manner, as an effort to significantly increase work safety.
As a result, we experienced an increase in reported
accidents, which enabled the company to better
understand the factors potentially leading to accidents
and to make proactive efforts to prevent such situations.

ESG NOTE 3 GOvERNANCE DATA

ESG Note 3.1 Gender diversity - Board of Directors

ESG Note 3.2 Board meeting attendance

Share of females unchanged from last year

Steady meeting attendance

Gender diversity in the board is important, on the one
hand to secure representation of both genders at a high
level, and on the other hand to bring a variety of
perspectives to the business. Ensuring gender diversity
in the Board is also a legal requirement in Denmark.
The current Board of Directors consist of fifteen farmer
owners, three employee representatives and two
external advisors, where only owner representatives are
elected at the general assembly by the Board of
Representatives. Four of these 20 board members are
female, reflecting a ratio of 20 per cent female and 80
per cent male. This constitues an improvement of 7

percentage points compared to last year and has been
postively impacted by the inclusion of two independent
external advisors. In accordance with section 99b of the
Danish Financial Statements Act, we also disclose board
composition data only for members elected by the
Board of Representatives. In 2019 two of 15 farmer
owners within the board were female which equates to
a composition of 13 per cent female and 87 per cent
male, unchanged compared to last year. In 2019 Arla
set a 4-year target to achieve a female representation in
the Board of Directors of at least 13 per cent.

Attendance of the board meetings by the members of
the board ensures that all of Arla's owners and
employees are represented when important strategic
decisions are made. The board members in Arla are
highly engaged, and in general all board members
attend all meetings unless they are prevented due to
health reasons.

In 2019 board attendance decreased to 96 per cent
from 99 per cent last year, but is still at an exceptionally
high level.Information on board members are included
on page 39 to 41.

ESG Table 3.2 BoD meeting attendance

2019

2018

2017

2016

2015

Number of meetings
Attendance

10
96%

13
99%

9
99%

9
98%

10
97%

ESG Table 3.1 Gender diversity Board of Directors

2019

2018

2017

2016

2015

Share of female among Board of Directors

13%

12%

Accounting policies

The gender diversity ratio is calculated based on the
general assembly members of the board of directors

and excludes employee representatives and advisors
to the board.

The board meeting attendance ratio is calculated as the
sum of board meetings attended per board member
and the total possible attendance.

The current Board of Directors consists of three
employee representatives, two external advisors and
fifteen owners. When calculating board meeting
attendance, all twenty board members are included.

131 ARLA FOODS ANNUAL REPORT 2019

ESG NOTE 3 GOvERNANCE DATA (CONTiNUED)

ESG note 3.5

Basis for preparation
The consolidated environmental, social and governance
(ESG) data are based on ongoing monthly and annual
reporting procedures. The consolidated data comply
with the same consolidation principles as the consolidat-
ed financial statements unless described separately in
the definition section of each ESG note. All reported data
follow the same reporting period as the consolidated
financial statements.

understanding of their views and opinions. In addition to
prioritising the group's activities, these results were used
to improve communication processes and widen the
reporting scope. Based on results from the materiality
analysis and constant tracking of consumer preferences;
climate, food safety and animal care were identified as
focus areas. Recycling and waste, transparent and
accountable business, and diversity were also ranked as
highly important to Arla's stakeholders.

This section was inspired by the principles and
recommendations of the The Danish Finance Society/
CFA Society Denmark, FSR – Danish Auditors, and
Nasdaq, published in the ESG reporting guidelines
booklet in 2019. Where maturity and availability of data
allowed, recommended ESG figures were added to this
section. In the coming years plans are to widen the scope
of reporting to fully comply with best practice in ESG
reporting.

Comparison figures
In line with ESG reporting guidelines, environmental data
are presented in absolute figures to ensure comparability.
Where relevant, a measure for progress towards Arla's
previously communicated internal targets are included.
In case of new mergers and acquisitions, the baseline has
been adjusted to better reflect the changed business.

Materiality and reporting scope
When presenting the consolidated ESG data,
management focuses on presenting information that is
considered of material importance for stakeholders, or
which is recommended to be reported by relevant
professional groups or authorities.

To establish what is material for this report, an analysis was
conducted in 2017, involving consumers, customers,
owners, non-profit organisations and financial institutions
in Denmark, Sweden, the UK and Germany. All stakehold-
er groups received a survey and were asked to prioritise
22 defined areas of interest. Moreover, a group of
non-profit organisations was interviewed to get a deeper

The figures disclosed in the consolidated ESG data section
were chosen based on the materiality analysis, but also
consider the maturity of data to ensure high data quality
on each KPI. In some cases it was concluded that current
data tracking or collection capabilities do not provide
sufficient data quality to satisfy disclosure to the highest
standards, despite the fact that the figures could be of
material importance to stakeholders. In these cases the
necessary steps to improve data tracking and collection
have been intiated and the plan is to extend the ESG
reporting in 2020
and beyond.

The above priorities are reflected throughout the annual
report: natural products (pages 20, 21 and 33), farming
practices (page 32), governance principles (page 35) and
diversity policies (page 38) are reported at length in the
management review, while in this section definitions,
data and accounting policies related to Arla's greenhouse
gas emissions (Note 1.1) food safety (Note 2.5), waste
and recycling (Note 1.3), and diversity (Note 2.2 and 2.3)
are presented, making Arla's business more transparent
and accountable.

132 ARLA FOODS ANNUAL REPORT 2019

INDEPENDENT AUDiTOR’S LiMiTED ASSURANCE REPORT

To the stakeholders of Arla Foods Amba

Arla Foods Amba engaged us to provide limited
assurance on the data described below and set out in the
consolidated environmental, social and governance (ESG)
statements in the Annual Report on pages 122-132 for
the period 1 January 2019 to 31 December 2019.

We are to conclude on whether the ESG statements
have been prepared in accordance with the reporting
approach and criteria described on pages 122-132.
The degree of assurance expressed in the conclusion is
limited.

Limited assurance conclusion
Based on the procedures performed and the evidence
obtained, nothing has come to our attention that causes
us to believe that Arla’s ESG statements in the annual
report for the period 1 January 2019 to 31 December
2019 have not been prepared, in all material respects,
in accordance with the reporting approach and criteria
described on pages 122-132.

Management’s responsibility
Arla’s Management is responsible for the preparation of
the ESG statements in accordance with the reporting
approach and criteria described on pages 122-132. Arla’s
Management is also responsible for such internal control,
as the Management considers necessary to enable the
preparation of the ESG statements that are free from
material misstatement, whether due to fraud or error.

Auditor’s responsibility
Our responsibility is to express a conclusion on Arla’s
ESG statements in the Annual Report based on our
procedures. We performed our procedures in accordance
with ISAE 3000, “Assurance Engagements Other than
Audits or Reviews of Historical Financial Information” and
additional requirements under Danish audit legislation to
obtain limited assurance for our conclusion.

Ernst & Young Godkendt Revisionspartnerselskab is
subject to the International Standard on Quality Control
(ISQC) 1 and thus uses a comprehensive quality control
system, documented policies and procedures regarding
compliance with ethical requirements, professional
standards, applicable requirements in Danish law and
other regulations.

We complied with independence requirements and
other ethical standards under FSR - Danish Auditors’
Code of Ethics for Professional Accountants, which rely
on general principles regarding integrity, objectivity,
professional competence and due care, confidentiality
and professional conduct.

As part of our examination, we performed the
below procedures:

Interviews of relevant company professionals
responsible for sustainability strategy, management
and reporting, located at Arla’s headquarters in Viby
Assessment of whether data have been collected,

assessed and quality-reviewed as prescribed in Arla’s
manual for collection of ESG data

Analytical reviews, including trend analyses, of data
supplied by Arla
Evaluation of the appropriateness of accounting
policies used and the reasonableness of accounting
estimates made by Management
On a sample basis, tested if data is supported by
sufficient evidence

We believe that our procedures provide a reasonable
basis for our conclusion. The procedures performed in
connection with our examination are less than those
performed in connection with a reasonable assurance
engagement. Consequently, the degree of assurance for
our conclusion is substantially less than the assurance,
which would be obtained, had we performed a reasonable
assurance engagement.

Viby, 18 February 2020
ERNST & YOUNG
Godkendt Revisionspartnerselskab
CVR-nr. 30 70 02 28

Henrik Kronborg Iversen
State Authorised Public
Accountant
MNE no. 24687

Carina Ohm
Associate Partner

133 ARLA FOODS ANNUAL REPORT 2019

GLOSSARy

Arlagarden® is the name of our quality assurance
programme.

BEPS is an acronym referring to base erosion and
profit shifting. These are tax avoidance strategies
that exploit gaps and mismatches in tax rules to
artificially shift profits to low or no-tax locations.

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.

Biogas is the mixture of gases produced by the
breakdown of organic matter in the absence of
oxygen, primarily consisting of methane and carbon
dioxide. At Arla biogas is primarily produced from
cow manure.

Digital reach is defined as engagement with Arla’s
digitial content, i.e: spending more than 2 minutes
on our website, watching our videos to the end on
YouTube, and liking or commenting on content on
our social media platforms.

Biomass is plant or animal material used for energy
production. It can be purposely grown energy crops,
wood or forest residues, waste from food crops,
horticulture, food processing, animal farming, or
human waste from sewage plants.

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.

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.

Carbon sequestration refers to a natural or
artificial process by which carbon dioxide is removed
from the atmosphere and held in solid or liquid form.

CPI is an abbreviation of Consumer Price Index.

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.

EMEA is an acronym referring to Europe,
Middle-East and Africa.

Equity ratio is the ratio between equity excluding
minority interests and total assets, and is a measure
of the financial strength of Arla.

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.

FTE is an acronym for full time equivalents. FTEs
are defined as the contractual working hours for an
employee compared to a full time contract in the
same position and country. The FTE figure is used to
measure the active workforce counted in full time
positions. An FTE of 1.0 is equivalent to a full-time
worker, while an of FTE of 0.5 equals half of the full
workload.

GDPR is an acronym for the General Data Protection
Regulation, which regulates data protection and
privacy in the European Union (EU) and the
European Economic Area (EEA). It also addresses
the transfer of personal data outside the EU and EEA
areas. The GDPR aims primarily to give control to
individuals over their personal data and to simplify
the regulatory environment for international
business by unifying the regulation within the EU.

The Greenhouse Gas Protocol (GHGP)
provides accounting and reporting standards,
sector guidance, calculation tools to account for
greenhouse gas emissions. It establishes a
comprehensive, global, standardized framework for
measuring and managing emissions from private
and public sector operations, value chains, products,
cities, and policies.

Incoterms refer to International Commercial
Terms. These are a series of pre-defined commercial
terms published by the International Chamber of
Commerce (ICC) relating to international commercial
law. They are widely used in international commercial
transactions or procurement processes and their
use is encouraged by trade councils, courts and
international lawyers.

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.

Lactalbumin, also known as “whey protein”, is the
albumin contained in milk and obtained from whey.

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.

Meal kits are a subscription service-foodservice
business model where a company sends customers
pre-portioned and sometimes partially-prepared
food ingredients and recipes to prepare homecooked
meals.

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.

134 ARLA FOODS ANNUAL REPORT 2019

GLOSSARy (CONTiNUED)

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.

Other supported brands are brands other than
Arla®, Lurpak®, Puck®, Castello® and milk based
branded beverages, that contribute to strategic
branded volume driven revenue growth.

Strategic brands are defined as products sold
under branded products such as Arla®, Lurpak®,
Castello® and Puck®.

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.

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.

Net working capital is the capital tied up in
inventories, receivables, and payables including
payables for owner milk.

Prepaid milk price describes the cash payment
farmers receive per kg milk delivered during the
settlement period.

Net working capital excluding owner milk is
defined as capital that is tied up in inventories,
receivables, and payables excluding payables for
owner milk.

Non-GMO means non-genetically modified
organisms, for example non-genetically modified
feed crops for cows.

OCI is an acronym for other comprehensive income.
OCI includes revenues, expenses, gains, and losses
that have yet to be realized.

OECD refers to the Organisation for Economic
Cooperation and Development.

Private label refers to retail brands, which are
owned by retailers but produced by Arla based on
contract manufacturing agreements.

Profit margin is a measure of profitability. It is the
amount by which revenue from sales exceeds costs
in a business.

Profit share is defined as the ratio between profit
for the period allocated to owners of Arla Foods, and
total revenue.

QEHS stand for Quality, Environmental, Health, and
Safety. It is a department within Arla’s supply chain
safeguarding the quality and safety of production.

On-the-go refers to food consumed while on the
go, and also to packaging solutions supporting this
trend of food consumption.

SEA is an acronym referring to South-East Asia.

SMP is an abbreviation of skimmed milk powder.

135 ARLA FOODS ANNUAL REPORT 2019

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.

Volume driven revenue growth is defined as
revenue growth associated with growth in volumes
while keeping prices constant.

Whey protein hydrolysate is a concentrate or
isolate in which some of the amino bonds have
been broken by exposure of the proteins to heat,
acids or enzymes. This pre-digestion makes
hydrolysed proteins more rapidly absorbed in the
gut than either whey concentrates or isolates.

WMP is an abbreviation referring to whole milk
powder.

Strategic branded volume driven revenue
growth is defined as revenue growth associated
with growth in volumes from strategic branded
products while keeping prices constant. It is also
referred to in the report as branded volume growth.

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.

USD related currencies are currencies which
move the same direction as the USD (i.e: when the
USD depreciates versus the EUR, they also
depreciate vs the EUR). Currencies in the MENA
region and the Chinese yen are typical examples.

Project management: Corporate external reporting, Arla. Design and production: We Love People. Translation: Semantix.
Photos: Hans-Henrik Hoeg and Arla. The annual report is published in English, Danish, Swedish, German, French and Dutch.
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.

CORPORATE CALENDAR 2020

Financial reports and major events

27
FEBRUARy

Publication of the consolidated annual
report for 2019

7-8
OCTOBER

Board of Representatives meeting

26-27
FEBRUARy

29
AUGUST

Board of Representatives meeting

Publication of the consolidated half-year
results for 2020

136 ARLA FOODS ANNUAL REPORT 2019

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 1 AB
England

Phone +45 89 38 10 00
E-mail arla@arlafoods.com

Phone +44 113 382 7000
E-mail arla@arlafoods.com